<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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SPLITROCK SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 76-0529757 4825
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) NUMBER) CLASSIFICATION CODE NUMBER)
</TABLE>
8665 NEW TRAILS DRIVE, STE. 200
THE WOODLANDS, TEXAS 77381
(281) 465-1200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PATRICK J. MCGETTIGAN, JR., ESQ.
SENIOR VICE PRESIDENT
8665 NEW TRAILS DRIVE, STE. 200
THE WOODLANDS, TEXAS 77381
(281) 465-1200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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Copies to:
ARTHUR S. BERNER, ESQ.
WINSTEAD SECHREST & MINICK P.C.
910 TRAVIS, SUITE 2400
HOUSTON, TEXAS 77002
(713) 650-2729
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER UNIT OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
11 3/4% Series B Senior Notes
due 2008...................... $250,000,000 100% $250,000,000 $73,750
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</TABLE>
(1) Pursuant to Rule 457(f)(2), the registration fee is calculated based on the
book value, which has been calculated as of July 31, 1998, of the
outstanding 11 3/4% Senior Notes due 2008, of the Registrant to be cancelled
in the exchange transaction hereunder.
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
The Information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer and sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 12, 1998
PRELIMINARY PROSPECTUS
[SPLITROCK LOGO]
$250,000,000
SPLITROCK SERVICES, INC.
OFFER TO EXCHANGE
11 3/4% SERIES B SENIOR NOTES DUE 2008 FOR ALL
OUTSTANDING 11 3/4% SENIOR NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
Splitrock Services, Inc., a Delaware corporation ("Splitrock" or the
"Company") hereby offers, upon the terms and subject to the conditions set forth
in this prospectus (the "Prospectus") and the accompanying letter of transmittal
(the "Letter of Transmittal" and, together with the Prospectus, the "Exchange
Offer"), to exchange up to an aggregate principal amount of $250,000,000 of its
new 11 3/4% Series B Senior Notes due 2008 (the "Exchange Notes") for up to an
aggregate principal amount of $250,000,000 of its outstanding 11 3/4% Senior
Notes due 2008 (the "Original Notes" and together with Exchange Notes, the
"Notes") other than those Original Notes held by an affiliate of the Company. As
of the date hereof, Original Notes in the aggregate principal amount of $11.0
million are held by an affiliate of the Company. See "The Exchange Offer Purpose
of the Exchange Offer." The Exchange Offer has been registered under the
Securities Act of 1933, as amended (the "Securities Act") pursuant to a
registration statement (the "Registration Statement") of which this Prospectus
is a part. The form and terms of the Exchange Notes are substantially identical
to the form and terms of the Original Notes, except for certain transfer
restrictions, registration rights and liquidated damages relating to the
Original Notes. The Exchange Notes will evidence the same debt as the Original
Notes and will be issued under and entitled to the benefits of an indenture
dated July 24, 1998 governing the Original Notes (the "Indenture").
The Exchange Notes will bear interest at the same rate and on the same
terms as the Original Notes. Interest on the Exchange Notes will accrue from the
date of issuance (the "Exchange Date") at the rate of 11 3/4% per annum and will
be payable semi-annually on January 15 and July 15 of each year, commencing on
January 15, 1999. Holders of the Exchange Notes will also, on January 15, 1999,
receive an amount equal to the accrued interest on the Original Notes exchanged
therefor. Interest on the Original Notes accepted for exchange will cease to
accrue upon issuance of the Exchange Notes. The Company has deposited with The
Chase Manhattan Bank, as escrow agent (the "Escrow Agent"), in an escrow account
(the "Escrow Account") established pursuant to the Escrow and Disbursement
Agreement (the "Escrow Agreement") dated July 24, 1998 between the Company and
the Escrow Agent, an amount of cash or
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 19 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE EXCHANGE NOTES.
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO HOLDERS
OF OUTSTANDING NOTES ON OR ABOUT , 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
Temporary Cash Investments (as defined) that, together with the interest
received thereon, will be sufficient to pay when due the first four semi-annual
interest payments on the Notes. The Notes will mature on July 15, 2008. The
Company may redeem the Notes, in whole or in part, on or after July 15, 2003, at
the redemption prices set forth herein, together with accrued and unpaid
interest and liquidated damages, if any, to the date of redemption. In addition,
at any time and from time to time prior to July 15, 2001, the Company may,
subject to certain requirements, redeem up to 35% of the aggregate principal
amount of the Notes (calculated after giving effect to any issuance of
Additional Notes, as defined) with the Net Cash Proceeds (as defined) of one or
more Equity Offerings (as defined) by the Company, at a redemption price equal
to 111.75% of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, to the date of redemption; provided, however, that
at least 65% of the original aggregate principal amount of the Notes remains
outstanding immediately after giving effect to such redemption. The Notes will
not be subject to any sinking fund requirement. Upon the occurrence of a Change
of Control (as defined), each holder of the Notes will have the right to require
the Company to repurchase all or any part of such holder's Notes at a price
equal to 101% of the aggregate principal amount of the Notes plus accrued and
unpaid interest and liquidated damages, if any, to the date of repurchase. See
"Description of the Notes."
The Notes will be Senior Indebtedness (as defined) of the Company, will
rank pari passu with all existing and future Senior Indebtedness of the Company
and will rank senior to all future Subordinated Obligations (as defined) of the
Company. The Notes will be unsecured (except that the Trustee (as defined) will
have a security interest in the Escrow Account for the benefit of the holders of
the Notes) and will therefore be effectively subordinated to all secured
indebtedness of the Company. Although the Company does not currently have any
subsidiaries, the Notes will be fully and unconditionally guaranteed on a
senior, unsecured basis by each of the Company's future Restricted Subsidiaries
(as defined) that incurs indebtedness. See "Description of the Notes -- Certain
Covenants -- Future Subsidiary Guarantors." At March 31, 1998, after giving pro
forma effect to the offering of the Original Notes and the application of the
proceeds therefrom, the Company would have had $21.1 million of indebtedness
outstanding (other than the Notes), all of which would have been Senior
Indebtedness and all of which would have been secured.
The Original Notes were issued and sold on July 24, 1998, as part of a unit
offering (the "Unit Offering") in which each unit (the "Units") consisted of one
Original Note and one warrant (the "Warrants") to purchase 10.124954 shares of
common stock, par value $.001 per share (the "Common Stock"), of the Company.
The Unit Offering was not registered under the Securities Act, in reliance upon
the exemptions provided in Section 4(2) of and Rule 144A under the Securities
Act. Accordingly, the Original Notes may not be reoffered, resold or otherwise
pledged, hypothecated or transferred unless so registered or unless an
applicable exemption from the registration requirements of the Securities Act is
available. Under the Exchange Offering, the Company will accept for exchange all
Original Notes, other than Original Notes held by affiliates of the Company,
validly tendered and not withdrawn before 5:00 p.m., New York City time, on
, 1998 unless extended by the Company, in its sole discretion, to
a date not later than , 1998 (the "Expiration Date"). Tenders of
Original Notes may be withdrawn at any time before 5:00 p.m., New York City
time, on the Expiration Date. If the Company terminates the Exchange Offer and
does not accept for exchange any Original Notes with respect to the Exchange
Offer, the Company will promptly return the Original Notes to the holders
thereof. The Exchange Offer is not conditioned upon any minimum principal amount
of Original Notes being tendered for exchange, but is subject to certain other
conditions, which may be waived by the Company. See "The Exchange
Offer -- Certain Conditions." Notes may be tendered only in integral multiples
of $1,000.
Although the Notes are eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market, there is no
established trading market for the Notes and the Company does not intend to list
the Notes on any securities exchange or to seek approval for quotation through
any automated quotation system. There can be no assurance that an active market
for the Notes will develop. To the extent that a market for the Notes does
develop, the market value of the Notes will depend on market conditions (such as
yields on alternative investments), general economic conditions, the Company's
financial condition and other conditions. Such conditions might cause the Notes,
to the extent that they are actively traded, to trade at a significant discount
from face value. See "Risk Factors Absence of Public Market."
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The Exchange Notes are being offered hereunder to satisfy certain
obligations of the Company contained in the Exchange and Registration Rights
Agreement dated as of July 24, 1998 (the "Exchange and Registration Rights
Agreement") by and between the Company and Chase Securities Inc. (the "Initial
Purchaser") executed in connection with the sale of the Original Notes. Although
the Company has agreed to bear the expenses of this Exchange Offer, the Company
will not receive any proceeds from this Exchange Offer and no underwriter is
being used in connection with this Exchange Offer. Based on no-action letters
issued by the staff of the Securities and Exchange Commission (the "Commission")
to third parties, the Company believes that the Exchange Notes issued pursuant
to this Exchange Offer in exchange for Original Notes may be offered for resale,
resold and otherwise transferred by a holder thereof (other than (i) a broker-
dealer who purchases such Exchange Notes directly from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
or (ii) a person that is an affiliate of the Company within the meaning of Rule
405 under the Securities Act), without compliance with the registration and
prospectus delivery requirements of the Securities Act if the holder is
acquiring the Exchange Notes in the ordinary course of its business and is not
participating and had no arrangement or understanding with any person to
participate in a distribution of the Exchange Notes. Holders of Original Notes
wishing to accept the Exchange Offer must represent to the Company that such
conditions have been met. Only broker-dealers who acquired the Original Notes as
a result of market-making activities or other trading activities may participate
in the Exchange Offer. Each broker-dealer that receives Exchange Notes for its
own account in exchange for the Original Notes must acknowledge that it will
deliver a Prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Original
Notes if such Original Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has indicated
its intention to make this Prospectus, as it may be amended or supplemented,
available to any broker-dealer for use in connection with any such resale for a
period of 180 days after the Expiration Date. See "Plan of Distribution."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OUTSTANDING NOTES IN ANY JURISDICTION
IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES ACT OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING
LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN STATEMENTS
OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION
STATEMENTS REGARDING THE COMPANY'S FUTURE FINANCIAL POSITION, STRATEGY,
PROJECTED COSTS AND PLANS, OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS AND
STATEMENTS REGARDING "YEAR 2000" COMPLIANCE, MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN
SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE
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THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS
("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS. ALL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON THEIR BEHALF ARE
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (including all amendments, annexes, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the Exchange
Notes offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus omits certain information, exhibits and undertakings
contained in the Registration Statement with respect to the Company and the
Exchange Notes offered hereby. For further information, reference is made to the
Registration Statement, including the exhibits and financial schedules filed as
a part thereof. Statements made in this Prospectus concerning the contents of
any document referred to herein are not necessarily complete. With respect to
each such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the document or matter involved and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement,
including the exhibits thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at the regional offices of the
Commission at Seven World Trade Center, Suite 1300, New York, New York 10048 and
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials can be obtained by mail from the Commission's
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Electronic filings filed through the Commission's Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR") are publicly available
through the Commission's home page on the Internet at http://www.sec.gov.
As a result of this Exchange Offer, the Company will be subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As long as the Company is
subject to such periodic reporting and informational requirements, the Company
will furnish all reports and other information required thereby to the
Commission and pursuant to the Indenture will furnish copies of such reports and
other information to the Trustee.
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission, for so long as any of the Notes remain
outstanding, the Company will furnish to the holders of Notes (excluding
exhibits, which will be available upon request) and file with the Commission
(unless the Commission will not accept such a filing) (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company were required to file
such forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants, and
(ii) all reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, for so long
as any of the Notes remain outstanding, the Company has agreed to make
available, upon request, to any prospective purchaser of the Notes and
beneficial owner of the Notes in connection with any sale thereof the
information required by Rule 144A(d)(4) under the Securities Act. Information
may be obtained from the Company at 8665 New Trails Drive, Suite 200, The
Woodlands, Texas 77381 (telephone number: (281) 465-1200), Attention: Patrick J.
McGettigan, Jr., Senior Vice President and Secretary.
4
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto included elsewhere in this Prospectus. Unless the context
otherwise requires, references to the "Company" or "Splitrock' refer to
Splitrock Services, Inc., references to "Prodigy" refer to Prodigy, Inc.,
references to "Lucent" refer to Lucent Technologies, Inc. and references to
"Yurie" refer to Yurie Systems, Inc. Yurie was acquired by Lucent in May 1998.
Certain industry data provided herein have been provided by International Data
Corporation ("IDC") or Forrester Research, Inc. ("Forrester"), private market
research firms. In addition, certain Internet Service Provider ("ISP")
performance data have been provided by Inverse Network Technology Inc., an
independent Internet testing group ("Inverse"). Capitalized terms used in this
Prospectus which are not otherwise defined herein have the respective meanings
assigned thereto under the heading "Glossary." The Company effected a 100-for-1
stock split on June 3, 1997 and a 10-for-1 stock split on August 8, 1997. All
share amounts included in this Prospectus have been adjusted to reflect the
effect of these stock splits. All information contained in this Prospectus
relating to percentage ownership of the Common Stock does not take into account
the 2,642,613 shares of Common Stock issuable upon exercise of certain
outstanding warrants issued by the Company.
THE COMPANY
GENERAL
The Company is a provider of telecommunications services, including high
speed Internet access services, on an advanced nationwide network based on ATM
switching technology which is deployed in every operational point of presence
("POP") of the network (the "Splitrock Network" or the "Network"). The pervasive
deployment of ATM switches throughout the Network ("ATM-to-the-edge") enables
the Company to serve as a broad-based ISP through the creation of a
multi-service platform which efficiently delivers IP, frame relay and other
Internet services. This flexibility will allow the Company to expand its service
offerings to provide fully integrated data, video and voice services and to
incorporate future technological innovations into its Network architecture with
a lower incremental investment than that required by other, less flexible,
networks. The Company currently provides nationwide Internet dial access and
related services to Prodigy, the third largest U.S. ISP measured in minutes
on-line, for its approximately 900,000 subscribers. In addition, the Company has
begun providing Internet transit services to Orbis Internet Services Inc., an
Internet connection service provider to businesses ("Orbis"), and virtual
private network ("VPN") services to NetworkTwo Communications Group, a value
added network service provider ("NetworkTwo"). For the quarter ended March 31,
1998, the Company had revenues of $16.5 million.
The Splitrock Network currently reaches more than 55% of U.S. households by
a local call with 56k modem access (currently the fastest modem speed
commercially available over residential phone lines), including households in
every market with a population of at least 100,000 as well as several second
tier markets. From September 1997 to April 1998, the Company deployed the
Splitrock Network infrastructure, primarily targeting densely populated markets
(the "Phase I Buildout"). The Phase I Buildout resulted in the deployment of the
nationwide ATM backbone portion of the Splitrock Network and POPs in 70
metropolitan areas across the nation. The Company is currently in the process of
constructing approximately 330 new POPs, deploying advanced processing equipment
and software to enhance and accelerate its ability to offer value added
services, such as ISDN video, web hosting and VPN, and augmenting its network
management infrastructure (the "Phase II Expansion"). The Company believes that
the Phase II Expansion will be substantially completed in the second quarter of
1999. Upon completion of the Phase II Expansion, the Network will have
approximately 400 active POPs with a physical presence in all 50 states,
reaching over 90% of U.S. households with a local call.
In order to provide services to Prodigy while the Splitrock Network was
being deployed, on July 1, 1997 the Company acquired Prodigy's existing legacy
network infrastructure (the "Legacy Network") and began immediately providing
Internet dial access and related services to Prodigy for its approximately
900,000 subscribers. See "Risk Factors Reliance on Prodigy; Recent Discussions
with Prodigy." Additionally, the
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Company has an agreement with IBM to use IBM's network (the "IBM Global Services
Network") to cover market areas that are served neither by the Splitrock Network
nor the Legacy Network. The Company currently handles more than 750 million
minutes of Internet traffic per month for Prodigy (currently the Company's only
Internet dial access customer), with over 60% of the traffic flowing on the
Splitrock Network, approximately 30% on the IBM Global Services Network and the
remainder on the Legacy Network. As the Phase II Expansion progresses, Legacy
Network POPs will be decommissioned and access to specific IBM Global Services
Network POPs will be terminated when appropriate. Substantially all Legacy
Network POPs are expected to be decommissioned by the end of 1998 and usage of
the IBM Global Services Network is expected to be terminated by the end of the
second quarter of 1999.
INDUSTRY OVERVIEW
The Company believes that it is well-positioned to capture revenue
opportunities in the growing Internet services market. As a broad-based ISP, the
Company utilizes an advanced ATM-to-the-edge Network to offer services that
either directly address Internet connectivity (dial access and transit) or which
leverage Internet technology to provide cost-effective alternatives to
traditional corporate network solutions (VPN). While the Company is considering
broadening its service offerings to optimize Network utilization, the Company
believes that a significant amount of its revenues for the foreseeable future
will continue to be derived from Internet related applications.
The Internet services industry is one of the fastest growing segments of
the global telecommunications market. Forrester estimates that the U.S. market
for Internet and related services, including advanced Internet applications such
as VPN, voice communications, fax and video conferencing, was approximately $6.2
billion in 1997 and will grow to approximately $49.7 billion in 2002, reflecting
a compound annual growth rate of over 50%. The Company believes that Internet
dial access and transit services, VPN services and enhanced business services
represent three of the fastest growing segments of the industry.
Internet access services represent the means by which ISPs interconnect
either businesses or individual consumers to the Internet's resources or to
corporate intranets and extranets. Access services include dial-up access for
individuals and small businesses and high-speed dedicated access (transit
services) used primarily by mid-sized and larger organizations. According to
Forrester, business access services are projected to grow at a compound annual
growth rate of approximately 75%, from approximately $1.0 billion in 1997 to
approximately $16.0 billion in 2002.
In addition, the Company believes that many businesses desire to utilize
VPNs as a lower-cost alternative to certain traditional telecommunications
services. Historically, many corporations established and maintained their own
private wide-area networks ("WANs") to provide network-based services, such as
transaction processing, to their customers and to coordinate operations between
employees, suppliers and business partners. These networks, which have
traditionally required the use of leased telephone lines with dedicated
bandwidth and the purchase of vendor-specific networking equipment and software,
are inherently expensive to set up, operate and maintain. The Company believes
that VPNs present a cost-effective alternative to WANs since VPNs (i) eliminate
the need to invest significant amounts in proprietary equipment and software,
(ii) securely and efficiently connect multiple, geographically dispersed
locations, (iii) provide global remote access capabilities and (iv) offer a full
range of value added services, such as videoconferencing, that meet a company's
particular networking needs.
In addition to Internet access and VPN services, business customers
increasingly are seeking a variety of enhanced products and applications to take
full advantage of the Internet. The principal enhanced services currently
available to companies are Web hosting, including hosting of intranet sites,
e-mail outsourcing, e-mail broadcast and security. Forrester forecasts that
enhanced business services revenues will grow from approximately $0.4 billion in
1997 to approximately $10.5 billion in 2002, representing a compound annual
growth rate of 92%. See "Industry Overview."
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COMPETITIVE ADVANTAGES
Since July 1997, the Company has provided Internet dial access services to
Prodigy for its approximately 900,000 subscribers. The Company believes it
benefits from the following competitive advantages which will assist it in
implementing its business strategy:
Flexible and Efficient New Network Infrastructure. The Splitrock
Network is designed to provide reliable, flexible and efficient services to
the Company's current and future customers. Since the Splitrock Network is
newly-designed (and not based on or an upgrade to an older network), the
Company believes the Network contains many features that are not present in
older networks and is able to flexibly incorporate future developments and
innovations. Older networks were typically designed to provide one type of
service, such as voice or data, and are less efficient at carrying other
traffic. Unlike many networks which deploy ATM technology only along the
core sites in the backbone, the Splitrock Network deploys ATM-to-the-edge
at every core site, hub site and remote site. See "Business Splitrock's
Network." Each POP is supported by the Lucent LDR200 switch, which the
Company believes provides significant quality of service advantages over
typical ATM backbone switches. Management believes that the Network
contains more ATM-based switches than that of any other commercial network.
This pervasive use of ATM technology and the Lucent LDR200 switch enables
the Company to create a multi-service platform which delivers IP, frame
relay and other Internet services. In addition, ATM-to-the-edge provides
additional capabilities to expand the Company's service offerings to
provide fully integrated data, video and voice services and to incorporate
future technological innovations into the Splitrock Network architecture
with a lower incremental investment than that required by other, less
flexible, networks.
Provider of Wholesale Internet Dial Access and International
Services. The Company currently provides wholesale Internet dial access
services to Prodigy for its approximately 900,000 subscribers. The Company
intends to market Internet dial access services directly to ISPs rather
than to individual end-users. As a result, unlike many providers of network
services, the Company does not intend to compete against its ISP customers,
thereby broadening the potential customer base to include those ISPs
unwilling to strengthen their competitors with their own network business.
Furthermore, the Company believes it will be viewed as a non-competing
vendor and, thus a potential partner, by major foreign and regional
telecommunications carriers, providing an alternative to their primary U.S.
competitors for delivering data, video and voice services.
Experienced Management Team. The Company's co-founders, Kwok L. Li,
Chairman of the Board and Chief Technical Officer, and William R. Wilson,
President and Chief Executive Officer, have assembled a management team
with significant data and voice communications experience. The 10 most
senior executives and managers of the Company have an average of over 12
years experience in the data and voice communications industry. Previously,
Mr. Li and Mr. Wilson were both senior executives at the predecessor
corporation of WilTel Communications LLC ("WilTel"), a wholesale provider
of telecommunications services. During their tenure WilTel designed,
constructed, developed and managed modern packet switched networks
(including frame relay and ATM) and marketed related services. At the time
of the sale of Yurie to Lucent in May 1998, Mr. Li was a Director, Vice
Chairman and Chief Technical Officer at Yurie, where he created and
designed the Lucent LDR200 switch which is a key component of the Splitrock
Network.
BUSINESS STRATEGY
Key elements of the Company's business strategy include:
Complete the Expansion of the Advanced Network Infrastructure. The
Company has designed, deployed and is in the process of expanding the
Splitrock Network, an advanced nationwide telecommunications network based
on ATM-to-the-edge switching technology. Through March 31, 1998, the
Company had spent approximately $23.9 million on the Phase I Buildout,
which was substantially completed in April 1998, and $12.7 million on the
Phase II Expansion. The Company anticipates that completion of the Phase II
Expansion will require an additional $141.1 million of capital
expenditures. The Company expects to spend approximately $47.4 million to
construct approximately 330 additional
7
<PAGE> 9
POPs, approximately $81.5 million to deploy advanced processing equipment
and software to enhance and accelerate the Company's ability to provide
value added services, such as ISDN video, web hosting and VPN, and
approximately $12.2 million to augment the Company's network management
infrastructure. Of these amounts, the Company has spent $1.7 million since
March 31, 1998. The Company believes that having ATM-to-the-edge results
in: (i) a more easily upgradeable network; (ii) the ability to efficiently
add new services at a lower incremental investment; (iii) improved network
reliability; (iv) interoperability with other network platforms; and (v)
improved network manageability.
Offer a Comprehensive Range of Services to Optimize Network
Utilization. Given the fixed cost nature of the Splitrock Network's
infrastructure, the Company seeks to increase total network utilization
primarily by targeting providers of business services (daytime intensive
traffic) and, to a lesser extent, providers of consumer services (evening
intensive traffic) to balance the Network's usage throughout a 24-hour
period. The Network's flexibility will provide for service innovation
(including data, video and voice services) with lower incremental
investment than less flexible networks. To offer new services, the Company
will only need to add the appropriate protocol processors and billing and
service management systems without changes to the core ATM switching
platform. Therefore, the Company believes it will be able to maximize
Network utilization by offering both daytime business-oriented services
(such as video conferencing and VPN services) and evening-time
consumer-oriented services (such as Internet dial access services). The
ability of the Company to offer a wide range of services will enhance its
ability to optimize traffic at all times of the day, thereby increasing
revenue and profitability. As its business strategy is implemented, the
Company will evaluate offering complementary services as they are required
by its customer base.
Development of Advanced Business Support Systems. Through the
development of scalable business support systems, the Company believes that
it has the opportunity to establish a competitive advantage relative to
traditional network service providers. Traditional network service
providers typically operate extensive legacy business support systems with
compartmentalized architectures that limit their ability to scale rapidly
and introduce enhanced services and features. In connection with the
expansion of the Splitrock Network the Company is creating business support
systems with an architecture designed to maximize both reliability and
scalability. All database and billing systems will run on a PC or UNIX
distributed architecture rather than centralized mainframe systems.
Expand Target Market Opportunities. IDC estimates that the total
number of U.S. companies with Internet access will grow from an estimated
1.5 million, or 20.0% of total U.S. companies, in 1996 to 4.1 million, or
53.0% of total U.S. companies, in 2000. IDC also estimates that the number
of U.S. households with a personal computer and a modem will grow from an
estimated 8.8 million, or 24.0% of all U.S. households with a personal
computer in 1996, to 39.4 million, or 58.0% of all U.S. households with a
personal computer, in 2000. IDC estimates that there are currently over
4,000 ISPs in the U.S., consisting of national, regional and local
providers, of which the Company believes only a small percentage have
access to their own nationwide backbone network infrastructure. The Company
intends to capitalize on this expected growth in demand for network
services by aggressively marketing its services through a variety of
distribution channels and evaluating strategic alliances and acquisitions
as they present themselves. The Company believes that utilizing a range of
distribution channels will enable it to cost-effectively reach a broad base
of potential customers. The Company currently intends to develop and use a
direct sales force (which it expects to begin hiring late in the second
half of 1998) to attract ISPs, carriers, value added service providers and
medium and large businesses. In addition, the Company intends to use
alternative distribution channels, including agents, resellers and
wholesalers, to gain access to a substantially larger base of potential
customers than the Company could otherwise initially address through its
direct sales force. Through the combination of a direct sales force and
alternative distribution channels, the Company will seek to rapidly
increase revenue-producing traffic on its Network.
The Company also intends to evaluate strategic alliances and
acquisitions that could provide additional traffic over the Splitrock
Network. While the Company is primarily focused on the domestic services
market, it believes the demand for Internet services outside the U.S. will
grow over the next few years. As a result, the Company will evaluate
opportunities, primarily in Latin America, to partner with
8
<PAGE> 10
strong, established telecommunications service providers. For example, the
Company will consider entering into international alliances to originate
and terminate international traffic on the Splitrock Network.
Provide Superior Comprehensive Customer Service. Splitrock believes
that superior customer service is a critical element in attracting and
retaining customers, and expanding value added services to existing
customers. In particular, the Company believes it is critical to maintain
two geographically dispersed Network Operations Centers ("NOCs"), each of
which is able to monitor the entire Network and provide rapid problem
resolution. The Company has established a 24-hours per day, seven days per
week NOC at its Yorktown, NY facility. In addition, a new 24-hours per day,
seven days per week NOC recently became fully operational at The Woodlands,
TX facility.
RECENT DEVELOPMENTS
During the three months ended June 30, 1998, the Company began the Phase II
Expansion, the Company's largest build-out initiative to date. Until the
completion of the Phase II Expansion (expected in the second quarter of 1999),
the Company will continue to utilize the IBM Global Services Network. On April
1, 1998, the Company renegotiated the usage contract for the IBM Global Services
Network, which management believes will increase charges related to the IBM
Global Services Network by approximately 45% for the second quarter of 1998 as
compared to the first quarter of 1998. The Company's results for the second
quarter of 1998 are not yet available, however the Company expects to record
substantially lower EBITDA (as defined) than in the first quarter of 1998. This
expected lower EBITDA amount is consistent with the Company's expectations and
business plan. For the months of April and May of 1998, the Company recorded
revenues of $5.2 million and $5.3 million, respectively, net losses of $3.2
million and $2.8 million, respectively, and EBITDA of $(2.5) million and $(1.9)
million, respectively. The decrease in revenues in April and May from March of
1998 was primarily the result of the switch in the calculation of charges for
Prodigy services from the Usage-Based Rate (as defined) to the Subscriber-Based
Rate (as defined) and a slight decrease in total Prodigy subscribers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The larger EBITDA deficit in April and May of 1998 compared to each
of the months in the first quarter of 1998 was primarily the result of the lower
revenues and the increased usage charges related to the IBM Global Services
Network described above and increased line and telecommunications charges
relating to the expansion of Splitrock Network. The Company expects to continue
to incur negative EBITDA through the completion of the Phase II Expansion.
Thereafter, the Company's ability to generate positive EBITDA will depend on the
successful implementation of its business strategy.
In cooperation with Telefonos de Mexico, S.A. de C.V. ("Telmex"), Mexico's
primary phone company, the Company expects to install a POP in Monterrey, Mexico
in August 1998. This POP is currently intended only to test connectivity between
the Splitrock Network and Telmex's data network. Should testing prove
successful, the Company will consider entering into formal negotiations to
provide services to Telmex, including carrying all or a portion of Telmex's U.S.
bound data traffic over the Splitrock Network.
Carso Global Telecom, S.A. de C.V. ("Carso") is the controlling stockholder
of Prodigy and a significant stockholder of Telmex. Orient Star Holdings
("Orient Star"), a wholly owned subsidiary of Carso, owns 20.0 million shares,
or 25.7%, of the Common Stock of the Company and holds a warrant, exercisable
through September 18, 1998, to acquire an additional 5.0 million shares which
would result, if exercised, in Orient Star holding approximately 30.2% of the
Common Stock of the Company. The Company expects that this warrant will be
exercised. See "Management Certain Relationships and Related Transactions."
THE PRIVATE PLACEMENT AND USE OF PROCEEDS
The Company sold the Units, which included the Original Notes, on July 24,
1998 to Chase Securities Inc. (the "Initial Purchaser"), reflected in the
offering memorandum dated July 21, 1998 (the "Offering Memorandum"). The Initial
Purchaser thereupon offered and sold the Units that included Original Notes in
the aggregate principal amount of $250.0 million to certain qualified buyers and
Units that included Original
9
<PAGE> 11
Notes in the aggregate principal amount of $11.0 million to Linsang Partners
L.L.C., an affiliate of the Company ("Linsang"). The $252.9 million of net
proceeds the Company received in connection with the sale of the Original Notes,
which were sold as units together with certain warrants (the "Warrants") to
purchase an aggregate of 2,642,613 shares of the Company's common stock ("Common
Stock"), as described in the Offering Memorandum were used as follows: (i)
approximately $56.6 million was deposited in escrow to pay the first four
semi-annual interest payments on the Notes, (ii) approximately $11.0 million was
used to refinance certain stockholder indebtedness, (iii) approximately $1.5
million was used to repay debt owed to a supplier, and (iv) the remainder will
be used to finance capital expenditures to complete the Phase II Expansion (as
defined) of the Splitrock Network (as defined), expected to be approximately
$139.4 million, and for general corporate purposes. In addition, a portion of
the net proceeds may be used to make investments in or acquisitions of certain
businesses or assets. See "Use of Proceeds." The Warrants have an exercise price
of $.01 per share, and are exercisable at any time on or after the first
anniversary of the date of original issuance of the Warrants and prior to the
maturity date of the Notes. The Warrants are not being registered in the
Exchange Offer, but are entitled to registration rights under the Warrant
Agreement. See "Capitalization," "Description of Capital Stock" and "Description
of the Warrants."
THE EXCHANGE OFFER
The Exchange Offer, the consummation of which is required by the Indenture
and the Exchange and Registration Rights Agreement described in the Offering
Memorandum, relates to the exchange of up to $250.0 million in principal amount
of Exchange Notes for up to $250.0 million in principal amount of Original
Notes. The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Original Notes except that the Exchange
Notes have been registered under the Securities Act and will not contain certain
transfer restrictions, registration rights or liquidated damages provisions. The
Exchange Notes will evidence the same debt as the Original Notes and will be
issued under and be entitled to the benefits of the Indenture governing the
Original Notes. See "Description of the Notes."
The Exchange Offer......... The Company is offering to exchange an Exchange
Note in the principal amount of $1,000 for each
Original Note in the principal amount of $1,000,
other than Original Notes held by affiliates of the
Company, that is properly tendered and accepted.
The Company will issue Exchange Notes on or
promptly after the Expiration Date. The Exchange
Offer covers Original Notes in an aggregate
principal amount of $250.0 million, not including
11,000 Original Notes in an aggregate principal
amount of $11.0 million held by affiliates of the
Company. Such $11.0 million of Original Notes will
be exchanged for $11.0 million of Exchange Notes in
a private offering and such Exchange Notes are
expected to be registered for resale under the
Securities Act. See "The Exchange Offer."
Expiration Date; Right to
Withdraw................. The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998, unless
the Exchange Offer is extended by the Company in
its sole discretion, to a date not later than
, 1998, in which case the term
"Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. The
tender of Original Notes pursuant to the Exchange
Offer may be withdrawn at any time before the
earlier of acceptance for exchange or the
Expiration Date. Any Original Notes not accepted
for any reason will be returned without expense to
the tendering holder thereof as promptly as
practicable after the expiration or termination of
the Exchange Offer. See "The Exchange
Offer -- Withdrawal of Tenders."
10
<PAGE> 12
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer -- Certain Conditions to The
Exchange Offer." The Exchange Offer is not
conditioned upon any minimum aggregate principal
amount of Original Notes being tendered for
exchange.
Procedures for Tendering
Notes...................... Each holder of Original Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Original Notes and any other required
documentation to Bank of Montreal Trust Company, as
Exchange Agent, at the address set forth herein. By
executing the Letter of Transmittal, each holder
will represent to the Company that, among other
things, (i) the Exchange Notes to be acquired by
the holder of the Original Notes in connection with
the Exchange Offer are being acquired by the holder
in the ordinary course of business of the holder,
(ii) the holder has no arrangement or understanding
with any person to participate in the distribution
of Exchange Notes, (iii) the holder acknowledges
and agrees that any person who is a broker-dealer
registered under the Exchange Act or is
participating in the Exchange Offer for the
purposes of distributing the Exchange Notes must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with a secondary resale transaction of
the Exchange Notes acquired by such person and
cannot rely on the position of the staff of the
Commission set forth in no-action letters (see "The
Exchange Offer -- Resale of Exchange Notes"), (iv)
the holder understands that a secondary resale
transaction described in clause (iii) above and any
resales of Exchange Notes obtained by such holder
in exchange for Original Notes acquired by such
holder directly from the Company should be covered
by an effective registration statement containing
the selling security holder information required by
Item 507 or Item 508, as applicable, of Regulation
S-K of the Commission, and (v) the holder is not an
"affiliate," as defined in Rule 405 under the
Securities Act, of the Company. If the holder is a
broker-dealer that will receive Exchange Notes for
its own account in exchange for Original Notes that
were acquired as a result of market-making
activities or other trading activities, the holder
is required to acknowledge in the Letter of
Transmittal that it will deliver a Prospectus in
connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a
Prospectus, the holder will not be deemed to admit
that it is an "underwriter" within the meaning of
the Securities Act. See "The Exchange
Offer -- Procedures for Tendering."
Exchange and Registration
Rights Agreement......... The Exchange and Registration Rights Agreement
grants the holders of the Original Notes certain
exchange and registration rights. See "The Exchange
Offer -- Termination of Certain Rights." This
Exchange Offer is intended to satisfy such rights,
which terminate upon the consummation of the
Exchange Offer. The holders of the Exchange Notes
are not entitled to any exchange or registration
rights with respect to the Exchange Notes. If the
Company fails to consummate the Exchange
11
<PAGE> 13
Offer on or before 135 days after the date of the
issuance of the Original Notes or is otherwise not
in compliance with certain obligations under the
Exchange and Registration Rights Agreement, the
Company will be obligated to pay liquidated damages
to the holders of the Original Notes.
Accrued Interest on the
Exchange Notes and
Original Notes........... Interest on the Exchange Notes will accrue from the
Exchange Date at the rate of 11 3/4% annually and
will be payable semiannually in arrears on January
15 and July 15 of each year, commencing on January
15, 1999. Holders of Exchange Notes will also, on
January 15, 1999, receive an amount equal to the
accrued interest on the Original Notes exchanged
therefor. Interest on the Original Notes accepted
for exchange will cease to accrue on the Exchange
Date.
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Original Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. See
"The Exchange Offer -- Procedures for Tendering."
If such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal
and delivering such owner's Original Notes, either
make appropriate arrangement to register ownership
of the Original Notes in such owner's name or
obtain a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may not be
able to be completed prior to the Expiration Date.
Guaranteed Delivery
Procedures................. Holders of Original Notes who wish to tender their
Original Notes and whose Original Notes are not
immediately available or who cannot deliver their
Original Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent, prior to the
Expiration Date, must tender their Original Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
Acceptance of the Original
Notes and Delivery of the
Exchange Notes........... Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company will
accept for exchange any and all Original Notes
which are properly tendered in the Exchange Offer
prior to the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered on the earliest practicable date
following the Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer."
Certain Federal Income Tax
Considerations........... For a discussion of certain federal income tax
considerations relating to the exchange of the
Exchange Notes for the Original Notes, see "Certain
Federal Income Tax Considerations."
Exchange Agent............. Bank of Montreal Trust Company is serving as the
exchange agent (the "Exchange Agent") in connection
with the Exchange Offer.
12
<PAGE> 14
Consequences of Failure to
Exchange................. The Original Notes that are not exchanged pursuant
to the Exchange Offer will remain restricted
securities. Accordingly, such Original Notes may be
resold only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act, or (iii) pursuant to an effective
registration statement under Securities Act. See
"The Exchange Offer -- Consequences of Failure to
Exchange."
THE NOTES
The Exchange Notes......... The Exchange Offer applies to Original Notes in the
aggregate principal amount of $250.0 million. The
form and terms of the Exchange Notes are the same
as the form and terms of the Original Notes except
that (i) the exchange will have been registered
under the Securities Act and, therefore, the
Exchange Notes will not bear legends restricting
their transfer pursuant to the Securities Act and
(ii) holders of the Exchange Notes will not be
entitled to certain rights of holders of the
Original Notes under the Exchange and Registration
Rights Agreement. Such rights will terminate upon
consummation of the Exchange Offer. The Exchange
Notes will represent the same debt as the Original
Notes (which they replace) and will be issued
under, and be entitled to the benefits of, the
Indenture. See "Description of the Notes."
Maturity................... July 15, 2008.
Interest Payment Dates..... January 15 and July 15 of each year, commencing on
January 15, 1999.
Escrow Proceeds............ The Company has deposited with the Escrow Agent an
amount of Temporary Cash Investments (approximately
$56.6 million), that, together with the interest
received thereon, will be sufficient to pay when
due the first four semi-annual interest payments on
the Notes, with any remaining balance to be
retained by the Company. The Notes will be
collateralized by a first priority and exclusive
security interest in the Escrow Account. See
"Description of the Notes -- Disbursement of Funds;
Escrow Account."
Sinking Fund............... None.
Guarantees................. The Notes will be fully and unconditionally
guaranteed on a senior, unsecured basis by each of
the Company's future Restricted Subsidiaries that
incurs indebtedness. See "Description of the
Notes -- Certain Covenants -- Future Subsidiary
Guarantors." The Company does not currently have
any subsidiaries.
Optional Redemption........ Except as described below, the Company may not
redeem the Notes prior to July 15, 2003. On or
after such date, the Company may redeem the Notes,
in whole or in part, at the redemption prices set
forth herein, together with accrued and unpaid
interest and liquidated damages, if any, to the
date of redemption. In addition, at any time and
from time to time prior to July 15, 2001, the
Company may, subject to certain requirements,
redeem up to 35% of the original aggregate
principal amount of the Notes (calculated after
giving effect to any issuance of Additional Notes,
as defined) with the Net Cash Proceeds of one or
more Equity Offerings by the Company, at a
redemption price equal to 111.75% of the principal
amount thereof, plus accrued and unpaid interest
and liqui-
13
<PAGE> 15
dated damages, if any, to the date of redemption;
provided, however, that at least 65% of the
original aggregate principal amount of the Notes
remains outstanding immediately after each such
redemption (calculated after giving effect to any
issuance of Additional Notes). See "Description of
the Notes -- Optional Redemption."
Change of Control.......... Upon the occurrence of a Change of Control, each
holder of the Notes will have the right to require
the Company to repurchase all or any part of such
holder's Notes at a price equal to 101% of the
aggregate principal amount of the Notes plus
accrued and unpaid interest and liquidated damages
thereon, if any, to the date of repurchase. See
"Description of the Notes -- Change of Control."
Ranking.................... The Notes will be Senior Indebtedness of the
Company, will rank pari passu with all existing and
future Senior Indebtedness of the Company and will
rank senior to all future Subordinated Obligations
of the Company. The Notes will be unsecured (except
that the Trustee will have a security interest in
the Escrow Account for the benefit of the Holders
of the Notes) and will therefore be effectively
subordinated to all secured indebtedness of the
Company. At March 31, 1998, after giving pro forma
effect to the offering of the Notes and the
application of the proceeds therefrom, the Company
would have had $21.1 million of indebtedness
outstanding (other than the Notes), all of which
would have been Senior Indebtedness and all of
which would have been secured. See "Description of
the Notes -- Ranking."
Prospective investors in the Exchange Notes should carefully consider all
of the information set forth in this Prospectus and, in particular, should
evaluate the specific factors under "Risk Factors" for risks involved with an
investment in the Exchange Notes.
---------------------
The Company's principal executive offices are located at 8665 New Trails
Drive, Suite 200, The Woodlands, Texas 77381. The Company's telephone number is
(281) 465-1200.
14
<PAGE> 16
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The following table sets forth summary historical and unaudited pro forma
financial data of the Company. The historical statement of operations and other
financial data for the period from inception (March 5, 1997) through December
31, 1997 and the historical balance sheet data as of December 31, 1997 have been
derived from, should be read in conjunction with and are qualified in their
entirety by reference to the audited financial statements, including the notes
thereto, included elsewhere in this Prospectus. The historical statement of
operations and other financial data for the three months ended March 31, 1998
and the historical balance sheet data as of March 31, 1998 have been derived
from, should be read in conjunction with and are qualified in their entirety by
reference to the unaudited condensed financial statements, including the notes
thereto, included elsewhere in this Prospectus which have been prepared on a
basis consistent with the audited financial statements and in the opinion of
management include all adjustments, consisting solely of normal, recurring
adjustments, necessary to present fairly the information contained therein. The
historical quarterly statement of operations data for the three months ended
June 30, 1997, September 30, 1997 and December 31, 1997 have been derived from
the Company's accounting records and have been prepared on a basis consistent
with the audited financial statements and in the opinion of management include
all adjustments, consisting solely of normal, recurring adjustments, necessary
to present fairly the information contained therein. The summary historical
financial data are not necessarily indicative of the operating results to be
expected in future periods.
The following table also presents certain summary unaudited pro forma
financial data of the Company for the period from inception (March 5, 1997) to
December 31, 1997 and the three months ended and as of March 31, 1998, which
give effect to the Unit Offering and the application of the proceeds therefrom
as if they had occurred on March 5, 1997 and January 1, 1998, respectively, in
the case of the statement of operations data, and March 31, 1998, in the case of
the balance sheet data. The summary unaudited pro forma financial data do not
purport to be indicative of the results that actually would have been obtained
had the Unit Offering been consummated on the assumed dates and they are not
necessarily indicative of operating results to be expected in future periods.
The following summary historical and unaudited pro forma financial data
should be read in conjunction with the historical financial statements of the
Company and the notes thereto included elsewhere in this Prospectus, "Selected
Historical and Unaudited Pro Forma Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
15
<PAGE> 17
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 5, 1997) THREE MONTHS
THROUGH ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 22,708 $16,494
Operating expenses:
Network personnel costs................................... 437 1,051
Network operating costs................................... 1,925 3,127
Legacy Network costs...................................... 25,341 12,295
Severance costs(1)........................................ 463 --
Selling, general and administrative....................... 1,276 657
Depreciation and amortization............................. 3,500 2,820
-------- -------
Total operating expenses.......................... 32,942 19,950
-------- -------
Loss from operations........................................ (10,234) (3,456)
Other income (expense):
Interest income........................................... 348 107
Interest expense.......................................... (235) (349)
-------- -------
Loss before income taxes.................................... (10,121) (3,698)
Provision for income taxes.................................. -- --
-------- -------
Net loss.................................................... $(10,121) $(3,698)
======== =======
Loss per share -- basic and diluted......................... $ (0.24) $ (0.05)
======== =======
Weighted average shares -- basic and diluted................ 42,824 76,800
======== =======
OTHER FINANCIAL DATA:
Capital expenditures(2)..................................... $ 42,004 $ 4,822
EBITDA(3)................................................... (6,271) (636)
Cash provided by (used in):
Operating activities...................................... (2,233) (4,874)
Investing activities...................................... (17,198) (2,740)
Financing activities...................................... 27,141 3,253
PRO FORMA DATA:(4)
Interest expense............................................ $ 26,422 $ 8,140
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF MARCH 31, 1998
1997 ---------------------
------------ PRO
ACTUAL ACTUAL FORMA(5)
------------ -------- ---------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(6)................................ $ 7,710 $ 3,349 $192,620
Restricted cash(7).......................................... 3,472 -- 56,604
Property and equipment, net................................. 38,504 40,506 40,506
Total assets...................................... 54,388 51,095 306,095
Long term debt and capital lease obligations (including
current portion)(6)....................................... 25,120 27,074 279,194
Stockholders' equity(8)..................................... 20,407 16,709 19,589
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1998
-------- ------------- ------------ ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
QUARTERLY STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ -- $10,729 $11,979 $16,494
Operating expenses
Network personnel costs...................... -- 95 342 1,051
Network operating costs...................... -- 561 1,364 3,127
Legacy Network costs......................... -- 13,119 12,222 12,295
Severance costs(1)........................... -- -- 463 --
Selling, general and administrative.......... 125 471 680 657
Depreciation and amortization................ -- 1,708 1,792 2,820
-------- ------- ------- -------
Total operating expenses............. 125 15,954 16,863 19,950
-------- ------- ------- -------
Loss from operations........................... (125) (5,225) (4,884) (3,456)
Other income (expense):
Interest income.............................. 30 137 181 107
Interest expense............................. -- (113) (122) (349)
-------- ------- ------- -------
Loss before income tax......................... (95) (5,201) (4,825) (3,698)
Provision for income tax....................... -- -- -- --
-------- ------- ------- -------
Net loss....................................... $ (95) $(5,201) $(4,825) $(3,698)
======== ======= ======= =======
Loss per share -- basic and diluted............ $ (0.01) $ (0.11) $ (0.06) $ (0.05)
======== ======= ======= =======
Weighted average shares -- basic and diluted... 14,648 48,991 76,800 76,800
======== ======= ======= =======
OTHER QUARTERLY DATA:
EBITDA(2)...................................... $ (125) $(3,517) $(2,629) $ (636)
Cash provided by (used in):
Operating activities......................... (1,554) 103 (2,333) (4,874)
Investing activities......................... (377) (12,242) (2,878) (2,740)
Financing activities......................... 10,026 19,750 (3,387) 3,253
</TABLE>
- ---------------
(1) Prior to January 1998, certain staffing positions were filled by Prodigy
employees who were subcontracted to the Company. In the fourth quarter of
1997, the Company recorded a severance charge related to the elimination of
13 of these positions.
(2) Capital expenditures include equipment purchased through capital leases of
$26.2 million and $2.2 million for the period from inception (March 5, 1997)
through December 31, 1997 and for the three months ended March 31, 1998,
respectively.
(3) EBITDA is defined as net income (loss) plus net interest expense, provision
for income taxes, depreciation and amortization and severance costs. EBITDA
is presented as it is commonly used by certain investors to analyze and
compare operating performance and to determine a company's ability to
service and/or incur debt. However, EBITDA should not be considered in
isolation or as a substitute for net income, cash flows or other income or
cash flow data or as a measure of a company's profitability or liquidity and
is not a measure in accordance with generally accepted accounting
principles. EBITDA is not necessarily comparable with similarly titled
measures reported by other companies.
(4) Pro forma interest expense assumes that the Unit Offering and the
application of the net proceeds therefrom had occurred on the first day of
the period presented. In addition to the stated interest rate on the Notes,
pro forma interest expense includes amortization of deferred issuance costs
and discount on the Notes related to the Warrants. Pro forma interest
expense does not include the pro forma effect of interest income which would
have been earned on excess cash for the period from inception (March 5,
1997) through December 31, 1997 and for the three months ended March 31,
1998.
(5) Pro forma balance sheet data assumes the Unit Offering and the application
of the net proceeds therefrom had occurred on March 31, 1998.
17
<PAGE> 19
(6) In addition to the indebtedness set forth in the above table, at July 15,
1998 the Company owed Ericsson $1.5 million (which was repaid with the
proceeds of the Unit Offering) and owed a stockholder $11.0 million
(increased from $6.0 million on March 31, 1998), which was refinanced in
connection with the Unit Offering. After giving effect to such repayment and
refinancing, pro forma cash and cash equivalents would have been $186.1
million. Pro forma long term debt and capital lease obligations is net of
$2.9 million discount to the principal amount of the Notes attributable to
the Company's estimate of the value of the Warrants issued in connection
with the Unit Offering.
(7) As of December 31, 1997, the Company had an outstanding letter of credit in
the amount of $3.5 million. This letter of credit was secured by the amount
in the restricted cash account. In the first quarter of 1998, the Company
exercised its early purchase option with regard to the related capital lease
and the letter of credit was retired. Pro forma amount represents escrowed
funds that, together with interest received thereon, will be sufficient to
pay when due the first four semi-annual interest payments on the Notes.
(8) Includes $2.9 million attributable to the Company's estimate of the value of
the Warrants. Such estimate was based on a valuation of the Common Stock as
of December 31, 1997 by a third party valuation firm. See
"Management -- Executive Compensation." No assurance can be given that the
value allocated to the Warrants is indicative of the price at which the
Warrants may actually trade.
18
<PAGE> 20
RISK FACTORS
An investment in the Exchange Notes involves a high degree of risk. In
addition to the other information set forth elsewhere in this Prospectus, the
following factors relating to the Company and this Exchange Offer should be
considered carefully by prospective investors when evaluating an investment in
the Exchange Notes.
LIMITED OPERATING HISTORY; OPERATING LOSSES
The Company was formed in March 1997 and has a limited history of
operations. Thus, historical information set forth herein may not be indicative
of the Company's future operating results and financial condition. In view of
the limited operating history of the Company, the Company remains vulnerable to
a variety of business risks generally associated with start-up companies, some
of which are beyond the control of the Company. Failure to continue to upgrade
operating and financial controls or systems or unexpected difficulties
encountered during expansion could adversely affect the Company's business,
financial condition and results of operation. Since June 1997, the Company has
recruited and hired key members of management in the areas of operations and
administration. As a result, the key members of the Company's management team
have worked together for only a short time. See "Management."
The Company reported EBITDA (as defined) of approximately $(6.3) million
and $(0.6) million for the period from inception (March 5, 1997) to December 31,
1997 and the three months ended March 31, 1998, respectively (net losses
amounted to $10,121 and $3,698 for the same periods). On a pro forma basis after
giving effect to the offering of the Original Notes and the application of the
net proceeds therefrom, the Company would have reported net losses of $36.3
million and $11.5 million for the period from inception (March 5, 1997) to
December 31, 1997 and the three months ended March 31, 1998, respectively. The
Company expects such net losses to continue as the Company focuses on increasing
its customer base, implementing its business strategy and developing new
services which will require it to incur significantly increased expenses for
marketing, network infrastructure, accounting, billing and other financial
control systems and personnel. Such expenses are expected to adversely impact
cash flow and operating performance. See "Summary -- Recent Developments." There
can be no assurance that the Company will generate sufficient revenues such that
the Company's operations will become profitable or generate positive cash flows
in the future. If the Company cannot achieve operating profitability or positive
cash flows from operating activities, it may not be able to meet its working
capital or debt service requirements, including its obligations under the Notes,
which would cause an event of default under the Indenture. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DIFFICULTIES IN EXPANDING AND OPERATING THE SPLITROCK NETWORK
The Company's ability to generate positive cash flows from operations will
depend upon the successful, timely and cost-effective expansion of the Splitrock
Network, the successful operation of the Splitrock Network and the Company's
ability to continue to attract customers. The expansion of the Splitrock Network
is subject to a variety of uncertainties and contingencies, including site and
facility acquisitions, the purchase and installation of network equipment, the
timely performance by its suppliers and third-party contractors of their
obligations, obtaining local telecommunications connections, and network
testing. Although the Company believes that its cost estimates and the expansion
schedule are reasonable, there can be no assurance that the actual construction
costs or time required to expand the Splitrock Network will not substantially
exceed current estimates. The inability of the Company to complete the Phase II
Expansion or obtain the necessary third-party telecommunication connections on a
timely or cost-efficient basis would have a material adverse effect on the
Company's financial condition and results of operations.
The Company has limited experience managing a telecommunications network.
The operation of the Splitrock Network is a significant undertaking.
Administrative, technical, operational and other problems that could arise,
including as a result of increasing traffic volume and equipment and software
failures, may be more difficult to address and solve due to the significant size
and complexity of the Network. The Company has experienced technical problems
which have led to significant service interruptions and failures. See
"-- Reliance on Prodigy; Recent Discussions with Prodigy." The inability of the
Company to effectively
19
<PAGE> 21
operate the Network and to quickly respond to problems as they occur would have
a material adverse effect on the Company's financial condition and results of
operations.
The Company's financial performance will further depend on its ability to
generate significant customer traffic. The Company currently derives
substantially all of its revenues from Prodigy. Although the Company has begun
receiving revenues from two additional customers, the Company expects that for
the foreseeable future Prodigy will remain its dominant customer and a small
number of customers will continue to account for all the Company's revenue. See
"Business -- Customers." In order to broaden its customer base, the Company will
need to expand its marketing and sales efforts and staff. See "-- Ability to
Manage Growth." The inability to significantly increase customer traffic would
have a material adverse effect on the Company.
The Company anticipates that even after the Phase II Expansion, future
expansions and adaptations of the Network's infrastructure, including the
electronic and software components used therein, will be necessary in order to
respond to growth in the number of customers served, increased demands to
transmit larger amounts of data, changes in its customers' service requirements
and technological advances by competitors. The expansion and adaptation of the
Splitrock Network will require substantial financial, operational and managerial
resources. There can be no assurance that the Company will be able to expand or
adapt the Splitrock Network to meet the evolving standards, demands and
requirements of its customers or technological advances of its competitors on a
timely basis and at a commercially reasonable cost, if at all, or that the
Company will be able to deploy successfully any expanded and adapted Network
infrastructure. The Company believes, based on current plans and assumptions
relating to its operations, that the net proceeds of the Unit Offering, together
with its existing financial resources and future borrowings from a stockholder,
if any, will be sufficient to fund the Company's growth and operations. In the
event that the Company's plans or assumptions change or prove to be inaccurate,
the Company may be required to seek alternative sources of financing. There can
be no assurance that the Company would be able to obtain additional financing on
acceptable terms, or at all. Any failure by the Company to expand or adapt the
Splitrock Network to the needs of its customers could have a material adverse
effect on the Company's financial condition and results of operations.
RELIANCE ON PRODIGY; RECENT DISCUSSIONS WITH PRODIGY
Pursuant to the Prodigy Agreement (as defined), the Company currently
provides certain network and related services, including Internet dial access
services, to Prodigy for its subscribers. Substantially all of the Company's
revenue to date has been derived from Prodigy under this agreement. Although the
Company has recently begun providing services to two additional customers and
expects to attract additional customers in the short-term, the Company expects
that for the foreseeable future Prodigy will remain its dominant customer and a
small number of customers will continue to account for all the Company's
revenue.
Prodigy is currently the third largest U.S. ISP measured in minutes
on-line. Launched in 1984 as a joint venture between IBM and Sears, Prodigy is
currently controlled by Carso, which indirectly owns 20.0 million shares, or
25.7%, of the Common Stock of the Company and a warrant, exercisable through
September 18, 1998, to acquire an additional 5.0 million shares, which, if
exercised, would result in Carso indirectly holding approximately 30.2% of the
Common Stock of the Company. Samer Salameh, the President and Chief Executive
Officer of Prodigy, is a member of the Board of Directors of the Company. See
"Principal Stockholders". Since Prodigy is a private company, limited financial
or other information regarding Prodigy is publicly available. In addition, the
Prodigy Agreement provides for only very limited information regarding Prodigy
to be provided to the Company. Therefore, the Company is unable to assess with
any certainty the financial condition or results of operations of Prodigy or
whether Prodigy will continue to operate as a financially solvent company or
remain able to pay amounts owed under the Prodigy Agreement. Furthermore,
Prodigy operates in a highly competitive environment. Prodigy competes with a
wide range of national, regional and local ISPs. Due to the limited available
information regarding Prodigy, the Company is unable to predict whether Prodigy
will remain competitive in the ISP marketplace. If competitive or other factors
were to result in a reorganization, bankruptcy, liquidation or similar
proceeding with respect to Prodigy or otherwise result in Prodigy being unable
to pay amounts due under the Prodigy Agreement the Company's financial position,
results of operations and ability to pay principal and interest on the Notes
would be materially adversely affected. Furthermore, if due to competitive or
other factors the number of Prodigy subscribers or
20
<PAGE> 22
usage by subscribers were to decrease, the Company would receive less revenue
under the Prodigy Agreement, which could have a material adverse effect on the
Company's financial position and results of operations. In addition, Prodigy is
operating in an industry undergoing rapid consolidation. Any acquisition or
merger involving Prodigy and a company with an alternative source of network
services could result in Prodigy exercising its option to terminate the Prodigy
Agreement and therefore have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Prodigy Transactions."
The Prodigy Agreement allows Prodigy to terminate its arrangement with the
Company on twelve months notice upon the payment of a termination charge. The
Prodigy Agreement also allows Prodigy to terminate its arrangement with the
Company on 45 days notice without payment if the Company defaults, following a
cure period, with respect to certain performance standards contained in the
Prodigy Agreement. In addition, the Prodigy Agreement provides for arbitration
to resolve certain other disputes including a default by the Company with
respect to certain financial covenants. Such arbitration could lead to a
termination of the Prodigy Agreement. The Company believes that, based on
current market conditions, if the relationship with Prodigy were terminated, it
could find new customers to replace the resulting loss of traffic. There can be
no assurance that there will not be a change in market conditions or that the
Company will be able to secure additional traffic should the relationship with
Prodigy be terminated. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Customers."
The Company is currently Prodigy's sole supplier of network services. As a
result, Prodigy is dependent on the Company to provide local Internet dial
access services to its subscribers. As such, Prodigy closely monitors the
quality of the services provided by the Company since it directly impacts
Prodigy's business and financial performance.
As part of its expansion plan, in January 1998 the Company began migrating
Prodigy subscribers from the Legacy Network to the Splitrock Network. In
addition to technical problems and network failures which occur from time to
time in the ordinary course of operating a telecommunications network, in
connection with the rapid migration of Prodigy subscribers from the Legacy
Network to the Splitrock Network during the first quarter of 1998, the Company,
and therefore Prodigy, experienced significant service interruptions and
failures, the most prolonged and serious of which occurred in February, March
and April of 1998. These service interruptions and failures were primarily due
to a faulty modem code that, among other things, resulted in a significant
number of Prodigy subscribers who called into the Splitrock Network receiving
busy signals when, in fact, there was sufficient capacity available to handle
the calls. At the time of these service interruptions, the Company had
inadequate staffing levels and procedures in place to detect or respond to the
situation in a timely manner. As a result, the modem related problems resulted
in an unfavorable call failure rate compared to industry norms. The Company
believes that it and its third-party modem vendor have corrected the faulty
modem code, although no assurance can be given in this regard. In addition, the
Company believes that it has achieved staffing levels in its NOCs adequate to
detect and address any such future service interruptions or failures.
Since February 1998 Prodigy has expressed repeated and serious concerns
regarding the Company's ability to deliver network services at a level of
quality and reliability necessary to sustain Prodigy's business and expected
growth. In particular, Prodigy has indicated that it believes that, due to the
Company's Network problems during the first quarter of 1998, Prodigy lost a
significant number of subscribers and the associated revenues and incurred
substantial costs. In addition, Prodigy has expressed serious concern about the
impact the Company's Network problems have had on the perception of Prodigy in
the industry. In May 1998, Prodigy notified the Company that unless the Company
was able to improve Network quality and access availability, it would be forced
to use alternate network service providers.
In connection with these discussions Prodigy raised a number of service and
technology related issues that it believes require prompt resolution. These
issues include, among other things, providing backup capacity to the Splitrock
Network (including through other providers' networks), automatic rollover
services to alternate access phone numbers, methods for limiting service
abusers, and network time-out circumventions. In addition, Prodigy has proposed
a number of amendments to the Prodigy Agreement including, among other
21
<PAGE> 23
things, modifying the current fee structure to a monthly fee based on
utilization of the Network, imposing more stringent financial penalties on the
Company in the event of Network interruptions, and exclusivity until the Network
is stable (i.e., a prohibition on the Company providing Internet dial access
services to Prodigy's large consumer-oriented ISP competitors).
Prodigy and the Company have had several meetings with regard to these
issues and have agreed to continue to have frequent periodic meetings. As a
result of these meetings, the Company has implemented a number of additional
procedures and business support systems. For example, the Company has
implemented network management systems that enable real time monitoring of the
Network and has established more frequent access to Prodigy subscriber-related
data on Network performance. Certain issues, however, remain under discussion.
Although the Company believes that it will resolve the outstanding issues
between the Company and Prodigy, until these issues are resolved, the future of
the Company's relationship with Prodigy is uncertain and there can be no
assurance that further discussions with Prodigy will not result in a termination
of the relationship, increased costs to the Company or amendments to the Prodigy
Agreement that are unfavorable to the Company. The loss of Prodigy as a customer
or any such increased costs or amendments to the Prodigy Agreement could have a
material adverse effect on the Company.
Prior to solutions implemented by the Company and its third-party modem
vendor, in April 1998 Inverse, an independent Internet testing group, indicated
that Prodigy had a call failure rate for the March 1998 reporting period that
was almost double that of Inverse's reported industry average, an 18.3% call
failure rate versus 9.4%, respectively, during the evening hours in which most
Prodigy traffic occurs. In June 1998, Inverse indicated that for the May
reporting period Prodigy had a call failure rate that was lower than the Inverse
industry average during such evening hours. The Company believes that its
improvement was primarily due to the solutions implemented by it and its
third-party modem vendor. In July 1998, Inverse indicated that for the June
reporting period Prodigy had a call failure rate above the Inverse industry
average during such evening hours. Prodigy's higher rate was in part due to
problems Prodigy experienced with certain log-on software during four evenings
during the Inverse testing period. The Company believes that Prodigy has
corrected these software problems. In all other call failure rating categories
tested by Inverse during June, the Company's measurements were better than the
Inverse industry average. Investors should not place undue reliance on the
Inverse report as a measure of the Company's Network performance because it does
not measure and report on all the factors that may affect the quality of
Splitrock's services to Prodigy and Inverse's findings are based on tests
conducted on a sampling of only 42 POPs. Furthermore, the most recent Inverse
data reflect only two months of operations and there can be no assurance that
the Company will be able to sustain such a level of Network performance.
ESTABLISHMENT AND MAINTENANCE OF TRANSMISSION SERVICES AND PEERING RELATIONSHIPS
The Company's success will depend upon its ability to complete the Phase II
Expansion and develop adequate support systems and services at an acceptable
cost. In order to complete the Phase II Expansion and continue operating the
existing POPs, the Company has entered into and will continue to enter into
agreements with various providers of infrastructure capacity.
The Company currently maintains transmission services agreements primarily
with WorldCom Communications, Inc. ("WorldCom") for long distance and with
competitive local exchange carriers ("CLECs") and various regional Bell
operating companies ("RBOCs") for local connections. In the future, the Company
will be required to negotiate new transmission services agreements, or
renegotiate existing transmission services agreements, as the Company expands
the Network. There can be no assurance that the Company will successfully
negotiate or renegotiate such agreements. The failure to negotiate or
renegotiate required transmission services agreements could have a material
adverse effect on the Company's financial condition and results of operations.
See "Business -- Splitrock's Network -- Transmission Services."
The Company has established peering arrangements with several ISPs and
intends to negotiate further agreements. The establishment and maintenance of
peering relationships with other network service providers is necessary in order
to exchange traffic with other network service providers without having to pay
transit costs. The basis on which network service providers make peering
available or impose settlement charges is
22
<PAGE> 24
evolving as the provision of Internet access and related services has expanded
and the dominance of a small group of national network service providers has
driven corporate peering policies. Recently, companies that have previously
offered peering have cut back or eliminated peering relationships and are
establishing new, more restrictive criteria for peering. Furthermore, if
increasing requirements associated with maintaining peering with the major
national network service providers develop, the Company may have to comply with
those additional requirements in order to establish peering relationships.
Failure to maintain peering relationships or establish new ones, if necessary,
would cause the Company to incur additional operating expenditures which would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Splitrock's Network -- Peering."
LEVERAGE AND RESTRICTIONS IMPOSED BY INDEBTEDNESS
The Company is highly leveraged. At March 31, 1998, on a pro forma basis
after giving effect to the offering of the Original Notes and the application of
the net proceeds therefrom, the Company would have had $279.2 million of total
indebtedness, representing approximately 93.4% of the Company's total
capitalization. See "Capitalization." In addition, the terms of the Notes permit
the Company to incur certain other indebtedness. There can be no assurance that
the Company will have sufficient cash flow to pay the interest expense or the
principal associated with the Notes or such additional indebtedness. See "Use of
Proceeds," "Selected Historical and Unaudited Pro Forma Financial Data,"
"Capitalization," and "Description of the Notes."
The historical earnings of the Company were insufficient to cover its fixed
charges for the period from inception (March 5, 1997) to December 31, 1997 and
the three months ended March 31, 1998 by approximately $10.1 million and $3.7
million, respectively. On a pro forma basis after giving effect to the offering
of the Original Notes and the application of the net proceeds therefrom, the
earnings of the Company would have been insufficient to cover its fixed charges
for the period from inception (March 5, 1997) to December 31, 1997 and the three
months ended March 31, 1998 by approximately $36.3 million and $11.5 million,
respectively. See "Selected Historical and Unaudited Pro Forma Financial Data."
The degree to which the Company will be leveraged could have several
important consequences to the holders of the Notes, including, but not limited
to, the following: (i) a substantial portion of the Company's cash flow from
operations will be required to be dedicated to service the Company's
indebtedness, and the failure of the Company to generate sufficient cash flow to
service such indebtedness could result in a default under such indebtedness,
including under the Notes; (ii) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or for other purposes may be impaired; (iii) the Company's flexibility to
expand, make capital expenditures and respond to changes in the industry and
economic conditions may be limited; (iv) the Indenture will contain, and future
agreements relating to the Company's indebtedness (including any credit
facilities, to the extent permitted by the Indenture) may contain, numerous
financial and other restrictive covenants, including, among other things,
limitations on the ability of the Company to incur additional indebtedness, to
create liens and other encumbrances, to make certain payments and investments,
to pay dividends, to sell or otherwise dispose of assets or to merge or
consolidate with another entity, the failure to comply with which may result in
an event of default, which, if not cured or waived, could have a material
adverse effect on the Company; and (v) the Company will be more leveraged than
certain of its competitors, which might place the Company at a competitive
disadvantage. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company's ability to meet its debt service obligations, to finance
planned capital expenditures, lease payments or acquisitions or to comply with
the covenants contained in the Indenture will depend upon the Company's future
performance, which will be subject to general economic conditions and to
financial, business, competitive, legislative, regulatory and other factors
affecting its operations, many of which are beyond the control of the Company.
There can be no assurance that the Company's business will be able to generate
cash flow at levels sufficient to satisfy its debt service and other
requirements. If in the future the Company is unable to generate sufficient cash
from its operations to make scheduled interest payments on the Notes, to pay the
Notes at maturity, or to meet other obligations and commitments, the Company may
be required to adopt one or more alternatives, such as refinancing or
restructuring its indebtedness, reducing or
23
<PAGE> 25
delaying planned expansion, selling assets or seeking to raise additional debt
or equity. There can be no assurance that the Company will be able to implement
any of these alternatives on satisfactory terms or at all. In addition, the
terms of existing or future debt agreements, including the Indenture, may
prohibit the Company from adopting some of these alternatives. See "Description
of the Notes."
ASSET ENCUMBRANCE
The Exchange Notes will be senior obligations of Splitrock ranking pari
passu in right of payment with all existing and future Senior Indebtedness of
Splitrock. The Exchange Notes will be unsecured except that the Trustee will
have a security interest in the Escrow Account for the benefit of holders of the
Exchange Notes. The Indenture will permit the Company to incur certain
indebtedness, including secured indebtedness. Holders of secured indebtedness of
the Company will have claims with respect to the assets constituting collateral
for such indebtedness that are prior to the claims of holders of Exchange Notes.
In the event of a default on the Exchange Notes, or a bankruptcy,
liquidation or reorganization of the Company, assets securing indebtedness of
the Company and its subsidiaries other than the Exchange Notes will be available
to satisfy obligations with respect to the indebtedness secured thereby before
any payment therefrom could be made on the Exchange Notes. Accordingly, the
Exchange Notes will be effectively subordinated to claims of secured creditors
of the Company to the extent of such pledged collateral. At March 31, 1998,
after giving pro forma effect to the offering of the Original Notes and the
application of the net proceeds therefrom, the Company would have had $21.1
million of secured indebtedness outstanding. See "Description of the Notes,"
"Selected Historical and Unaudited Pro Forma Financial Data," "Description of
Certain Indebtedness" and the Company's historical financial statements and
notes thereto included elsewhere in this Prospectus.
ABILITY TO MANAGE GROWTH
To date, the Company's operations have been limited to one primary customer
and rapid growth may place a significant strain on the Company's Network and
management, administrative, operational and financial resources. The Company's
ability to manage its growth successfully will require the Company to further
enhance its operational, management, administrative, financial and information
systems and controls. There can be no assurance that the Company will have the
resources available to successfully enhance such systems and controls.
Since June 1997, the Company has recruited and hired key members of
management in the areas of operations and administration. As a result, the key
members of the Company's management team have worked together for only a short
time. See "Management." Currently, the Company has limited personnel. In
accordance with the Company's growth strategy, it is seeking to hire additional
sales, marketing, administrative, operating and technical personnel. See
"Business -- Employees." Successful implementation of the Company's strategy
will depend on its ability to attract and retain such employees. The process of
locating, training and successfully integrating qualified personnel into the
Company's operations is often lengthy and expensive, and as a result of the
recent growth in the industry, the Company has experienced significant
competition in the attraction and retention of personnel that possess the skill
sets that the Company is seeking. There can be no assurance that the Company
will be successful in attracting, integrating and retaining such personnel. The
loss of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect on the Company's
results of operations, product development efforts, ability to attract customers
and ability to expand the Network.
In addition, as the Company increases its service offerings and number of
customers, there will be additional demands on the Company's customer support,
sales, marketing and administrative resources and personnel as well as on the
Splitrock Network infrastructure. While the Company's Network is operational, it
has experienced significant recent interruptions and failures and has not been
tested under circumstances consistent with the more significant volume of
activity anticipated as the Company grows its business and continues to migrate
Prodigy traffic from the Legacy Network and the IBM Global Services Network to
the Splitrock Network. See "-- Difficulties in Expanding and Operating the
Splitrock Network" and "-- Reliance
24
<PAGE> 26
on Prodigy; Recent Discussions with Prodigy." The Company's inability to
effectively manage its growth could have a material adverse effect on the
Company.
DEVELOPMENT OF EFFECTIVE PROCESSES AND SYSTEMS
Sophisticated processes and systems are vital to the Company's growth and
its ability to monitor costs, bill customers, record and manage customer orders
and record taxes due. The Company utilizes information management, equipment
monitoring, tracking and other software systems provided by third party vendors
and intends to implement a billing system based on third party software late in
1998. As the Company's strategy provides for growth in the number and volume of
products and services offered by the Company, such systems will be required to
expand with and adapt to the Company's growth. Failure of third party vendors to
deliver proposed products and services in a timely and effective manner and at
acceptable costs, failure of the Company to adequately identify all of its
information and processing needs, failure of the Company's processing or
information systems or failure of the Company to upgrade systems as necessary
would have a material adverse effect on the ability of the Company to implement
its strategy and on its financial condition and results of operations.
COMPETITION
The industry in which the Company competes is extremely competitive. The
Company expects that competition will continue to intensify as customers seek
additional capacity to satisfy continued growth of the Internet industry. In
addition, numerous competitors, including major telecommunications carriers, are
rapidly expanding their network capabilities. The Company believes that the
primary competitive factors for the provision of network services are quality of
service, network coverage, reliability, price, and product innovation.
Management believes it can compete effectively on these factors based on the
design of the Splitrock Network and industry experience at top management
levels, although there can be no assurance in this regard.
The Company's current and prospective competitors generally may be divided
into two groups: (i) companies that provide Internet access services to ISPs
with both residential and small business customers, including Verio Inc.
("Verio"), Concentric Network Corporation ("Concentric"), PSINet Inc. ("PSINet")
and NETCOM On-Line Communications Services, Inc. ("Netcom") and (ii) companies
that provide Internet access (including Internet dial access and transit), VPN
and other value added services to medium and large business customers, including
UUNet Technologies, Inc., a subsidiary of WorldCom ("UUNet"), GTE
Internetworking (formerly Bolt, Beranek & Newman, Inc. ("BBN")) and DIGEX, a
subsidiary of Intermedia Communications Inc. ("DIGEX"), as well as most of the
major long distance companies. Many of these competitors, in addition to their
substantially greater market presence and financial, technical and personnel
resources, also have large existing commercial customer bases. Furthermore, many
of these competitors have the ability to bundle Internet access and VPN services
with other services such as Web browsing or, in the case of long distance
companies, telephony. Such bundling of services may have a material adverse
effect on the Company's ability to compete effectively and thus could have an
adverse effect on the Company's business, financial condition and results of
operations.
The Company believes that significant new competitors will enter the
network services market. The Company is aware that other companies, including
IXC Communications Inc. ("IXC Comm.") and Level 3 Communications Inc. ("Level
3"), are in the process of building or expanding networks that will have the
ability to provide services comparable to those of the Company. In addition,
many of the Company's competitors have the financial and operational resources
to construct networks similar to the Splitrock Network. For example, Sprint
Communications Corp. ("Sprint") recently announced that it is in the process of
designing a network which will contain ATM switches at every core, hub and
remote site. There can be no assurance that the Company will be able to compete
effectively with such companies.
Recent reforms in the federal regulation of the telecommunications industry
have also created greater opportunities for local exchange carriers ("LECs"),
including the RBOCs, to enter the Internet network services market and therefore
compete with the Company. Such increased competition could have a material
adverse effect on the Company. In order to address the Internet network service
requirements of the current
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business customers of long distance and local carriers, the Company believes
that there is a trend toward horizontal integration through acquisitions of,
joint ventures with, and the wholesale purchase of connectivity from, ISPs. The
WorldCom/MFS Communications Company, Inc. ("MFS")/UUNet consolidation (as well
as the pending WorldCom/MCI Communications Corporation ("MCI") merger), the
Netcom/ICG Communications Inc. merger, the Intermedia Communications Inc.
("Intermedia")/DIGEX merger and the GTE Corporation's ("GTE") acquisition of BBN
are indicative of this trend. Such consolidations may result in the Company
competing with larger companies with greater resources to devote to the
development of new competitive products and services and the marketing of
existing competitive products and services.
As a result of increased competition and integration in the industry, the
Company could encounter significant pricing pressure, which in turn could result
in significantly lower average selling prices of the Company's services. There
can be no assurance that the Company will be able to offset the effects of any
such lower prices with an increase in the number of its customers, growth in
sales to its customers base, higher revenue from enhanced services, cost
reductions or otherwise. In addition, the Company believes that the Internet
access and related services industry is likely to undergo further consolidation
in the near future, which could result in increased price and other competition
in these industries and, potentially, other portions of the industry, including
the market for VPN services. Increased price or other competition could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will have the
financial resources, technical expertise or marketing and support capabilities
to continue to compete successfully.
DEPENDENCE ON SUPPLIERS
The Company is dependent on third parties for key components of its network
infrastructure, including for leased lines, transmission services and networking
equipment, such as routers, switches and modems. The quantities and quality of
such networking equipment required by the Company are available only from
limited sources. The Company currently utilizes Lucent for ATM switching
products, including the Lucent LDR200 switch, Bay Networks, Inc. ("Bay
Networks") for its Internet dial access platform, Cisco Systems, Inc. ("Cisco")
for routers and Sun Microsystems, Inc. ("Sun") for servers. The Company also
depends upon a variety of LECs and interexchange carriers ("IXCs") to provide
telecommunication services, including leased line and collocation facilities.
The Company currently has limited alternative suppliers for many of the
products or services it employs in its Network. In particular, Lucent is the
sole producer of the LDR200 switch, which the Company believes is a key
component of the Network. The Company has entered into a Purchase Agreement with
Yurie (which was acquired by Lucent in May 1998) pursuant to which the Company
agreed to purchase and Yurie agreed to provide a minimum of $20.0 million of
Yurie equipment and related products prior to January 1, 1999. As of July 15,
1998 the Company had purchased $11.0 million of equipment and products under
this agreement. Should the Company require additional Lucent LDR200 switches
beyond the quantity covered by the agreement (which the Company does not expect
to be the case), there can be no assurance that the Company will be able to
acquire them on acceptable terms, or at all. See "Business -- Suppliers." In
addition, expansion of network infrastructures by the Company and others is
placing, and will continue to place, a significant demand on the Company's other
suppliers, some of which have limited resources and production capacity. Certain
of the Company's suppliers, in turn, rely on sole or limited sources of supply
of components included in their products. These constraints may limit such
suppliers' ability to deliver products of the quality or within the time frame
demanded by the Company. The Company has experienced significant service
interruptions caused, in part, by faulty modem software code provided by one of
its suppliers. See "-- Reliance on Prodigy; Recent Discussions with Prodigy."
The Company is also dependent upon third party suppliers for its data
communications facilities and capacity. Certain of these suppliers are or may
become competitors of the Company, and such suppliers are not subject to any
contractual restrictions upon their ability to compete with the Company. The
Company currently uses WorldCom for the majority of its long distance
connections and backbone long distance transmission facilities. In addition, the
Company obtains bandwidth capacity under leased line connection agreements with
LECs, including RBOCs, or is provided telecommunications services and leased
physical
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space under local access/collocation agreements with various CLECs, such as
Focal Communications Corp. ("Focal"), Intermedia, Brooks Fiber Communications
and others. Since its inception, the Company has actively pursued agreements
with additional CLECs in an effort to establish relationships with a variety of
telecommunication providers and thereby reduce the cost of leased connectivity.
There can be no assurance that the Company will be able to continue to obtain
services from such suppliers on the scale and within the time frames required by
the Company at commercially reasonable cost, or at all. See
"Business -- Splitrock's Network -- Transmission Services." Any difficulties in
receiving adequate equipment, services or additional capacity on a timely basis
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has an agreement with IBM to use the IBM Global Services
Network to cover market areas that are neither served by the Splitrock Network
nor the Legacy Network. These POPs currently account for approximately 30% of
all Prodigy-related traffic. The terms of the agreement provide that either
party may, upon 60 days prior notice, terminate its respective obligations under
the contract for the remaining POP sites. In addition, under the terms of the
agreement with IBM services at certain of the POPs in the IBM Global Services
Network are scheduled to be discontinued on September 30, 1998. These POPs
currently represent less than 2% of the Company's Prodigy-related traffic. As
part of the Phase II Expansion, the Company plans to deploy POPs to those
locations. The Company has also formulated contingency plans, including
providing toll free Internet dial access to users in these areas, should the
Company be unable to timely deploy POPs in those areas or IBM be unwilling to
continue to provide service to those POPs after September 30, 1998. The
inability to provide coverage to those cities terminated on September 30, 1998
or any termination of IBM's other obligations under the contract could have a
material adverse effect on the Company's relationship with Prodigy, and,
consequently, the Company's business, financial condition and results of
operations.
As part of the Company's strategy to replace remaining POPs covered by the
IBM Global Services Network and to complete the expansion of the Splitrock
Network, the Company will rely significantly upon third parties to provide
equipment and services and to deploy the remainder of the Splitrock Network. The
Company has an agreement with Ericsson under which Ericsson will provide certain
equipment and services for, and deploy, 99 additional POP sites (the "Ericsson
Agreement"). In April 1998, Ericsson provided the Company with a $5.0 million
credit facility to be used to pay amounts due under the Ericsson Agreement. All
amounts drawn under the facility were repaid upon consummation of the Unit
Offering. The Company is in negotiations with Ericsson for the deployment of the
additional 231 POPs needed to complete the Phase II Expansion. The Company
expects that such negotiations will lead to an agreement on similar terms and
conditions as the Ericsson Agreement. There can be no assurance that the Company
and Ericsson will come to an agreement on the deployment of the remaining 231
POPs required to complete the Network's expansion. Should the Company and
Ericsson fail to reach such an agreement, there can be no assurance that the
Company will be able to secure an alternative vendor to complete the Network's
expansion. The inability of Ericsson to complete its obligations under the
Ericsson Agreement or the failure of the Company to reach an agreement for the
deployment of additional POPs would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Suppliers" and "Description of Certain Indebtedness."
The Company also engages third party vendors for routine maintenance,
on-call repair and certain related services. In addition to nine employees and
six individual contractors designated, trained and engaged by the Company as
field operation personnel, the Company has an agreement with IBM designed to
provide additional on-call field support personnel for maintenance, part
replacement and repairs for the Legacy Network until that network is
substantially decommissioned. In addition, during and following the Phase I
Buildout, WilTel has performed on-call services for replacement parts,
maintenance and repair services for the Splitrock Network. The agreement with
WilTel will expire on September 30, 1998. The Company is currently evaluating
and negotiating maintenance service proposals that are designed to replace the
existing agreements with IBM and WilTel and expand as the network infrastructure
grows. There can be no assurance that the Company will be able to enter into a
replacement maintenance agreement on acceptable terms, or at all. See
"Business -- Suppliers."
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DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by key executive officers, particularly
Mr. Kwok L. Li, Chairman of the Board and Chief Technical Officer, and Mr.
William R. Wilson, President and Chief Executive Officer. In addition, the
Company is currently in the process of recruiting additional key personnel,
including a Chief Operating Officer. The loss of one or more members of senior
management or the failure to recruit such personnel in the future could
significantly impede attainment of the Company's financial objectives. See "
Ability to Manage Growth." The Company does not currently maintain key man life
insurance on the life of any of its officers or employees but intends to acquire
such insurance for Mr. Li and Mr. Wilson in the near future.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control each
holder of Notes will have the right to require the Company to repurchase all or
any part of such holder's Notes at a price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
liquidated damages, if any, to the date of repurchase. The Indenture allows the
Company to incur certain indebtedness, including Senior Indebtedness. The terms
of such indebtedness may prohibit the repurchase of the Notes by the Company in
the event of a Change of Control, unless and until such time as it is repaid in
full. In such case, the Company, in order to repurchase the Notes, would need to
obtain the consent of the requisite lenders under such indebtedness or to repay
such indebtedness in full. The Company's failure to repurchase the Notes would
result in a default under the Indenture. The inability to repay any future
indebtedness, if accelerated, would also constitute an event of default under
the Indenture. There can be no assurance that the Company will have the
financial resources necessary to repurchase the Notes or any other indebtedness
upon a Change of Control. See "Description of the Notes -- Change of Control."
RISKS ASSOCIATED WITH STRATEGIC ALLIANCES AND ACQUISITIONS
The Company intends to evaluate strategic alliances and acquisitions both
domestically and internationally as they present themselves. The Company
believes that an attractive strategic alliance or acquisition candidate should
provide additional traffic over the Network, service enabling technology, or
management or employee expertise. Any future strategic alliances or acquisitions
which the Company pursues would be accompanied by the risks commonly encountered
in strategic alliances with or acquisitions of companies. Such risks include,
among other things, the difficulty of integrating the operations and personnel
of the companies, the potential disruption of the Company's ongoing business,
the inability of management to maximize the financial and strategic position of
the Company by the successful incorporation of licensed or acquired technology
and rights into the Company's service offerings, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and customers as a result of changes in management. Any
international alliance or acquisition would be accompanied by the additional
risks of doing business abroad, including unexpected changes in the regulatory
environments, export controls, tariffs, fluctuations in currency exchange rates
and potentially adverse tax consequences. There can be no assurance that the
Company would be successful in overcoming these risks or any other problems
encountered in connection with such strategic alliances or acquisitions. In
connection with any strategic alliance or acquisition, the Company could incur
substantial expenses, including the expenses of integrating the business of the
strategic alliance or the acquired company with the Company's business. Such
expenses, in addition to the financial impact of such strategic alliances or
acquisitions, could have a material adverse effect on the Company's business,
financial condition and results of operations.
CONTROL BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT; TRANSACTIONS WITH RELATED
PARTIES
Mr. Kwok L. Li, one of the founders and Chairman of the Board of the
Company, and Linsang Partners, LLC ("Linsang"), a company controlled by Mr. Li,
collectively own approximately 50.1% of the Company's outstanding shares. In
addition, William R. Wilson, the other founder and the President and Chief
Executive Officer of the Company, owns approximately 21.8% of the Company's
outstanding shares. As a result of this direct and indirect ownership, Mr. Li,
individually, and Mr. Li and Mr. Wilson, collectively, are able to elect
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the entire Board of Directors of the Company, to direct the affairs of the
Company, to appoint new management and to approve any action requiring the
approval of the holders of the Company's capital stock, including the adoption
of amendments to the Company's certificate of incorporation and approval of
mergers or sales of substantially all of the Company's assets. There can be no
assurance that the interests of Mr. Li and Mr. Wilson will not conflict with the
interests of the holders of the Notes. See "Principal Stockholders."
Certain of the directors of the Company also serve as directors and/or
officers of other companies with which the Company conducts business and,
consequently, there exists the possibility that such directors will have a
conflict of interest. Until its sale to Lucent, Mr. Li was Director, Vice
Chairman, Chief Technology Officer and owner of 12.4% of the Common stock of
Yurie, one of the Company's principal suppliers. In connection with the sale of
Yurie to Lucent, Linsang has agreed to make the services of Mr. Li available to
Lucent to provide technical guidance for both the Lucent LDR200 and Lucent's
entire line of other ATM switches. The agreement has a term of three years and
terminates on May 29, 2001. Mr. Li has been named Chief Technical Officer of the
Carrier Network division of Lucent and has agreed to not participate in
designing, developing, producing, manufacturing or marketing multi-service
access equipment other than for Lucent. See "-- Dependence on Suppliers".
Furthermore, Mr. Samer Salameh is President and Chief Executive Officer of
Prodigy and is a member of the Company's Board of Directors. In addition,
certain stockholders may have conflicting interests. Orient Star, a wholly owned
subsidiary of Carso, owns 20.0 million shares, or 25.7%, of the outstanding
shares of Common Stock of the Company and an option, exercisable through
September 18, 1998, to subscribe for an additional 5.0 million shares which, if
exercised, would result in Orient Star holding approximately 30.2% of the Common
Stock of the Company. The Company expects that this option will be exercised
although no assurance can be given in this regard. Carso is a controlling
stockholder of Prodigy and a significant stockholder of Telmex.
Any decision made by directors is required by law to be made in accordance
with their duties and obligations to deal fairly and in good faith with a view
to the best interests of the Company and its shareholders. Directors may owe
similar duties to the other companies for which they serve as directors or
officers. Due in part to the nature of the potential conflicts presented on an
ongoing basis by certain of the Company's suppliers, customers and others, there
can be no assurance that the directors involved in such a conflict will act in
the best interests of the Company. See "Management -- Certain Relationships and
Related Transactions" and "Description of the Notes -- Certain Covenants
Limitation on Transactions with Affiliates."
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
The markets for Internet access, transit services, VPNs and related
services provided by the Company are relatively new and characterized by rapidly
changing technology, evolving industry standards, changes in customer needs and
frequent new product and service introductions. The Company's future success
will depend, in part, on its ability to effectively use leading technologies, to
continue to develop its technical expertise, to enhance its current services, to
develop new products and services that meet changing customer needs, and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost-effective basis. There can be no assurance that the
Company will be successful in effectively using new technologies, developing new
services and technical expertise or enhancing its current services on a timely
basis or that such new technologies or enhancements will achieve market
acceptance. The Company believes that its ability to compete successfully is
also dependent upon the continued compatibility of its services with products
and architectures offered by various vendors. There can be no assurance that the
Company will be able to effectively address the compatibility issues raised by
technological changes or new industry standards. In addition, there can be no
assurance that services or technologies developed by others will not render the
services or technology of the Company or its vendors uncompetitive or obsolete.
In addition, issues concerning the commercial use of the Internet and other
services remain unresolved and may impact the growth of Internet use, especially
in the business market targeted by the Company. Despite growing interest in the
many commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others, inconsistent quality of service, the lack of availability of
cost-effective, high-speed options, a limited number of local access points
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for corporate users, inability to integrate business applications on the
Internet, the need to deal with multiple and frequently incompatible vendors,
inadequate protection of the confidentiality of stored data and information
moving across the Internet, and a lack of tools to simplify Internet access and
use. In particular, there is a perceived lack of security of commercial data,
such as credit card numbers, that has significantly impeded commercial
exploitation of the Internet to date, and there can be no assurance that
encryption or other technologies will be developed that satisfactorily address
these security concerns. Capacity constraints caused by growth in the use of the
Internet may, unless resolved, also impede further development of the Internet
to the extent that users experience delays, transmission errors and other
difficulties. The failure of the Internet industry to address these concerns and
introduce viable solutions could limit the growth of the Internet and other
telecommunications services. Any such failure would have a material adverse
effect on the Company's ability to rapidly grow its business and attain its
financial objectives.
NETWORK SECURITY RISKS
Despite the implementation of network security measures by the Company,
such as limiting physical and network access to its equipment, its
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by others. Computer viruses, break-ins or
other problems caused by third parties could lead to interruptions, delays or
cessation in service to the Company's customers. Furthermore, inappropriate use
of the Internet by third parties could also potentially jeopardize the security
of confidential information stored in the computer systems of the Company's
customers, which may deter potential customers and adversely affect existing
customer relationships. Security problems represent an ongoing threat to public
and private data networks. Addressing problems caused by computer viruses,
break-ins or other problems caused by third parties could have a material
adverse effect on the Company.
The security measures employed by the Company cannot assure complete
protection from computer viruses, break-ins and other disruptive problems. The
occurrence of such problems may result in claims against or liability on the
part of the Company. Such claims, regardless of their ultimate outcome, could
result in costly litigation and could have a material adverse effect on the
Company's business or reputation or on its ability to attract and retain
customers for its services.
RISK OF SYSTEM FAILURE; INSURANCE
The success of the Company is dependent upon its ability to protect its
network infrastructure against damage from fire, earthquakes, floods, power
loss, telecommunications failures and similar events. Despite precautions taken
by and planned by the Company, the occurrence of a natural disaster or other
unanticipated problems at one of the Company's NOCs or at a number of the
Company's core sites, hub sites or remote access sites could cause significant
interruptions in the services provided by the Company. Additionally, failure of
the Company's telecommunications providers to provide the communications
capacity required by the Company as a result of natural disaster, operational
disruption or for any other reason could cause significant interruptions in the
services provided by the Company. While the Company believes it has insurance
adequate to cover such risks, the occurrence of a significant loss not fully
covered by insurance could have a material adverse effect on the Company. In
addition, there can be no assurance that the Company will be able to maintain
adequate insurance coverage at rates it believes reasonable.
REGULATORY MATTERS; POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED OVER THE
INTERNET
Although the Company is not currently subject to direct regulation by the
Federal Communications Commission ("FCC") or any other federal or state agency,
it operates in a highly regulated industry and therefore changes in the
regulatory environment relating to Internet services and traditional
telecommunications services, including regulatory changes which directly or
indirectly affect telecommunications costs or increase the likelihood or scope
of competition from RBOCs or other telecommunication companies, could have a
material adverse effect on the Company's financial position or results of
operations, including by affecting the prices at which the Company offers its
services or imposing regulatory compliance and other costs on the Company. There
can be no assurance that future service offerings of the Company will not be
subject to regulation or that the current regulatory environment will not evolve
in ways which impose
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requirements on the Company or its customers that would materially adversely
affect the Company. Various existing federal and state regulations are currently
the subject of judicial proceedings, legislative hearings and administrative
proposals which could change, in varying degrees, the manner in which the
industry operates. For example, the FCC is considering whether Internet related
service providers should be required to pay into Universal Service subsidy
pools. The imposition of such regulatory charges or similar regulatory
constraints would affect the Company's costs of serving its customers and could
have a material adverse effect on the Company's business and results of
operations. Furthermore, the FCC has indicated that it may consider regulating
ISPs, which could have a material adverse effect on the Company. In addition,
Internet telephony may become subject to some form of regulation in the future.
See "Business -- Regulation".
The law in the United States relating to the liability of ISPs and
providers of transmission capacity for information carried on, disseminated
through, or hosted on their systems is currently unsettled. The
Telecommunications Act of 1996 (the "Communications Act") and statutes enacted,
or under consideration in some states, impose civil and criminal liability upon
ISPs, or providers of transmission capacity to ISPs, for the transmission or
dissemination of certain types of information and materials. The imposition of
such liability may require the Company to implement measures to reduce its
exposure to such liability, which may require the expenditure of substantial
resources. Regulations, litigation, or legislation could affect the demand for
the Company's services.
DISCRETIONARY AUTHORITY OVER USE OF NET PROCEEDS
Management will retain a significant amount of discretion over the
application of the net proceeds of the Offering (other than amounts required to
be deposited into escrow). Because of the number and variability of factors that
determine the Company's use of the net proceeds of the Offering, there can be no
assurance that such applications will not vary substantially from the Company's
current intentions. Pending utilization, the Company intends to invest the net
proceeds of the Offering in investment grade and U.S. government securities.
BANKRUPTCY RISKS RELATED TO ESCROW ACCOUNT
The right of the Trustee under the Indenture and the Escrow and
Disbursement Agreement (as defined) to foreclose upon and sell Escrow Collateral
(as defined) upon the occurrence of an Event of Default on the Notes is likely
to be significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against the Company. Under
applicable bankruptcy law, secured creditors such as the holders of the Notes
are prohibited from foreclosing upon or disposing of a debtor's property without
prior bankruptcy court approval. See "Description of Notes -- Disbursement of
Funds; Escrow Account."
FRAUDULENT CONVEYANCE; PREFERENTIAL TRANSFER
If, in a bankruptcy or reorganization case or a lawsuit by or on behalf of
unpaid creditors of the Company, a court were to find that, at the time the
Company incurred indebtedness under the Notes, (i) the Company incurred such
indebtedness with the intent of hindering, delaying or defrauding current or
future creditors or (ii)(a) the Company received less than reasonably equivalent
value or fair consideration for incurring such indebtedness and (b) the Company
(1) was insolvent or was rendered insolvent by reason of such incurrence, (2)
was engaged, or about to engage, in a business or transaction for which its
assets constituted unreasonably small capital, (3) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured (as all of the foregoing terms are defined in or interpreted under the
relevant fraudulent transfer or conveyance statutes) or (4) was a defendant in
an action for money damages, or had a judgment for money damages docketed
against it (if, in either case, after final judgment, the judgment is
unsatisfied), then such court could avoid or subordinate the Company's
obligations under the Notes to presently existing and future indebtedness of the
Company and take other actions detrimental to the holders of the Notes.
For purposes of the foregoing, the measure of insolvency varies depending
upon the law of the jurisdiction which is being applied. Generally, however, the
Company would be considered to have been insolvent at the time the Notes were
issued if the sum of its debts was, at that time, greater than the sum of the
value of all of
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its property at a fair valuation, or if the then fair saleable value of its
assets was less than the amount that was then required to pay its probable
liability on its existing debts as they became absolute and matured. There can
be no assurance as to what standard a court would apply in order to determine
whether the Company was insolvent as of the date the Notes were issued, or that,
regardless of the method of valuation, a court would not determine that the
Company was insolvent on that date, or that, regardless of whether the Company
was insolvent on the date the Notes were issued, that the issuance constituted a
fraudulent transfer for the grounds summarized above.
Additionally, under federal bankruptcy law or applicable state insolvency
law, if certain bankruptcy or insolvency proceedings were initiated by or
against the Company within 90 days after any payment by the Company with respect
to the Notes or if the Company anticipated becoming insolvent at the time of
such payment or incurrence, all or a portion of such payment could be avoided as
a preferential transfer and the recipient of such payment could be required to
return such payment.
ABSENCE OF PUBLIC MARKET
Before the Exchange Offer, there has not been any public market for the
Original Notes. The Original Notes have not been registered under the Securities
Act and are subject to restrictions on transferability to the extent that they
are not exchanged for Exchange Notes by holders who are entitled to participate
in the Exchange Offer. The Exchange Notes will constitute a new issue of
securities with no established trading market. The Company does not intend to
list the Exchange Notes on any national securities exchange or to seek approval
for quotation through any automated quotation system. The Initial Purchaser of
the Original Notes currently makes a market in the Notes, but is not obligated
to do so and may discontinue such market making at any time. In addition, such
market making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act and may be limited during the Exchange Offer.
Accordingly, no assurance can be given that an active public or other market
will develop for the Exchange Notes or as to the liquidity of the trading market
for the Exchange Notes. If a trading market does not develop or is not
maintained, holders of the Exchange Notes may experience difficulty in reselling
the Exchange Notes or may be unable to sell them at all. If a market for the
Exchange Notes develops, any such market may be discontinued at any time.
If a public trading market develops for the Exchange Notes, future trading
prices of such securities will depend on many factors, including, among other
things, prevailing interest rates, the Company's results of operations and the
market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the Exchange Notes may trade at a discount from their
principal amount. Historically, the market for securities similar to the
Exchange Notes, including non-investment grade debt, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the Exchange Notes, if
such market develops, will not be subject to similar disruptions.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Original Notes who do not exchange their Notes for Exchange
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Notes as set forth in the legend thereon and in
the Offering Memorandum, dated July 21, 1998, because the Original Notes were
issued pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Original Notes may not be offered or sold unless
registered under the Securities Act and applicable state securities laws, or
pursuant to an exemption therefrom, or in a transaction not subject to the
Securities Act and applicable state securities laws. The Company does not intend
to register the Original Notes under the Securities Act, and after consummation
of the Exchange Offer will not be obligated to do so except under limited
circumstances. To the extent Original Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Original Notes could be adversely affected. See "The Exchange Offer."
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EXCHANGE OFFER PROCEDURES
The Exchange Notes will be issued in exchange for Original Notes only after
timely receipt by the Exchange Agent of such Original Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documents. Therefore, holders of Original Notes desiring to tender such Original
Notes in exchange for Exchange Notes should allow sufficient time to ensure
timely delivery. Neither the Exchange Agent nor the Company is under any duty to
give notification of defects or irregularities with respect to tenders of
Original Notes for exchange. Original Notes that are not tendered or are
tendered but not accepted will, following consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof. In
addition, any holder of Original Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes will be
required to comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Based on an
interpretation by the staff of the Commission set forth in no-action letters
issued to third parties, the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Original Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, if such Exchange Notes are
acquired in the ordinary course of such holder's business, such holders have no
arrangement with any person to participate in the distribution of such Exchange
Notes and neither such holders nor any such other person is engaging in or
intends to engage in a distribution of such Exchange Notes. Any holder of
Original Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Original Notes, where such
Original Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. See
"Plan of Distribution" and "The Exchange Offer."
YEAR 2000
The year-2000 issue (as defined) is the result of computer programs being
written using two digits, rather than four digits, to define the applicable
year. Programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000 (the "year-2000 issue"). This could
result in a major system failure or miscalculations, including an inability to
process transactions, send invoices or engage in similar normal business
activities. Due to its reliance on computer hardware and software, the Internet
and related service industries are highly susceptible to the year-2000 issue. If
the year-2000 issue should cause widespread problems across the Internet, usage
can be expected to decline dramatically. Such an event would have a material
adverse effect on the Company's financial condition and results of operations,
the nature and extent of which cannot reasonably be determined by the Company on
the basis of information currently available to it. The Company has not prepared
a contingency plan and does not expect to do so in light of the uncertainty of
the impact of year-2000 issues on the Internet as a whole and the Company's
anticipated schedule to be year-2000 compliant before the end of 1999.
The Company is currently in the process of evaluating its operations and
both its information technology systems and its non-information technology
systems to determine its own vulnerability to the year-2000 issue. The Company
relies heavily on non-information technology systems in the conduct of its
operations and has determined that substantially all of such systems are
year-2000 compliant. Certain network-monitoring software, which is used by the
Company to monitor network equipment (POPs) on the Legacy Network, is not
year-2000 compliant, but as part of the Company's Phase II Expansion,
substantially all of the Legacy Network POPs are scheduled to be decommissioned
by the end of 1998 and such network-monitoring software will no longer be used
by the Company. With respect to the Company's database inventory software, used
to capture data about the network configuration, including location of equipment
and maintenance, the Company has purchased and is currently installing year-2000
compliant software to replace its existing software. Installation is scheduled
to be completed by the end of 1998, and the cost of such purchase and
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<PAGE> 35
installation is not material. The Company has also determined that certain other
of its software systems are not year-2000 compliant. The Company believes that,
with modifications and upgrades to such software, which are scheduled to occur
in the ordinary course of business, it will be fully year-2000 compliant by the
end of 1999. The Company is continuing its evaluation of the remaining areas
impacted by year-2000 issues, including Internet interfaces, facility matters
and equipment vendors, but does not expect to incur material costs in connection
with making its software year-2000 compliant. To date the Company has not
incurred material costs in ensuring year-2000 compliance.
The Company is also dependent upon the ability of its customers to ensure
that their software and equipment is year-2000 compliant. The Company has
initiated formal communications with Prodigy to determine the extent to which
the Company is vulnerable to Prodigy's own year-2000 issues, if any. Prodigy has
informed the Company that Prodigy Classic may not be year-2000 compliant.
Prodigy is in the process of migrating users to Prodigy Internet, which is
year-2000 compliant, and plans to discontinue Prodigy Classic service by the end
of 1999. However, there can be no guarantee that Prodigy Classic or systems of
future customers on which the Company may rely will be timely converted, or that
a failure to convert, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange
Original Notes in like principal amount, the terms of which are substantially
identical to the Exchange Notes. The Original Notes surrendered in exchange for
Exchange Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the outstanding indebtedness of the Company.
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<PAGE> 36
CAPITALIZATION
The following table sets forth the Company's capitalization as of March 31,
1998 (i) on an actual basis and (ii) on an as adjusted basis after giving effect
to the offering of the Original Notes and the application of net proceeds
therefrom as if they had occurred on March 31, 1998. This table should be read
in conjunction with "Selected Historical and Unaudited Pro Forma Financial
Data," "Use of Proceeds," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical financial statements of
the Company, including the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 3,349 $192,620
======== ========
Restricted cash(1).......................................... $ -- $ 56,604
======== ========
Total debt (including current portion)(2):
Capital leases............................................ $ 21,074 $ 21,074
Senior Notes due 2008(3).................................. -- 258,120
Notes payable to stockholder(4)........................... 6,000 --
-------- --------
Total debt........................................ 27,074 279,194
Stockholders' equity:
Common stock.............................................. 77 77
Common Stock Warrants(5).................................. -- 2,880
Additional paid-in capital(6)............................. 30,451 30,451
Accumulated deficit....................................... (13,819) (13,819)
-------- --------
Total stockholders' equity........................ 16,709 19,589
-------- --------
Total capitalization.............................. $43,783.. $298,783
======== ========
</TABLE>
- ---------------
(1) As adjusted amount represents escrowed funds that, together with interest
received thereon, will be sufficient to pay when due the first four
semi-annual payments on the Notes.
(2) In addition to the indebtedness set forth in the above table, at July 15,
1998 the Company owed Ericsson $1.5 million. This indebtedness was repaid
with the net proceeds of the Unit Offering.
(3) Net of discount to the principal amount of the Notes attributable as of the
date hereof to the Company's estimate of the value of the Warrants issued
together with the Original Notes as the Units in the Unit Offering.
(4) At July 15, 1998, notes payable to stockholder amounted to $11.0 million.
This amount was refinanced in connection with the Unit Offering. In
connection with such refinancing, such stockholder purchased $11.0 million
of the Original Notes. After giving effect to such refinancing and the
repayment of indebtedness to Ericsson, as adjusted cash and cash equivalents
would have been $186.1 million.
(5) Includes $2.9 million attributable to the Company's estimate of the value of
the Warrants issued as part of the Units. Such estimate was based on a
valuation of the Common Stock as of December 31, 1997 by a third party
valuation firm. See "Management -- Executive Compensation." No assurance can
be given that the value allocated to the Warrants is indicative of the price
at which the Warrants may actually trade.
(6) Includes a $10.0 million convertible note that was converted into equity on
August 9, 1997.
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<PAGE> 37
THE EXCHANGE OFFER
EXCHANGE OFFER PURSUANT TO EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The Original Notes were sold by the Company on July 24, 1998 (the "Issue
Date"). The Initial Purchaser purchased $261,000,000 in aggregate principal
amount of the Original Notes, of which $11.0 million in aggregate principal
amount of the Original Notes were sold to Linsang, an affiliate of the Company.
As a condition to the sale of the Original Notes, the Company and the Initial
Purchaser entered into the Exchange and Registration Rights Agreement on the
Issue Date. Pursuant to the Exchange and Registration Rights Agreement, the
Company agreed that, unless the Exchange Offer is not permitted by applicable
law or Commission policy, it would (i) file with the Commission a Registration
Statement under the Securities Act with respect to the Exchange Notes within 45
days after the Issue Date, (ii) use its reasonable best efforts to cause such
Registration Statement to become effective under the Securities Act within 105
days after the Issue Date and (iii) upon effectiveness of the Registration
Statement, commence the Exchange Offer, keep the Exchange Offer open for at
least 30 days (or a longer period if required by law) and deliver to the
Exchange Agent Exchange Notes in the same aggregate principal amount at maturity
as the Original Notes that were tendered by holders thereof pursuant to the
Exchange Offer. A copy of the Exchange and Registration Rights Agreement has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part. The Registration Statement of which this Prospectus is a part is
intended to satisfy certain of the Company's obligations under the Exchange and
Registration Rights Agreement.
If (i) because of any change in law or applicable interpretations thereof
by the staff of the Commission, the Company is not permitted to effect the
Exchange Offer as contemplated hereby, (ii) any Original Notes validly tendered
pursuant to the Exchange Offer are not exchanged for Exchange Notes within 135
days after the Issue Date, (iii) the Initial Purchaser so requests with respect
to Original Notes not eligible to be exchanged for Exchange Notes in the
Exchange Offer, (iv) any applicable law or interpretations do not permit any
holder of Original Notes to participate in the Exchange Offer, (v) any holder of
Original Notes that participates in the Exchange Offer does not receive freely
transferable Exchange Notes in exchange for tendered Original Notes, or (vi) the
Company so elects, the Company has agreed to file with the Commission a shelf
registration statement (the "Shelf Registration Statement") to cover resales of
each Original Note that (i) has not been exchanged for a freely transferable
Exchange Note in the Exchange Offer; (ii) has not been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iii) has not been nor is eligible to be distributed
to the public pursuant to Rule 144 under the Securities Act or Rule 144(k) under
the Securities Act (each such Original Note being a "Restricted Note").
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) any
such holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) who exchanges the Original Notes for the Exchange
Notes in the ordinary course of business and who is not participating, does not
intend to participate, and has no arrangement with any person to participate, in
the distribution of the Exchange Notes, will be allowed to resell the Exchange
Notes to the public without further registration under the Securities Act and
without delivering to the purchasers of the Exchange Notes a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if any
holder acquires the Exchange Notes in the Exchange Offer for the purposes of
distributing or participating in the distribution of the Exchange Notes or is a
broker-dealer, such holder cannot rely on the position of the staff of the
Commission enumerated in certain no-action letters issued to third parties and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Original Notes, where such
Original Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in
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<PAGE> 38
connection with any resale of such Exchange Notes. The Company has agreed to
make available a Prospectus meeting the requirements of the Securities Act to
any broker-dealer for use in connection with any resale of any such Exchange
Notes acquired as described below for such period as such broker-dealers must
comply with such requirements. A broker-dealer that 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
Exchange and Registration Rights Agreement (including certain indemnification
rights and obligations). The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired by such
broker-dealer as a result of market-making or other trading activities. Pursuant
to the Registration Rights Agreement, the Company has agreed to make this
Prospectus, as it may be amended or supplemented from time to time, available to
broker-dealers for us in connection with any resale for a period of 180 days
after the Expiration Date. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Original
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal amount of outstanding Original Notes surrendered pursuant
to the Exchange Offer. Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the exchange will be registered under the
Securities Act and hence the Exchange Notes will not bear legends restricting
their transfer and (ii) holders of the Exchange Notes will not be entitled to
the certain rights of holders of the Original Notes under the Exchange and
Registration Rights Agreement, which rights will terminate upon the consummation
of the Exchange Offer. The Exchange Notes will evidence the same debt as the
Original Notes (which they replace) and will be issued under, and be entitled to
the benefits of, the Indenture, which also authorized the issuance of the
Original Notes, such that all outstanding Notes will be treated as a single
class of debt securities under the Indenture.
As of the date of this Prospectus, $250.0 million aggregate principal
amount of the Original Notes are outstanding and registered in the name of Cede
& Co., as nominee for The Depository Trust Company (the "Depositary"). In
addition, Original Notes in the aggregate principal amount of $11.0 million,
also outstanding and registered in the name of Cede & Co. (which are not
eligible to be exchanged under this Exchange Offer) are held by an affiliate of
the Company. Such $11.0 million of Original Notes will be exchanged for $11.0
million of Exchange Notes in a private offering and the Exchange Notes are
expected to be registered for resale under the Securities Act. Only a registered
holder of the Original Notes (or such holder's legal representative or
attorney-in-fact) as reflected on the records of the Trustee under the Indenture
may participate in the Exchange Offer. There will be no fixed record date for
determining registered holders of the Original Notes entitled to participate in
the Exchange Offer.
Holders of the Original Notes do not have any appraisal or dissenter's
rights under the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Exchange and Registration Rights Agreement and the applicable requirements of
the Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder.
The Company shall be deemed to have accepted validly tendered Original
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders of Original Notes for the purposes of receiving the Exchange Notes from
the Company.
Holders who tender Original Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other
37
<PAGE> 39
than certain applicable taxes described below, in connection with the Exchange
Offer. See " Fees and Expenses."
37.1
<PAGE> 40
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
, 1998 unless the Company, in its sole discretion, extends the
Exchange Offer to a date not later than , 1998, in which case the
term "Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) will mail to the
registered holders of Original Notes an announcement thereof, (iii) will issue a
press release or other public announcement which shall include disclosure of the
approximate number of Original Notes deposited to date, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Without limiting the manner in which the Company may choose to
make a public announcement of any delay, extension, amendment or termination of
the Exchange Offer, the Company shall have no obligation to publish, advertise
or otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) to extend the Exchange Offer, or (iii) if any
conditions set forth below under "-- Certain Conditions to the Exchange Offer"
shall not have been satisfied, to terminate the Exchange Offer by giving oral or
written notice of such delay, extension or termination to the Exchange Agent.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders. If the Exchange Offer is amended in a manner determined by
the Company to constitute a material change, the Company will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered holders of Original Notes, and the Company will extend the
Exchange Offer for a period of five to 10 business days, depending upon the
significance of the amendment and the manner of disclosure to such registered
holders, if the Exchange Offer would otherwise expire during such five to 10
business day period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes bear interest at a rate equal to 11 3/4% per annum.
Interest on the Exchange Notes is payable semi-annually on each January 15 and
July 15, commencing on January 15, 1999. Holders of Exchange Notes will receive
interest on January 15, 1999 from the date of initial issuance of the Original
Notes plus an amount equal to the interest accrued on the Original Notes.
Interest on the Original Notes accepted for exchange will cease to accrue upon
issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Original Notes may tender such Original Notes
in the Exchange Offer. To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, or facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile to the
Exchange Agent at the address set forth below under "-- Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Original Notes must be received by the Exchange Agent along with the Letter
of Transmittal, or (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Original Notes, if such procedure is
available, into the Exchange Agent's account at the Depositary pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the holder must comply
with the guaranteed delivery procedures described below.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOM-
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<PAGE> 41
MENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE
EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR ORIGINAL
NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE
ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner(s) of the Original Notes whose Original Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Original Notes, either make appropriate
arrangements to register ownership of the Original Notes in such owner's name
(to the extent permitted by the Indenture) or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Original Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box entitled "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. If signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be made by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act which is a member of
one of the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Original Notes listed therein, such Original Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Original
Notes.
If the Letter of Transmittal or any Original 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 should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Original Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original 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
Original Notes not properly tendered or any Original Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Original Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Original 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 Original Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Original Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived.
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<PAGE> 42
While the Company has no present plan to acquire any Original Notes which
are not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Original Notes which are not tendered pursuant to the
Exchange Offer (other than the Shelf Registration Statement in connection with
the Original Notes in the aggregate principal amount of $11.0 million held by an
affiliate of the Company), the Company reserves the right in its sole discretion
to purchase or make offers for any Original Notes that remain outstanding after
the Expiration Date or, as set forth below under "-- Certain Conditions to the
Exchange Offer," to terminate the Exchange Offer and, to the extent permitted by
applicable law, purchase Original 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, each holder will represent to the Company that, among other
things, (i) the Exchange Notes to be acquired by the holder of the Original
Notes in connection with the Exchange Offer are being acquired by the holder in
the ordinary course of business of the holder, (ii) the holder has no
arrangement or understanding with any person to participate in the distribution
of Exchange Notes, (iii) the holder acknowledges and agrees that any person who
is a broker-dealer registered under the Exchange Act or is participating in the
Exchange Offer for the purposes of distributing the Exchange Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of the staff of the Commission
set forth in certain no-action letters, (iv) the holder understands that a
secondary resale transaction described in clause (iii) above and any resales of
Exchange Notes obtained by such holder in exchange for Original Notes acquired
by such holder directly from the Company should be covered by an effective
registration statement containing the selling securityholder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission, and (v) the holder is not an "affiliate," as defined in Rule 405 of
the Securities Act, of the Company. If the holder is a broker-dealer that will
receive Exchange Notes for its own account in exchange for Original Notes that
were acquired as a result of market-making activities or other trading
activities, the holder is required to acknowledge in the Letter of Transmittal
that it will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, the holder
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
RETURN OF NOTES
If any tendered Original Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Original Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Original Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Original Notes tendered by book-entry transfer into the Exchange Agent's
account at the Depositary pursuant to the book-entry transfer procedures
described below, such Original Notes will be credited to an account maintained
with the Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at the Depositary for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make
book-entry delivery of Original Notes by causing the Depositary to transfer such
Original Notes into the Exchange Agent's account at the Depositary in accordance
with the Depositary's procedures for transfer. Although delivery of Original
Notes may be effected through book-entry transfer at the Depositary, the Letter
of Transmittal or facsimile thereof, with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
by the Exchange Agent at the address set forth below under " Exchange Agent" on
or prior to the Expiration Date or pursuant to the guaranteed delivery
procedures described below.
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<PAGE> 43
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original
Notes are not immediately available or (ii) who cannot deliver their Original
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 substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Original Notes and
the principal amount of Original Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof) together with the certificate(s) representing the
Original Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Original
Notes in proper form for transfer and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Original Notes to be withdrawn (the "Depositor"), (ii) identify the Original
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Original Notes), and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Original Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sole discretion, whose
determination shall be final and binding on all parties. Any Original Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Original Notes so withdrawn are validly retendered. Properly withdrawn Notes
may be retendered by following one of the procedures described above under
"Procedures for Tendering" at any time before the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Original Notes not theretofore accepted for exchange, and may terminate or amend
the Exchange Offer as provided herein before the acceptance of such Original
Notes, if any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might impair the ability
of the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to the
Company or there shall
41
<PAGE> 44
have occurred any material adverse development in any existing action or
proceeding with respect to the Company; or
(b) there shall have been any material change, or development
involving a prospective change, in the business or financial affairs of the
Company which, in the reasonable judgment of the Company, would materially
impair the contemplated benefits of the Exchange Offer to the Company; or
(c) there shall have been proposed, adopted or enacted any law,
statute, rule or regulation which, in the reasonable judgment of the
Company, might materially impair the ability of the Company to proceed with
the Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(d) any governmental approval which the Company shall, in its
reasonable discretion, deem necessary for the consummation of the Exchange
Offer as contemplated hereby has not been obtained.
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Original
Notes and return all tendered Original Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Original Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders to
withdraw such Original Notes (see "Withdrawal of Tenders"), or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Original Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders of the Original Notes, and the Company
will extend the Exchange Offer for a period of five to 10 business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during such
five to 10 business day period.
Holders may have certain rights and remedies against the Company under the
Exchange and Registration Rights Agreement if the Company fails to consummate
the Exchange Offer, notwithstanding a failure of the conditions stated above.
Such conditions are not intended to modify those rights or remedies in any
respect.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition or may be waived by the Company in whole or in part at any time and
from time to time in the Company's sole discretion. The failure by the Company
at any time to exercise the foregoing rights shall not be deemed a waiver of
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
TERMINATION OF CERTAIN RIGHTS
All rights under the Exchange and Registration Rights Agreement (including
registration rights) of holders of the Original Notes eligible to participate in
this Exchange Offer will terminate upon consummation of the Exchange Offer
except with respect to the Company's continuing obligations (i) to indemnify the
holders (including any broker-dealers) and certain parties related to the
holders against certain liabilities (including liabilities under the Securities
Act), (ii) to provide, upon the request of any holder of a transfer-restricted
Original Note, the information required by Rule 144(d)(4) under the Securities
Act in order to permit resales of such Original Notes pursuant to Rule 144A,
(iii) to use its best efforts to keep the Registration Statement effective to
the extent necessary to ensure that it is available for resales of transfer-
restricted Notes by broker-dealers for a period of 180 days from the date on
which the Registration Statement is declared effective, and (iv) to provide
copies of the latest version of the Prospectus to broker-dealers upon their
request for a period of 180 days from the date on which the Registration
Statement is declared effective.
LIQUIDATED DAMAGES
If (i) the Registration Statement or Shelf Registration Statement is not
filed with the Commission on or prior to 45 days after the Issue Date; (ii)
Registration Statement or the Shelf Registration Statement is not declared
effective within 105 days after the Issue Date; (iii) the Exchange Offer is not
consummated on or
42
<PAGE> 45
prior to 135 days after the Issue Date or (iv) the Shelf Registration Statement
is filed and declared effective within 135 days after the Issue Date but shall
thereafter cease to be effective (at any time that the Company is obligated to
maintain the effectiveness thereof) without being succeeded within 30 days by an
additional registration statement filed and declared effective (each such event
referred to in clauses (i) through (iv), a "Registration Default"), the Company
will be obligated to pay liquidated damages to each holder of Restricted Notes,
during the period of one or more such Registration Defaults, in an amount equal
to $0.192 per week per $1,000 principal amount of the Notes constituting
Restricted Notes held by such holder until the Registration Statement, the Shelf
Registration Statement or other applicable registration statement is filed, the
Exchange Offer Registration Statement is declared effective and the Exchange
Offer is consummated or the Shelf Registration Statement is declared effective
or again becomes effective, as the case may be. All accrued liquidated damages
shall be paid to holders in the same manner as interest payments on the Notes on
semi-annual payment dates which correspond to interest payment dates for the
Notes. Following the cure of all Registration Defaults, the accrual of
liquidated damages will cease.
EXCHANGE AGENT
Bank of Montreal Trust Company has been appointed as Exchange Agent of the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed
as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand Delivery:
Bank of Montreal Trust Company Bank of Montreal Trust Company
Wall Street Plaza Wall Street Plaza
88 Pine Street, 19th Floor 88 Pine Street, 19th Floor
New York, NY 10005 New York, NY 10005
By Overnight Delivery: By Facsimile:
Bank of Montreal Trust Company 212/701-7664
Wall Street Plaza
88 Pine Street, 19th Floor
New York, NY 10005
</TABLE>
FEES AND EXPENSES
All fees and expenses incident to compliance with the Exchange and
Registration Rights Agreement regarding this Exchange Offer shall be borne by
the Company whether or not the Exchange Offer or a Shelf Registration becomes
effective.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$350,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, among
others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Original Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Original Notes pursuant to
the Exchange Offer, then 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 with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
43
<PAGE> 46
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Original
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
The Original Notes which are not exchanged for the Exchange Notes pursuant
to the Exchange Offer will remain restricted securities. Accordingly, such Notes
may be resold only (i) to a person whom the seller reasonably believes is a
qualified institutional buyer (as defined in Rule 144A under the Securities Act)
in a transaction meeting the requirements of Rule 144A, (ii) in a transaction
meeting the requirements of Rule 144 under the Securities Act, (iii) outside the
United States to a foreign person in a transaction meeting the requirements of
Rule 904 under the Securities Act, (iv) in accordance with another exemption
from the registration requirements of the Securities Act (and based upon an
opinion of counsel if the Company so requests), (v) to the Company, or (vi)
pursuant to an effective registration statement and, in each case, in accordance
with any applicable securities laws of any state of the United States or any
other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
44
<PAGE> 47
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The following table sets forth selected historical and unaudited pro forma
financial data of the Company. The historical statement of operations and other
financial data for the period from inception (March 5, 1997) through December
31, 1997, and the historical balance sheet data as of December 31, 1997 have
been derived from, should be read in conjunction with and are qualified in their
entirety by reference to the audited financial statements, including the notes
thereto, included elsewhere in this Prospectus. The historical statement of
operations and other financial data for the three months ended March 31, 1998
and the historical balance sheet data as of March 31, 1998 have been derived
from, should be read in conjunction with and are qualified in their entirety by
reference to the unaudited condensed financial statements, including the notes
thereto, included elsewhere in this Prospectus which have been prepared on a
basis consistent with the audited financial statements and in the opinion of
management include all adjustments, consisting solely of normal, recurring
adjustments, necessary to present fairly the information contained therein. The
historical quarterly statement of operations data for the three months ended
June 30, 1997, September 30, 1997 and December 31, 1997 have been derived from
the Company's accounting records and have been prepared on a basis consistent
with the audited financial statements and in the opinion of management include
all adjustments, consisting solely of normal, recurring adjustments, necessary
to present fairly the information contained therein. The selected historical
financial data are not necessarily indicative of the operating results to be
expected in future periods.
The following table also presents certain selected unaudited pro forma
financial data of the Company for the period from inception (March 5, 1997) to
December 31, 1997 and the three months ended and as of March 31, 1998, which
give effect to the Unit Offering of the Original Notes and the application of
the proceeds therefrom as if they had occurred on March 5, 1997 and January 1,
1998, respectively, in the case of the statement of operations data, and March
31, 1998, in the case of the balance sheet data. The selected unaudited pro
forma financial data do not purport to be indicative of the results that
actually would have been obtained had the Unit Offering or the Original Notes
been consummated on the assumed dates and they are not necessarily indicative of
operating results to be expected in future periods.
The following selected historical and unaudited pro forma financial data
should be read in conjunction with the historical financial statements of the
Company and the notes thereto included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 5, 1997) THREE MONTHS
THROUGH ENDED
DECEMBER 31, 1997 MARCH 31, 1998
--------------------- --------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 22,708 $16,494
Operating expenses:
Network personnel costs................................... 437 1,051
Network operating costs................................... 1,925 3,127
Legacy Network costs...................................... 25,341 12,295
Severance costs(1)........................................ 463 --
Selling, general and administrative....................... 1,276 657
Depreciation and amortization............................. 3,500 2,820
-------- -------
Total operating expenses.......................... 32,942 19,950
-------- -------
Loss from operations........................................ (10,234) (3,456)
Other income (expense):
Interest income........................................... 348 107
Interest expense.......................................... (235) (349)
-------- -------
Loss before income taxes.................................... (10,121) (3,698)
Provision for income taxes.................................. -- --
-------- -------
Net loss.................................................... $(10,121) $(3,698)
======== =======
Loss per share -- basic and diluted......................... $ (0.24) $ (0.05)
======== =======
Weighted average shares -- basic and diluted................ 42,824 76,800
======== =======
</TABLE>
45
<PAGE> 48
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF MARCH 31, 1998
1997 --------------------
------------ PRO
ACTUAL ACTUAL FORMA(6)
------------ -------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(7)................................ $ 7,710 $ 3,349 $192,620
Restricted cash(8).......................................... 3,472 -- 56,604
Property and equipment, net................................. 38,504 40,506 40,506
Total assets................................................ 54,388 51,095 306,095
Long term debt and capital lease obligations (including
current portion)(7)....................................... 25,120 27,074 279,194
Stockholders' equity(9)..................................... 20,407 16,709 19,589
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 5, 1997) THREE MONTHS
THROUGH ENDED
DECEMBER 31, 1997 MARCH 31, 1998
--------------------- --------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures(2)..................................... $ 42,004 $ 4,822
EBITDA(3)................................................... (6,271) (636)
Cash provided by (used in):
Operating activities...................................... (2,233) (4,874)
Investing activities...................................... (17,198) (2,740)
Financing activities...................................... 27,141 3,253
Ratio of earnings to fixed charges(4)....................... -- --
PRO FORMA DATA:(5)
Interest expense............................................ $ 26,422 $ 8,140
Ratio of earnings to fixed charges(4)....................... -- --
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1998
-------- ------------- ------------ ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
QUARTERLY STATEMENT OF OPERATIONS DATA:
Revenue......................................... $ -- $10,729 $11,979 $16,494
Operating expenses:
Network personnel costs....................... -- 95 342 1,051
Network operating costs....................... -- 561 1,364 3,127
Legacy Network costs.......................... -- 13,119 12,222 12,295
Severance costs(1)............................ -- -- 463 --
Selling, general and administrative........... 125 471 680 657
Depreciation and amortization................. -- 1,708 1,792 2,820
------- ------- ------- -------
Total operating expenses.............. 125 15,954 16,863 19,950
------- ------- ------- -------
Loss from operations............................ (125) (5,225) (4,884) (3,456)
Other income (expense):
Interest income............................... 30 137 181 107
Interest expense.............................. -- (113) (122) (349)
------- ------- ------- -------
Loss before income tax.......................... (95) (5,201) (4,825) (3,698)
Provision for income tax........................ -- -- -- --
------- ------- ------- -------
Net loss........................................ $ (95) $(5,201) $(4,825) $(3,698)
======= ======= ======= =======
Loss per share -- basic and diluted............. $ (0.01) $ (0.11) $ (0.06) $ (0.05)
======= ======= ======= =======
Weighted average shares -- basic and diluted.... 14,648 48,991 76,800 76,800
======= ======= ======= =======
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1998
-------- ------------- ------------ ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OTHER QUARTERLY DATA:
EBITDA(2)....................................... $ (125) $(3,517) $(2,629) $ (636)
Cash provided by (used in):
Operating activities.......................... (1,554) 103 (2,333) (4,874)
Investing activities.......................... (377) (12,242) (2,878) (2,740)
Financing activities.......................... 10,026 19,750 (3,387) 3,253
</TABLE>
- ---------------
(1) Prior to January 1998, certain staffing positions were filled by Prodigy
employees who were subcontracted to the Company. In the fourth quarter of
1997, the Company recorded a severance charge related to the elimination of
13 of these positions.
(2) Capital expenditures include equipment purchased through capital leases of
$26,198 and $2,173 for the period from inception (March 5, 1997) through
December 31, 1997 and for the three months ended March 31, 1998,
respectively.
(3) EBITDA is defined as net income (loss) plus net interest expense, provision
for income taxes, depreciation and amortization and severance costs. EBITDA
is presented as it is commonly used by certain investors to analyze and
compare operating performance and to determine a company's ability to
service and/or incur debt. However, EBITDA should not be considered in
isolation or as a substitute for net income, cash flows or other income or
cash flow data or as a measure of a company's profitability or liquidity and
is not a measure in accordance with generally accepted accounting
principles. EBITDA is not necessarily comparable with similarly titled
measures reported by other companies.
(4) The historical earnings of the Company were insufficient to cover its fixed
charges for the period from inception (March 5, 1997) to December 31, 1997
and the three months ended March 31, 1998 by approximately $10.1 million and
$3.7 million, respectively. On a pro forma basis after giving effect to the
offering of the Original Notes and the application of the net proceeds
therefrom, the earnings of the Company would have been insufficient to cover
its fixed charges for the period from inception (March 5, 1997) to December
31, 1997 and the three months ended March 31, 1998 by approximately $36.3
million and $11.5 million, respectively. Fixed charges consist of interest
expense and that portion of rent expense the Company believes to be
representative of interest (i.e., one-third of rent expense).
(5) Pro forma interest expense assumes that the offering of the Original Notes
and the application of the net proceeds therefrom had occurred on the first
day of the period presented. In addition to the stated interest rate on the
Notes, pro forma interest expense includes amortization of deferred issuance
costs and discount on the Notes related to the Warrants. Pro forma interest
expense does not include the pro forma effect of interest income which would
have been earned on excess cash for the period from inception (March 5,
1997) through December 31, 1997 and for the three months ended March 31,
1998.
(6) Pro forma balance sheet data assumes the Unit Offering and the application
of the net proceeds therefrom had occurred on March 31, 1998.
(7) In addition to the indebtedness set forth in the above table, at July 15,
1998 the Company owed Ericsson $1.5 million, which were repaid with the
proceeds of the Unit Offering, and a stockholder $11.0 million (increased
from $6.0 million on March 31, 1998), which was refinanced in connection
with the Unit Offering. After giving effect to such repayment and
refinancing, pro forma cash and cash equivalents would have been $186.1
million. Pro forma long term debt and capital lease obligations is net of
$2.9 million discount to the principal amount of the Notes attributable to
the Company's estimate of the value of the Warrants issued as part of the
Units.
(8) As of December 31, 1997, the Company had an outstanding letter of credit in
the amount of $3.5 million. This letter of credit was secured by the amount
in the restricted cash account. In the first quarter of 1998, the Company
exercised its early purchase option with regard to the related capital lease
and the letter of credit was retired. As adjusted amount represents escrowed
funds that, together with interest received thereon, will be sufficient to
pay when due the first four semi-annual interest payments on the Notes.
(9) Includes $2.9 million attributable to the Company's estimate of the value of
the Warrants issued as part of the Units. Such estimate was based on a
valuation of the Common Stock as of December 31, 1997 by a third party
valuation firm. See "Management Executive Compensation." No assurance can be
given that the value allocated to the Warrants is indicative of the price at
which the Warrants may actually trade.
47
<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in March 1997 and has a limited history of
operations. Thus, historical information set forth herein may not be indicative
of the Company's future operating results and financial condition.
The Company is a provider of telecommunications services, including high
speed Internet access services, on an advanced nationwide network based on ATM
switching technology which is deployed in every POP of the Network. The Company
is currently providing Internet dial access and related services to Prodigy for
its approximately 900,000 subscribers. The Splitrock Network currently reaches
more than 55% of U.S. households by a local call with 56k modem access
(currently the fastest modem speed commercially available over residential phone
lines), including households in every market with a population of at least
100,000 as well as several second tier markets. Upon completion of the Phase II
Expansion, the Network will have approximately 400 active POPs with a physical
presence in all 50 states, reaching over 90% of U.S. households with a local
call.
From the formation of the Company until July 1, 1997 the Company did not
generate any revenue. On July 1, 1997 the Company consummated the Prodigy
Transactions (as defined) following which the Company began providing Internet
dial access and related services to Prodigy for its subscribers. To date, the
Company has generated substantially all of its revenue under its agreement with
Prodigy. See "-- Prodigy Transactions" and "Risk Factors -- Reliance on Prodigy;
Recent Discussions with Prodigy."
The Company recently began generating revenue from two additional
customers. The Company has provided transit services to Orbis, an Internet
connection service provider to businesses, on a month-to-month basis since May
1998. In addition, the Company has signed an agreement with NetworkTwo, a value
added network service provider, to provide VPN services to NetworkTwo's 200
business customers under which the Company began providing services in June
1998. As part of the Company's strategy, the Company intends to add new
customers and services that will maximize traffic on the Network. See
"Business -- Business Strategy."
PRODIGY TRANSACTIONS
On June 24, 1997, the Company and Prodigy entered into the Splitrock Full
Service Agreement (the "Prodigy Agreement") pursuant to which the Company agreed
to provide certain network services to Prodigy for its subscribers. The Prodigy
Agreement became effective on July 1, 1997. In order to provide these services
to Prodigy for its subscribers prior to the completion of the Splitrock Network,
on July 1, 1997 the Company acquired, for temporary use, the Legacy Network from
Prodigy, which consisted of substantially all network assets and related
communications equipment owned or leased by Prodigy. Consideration for the
acquisition of the Legacy Network was in the form of the assumption of $5.9
million of liabilities. The foregoing transactions are collectively referred to
herein as the "Prodigy Transactions."
Prodigy Agreement. Under the Prodigy Agreement, the Company provides
Prodigy with network services, including Internet dial access services and other
network connections, and Prodigy pays the Company monthly usage-based or
subscriber-based service charges equal to the lower of: (i) total subscriber
hours for the month multiplied by the contracted hourly usage rate (the
"Usage-Based Rate") or (ii) total subscribers at the month end multiplied by the
fixed monthly charge per subscriber (the "Subscriber-Based Rate"). The
contracted hourly Usage-Based Rate increased by 9.5% on January 1, 1998 and will
increase by 8.7% on January 1, 1999. The fixed monthly Subscriber-Based Rate
does not increase over time. The Prodigy Agreement imposes certain minimum
monthly service charges on Prodigy in the event that the lower of the
Usage-Based Rate or Subscriber-Based Rate calculation is below defined levels.
The minimum monthly service charges are $3.5 million through June 30, 1999 and
will increase by $500,000 beginning each subsequent July 1. Additionally, in the
event the average monthly hours per subscriber (calculated as the total
subscriber hours for the month divided by the total subscribers at the month
end) exceeds 30 hours, the
48
<PAGE> 51
Prodigy Agreement provides that Prodigy will be subject to additional fees
("Additional Fees") equal to (a) $1.00, multiplied by (b) the number of average
monthly hours per subscriber in excess of 30 hours, multiplied by (c) the total
subscribers at the month end. Through March 31, 1998 amounts paid by Prodigy
under the Prodigy Agreement were based on the Usage-Based Rate. As a result of
the migration of Prodigy Classic subscribers to Prodigy Internet, since April
1998 such amounts have been based on the Subscriber-Based Rate. Over the
long-term the Company expects to receive amounts from Prodigy based on the
Subscriber-Based Rate, although in the short-term there may be periods when the
Usage-Based Rate applies. As a result, amounts received by the Company from
Prodigy since April 1998 have been, and over the long-term (except for any
Additional Fees) are expected to be, a function of the total number of Prodigy
subscribers as opposed to total subscriber hours. Depending on the relative
growth rates of the number of Prodigy subscribers and total subscriber hours,
the amount of the Company's revenues and the Company's operating margins could
be negatively affected.
The initial term of the Prodigy Agreement expires on June 30, 2001. After
the initial term either party may terminate the Prodigy Agreement upon twelve
months prior written notice. If no notice is received, the term of the Prodigy
Agreement is automatically extended for successive twelve month terms. Under the
Prodigy Agreement the Company is required, among other things, to provide
Prodigy with certain financial and other information, meet certain financial
covenants and meet certain network performance standards. The Company is
required to provide certain credits to Prodigy in the event it fails to meet
certain network performance standards. Prodigy has the right to terminate the
Prodigy Agreement following a cure period in the event of the Company's failure
to comply with certain provisions thereof, including certain network performance
standards. In addition, Prodigy has the right to terminate the Prodigy Agreement
during the initial term without cause by providing twelve months prior written
notice and paying a termination charge of $5.0 million until July 1, 1999 and
$3.0 million thereafter. In the event of certain prolonged network failures,
Prodigy also has the right to enter the Company's premises and cure such
failures.
RESULTS OF OPERATIONS
The following table sets forth selected quarterly statement of operations
data that are the basis of discussion below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1998
-------- ------------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................... $ -- $10,729 $11,979 $16,494
Operating expenses:
Network personnel costs.............. -- 95 342 1,051
Network operating costs.............. -- 561 1,364 3,127
Legacy Network costs................. -- 13,119 12,222 12,295
Severance costs...................... -- -- 463 --
Selling, general and
administrative.................... 125 471 680 657
Depreciation and amortization........ -- 1,708 1,792 2,820
-------- ------- ------- -------
Loss from operations................... $ (125) $(5,225) $(4,884) $(3,456)
======== ======= ======= =======
Other income (expense):
Interest income...................... 30 137 181 107
Interest expense..................... -- (113) (122) (349)
-------- ------- ------- -------
Loss before income tax................. (95) (5,201) (4,825) (3,698)
Provision for income tax............... -- -- -- --
-------- ------- ------- -------
Net loss............................... $ (95) $(5,201) $(4,825) $(3,698)
======== ======= ======= =======
Loss per share -- basic and diluted.... $ (0.01) $ (0.11) $ (0.06) $ (0.05)
======== ======= ======= =======
Weighted average shares -- basic and
diluted.............................. 14,648 48,991 76,800 76,800
======== ======= ======= =======
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1998
-------- ------------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Other Quarterly Data:
EBITDA (as defined).................... $ (125) $(3,517) $(2,629) $ (636)
Cash provided by (used in):
Operating activities................. (1,554) 103 (2,333) (4,874)
Investing activities................. (377) (12,242) (2,878) (2,740)
Financing activities................. 10,026 19,750 (3,387) 3,253
</TABLE>
Revenue. Prior to July 1, 1997, the Company did not generate any revenue.
Since July 1, 1997 (the date of the consummation of the Prodigy Transactions)
substantially all revenue of the Company has been received from Prodigy under
the Prodigy Agreement.
Prodigy currently offers two services to its subscribers: Prodigy Classic
and Prodigy Internet. Prodigy Internet subscribers generally have higher average
usage, and therefore when Prodigy pays the Company based on the Usage-Based Rate
such subscribers generate greater revenues for the Company. Since April 1998
amounts paid by Prodigy have been based on the Subscriber-Based Rate, which the
Company expects to continue over the long-term. Prodigy Classic subscribers are
expected to decline as Prodigy gradually migrates such subscribers to Prodigy
Internet and discontinues Prodigy Classic service at the end of 1999. Most of
those subscribers are expected to become Prodigy Internet subscribers, although
there can be no assurances in this regard.
During the third quarter of 1997, the first quarter following the
consummation of the Prodigy Transactions, the Company had revenue of $10.7
million.
During the fourth quarter of 1997, the Company had revenue of $12.0
million, an increase of 11.7% from the prior quarter. The increase in revenue
was due primarily to a 12.1% increase in total subscriber usage. While the
average number of total Prodigy subscribers for the fourth quarter decreased by
approximately 3.3%, average subscriber usage increased 15.8% due to a 30.2%
increase in the average number of total Prodigy Internet subscribers, with a
partially offsetting 19.3% decrease in the average number of total Prodigy
Classic subscribers, which traditionally have lower monthly usage than Prodigy
Internet subscribers. Such decrease in Prodigy Classic subscribers was in line
with expectations.
During the first quarter of 1998, the Company had revenue of $16.5 million,
an increase of 37.7% from the prior quarter. The increase in revenue was due
primarily to a 25.4% increase in total Prodigy subscriber usage, as the average
number of total Prodigy subscribers increased by 6.4% for the first quarter. In
addition, the 9.5% increase in the contracted hourly Usage-Based Rate effective
January 1, 1998 contributed to the revenue growth. Average subscriber usage
increased 17.9% due to a 36.4% increase in the average number of total Prodigy
Internet subscribers during the quarter, which was partially offset by an 16.7%
decrease in the average number of total Prodigy Classic subscribers. Such
decrease in Prodigy Classic subscribers was in line with expectations.
The Company expects the number of Prodigy subscribers and subscriber usage
to increase. Amounts due from Prodigy (other than any Additional Fees) are
expected to be based on the Subscriber-Based Rate over the long-term and as a
result, depending on the relative growth rates of the number of Prodigy
subscribers and total subscriber hours, the amount of the Company's revenues and
the Company's operating margins could be negatively affected. Prodigy has
informed the Company that it intends to begin a widespread major U.S. market
advertising campaign in September 1998. In addition, the Company expects the
number of Prodigy Internet subscribers to increase relative to the number of
Prodigy Classic subscribers, and thereby continue to increase average hourly
usage per subscriber, which could result in Additional Fees becoming due to the
Company. The Company is unable to predict when or whether it will receive any
Additional Fees from Prodigy in the future.
Network Related Operating Expenses. Network related operating expenses
include all of the direct costs incurred in connection with designing, deploying
and expanding the Splitrock Network, operating the Splitrock Network and the
Legacy Network, and accessing the IBM Global Services Network. The Company
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accounts for its direct Network-related operating expenses in three line items,
Network personnel costs, Network operating costs and Legacy Network costs.
Network personnel costs include all personnel expenses incurred in connection
with deploying, operating and expanding the Splitrock Network. Network operating
costs include all other expenses incurred in connection with deploying,
operating and expanding the Splitrock Network, including assembly costs, line
charges, maintenance costs, travel costs, auxiliary, equipment costs and
collocate charges. Legacy Network costs include all expenses incurred in
connection with operating the Legacy Network, including facility leases, line
charges, personnel costs, occupancy costs, equipment maintenance costs and
access fees for the IBM Global Services Network. Under a transition services
agreement with Prodigy entered into as part of the Prodigy Transactions, certain
of these expenses which were incurred by Prodigy prior to the consummation of
the Prodigy Transactions continued to be paid by Prodigy and the Company
reimbursed Prodigy for such charges or netted such charges against amounts due
from Prodigy. The transition services agreement expired on January 1, 1998,
although the Company continues to reimburse Prodigy for occupancy expenses,
telecommunications line charges and equipment lease payments relating to Legacy
Network POPs that have not yet been decommissioned. The Company assumed no
contractual liability for facility or telecommunications lines as part of the
transition services agreement.
As the expansion of the Splitrock Network progresses, the Legacy Network is
being decommissioned and usage of the IBM Global Services Network is declining.
As of July 15, 1998, there were 65 Legacy Network POPs awaiting decommission
(resulting in duplicative costs) and 20 Legacy Network POPs still in operation.
As POPs are decommissioned, all occupancy and telecommunication line changes are
terminated. The Company has decommissioned 70 of the original 155 Legacy Network
POPs through July 15, 1998. Substantially all Legacy Network POPs are expected
to be decommissioned by the end of 1998. There is typically a lag time of two to
three months between the time the Splitrock Network is operational in any given
area and either the Legacy Network infrastructure for such area is
decommissioned or the IBM Global Services Network is no longer used. As a
result, transition to the Splitrock Network involves a temporary duplication of
costs.
The Company was formed on March 5, 1997 to build the Splitrock Network.
From that time through the end of the second quarter of 1997, the Company had
not yet begun deploying the Splitrock Network nor had it consummated the Prodigy
Transactions. As a result, it incurred limited operating expenses prior to the
third quarter of 1997.
On July 1, 1997, the Company consummated the Prodigy Transactions. During
the third quarter of 1997, the Company incurred approximately $95,000 of Network
personnel costs and approximately $561,000 of Network operating costs. In
addition, during this quarter the Company incurred $13.1 million of Legacy
Network costs. The Network operating costs were comprised primarily of
approximately $470,000 of assembly and engineering design charges paid to Yurie.
The Legacy Network costs incurred in this period included costs to operate the
Legacy Network as well as $5.6 million of usage charges paid relating to the IBM
Global Services Network.
During the fourth quarter of 1997, the Company incurred approximately
$342,000 of Network personnel costs and $1.4 million of Network operating costs.
In addition, during this quarter the Company incurred $12.2 million of Legacy
Network costs. The increase in Network personnel costs was primarily due to the
hiring of approximately 20 technical and accounting employees for The Woodlands,
TX headquarters location. The increase in Network operating costs reflected the
beginning of the Splitrock Network deployment. During this period, the Company
deployed 29 POPs, of which 16 were operational by the end of the period, and
completed its backbone installation. The Network operating costs during this
period primarily consisted of approximately $514,000 of assembly and engineering
design charges paid to Yurie and approximately $551,000 of leased transmission
and local access line charges. The decrease in Legacy Network costs from the
prior quarter primarily resulted from disconnecting underutilized lines and
reduced occupancy and personnel costs, offset in part by expenses incurred
related to new lines installed for the Legacy Network in certain geographic
areas to address capacity issues and increased access charges relating to the
IBM Global Services Network. The Company paid $6.3 million of usage charges
related to the IBM Global Services Network in the fourth quarter of 1997. During
this quarter the Company disconnected 4,330 network access lines which carried a
total monthly rental cost of approximately $130,000. During this quarter the
Company incurred
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certain duplicative expenses as a result of the lag between moving Splitrock
Network POPs into production and decommissioning the corresponding Legacy
Network infrastructure.
Prior to January 1, 1998, the Yorktown, NY staff remained employed by
Prodigy and were made available to the Company by Prodigy. The Company
reimbursed Prodigy for the costs related to such employees and recorded them as
Legacy Network expenses. In the fourth quarter of 1997, as part of a downsizing
program in Yorktown, NY, the Company eliminated the need for 13 Prodigy
employees. The Company recorded a charge of approximately $463,000 related to
severance pay for these Prodigy employees. This charge was recorded as a
severance cost in the fourth quarter of 1997. As of January 1, 1998, the
remaining employees at the Yorktown, NY facility and NOC were transferred from
Prodigy's payroll to the Company's payroll. As these remaining employees are
expected to be retained after the Legacy Network is fully decommissioned,
effective January 1, 1998 the Company began recording the personnel expenses
related to such employees as Network personnel expenses rather than Legacy
Network expenses.
During the first quarter of 1998, the Company incurred $1.1 million of
Network personnel costs and $3.1 million of Network operating costs. In
addition, during this quarter the Company incurred $12.3 million of Legacy
Network costs. The increase in Network personnel costs was due to continued
hiring for The Woodlands, TX operations and the change in recording the
personnel costs for Yorktown, NY employees as Network personnel costs as opposed
to Legacy Network costs. The increase in Network operating costs reflected the
continued deployment of the Splitrock Network. By the end of this period, the
Company had deployed 58 POPs, of which 51 were operational. Approximately 77% of
the increase in Network operating costs was due to increased line and backbone
circuit charges. Network operating costs also included assembly and engineering
design charges paid to Yurie in the amount of $470,000. The slight increase in
Legacy Network costs was primarily due to increased usage charges relating to
the IBM Global Services Network as well as expenses incurred related to new
lines installed for the Legacy Network in certain geographic areas to address
capacity issues, offset by the decommissioning of Legacy Network lines (although
during this period duplicative costs were incurred in certain areas as a result
of the lag of such decommissioning) and the change in accounting for the
Yorktown, NY employees described above. During this quarter the Company
disconnected 9,526 Legacy Network lines which carried total monthly rental costs
of approximately $285,000. During this quarter the Company paid $7.3 million of
usage charges related to the IBM Global Services Network.
Prior to April 1, 1998, the Company accessed the IBM Global Services
Network under Prodigy's contract with IBM. During the period from July 1, 1997
to March 31, 1998, Prodigy incurred usage charges to IBM and was reimbursed by
the Company for $19.3 million of these expenses. Effective April 1, 1998, the
Company entered into a new contract with IBM to continue to provide these access
services. This contract provides for significantly higher hourly usage charges
due to the Company's expected short-term use of the IBM Global Services Network
as well as the Company's lack of a long-term relationship with IBM. The Company
anticipates that for the second quarter of 1998 IBM charges will increase
approximately 45% over the first quarter of 1998, but will decline through the
remainder of 1998 as the Splitrock Network is further expanded. Approximately
30% of total subscriber usage was accessed through IBM POPs for the month of May
1998. See "Risk Factors -- Dependence on Suppliers."
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of personnel costs relating to executive
management, accounting and finance, sales and marketing and administrative
employees, as well as other miscellaneous expenses such as occupancy costs,
travel expenses and legal fees. In the second quarter of 1997 the Company
incurred limited selling, general and administrative expenses, which primarily
consisted of consulting and legal fees incurred in connection with the Prodigy
Transactions. The Company incurred approximately $125,000, $471,000, $680,000
and $657,000 of selling, general and administrative expenses in the second
quarter of 1997, the third quarter of 1997, the fourth quarter of 1997 and the
first quarter of 1998, respectively. This gradual increase reflects the
development of the Company's executive, accounting and administrative support
departments. The decrease in selling, general and administrative expenses in the
first quarter of 1998 compared to the fourth quarter of 1997 was due to certain
non-recurring expenses incurred in the fourth quarter of 1997, primarily
increased travel costs, bonuses paid to employees and other miscellaneous costs.
The Company believes that selling, general and administrative expenses will
begin increasing at a greater rate in the third quarter of 1998, when the
Company plans to
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(i) begin hiring additional sales and marketing personnel and (ii) continue the
implementation of its advanced business support systems.
Depreciation and Amortization. Depreciation and amortization in the third
and fourth quarter of 1997 consisted almost exclusively of depreciation of
Legacy Network equipment acquired as part of the Prodigy Transactions. Legacy
Network equipment was recorded at approximately $5.9 million based on the fair
value of the consideration paid. Approximately 80% of the equipment acquired was
depreciated over nine months, the expected useful life of the Legacy Network,
with the remaining 20% depreciated over 36 months. Therefore, on March 31, 1998,
80% of Prodigy equipment acquired was fully depreciated. All Splitrock
Network-related equipment begins to be depreciated as it is placed into service
using a straight-line basis over three years. Depreciation will increase as the
Phase II Expansion progresses. The Company incurred depreciation expenses of
$1.7 million, $1.8 million and $2.8 million in the third quarter of 1997, the
fourth quarter of 1997 and the first quarter of 1998, respectively.
Interest Expense. Historical interest expense is related to capital leases
on equipment and loans from a stockholder of the Company. The Company incurred
interest expense of approximately $113,000, $122,000 and $349,000 in the third
quarter of 1997, the fourth quarter of 1997 and the first quarter of 1998,
respectively.
Interest Income. Interest income relates to the interest earned on
investments of cash on hand in commercial paper and money market accounts. The
Company recorded interest income of approximately $137,000, $181,000 and
$107,000 in the third quarter of 1997, the fourth quarter of 1997 and the first
quarter of 1998, respectively.
Provision for Income Taxes. No provision for income taxes has been
recognized as the Company had operating losses for both tax and financial
reporting purposes for the period from inception (March 5, 1997) to December 31,
1997 and for the three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Historical
Previous Financings. The Company was founded in March 1997 by Mr. Kwok L.
Li and Mr. William R. Wilson. Since its inception, the Company has raised
approximately $11.8 million (excluding a $10.0 million note that was converted
into equity) through private sales of debt (of which $0.8 million has been
repaid) and $31.6 million through private sales of equity (including the
conversion into equity of such $10.0 million convertible note).
Through various transactions since March 1997, Mr. Li and Linsang, a
technology investment company controlled by Mr. Li, have invested approximately
$21.8 million in debt (including the convertible note described above) and $7.5
million in equity in the Company. Of the amount that Mr. Li and Linsang have
loaned to the Company, $0.8 million has been repaid and the $10.0 million
convertible note was converted into 16.0 million shares of Common Stock of the
Company. The remaining debt outstanding is represented by demand notes which
bear annual interest of 9.75% and mature on the earlier of written demand or
December 1, 2002. Such indebtedness was refinanced in connection with the Unit
Offering. In connection with such refinancing, Linsang purchased 11,000 Units in
the Unit Offering.
On August 18, 1997, Roy Wilkens and Sandra Wilkens purchased 800,000 shares
of the Common Stock of the Company for $0.5 million. Mr. Wilkens became a member
of the Board of Directors of the Company in April 1998.
On September 22, 1997, Orient Star, a wholly owned subsidiary of Carso (the
controlling stockholder of Prodigy), purchased 20.0 million shares of Common
Stock of the Company for $12.5 million. The transaction price included an
option, exercisable through September 18, 1998, to subscribe for an additional
5.0 million shares of Common Stock for $3.1 million. The option, if exercised,
would result in Orient Star holding approximately 30.2% of the Common Stock of
the Company. The Company expects Orient Star to exercise the option. Samer
Salameh, the President of Prodigy, an affiliate of Carso, became a member of the
Board of Directors of the Company in April 1998.
In June 1998, Clark McLeod, CEO of McLeodUSA, Incorporated ("McLeodUSA"), a
regional telecommunications firm in the Midwest, exercised in full a stock
option previously granted to him and
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purchased 1.0 million shares of Common Stock of the Company for $1.1 million.
Mr. McLeod became a member of the Board of Directors of the Company in May 1998.
In addition, through March 31, 1998 the Company had arranged $28.4 million
in equipment financing, including $27.4 million related to network-related
equipment primarily from equipment vendors and $1.0 million related to office
equipment from vendors and leasing companies. The Company also assumed
approximately $5.9 million in liabilities pursuant to the Prodigy Transactions.
See " Prodigy Transactions."
Capital Expenditures. As of March 31, 1998 the Company had recorded capital
expenditures (exclusive of depreciation) of approximately $46.8 million, of
which $5.9 million represents assets acquired from Prodigy. The following table
sets forth such capital expenditures by category:
<TABLE>
<S> <C>
Network Equipment Deployed.................................. $23.9
Network Equipment Purchased for Phase II Expansion.......... 12.7
Spare Network Equipment..................................... 3.3
Assets Acquired from Prodigy................................ 5.9
Office Equipment and Furniture Purchased.................... 1.0
-----
$46.8
=====
</TABLE>
Future
The Company's future liquidity and capital requirements will result
primarily from its debt service and principal repayment obligations, lease
obligations, capital expenditures and other expenses to be incurred in
connection with the expansion of the Splitrock Network, acquisitions and joint
ventures and general working capital purposes. Through March 31, 1998, the
Company had spent approximately $23.9 million on the Phase I Buildout, which was
substantially completed in April 1998, and $12.7 million on the Phase II
Expansion. The Company anticipates making an additional $141.1 million of
capital expenditures in connection with the Phase II Expansion. The Company
expects to spend approximately $47.4 million to construct approximately 330
additional POPs, approximately $81.5 million to deploy advanced processing
equipment and software to enhance and accelerate the Company's ability to
provide value added services, such as ISDN video, web hosting and VPN, and
approximately $12.2 million to augment the Company's network management
infrastructure. Of these amounts, the Company has spent $1.7 million since March
31, 1998. The Company has a commitment to purchase $9.0 million of additional
equipment from Yurie prior to January 1, 1999. In addition, as of March 31, 1998
the Company had aggregate operating and capital lease payments of $6.8 million,
$9.6 million and $7.2 million due in the last nine months of 1998, 1999 and
2000, respectively. The Company currently believes that cash flow from operating
activities, together with the net proceeds of the Notes and future borrowings
from Linsang, if any, will be sufficient to fund the Company's expected capital
expenditures, working capital, lease obligations and debt service requirements.
Linsang has not committed to make any additional credit available to the
Company.
Any future acquisitions, joint ventures or similar transactions may require
additional financings and there can be no assurance that such financings will be
available to the Company on acceptable terms or at all.
The Company is highly leveraged. At March 31, 1998, on a pro forma basis
after giving effect to the offering of the Original Notes and the application of
the net proceeds therefrom, the Company would have had $279.2 million of total
indebtedness, representing approximately 93.4% of the Company's total
capitalization. See "Capitalization." In addition, the terms of the Notes permit
the Company to incur certain other indebtedness. There can be no assurance that
the Company will have sufficient cash flow to pay the interest expense or the
principal associated with the Notes or such indebtedness. The highly leveraged
position of the Company could have a material adverse effect on its ability to
obtain financing for acquisitions, joint ventures or other purposes.
The Company recorded EBITDA of approximately $(6.3) million and $(0.6)
million for the period from inception (March 5, 1997) to December 31, 1997 and
the three months ended March 31, 1998, respectively (For the same periods, the
Company reported net losses of $10.1 million and $3.7 million). On a pro forma
basis after giving effect to the Offering and the application of the net
proceeds therefrom, the Company would have reported net losses of $36.3 million
and $11.5 million for the period from inception (March 5, 1997) to
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December 31, 1997 and the three months ended March 31, 1998, respectively. The
Company expects such net losses to continue as the Company focuses on increasing
its customer base, implementing its business strategy and developing new
services. See "Summary Recent Developments." The historical earnings of the
Company were insufficient to cover its fixed charges for the period from
inception (March 5, 1997) to December 31, 1997 and the three months ended March
31, 1998 by approximately $10.1 million and $3.7 million, respectively. On a pro
forma basis after giving effect to the offering of the Original Notes and the
application of the net proceeds therefrom, the earnings of the Company would
have been insufficient to cover its fixed charges for the period from inception
(March 5, 1997) to December 31, 1997 and the three months ended March 31, 1998
by approximately $36.3 million and $11.5 million, respectively.
The Company's ability to meet its debt service obligations, to finance
planned capital expenditures, lease payments or acquisitions or to comply with
certain covenants contained in the Indenture will depend upon the Company's
future performance, which will be subject to general economic conditions and to
financial, business, competitive, legislative, regulatory and other factors
affecting its operations, many of which are beyond the Company's control. In
addition, for the foreseeable future the Company's financial performance will be
dependent on Prodigy. There can be no assurance that the Company's business will
be able to generate cash flow at levels sufficient to satisfy its debt service
and other requirements, although management expects cash received from the Unit
Offering to provide sufficient sources of liquidity for at least the next twelve
months. If in the future the Company is unable to generate sufficient cash from
its operations to make scheduled interest payments on the Notes, to pay the
Notes at maturity, or to meet other obligations and commitments, the Company may
be required to adopt one or more alternatives, such as refinancing or
restructuring its indebtedness, reducing or delaying planned expansion, selling
assets or raising additional debt or equity. There can be no assurance that the
Company will be able to implement any of these alternatives on satisfactory
terms or at all. In addition, the terms of existing or future debt agreements,
including the Indenture, may prohibit the Company from adopting some of these
alternatives. See "Description of the Notes."
YEAR 2000
The year-2000 issue is the result of computer programs being written using
two digits, rather than four digits, to define the applicable year. Programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations, including an inability to process transactions, send invoices
or engage in similar normal business activities. Due to its reliance on computer
hardware and software, the Internet and related service industries are highly
susceptible to the year-2000 issue. If the year-2000 issue should cause
widespread problems across the Internet, usage can be expected to decline
dramatically. Such an event would have a material adverse effect on the
Company's financial condition and results of operations, the nature and extent
of which cannot reasonably be determined by the Company on the basis of
information currently available to it. The Company has not prepared a
contingency plan and does not expect to do so in light of the uncertainty of the
impact of year-2000 issues on the Internet as a whole and the Company's
anticipated schedule to be year-2000 compliant before the end of 1999.
The Company is currently in the process of evaluating its operations and
both its information technology systems and its non-information technology
systems to determine its own vulnerability to the year-2000 issue. The Company
relies heavily on non-information technology systems in the conduct of its
operations and has determined that substantially all of such systems are
year-2000 compliant. Certain network-monitoring software, which is used by the
Company to monitor network equipment (POPs) on the Legacy Network, is not
year-2000 compliant, but as part of the Company's Phase II Expansion,
substantially all of the Legacy Network POPs are scheduled to be decommissioned
by the end of 1998 and such network-monitoring software will no longer be used
by the Company. With respect to the Company's database inventory software, used
to capture data about the network configuration, including location of equipment
and maintenance, the Company has purchased and is currently installing year-2000
compliant software to replace its existing software. Installation is scheduled
to be completed by the end of 1998, and the cost of such purchase and
installation is not material. The Company has also determined that certain other
of its software systems are not year-2000 compliant. The Company believes that,
with modifications and upgrades to such software,
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which are scheduled to occur in the ordinary course of business, it will be
fully year-2000 compliant by the end of 1999. The Company is continuing its
evaluation of the remaining areas impacted by year-2000 issues, including
Internet interfaces, facility matters and equipment vendors, but does not expect
to incur material costs in connection with making its software year-2000
compliant. To date, the Company has not incurred material costs in ensuring
year-2000 compliance.
The Company is also dependent upon the ability of its customers to ensure
that their software and equipment is year-2000 compliant. The Company has
initiated formal communications with Prodigy to determine the extent to which
the Company is vulnerable to Prodigy's own year-2000 issues, if any. Prodigy has
informed the Company that Prodigy Classic may not be year-2000 compliant.
Prodigy is in the process of migrating users to Prodigy Internet, which is
year-2000 compliant, and plans to discontinue Prodigy Classic service by the end
of 1999. However, there can be no guarantee that Prodigy Classic or systems of
future customers on which the Company may rely will be timely converted, or that
a failure to convert, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
INDUSTRY OVERVIEW
The Company believes that it is well-positioned to capture revenue
opportunities in the growing Internet services market. As a broad-based ISP, the
Company utilizes an advanced ATM-to-the-edge Network to offer services that
either directly address Internet connectivity (dial access and transit) or which
leverage Internet technology to provide cost-effective alternatives to
traditional corporate network solutions (VPN). While the Company is considering
broadening its service offerings to optimize Network utilization, the Company
believes that a significant amount of its revenues for the foreseeable future
will continue to be derived from Internet related applications.
The Internet. The Internet is a global collection of interconnected
computer networks that allows commercial organizations, educational
institutions, government agencies and individuals to communicate electronically,
access and share information and conduct business. The networks that comprise
the Internet are connected in a variety of ways, including by the public
switched telephone network ("PSTN") and by high speed, dedicated leased lines.
Over time, as businesses have begun to utilize e-mail, file transfer and, more
recently, intranet and extranet services, commercial usage has become a major
component of Internet traffic.
In order for an end-user to access the Internet, a local network connection
is required to an ISP's local facilities. For large, communication-intensive
users and for content providers, these connections are typically unswitched,
dedicated connections provided by incumbent local exchange carriers ("ILECs") or
CLECs, either as independent service providers or, in some cases, by a company
which is both a CLEC and an ISP. For residential and small and medium business
users, these connections are generally PSTN connections obtained on a dial-up
access basis as a local exchange telephone call. This collection of
interconnected networks makes up the Internet. A key feature of Internet
architecture is that a single dedicated channel between communication points is
never established, which distinguishes Internet-based services from the PSTN.
Internet Market Size and Growth. The Internet services industry is one of
the fastest growing segments of the global telecommunications market. Forrester
estimates that the U.S. market for Internet and related services, including
advanced Internet applications such as VPN, voice communications, fax and video
conferencing, was approximately $6.2 billion in 1997 and will grow to
approximately $49.7 billion in 2002, reflecting a compound annual growth rate of
over 50%. The Company believes that Internet dial access and transit services,
VPN services and enhanced business services represent three of the fastest
growing segments of the industry.
Internet Access. Internet access services represent the means by which ISPs
interconnect either businesses or individual consumers to the Internet's
resources or to corporate intranets and extranets. Access services include
dial-up access for individuals and small businesses and high-speed dedicated
access (transit services) used primarily by mid-sized and larger organizations.
According to Forrester, business access
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services are projected to grow at a compound annual growth rate of approximately
75%, from approximately $1.0 billion in 1997 to approximately $16.0 billion in
2002.
The demand for access services is driven by the end-user's ability and
desire to gather data and communicate or interact with others. Over the past few
years, many organizations have established Web pages on the Internet in order to
convey a variety of information to end-users. Compounding this growth in
information available over the Internet has been a dramatic increase in the
number of ISPs providing access and related services to end-users. According to
IDC, there are currently over 4,000 ISPs in the U.S., consisting of national,
regional and local providers, of which the Company believes only a small
percentage have access to their own nationwide backbone network infrastructure.
These ISPs have exposed a broad population of users to the opportunities
available over the Internet, resulting in a large and growing group of people
who are accustomed to using networked computers for a variety of purposes,
including e-mail, electronic file transfers, on-line computing and electronic
financial transactions. According to IDC, the number of Internet users worldwide
reached approximately 60.0 million in 1997 and is forecasted to grow to 173.0
million by the year 2000.
The ISP market is segmented into large national or multinational ISPs
("Tier 1 ISPs"), which are typically full-service providers that offer a broad
range of Internet access and value-added services to businesses and regional and
local ISPs ("Tier 2 ISPs" and "Tier 3 ISPs"), which typically offer a smaller
range of products and services to both individuals and business customers. Tier
1 ISPs also provide wholesale services by reselling capacity on their networks
to smaller regional and local ISPs, thereby enabling these smaller ISPs to
provide Internet services on a private label basis without building their own
facilities. The Company believes that the top six Tier 1 ISPs represented
approximately 50% of the market for business connectivity and value-added
services. Tier 1 ISPs exchange Internet traffic at multiple public peering
points known as network access points ("NAPs") and through private peering
arrangements.
VPNs. The Company believes that many businesses desire to utilize VPNs as a
lower-cost alternative to certain traditional telecommunications services.
Historically, many corporations established and maintained their own private
wide-area networks to provide network-based services, such as transaction
processing, to their customers and to coordinate operations between employees,
suppliers and business partners. Despite the attractive capabilities of private
networks, however, limitations of many private WANs have impeded or reduced the
effectiveness of their use. These networks, which traditionally have required
the use of leased telephone lines with dedicated bandwidth and the purchase of
vendor-specific networking equipment and software, are inherently expensive to
set up, operate and maintain. The Company believes that VPNs present a
cost-effective alternative to WANs since VPNs (i) eliminate the need to invest
significant amounts in proprietary equipment and software, (ii) securely and
efficiently connect multiple, geographically dispersed locations, (iii) provide
global remote access capabilities and (iv) offer a full range of value added
services, such as videoconferencing, that meet a company's particular networking
needs.
Enhanced Business Services. In addition to Internet access and VPN
services, business customers increasingly are seeking a variety of enhanced
products and applications to take full advantage of the Internet. The principal
enhanced services currently available to companies are Web hosting, including
hosting of intranet sites, e-mail outsourcing, e-mail broadcast and security.
Forrester forecasts that enhanced business services revenues will grow from
approximately $0.4 billion in 1997 to approximately $10.5 billion in 2002,
representing a compound annual growth rate of 92%.
Development of Network Technology. The Company has designed, deployed and
is in the process of expanding an advanced nationwide telecommunications network
based on ATM-to-the-edge switching technology. The pervasive deployment of ATM
switches throughout the Network enables the Company to create a multi-service
platform by which to expand its service offerings to provide fully integrated
data, video and voice services and to incorporate future technological
innovations into its architecture with a lower incremental investment than that
required by other, less flexible, networks.
Most networks currently in operation use either circuit switching or packet
switching. Circuit switching operates by dedicating a circuit, or fixed amount
of bandwidth, to each end device. Circuit switching's use of
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dedicated circuits provides high quality service for all network traffic, but,
since information is not continuously transmitted, the dedicated circuits are
often inefficiently and expensively idle.
Frame relay, a packet switching technology, was introduced in 1990 as a
method of connecting local area networks ("LANs") over WANs by using flexible
bandwidth allocation to lower the cost of transmission. Frame relay uses
"packets' or "frames" to transmit traffic, thereby allowing the same bandwidth
to be shared by many users, each using the bandwidth only for the time required
to transmit a packet. Designed primarily for data transmission, frame relay
cannot guarantee high quality transmission of voice and video. Currently, frame
relay is widely used to transmit data over WANs, including the Internet. Due to
the substantial increase in data traffic, however, today's frame relay networks
are being used to transmit more traffic than they were designed to support,
resulting in network congestion.
To increase a frame relay network's switching capacity to meet increased
data demands and alleviate congestion, sophisticated software is required. To
run this software, the network must be upgraded with powerful, intelligent
processors. The costs of these high-end processors required to switch frame
relay traffic at the speeds needed in today's data network backbones are very
high. Therefore, as data traffic increases, upgrading a frame relay network
becomes more costly and inefficient and ultimately impractical.
Faced with the limitations of frame relay, telecommunications service
providers are installing ATM switches, a newer packet switching technology, in
the backbones of their existing networks. ATM segments data, video and voice
traffic into small, uniform-sized "cells," rather than the larger, variable-size
"packets" or "frames" used in frame relay. The addition of ATM backbone switches
upgrades a network's performance by increasing switching capabilities at the
network's core. ATM's cell-based architecture increases bandwidth utilization
and seeks to provide consistent quality of service and predictability for all
traffic types.
ATM is the first standard protocol to permit reliable service for all
traffic types, allowing the consolidation of circuit switching and packet
switching networks into a single ATM network for data, video and voice. A single
ATM network offers the potential for economies of scale and streamlining of
network operations. The standardization of ATM has allowed for compatibility of
ATM equipment and interoperability of ATM among a wide variety of interfaces and
vendors.
The U.S. government was among the first to deploy ATM technology. Its
initial decision to use ATM was motivated by its desire to consolidate many
discrete networks onto a single network, thus significantly reducing cost. The
U.S. government was able to deploy ATM across geographic boundaries because ATM
was quickly accepted as an international standard, and the government soon
discovered the effectiveness and efficiency of ATM as a global networking
technology.
Several telecommunications service providers began offering trial ATM
services in the early 1990s. These services were available only for high speed
traffic and at high prices and, therefore, made ATM attractive only to users
with significant bandwidth needs. Driven by increasing competition and the rapid
growth of data traffic on frame relay systems, a number of telecommunications
service providers began deploying ATM for use in their network backbones to
manage heavy loads of user traffic and thereby relieve network congestion. Until
recently, providers have continued to install ATM primarily in their network
backbones and typically have not offered ATM service directly to end users.
In 1996, certain telecommunications service providers announced plans to
begin offering ATM services directly to end users at prices competitive with
similar packet switching and circuit switching access services. To utilize these
direct ATM services, an end user needs ATM access products either located at the
local office of a telecommunications service provider (in close proximity to the
end user) or deployed by the end user in its private network. Access products
provide the end user with network access through multiple network interfaces,
traffic concentration and data protocol translation.
ATM access products are well suited to provide efficient connectivity to
ATM networks, facilitate transmission of a variety of traffic types at varying
speeds and accommodate a mix of end user applications on a single network. In
addition, ATM access products have the potential to lower the cost to end users
of transmitting data, video and voice communications. Management believes that
the Splitrock Network contains more ATM-based switches than that of any other
commercial network.
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BUSINESS
GENERAL
The Company is a provider of telecommunications services, including high
speed Internet access services, on an advanced nationwide network based on ATM
switching technology which is deployed in every POP of the network. The
pervasive deployment of ATM switches throughout the Network enables the Company
to serve as a broad-based ISP through the creation of a multi-service platform
which efficiently delivers IP, frame relay and other Internet services. This
flexibility will allow the Company to expand its service offerings to provide
fully integrated data, video and voice services and to incorporate future
technological innovations into its Network architecture with a lower incremental
investment than that required by other, less flexible, networks. The Company
currently provides nationwide Internet dial access and related services to
Prodigy, the third largest U.S. ISP measured in minutes on-line, for its
approximately 900,000 subscribers. In addition, the Company has begun providing
Internet transit services to Orbis, an Internet connection service provider to
businesses, and VPN services to NetworkTwo, a value added network service
provider. For the quarter ended March 31, 1998, the Company had revenues of
$16.5 million.
The Splitrock Network currently reaches more than 55% of U.S. households by
a local call with 56k modem access (currently the fastest modem speed
commercially available over residential phone lines), including households in
every market with a population of at least 100,000 as well as several second
tier markets. From September 1997 to April 1998, the Company engaged in the
Phase I Buildout which resulted in the deployment of the nationwide ATM backbone
portion of the Splitrock Network and POPs in 70 metropolitan areas across the
nation. Upon completion of the Phase II Expansion, the Network will have
approximately 400 active POPs with a physical presence in all 50 states,
reaching over 90% of U.S. households with a local call.
In order to provide services to Prodigy while the Splitrock Network was
being deployed, on July 1, 1997 the Company acquired the Legacy Network and
began immediately providing Internet dial access and related services to Prodigy
for its approximately 900,000 subscribers. Additionally, the Company has an
agreement with IBM to use the IBM Global Services Network to cover market areas
that are served neither by the Splitrock Network nor the Legacy Network. The
Company currently handles more than 750 million minutes of Internet traffic per
month for Prodigy (currently the Company's only Internet dial access customer),
with over 60% of the traffic flowing on the Splitrock Network, approximately 30%
on the IBM Global Services Network and the remainder on the Legacy Network. As
the Phase II Expansion progresses, Legacy Network POPs will be decommissioned
and access to specific IBM Global Services Network POPs will be terminated when
appropriate. Substantially all Legacy Network POPs are expected to be
decommissioned by the end of 1998 and usage of the IBM Global Services Network
is expected to be terminated by the end of the second quarter of 1999.
COMPETITIVE ADVANTAGES
Since July 1997, the Company has provided Internet dial access services to
Prodigy for its approximately 900,000 subscribers. The Company believes it
benefits from the following competitive advantages which will assist it in
implementing its business strategy:
Flexible and Efficient New Network Infrastructure. The Splitrock
Network is designed to provide reliable, flexible and efficient services to
the Company's current and future customers. Since the Splitrock Network is
newly-designed (and not based on or an upgrade to an older network), the
Company believes the Network contains many features that are not present in
older networks and is able to flexibly incorporate future developments and
innovations. Older networks were typically designed to provide one type of
service, such as voice or data, and are less efficient at carrying other
traffic. Unlike many networks which deploy ATM technology only along the
core sites in the backbone, the Splitrock Network deploys ATM-to-the-edge
at every core site, hub site and remote site. See "Business -- Splitrock's
Network." Each POP is supported by the Lucent LDR200 switch which the
Company believes provides significant quality of service advantages over
typical ATM backbone switches. Management believes that the
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Network contains more ATM-based switches than that of any other commercial
network. This pervasive use of ATM technology and the Lucent LDR200 switch
enables the Company to create a multi-service platform which delivers IP,
frame relay and other Internet services. In addition, ATM-to-the-edge
provides additional capabilities to expand the Company's service offerings
to provide fully integrated data, video and voice services and to
incorporate future technological innovations into the Splitrock Network
architecture with a lower incremental investment than that required by
other, less flexible, networks.
Providing of Wholesale Internet Dial Access and International
Services. The Company currently provides wholesale Internet data access
services to Prodigy for its approximately 900,000 subscribers. The Company
intends to market Internet dial access services directly to ISPs rather
than to individual end-users. As a result, unlike many providers of network
services, the Company does not intend to compete against its ISP customers,
thereby broadening the potential customer base to include those ISPs
unwilling to strengthen their competitors with their own network business.
Furthermore, the Company believes it will be viewed as a non-competing
vendor and, thus a potential partner, by major foreign and regional
telecommunications carriers, providing an alternative to their primary U.S.
competitors for delivering data, video and voice services.
Experienced Management Team. The Company's co-founders, Kwok L. Li,
Chairman of the Board and Chief Technical Officer, and William R. Wilson,
President and Chief Executive Officer, have assembled a management team
with significant data and voice communications experience. The 10 most
senior executives and managers of the Company have an average of over 12
years experience in the data and voice communications industry. Previously,
Mr. Li and Mr. Wilson were both senior executives at the predecessor
corporation of WilTel, a wholesale provider of telecommunications services.
During their tenure WilTel designed, constructed, developed and managed
modern packet switched networks (including frame relay and ATM) and
marketed related services. At the time of the sale of Yurie to Lucent in
May 1998, Mr. Li was a Director, Vice Chairman and Chief Technical Officer
at Yurie, where he created and designed the Lucent LDR200 switch which is a
key component of the Splitrock Network.
BUSINESS STRATEGY
Key elements of the Company's business strategy include:
Complete the Expansion of the Advanced Network Infrastructure. The
Company has designed, deployed and is in the process of expanding the
Splitrock Network, an advanced nationwide telecommunications network based
on ATM-to-the-edge switching technology. Through March 31, 1998, the
Company had spent approximately $23.9 million on the Phase I Buildout,
which was substantially completed in April 1998, and $12.7 million on the
Phase II Expansion. The Company anticipates that completion of the Phase II
Expansion will require an additional $141.1 million of capital
expenditures. The Company expects to spend approximately $47.4 million to
construct approximately 330 additional POPs, approximately $81.5 million to
deploy advanced processing equipment and software to enhance and accelerate
the Company's ability to provide value added services, such as ISDN video,
web hosting and VPN, and approximately $12.2 million to augment the
Company's network management infrastructure. Of these amounts, the Company
has spent $1.7 million since March 31, 1998. The Company believes that
having ATM-to-the-edge results in: (i) a more easily upgradeable network;
(ii) the ability to efficiently add new services at a lower incremental
investment; (iii) improved network reliability; (iv) interoperability with
other network platforms; and (v) improved network manageability.
Offer a Comprehensive Range of Services to Optimize Network
Utilization. Given the fixed cost nature of the Splitrock Network's
infrastructure, the Company seeks to increase total network utilization
primarily by targeting providers of business services (daytime intensive
traffic) and, to a lesser extent, providers of consumer services (evening
intensive traffic) to balance the Network's usage throughout a 24-hour
period. The Network's flexibility will provide for service innovation
(including data, video and voice services) with lower incremental
investment than less flexible networks. To offer new services, the Company
will only need to add the appropriate protocol processors and billing and
service management systems without changes to the core ATM switching
platform. Therefore, the Company believes it will be
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able to maximize Network utilization by offering both daytime
business-oriented services (such as video conferencing and VPN services)
and evening-time consumer-oriented services (such as Internet dial access
services). The ability of the Company to offer a wide range of services
will enhance its ability to optimize traffic at all times of the day,
thereby increasing revenue and profitability. As its business strategy is
implemented, the Company will evaluate offering complementary services as
they are required by its customer base.
Development of Advanced Business Support Systems. Through the
development of scalable business support systems, the Company believes that
it has the opportunity to establish a competitive advantage relative to
traditional network service providers. Traditional network service
providers typically operate extensive legacy business support systems with
compartmentalized architectures that limit their ability to scale rapidly
and introduce enhanced services and features. In connection with the
expansion of the Splitrock Network the Company is creating business support
systems with an architecture designed to maximize both reliability and
scalability. All database and billing systems will run on a PC or UNIX
distributed architecture rather than centralized mainframe systems.
Expand Target Market Opportunities. IDC estimates that the total
number of U.S. companies with Internet access will grow from an estimated
1.5 million, or 20.0% of total U.S. companies, in 1996 to 4.1 million, or
53.0% of total U.S. companies, in 2000. IDC also estimates that the number
of U.S. households with a personal computer and a modem will grow from an
estimated 8.8 million, or 24.0% of all U.S. households with a personal
computer in 1996, to 39.4 million, or 58.0% of all U.S. households with a
personal computer in 2000. IDC estimates that there are currently over
4,000 ISPs in the U.S., consisting of national, regional and local
providers, of which the Company believes only a small percentage have
access to their own nationwide backbone network infrastructure. The Company
intends to capitalize on this expected growth in demand for network
services by aggressively marketing its services through a variety of
distribution channels and evaluating strategic alliances and acquisitions
as they present themselves. The Company believes that utilizing a range of
distribution channels will enable it to cost-effectively reach a broad base
of potential customers. The Company currently intends to develop and use a
direct sales force (which it expects to begin hiring in the second half of
1998) to attract ISPs, carriers, value added service providers and medium
and large businesses. In addition, the Company intends to use alternative
distribution channels, including agents, resellers and wholesalers, to gain
access to a substantially larger base of potential customers than the
Company could otherwise initially address through its direct sales force.
Through the combination of a direct sales force and alternative
distribution channels, the Company will seek to rapidly increase
revenue-producing traffic on its Network.
The Company also intends to evaluate strategic alliances and
acquisitions that could provide additional traffic over the Splitrock
Network. While the Company is primarily focused on the domestic services
market, it believes the demand for Internet services outside the U.S. will
grow over the next few years. As a result, the Company will evaluate
opportunities, primarily in Latin America, to partner with strong,
established telecommunications service providers. For example, the Company
will consider entering into international alliances to originate and
terminate international traffic on the Splitrock Network.
Provide Superior Comprehensive Customer Service. Splitrock believes
that superior customer service is a critical element in attracting and
retaining customers, and expanding value added services to existing
customers. In particular, the Company believes it is critical to maintain
two geographically dispersed NOCs, each of which is able to monitor the
entire Network and provide rapid problem resolution. The Company has
established a 24-hours per day, seven days per week NOC at its Yorktown, NY
facility. In addition, a new 24-hours per day, seven days per week NOC
recently became fully operational at The Woodlands, TX facility.
SPLITROCK'S NETWORK
Overview. The Splitrock Network is a facilities-based nationwide ATM-based
commercial telecommunications network. The Network currently reaches more than
55% of U.S. households by a local call with 56k
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modem access (currently the fastest modem speed commercially available over
residential phone lines), including every market with a population of at least
100,000 as well as several second-tier markets. Upon completion of the Phase II
Expansion, the Splitrock Network will have approximately 400 active POPs with a
physical presence in all 50 states, reaching over 90% of U.S. households with a
local call.
On June 24, 1997, the Company entered into the Prodigy Agreement to provide
nationwide Internet dial access and related services to Prodigy for its
approximately 900,000 subscribers on the new Splitrock Network. In order to
provide Internet access services to Prodigy while the Splitrock Network was
being deployed, on July 1, 1997 the Company acquired the Legacy Network and
began immediately providing Internet dial access and related services to Prodigy
for its subscribers. Additionally, the Company uses the IBM Global Services
Network to cover market areas that are served neither by the Splitrock Network
nor the Legacy Network. The Company currently handles more than 750 million
minutes of Internet traffic per month for Prodigy (currently the Company's only
Internet dial access customer), with over 60% of the traffic flowing on the
Splitrock Network, approximately 30% on the IBM Global Services Network and the
remainder on the Legacy Network. As the Phase II Expansion progresses, Legacy
Network POPs will be decommissioned and access to specific IBM Global Services
Network POPs will be terminated when appropriate. Substantially all Legacy
Network POPs are expected to be decommissioned by the end of 1998 and usage of
the IBM Global Services Network is expected to terminate by the end of the
second quarter of 1999. In addition to providing Internet dial access and
related services to Prodigy, the Company has recently launched two new data
services, transit services and VPN services, and has begun providing transit
services to Orbis, an Internet connection service provider to businesses, and
VPN services to NetworkTwo, a value added network service provider.
The Splitrock Network Architecture. The Splitrock Network, through its
ATM-to-the-edge architecture, will allow the Company to concurrently provide
multiple services such as data, video and voice to its customers and to
incorporate future technology changes at relatively low incremental investments.
As a result, the Company believes it has created a more efficient network than
its competitors, thereby reducing its own costs and concurrently improving
reliability to the end user.
Communication service providers have typically provided services using two
predominant types of infrastructure, one geared towards voice service and the
other designed to optimize data communications. These infrastructures are based
on (i) telecommunications switches designed primarily for voice grade services
or (ii) data telecommunications routers and switches designed primarily for
communications between computers. Practical considerations and equipment
constraints have lead to the development of these two types of distinct network
infrastructures. Voice telecommunications service providers historically have
needed to provide a high level of reliability because of the need for life
dependent emergency services such as 911 calls. Since telephone services use
relatively simple handsets that cannot redial or re-transmit automatically if
disconnected, telephone network providers depend upon equipment reliability,
network architecture design, network management and maintenance to meet their
service needs and reliability constraints. Data telecommunications service
providers, on the other hand, have the benefit of highly intelligent terminals
at the end-user. These terminals usually can determine if a transmission error
has occurred and automatically re-transmit data and even reconnect a session if
necessary. With the help of intelligent terminals, data telecommunication
service equipment run complex routing algorithms that allow them to locate and
find the best route to transmit data. While providing a high degree of
flexibility, data telecommunication service equipment is generally plagued with
system reliability issues and often unpredictable performance. This attribute
has historically differentiated data telecommunication service equipment from
voice telecommunication service equipment.
In order to create a network which efficiently supplies multiple types of
services, such as data, video and voice, a company must make the platform
reliable enough to support voice, yet flexible enough to support data. To date,
all companies successfully providing voice and data concurrently have
partitioned their network's bandwidth to support two separate service
infrastructures. Part of their bandwidth is used for voice, employing voice
telecommunications service switches, and the other part is used for data,
employing standard data telecommunication equipment in the network.
Separating bandwidth use is a very practical way to provide multiple
services. Particularly today, when voice traffic still dominates the majority of
bandwidth transferred over most networks, all major networks have
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partitioned their bandwidth into two separate components, one to carry voice and
the other to carry data. As long as data represents a small portion of network
traffic, this partitioning remains practical. However, it is expected that the
rapid growth of data will soon cause data to consume more bandwidth than voice.
When that occurs, partitioning will make network bandwidth utilization very
difficult to optimize while creating significant management complexity.
The Splitrock Network was designed to address these and other constraints
facing older networks by not requiring the separation of bandwidth for different
types of services. In the process of designing the Network the Company sought to
create a Network infrastructure which could (i) efficiently offer data, video,
and voice services concurrently, (ii) reduce operating costs by more efficient
utilization of network resources and (iii) provide high quality service for all
services offered on the Network.
The Company believes that three features distinguish the Splitrock Network
from other telecommunications networks. First, Splitrock uses the Lucent LDR200
switch which supports multiple services at every POP of the Network. The Company
believes that this "intelligent" ATM switch differs from typical ATM backbone
switch engines in two important ways. First, the Lucent LDR200 supports many
access protocols to the Network whereby an array of data, video and voice
services can be sent and/or received, such as IP, frame relay, ATM, ethernet,
T-1, T-3, OC-3 and many other digital as well as analog interfaces. The Lucent
LDR200 is also scalable with up to fourteen interface module slots designed to
house interface cards supporting these various services. The Lucent LDR200
translates these native service protocols into standard ATM format and
transports any service as an ATM connection. In addition, the Lucent LDR200
implements a patented queuing algorithm, allowing simultaneous support of data,
video and voice services on a unified platform without loss of quality of
service even during periods of high network utilization. The queuing algorithm
eliminates the need for bandwidth allocation to different kinds of services.
Second, to manage the large number of ATM switches in the Network, the
Company organized the Network architecture into classes and regions. This
architecture allows the Company to more quickly introduce new services because
all new services can be layered on the Network's ATM switching fabric without
alterations being made to the fabric itself. A new network service has two
components, the protocol that defines the format of the information payload and
the signaling or routing instructions required to direct the information to its
destination in the network. The Splitrock Network ATM switching platform
streamlines the signaling process because routing information is concentrated in
a limited number of central sites in the Network (known as core sites) rather
than having signaling or routing information interpreted by switches or routers
at every point of the network as occurs, for example, in a typical IP-based
network. Therefore, to introduce a new service, the Company only needs to deploy
the proper signaling or routing processors at a few core sites instead of
hundreds of switch or router sites distributed around the network. This reduced
number of routing decisions also allows for better management and typically
faster throughput than other networks.
Third, most modern networks achieve transmission efficiencies by deploying
ATM switching engines in three to twenty access sites only in the core backbone
of their network. In contrast, Splitrock has created an ATM-to-the-edge
switching fabric that blankets the entire network (i.e., ATM switches are
located in all POPs throughout the Splitrock Network). As of June 1, 1998,
Splitrock had installed 70 ATM switches, and expects to deploy an additional 330
ATM switches during the Phase II Expansion. ATM-to-the-edge forms the basic
platform for Splitrock to offer multiple services to all users on the Network.
The Splitrock Network is organized into three classes of access sites: core
sites, hub sites and remote sites. The architecture partitions the entire
Network into 21 regions, with a core site in each region. The core site is
generally located in the city with the most traffic in that region. Users access
the Network within a region by connecting to either a core, a hub or a remote
access site. The core sites form the backbone of the Splitrock Network, with the
hub and remote access sites extending the reach of the backbone.
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The following diagram is a simplified illustration of the Company's
ATM-to-the-edge Network architecture, and is designed for illustrative purposes
only. It does not represent the actual number or location of POPs.
[NETWORK ARCHITECTURE GRAPHIC]
The 21 core sites, all of which were completed by June 1, 1998, are
equipped with Lucent LDR200 switches. Using ATM technology, these core sites are
logically fully meshed, allowing traffic to pass directly from any one region to
any other region. The core sites are interconnected by standard transmission
links such as DS-3 or OC-3, which are available from IXCs such as WorldCom, MCI
and Qwest Communications International Inc. ("Qwest"). Because the Lucent LDR200
conforms to standard transmission specifications, the Company can purchase
bandwidth on an actual need basis between each site and upgrade these links as
the bandwidth demand increases.
In addition, each core site is equipped with special protocol processors to
enable the Network to accommodate demand for a wide variety of services. For
example, to support IP protocol for Internet services, standard Cisco IP routers
are installed, one per core site. These are the only routers installed in the
Network as opposed to other networks which have routers installed throughout the
network. Since a router has direct connections to every other router in the
Splitrock Network, the routers have very simple routing tables and can forward
packets from region to region efficiently and directly.
Hub sites service the major cities within a region. Upon completion of the
Network expansion, there will be approximately 60 hub sites in the Network, of
which 49 were completed by June 1, 1998. Each hub site is equipped with a Lucent
LDR200 switch and all other user access equipment, including Bay Network modems,
necessary for Internet dial access service. A Splitrock user connected to any
hub site can access the complete array of services. Hub sites connect to core
sites over a DS-3 line or multiple T-1 lines depending on the traffic
requirements. Hub sites can be connected redundantly to other hub sites or to
other core sites to increase network reliability. For IP traffic, all packets
from a hub site are forwarded directly to the region's core site, and then
forwarded to their destination region by the core site router.
Upon completion of the Phase II Expansion, the Network will have more than
300 remote sites to reach the smaller cities within a region. None of such sites
were in place by June 1, 1998. These sites are also fully equipped with Lucent
LDR200 switches and other equipment to allow user access to the same services as
elsewhere in the Network. Remote access sites connect to a hub site, usually
with a T-1 line. The remote sites
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can also be protected from transmission failures by being connected redundantly
to other access or hub sites in the region. The Company has not added a material
number of POPs since June 1, 1998.
The following diagram is a simplified illustration of how the Splitrock
Network is designed to deliver data (including Internet), video and voice
services.
[FLOW CHART
Network Infrastructure. The Company believes that it has provided for
future growth by ensuring that the Splitrock Network is scalable, flexible,
fault tolerant, open standards and interoperable and manageable from remote
locations.
- Scalable. Splitrock's flexible, multi-layer network architecture utilizes
a high-speed switching fabric enabling the Company to grow the number of
POPs and the number of users served in an incremental manner that matches
investment with demand. The Splitrock Network's scalability extends
beyond the currently installed base of POPs to allow for growth without
fundamental design changes.
- Flexible. The Company believes that the Splitrock Network will adapt to
new services and manages network resources according to each service's
needs, permitting the Network to efficiently offer data, video and voice
services concurrently. On the switching level, the switching elements
(Lucent LDR200 switches) adjust Network responses based on the traffic's
delay and loss sensitivities. On the protocol level, the Network
architecture is able to sort and direct various protocols to its
designated protocol processors, including Internet packets to Cisco
routers, ISDN signaling to workstations with ISDN software, and
traditional voice network signaling to workstations with SS7 software.
- Fault Tolerant. Redundancy and adaptive technology in the Splitrock
Network reduces the impact of isolated failures. For example, all core
sites are interconnected, allowing traffic to be transferred among sites
in case of a failure. In addition, key switching, routers and
workstations are configured to search for alternate paths in the event of
individual component or transmission line failure. The Company also has
an uninterruptible power supply at each POP, limiting the impact of local
power outages on the Network.
- Open Standards and Interoperable. The Splitrock Network is entirely based
on standards compliant architecture supporting various protocols,
including IP, ATM, frame relay, ISDN video and SS7. This architecture
allows Splitrock to interconnect freely with other carrier networks or
customer networks. As a result, Splitrock can extend services of another
carrier outside of that carrier's own region. In addition, potential VPN
clients that use standards based protocols can easily access the Network
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without having to purchase special equipment that would otherwise be
necessary with a proprietary network.
- Manageable. From its NOCs, the Company is able to monitor the Network
remotely, perform network diagnostics and equipment surveillance, and
inform customers when a network problem occurs. As a result of the
Company's network architecture, these tasks may be performed remotely
regardless of POP location or network status. This capability allows the
Company to control costs associated with on-site network configuration
and repair.
Network Management. The Company believes that superior customer service is
a critical element in attracting and retaining customers, and expanding value
added services to existing customers. In particular, the Company believes it is
critical to maintain two geographically dispersed NOCs, each of which is able to
monitor the entire Network and provide rapid problem resolution. The Company has
established a 24-hours per day, seven days per week NOC at its Yorktown, NY
facility. In addition, a new 24-hours per day, seven days per week NOC recently
became fully operational at The Woodlands, TX facility.
Peering. Peering arrangements between the Company and ISPs are necessary to
exchange traffic destined for other networks and to allow external traffic
access to the Splitrock Network. With Prodigy as a customer, the Company is now
carrying a significant amount of Internet traffic. The Company is building an
infrastructure equivalent to other Tier 1 providers and it has sought peering
relationships with many Tier 1 and Tier 2 ISPs. Peering arrangements have been
established with six ISPs, including Sprint and PSINet, and the Company is
currently in discussions with other ISPs in order to broaden its peering
capabilities. The Company peers with other networks from a core site through an
industrial standard Cisco router, which promotes proper protocol exchange
between Splitrock and other ISPs. The Company currently maintains private
peering connections at its Los Angeles, California; New York, New York; Atlanta,
Georgia; Phoenix, Arizona; and Dallas, Texas facilities. In addition, the
Company currently has access to one public peering location in Chicago, Illinois
and expects that access to two additional public peering locations will be
established in the third quarter of 1998. The Company expects that it will
substantially increase the number of ISPs with which it peers over the next two
years. The Company believes that by entering into direct peering relationships
with a large number of ISPs, the Company's business customers receive better
service and higher quality network performance. See "Risk Factors Establishment
and Maintenance of Transmission Services and Peering Relationships."
Transmission Services. The Company leases long distance connections of
various bandwidths to connect sites in the Network. The choice of long distance
carriers is based on their network reliability, bandwidth availability,
responsiveness and pricing. The Company currently leases a majority of its long
distance connections from WorldCom and is also reviewing other suppliers such as
Sprint and Qwest.
The Company leases local connections (DS-1, T-1 or ISDN PRI) to access the
end-user. The local service providers are selected based on their reliability,
service availability, responsiveness, pricing and minimum switch congestion
during busy hours. Based on these criteria, the Company has relationships with
21 CLECs and all major ILECs in the country. The Company has also established
approximately 60 collocations with various CLECs.
PRODUCTS AND SERVICES
General. The pervasive deployment of ATM switching technology throughout
the Network enables the Company to offer new services with lower incremental
investment than that required by less flexible networks. Currently, the Company
provides Internet access options and related-services, including Internet dial
access services and transit services, as well as enhanced VPN services. The
Company is seeking to increase total network utilization primarily by targeting
providers of business services (daytime intensive traffic) and, to a lesser
extent, providers of consumer services (evening intensive traffic).
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Internet Access Options. The Company provides the following Internet access
options and related services to its customers:
- Internet Dial Access Services. The Company's Internet dial access
services offer a cost effective Internet solution that provides 56k dial
access to the Company's advanced ATM-to-the-edge network via ordinary
telephone lines. The Company's Internet dial access services provide
smaller ISPs with the opportunity to increase their user base over time
while at the same time providing larger ISPs the opportunity to cost
effectively manage their growth. The Company currently provides Internet
dial access services to Prodigy for its approximately 900,000
subscribers. The Company intends to primarily target business focused
ISPs and businesses and, to a lesser extent, ISPs with residential
customers to maximize traffic throughout the Network. As of June 29,
1998, Prodigy was the Company's only Internet dial access service
customer.
- Transit Service. The Company offers high speed transit services, which
provide businesses with direct access, via dedicated capacity, to a full
range of Internet applications and allows an ISP to transfer traffic
through the Company's Network to another ISP. The Company's transit
services provide full-time dedicated Internet connectivity at a range of
access speeds from 56 Kbps to 155 Mbps. This service is designed to offer
comprehensive network security and to help ensure bandwidth availability
for priority business applications. Transit services enable businesses to
reduce their data communications expenses by leasing network utilization
from the Company in lieu of leasing point-to-point circuits from other
telecommunications providers. The Company has initially begun to target
carriers (i.e. ISPs, ILECs, CLECs, regional long distance providers and
wireless providers) as potential customers for this service. As the
Company's carrier transit service business grows, the Company will target
other businesses. Since May 1998, the Company has provided transit
services on a month-to-month basis to Orbis, an Internet connection
service provider to businesses, which is currently the Company's only
transit service customer.
Virtual Private Network Services. Many companies today have private data
communication networks (often referred to as WANs) built on expensive leased
lines designed to transfer proprietary data between office locations. The
Splitrock Network offers companies a cost-effective alternative to WANs through
VPNs, which are designed to provide secure transmission of private IP traffic
through the Internet. Additionally, many companies require that their employees
have remote access to these private networks from home or while traveling, which
is a function that VPNs provide. VPN products are also the vehicle for offering
intranet and extranet services. Intranets are corporate/organizational networks
that rely on Internet-based technologies to provide secure links between
corporate offices. Extranets expand the network to selected business partners
through secured links on the Internet. Increasingly, companies are finding that
intranets and extranets can enhance corporate productivity more easily and less
expensively than proprietary systems. The Company currently offers VPN
solutions, and is in the process of evaluating additional products to meet the
needs of customers. For example, the Company is in the process of testing ISDN
software and expects to offer video conferencing services to customers by
September 1998. Such services will be point-to-point, targeted primarily at the
communications needs of companies using PictureTel, VTEL or other standards
based video conferencing, and will allow the business customer to conduct video
conferencing with other on-network or off-network users with compatible video
conferencing equipment. The Company has initially begun to target carriers (e.g.
ISPs, ILECs, CLECs, regional long distance providers and wireless providers),
which the Company expects to distribute the Company's VPN services to end-users.
As the Company's VPN service business grows, the Company will also target
businesses as potential VPN customers. The Company has signed an agreement with
NetworkTwo, a value added network service provider, and began delivering VPN
services pursuant to this agreement in June 1998. NetworkTwo is currently the
Company's only VPN customer.
DISTRIBUTION STRATEGY
Through the combination of a direct sales force and alternative
distribution channels, the Company believes that it will be able to access
markets and increase revenue-producing traffic on the Splitrock Network. To
implement its distribution strategy, the Company intends to develop an in-house
direct sales force and has
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identified a variety of possible alternative distribution channels. The Company
expects to begin hiring sales employees in the second half of 1998.
The Company intends to utilize its direct sales force to market its
products and services directly to ISPs, carriers, value added service providers
and medium and large businesses. The Company intends to utilize alternate
distribution channels to market its products and services to medium and small
businesses. These alternate distribution channels include agents, resellers and
wholesalers.
- Agents are independent organizations that would sell the Company's
products and services under the Splitrock brand name to end-users in
exchange for revenue based commissions. The Company intends to identify
agents that generally would be focused on specific market segments (such
as medium and small businesses) and have existing customer bases. Sales
through this alternative distribution channel would require the Company
to provide the same type of services that would be provided in the case
of sales through its own direct sales force, such as order fulfillment,
billing and collections, customer service and direct sales management.
- Resellers are independent companies that would purchase the Company's
products and services and then "repackage" these services for sale to
their customers under their own brand name. The Company believes that
resellers would require access to certain of the Company's business
operating systems in connection with the sale of the Company's services
to the resellers' customers. Sales through this distribution channel
generally would not require the Company to provide order fulfillment,
billing and collection and customer service.
- Wholesalers are independent companies that would purchase from the
Company unbundled network and service capabilities in large quantities in
order to market their own products and services under a brand name other
than Splitrock. The Company believes that wholesalers would have minimal
dependence on the Company's business support systems in connection with
the sale of services to their customers.
The Company anticipates that participants in its alternative distribution
channels will sell services directly to medium and small businesses. The Company
expects these medium and small businesses to access the Splitrock Network by
using local switched services that are provided by CLECs or ILECs.
CUSTOMERS
The Company currently provides Internet dial access, transit and VPN
services to its customers. To date, Internet dial access services have provided
substantially all of the Company's revenue. The Company expects this percentage
to decrease as the Company continues to add new customers.
Internet dial access customers. Prodigy has been the Company's customer
since July 1997 and has provided substantially all of the Company's revenue
since its inception. Launched in 1984 as a joint venture between IBM and Sears,
Prodigy developed a nationwide on-line service that reached more than 85% of
U.S. households with a local call. Along with America Online, Inc. and
CompuServe Corp., Prodigy helped pioneer the concept of e-mail and on-line
services to consumers in the U.S.
In 1996, Prodigy was spun off from IBM and Sears. In 1997, Carso obtained
control of Prodigy. Carso introduced a new management team which has focused on
growing and expanding the business, modernizing infrastructure, and reducing
costs. In early 1997, Prodigy launched a new Internet-based service, Prodigy
Internet, separate from the original proprietary on-line service, Prodigy
Classic, priced at $19.95 per month for unlimited service. Prodigy is in the
process of migrating Prodigy Classic subscribers to Prodigy Internet. During the
first quarter of 1998 the average number of total Prodigy Internet subscribers
grew 36.4% compared to the fourth quarter of 1997, in part as a result of a
migration of Prodigy Classic subscribers to Prodigy Internet. The Company does
not expect this rate of growth to continue in the second quarter of 1998. In
September 1997, PC Magazine selected Prodigy as its Editor's Choice for Internet
service.
In 1998, as a result of its continued focus on marketing and customer
service, Prodigy outsourced its content management to Excite Communications,
Inc. Additionally, Prodigy has started aggressive marketing
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programs which are intended to rebuild its brand name recognition. Since July
1997, Prodigy has almost doubled the number of subscribers to its Prodigy
Internet service partially as a result of a migration of Prodigy Classic
subscribers to Prodigy Internet. The Prodigy customer base and associated
revenue has enabled the Company to support the deployment of the Splitrock
Network. See "Risk Factors -- Reliance on Prodigy; Recent Discussions with
Prodigy."
Transit customers. There are approximately 4,000 ISPs in the U.S. today.
Most of these do not have their own nationwide network and thus require transit
service to the Internet. Commencing in May 1998, the Company has provided
transit services to Orbis on a month-to-month basis. Orbis is the leading
provider of local Internet connection services for businesses in Minneapolis and
St. Paul, Minnesota. Orbis offers business critical connectivity featuring
redundant, high-speed (T-1, T-3) backbone connections, 24-hour operational and
environmental monitoring, and Web hosting services. At the beginning of each
month, Orbis requests a certain amount of dedicated bandwidth and the Company
then charges a monthly fee based on the amount of bandwidth requested. The
Company began generating revenues from Orbis in May 1998. The Company does not
expect that revenues from Orbis will be material for the foreseeable future.
VPN customers. The Company has entered into a three-year agreement to
provide VPN services to NetworkTwo. NetworkTwo, formerly known as ADP AutoNet
Communications Group, supplies high quality, reliable and fully supported
network services and operates a national wide area network delivering both
dedicated and dial-up connectivity to business clients. NetworkTwo also manages
VPNs, enterprise-wide intranets and extranets. NetworkTwo moves more than $2.0
billion over its network each day as a function of its cash management and funds
transfer service for ADP Financial Services. Other Network Two users include Dow
Jones' News Retrieval service; State Farm and Allstate insurance companies; and
60 of the top 100 U.S. banks. Under the agreement, NetworkTwo will be billed
depending on the type of modem port used (i.e. 612 Kbps, 768 Kbps, etc.) and the
amount of bandwidth consumed, with certain discounts available based on volume.
The agreement provides for a minimum aggregate payment by NetworkTwo of $7.0
million over the three year contract period. The Company began generating
revenue from NetworkTwo in June 1998.
CUSTOMER SERVICE
Splitrock believes that superior customer service is a critical element in
attracting and retaining customers and expanding value added services to
existing customers. In particular, the Company believes it is critical to
maintain two geographically dispersed NOCs, each of which is able to monitor the
entire Network and provide rapid problem resolution. Since the first quarter of
1998, the Company believes that it has developed a customer service platform
which will minimize the impact of future service interruptions and provide
superior customer service. Specifically, the Company has established a 24-hours
per day, seven days per week NOC at its Yorktown, NY facility and a new 24-hours
per day, seven days per week NOC recently became fully operational at The
Woodlands, TX facility. Each of these NOCs has the capability to manage traffic,
monitor system status and remotely implement solutions to system interruptions.
As of May 1998, the Company had implemented a number of other systems and
procedures to provide superior customer service. The Company has installed a
leading customer support trouble ticketing and workflow management system from
Remedy Corporation ("Remedy") to track, route and report on customer service
issues. In addition, software installed at the NOCs now enables the Company to
remotely service customer connections to the Splitrock Network. In addition,
field service personnel from the Company or third party vendors are dispatched
in the event of an equipment failure that cannot be serviced remotely. See
"-- Suppliers." In the first quarter of 1998 the Network experienced significant
service interruptions and failures. See "Risk Factors -- Reliance on Prodigy;
Recent Discussions with Prodigy."
BUSINESS SUPPORT SYSTEMS
General. Through the development of scalable business support systems, the
Company believes that it has the opportunity to establish a competitive
advantage relative to traditional network service providers. Traditional network
service providers typically operate extensive legacy business support systems
with compartmentalized architectures that limit their ability to scale rapidly
and introduce enhanced services and
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features. In connection with the expansion of the Splitrock Network, the Company
is creating business support systems with an architecture designed to maximize
both reliability and scalability. Furthermore, in establishing its business
support systems, the Company has attempted to develop Company-wide
standardization of hardware, software, database platforms and problem solving in
order to maximize system automation and minimize employee manual processing.
Business support systems are, or will be, distributed throughout the Splitrock
Network, rather than located at central sites, which improves network
performance, recovery and reliability, while also providing real-time capture of
statistical and accounting data. Splitrock utilizes, when available, industry
standard software systems developed and maintained by third party vendors but
customized for the Company's specific needs.
Network Management. The Company believes that an up-to-date management
platform is critical for the Company to be competitive and provide customers
with quality services. The Company has put in place a modern management platform
to manage the extensive Splitrock Network. The new management platform performs
operations, administration and management tasks. The Company has selected UNIX
and Windows NT based computing systems for network management to ensure ease of
upgrades in the future. Key features of the system are provided by third party
vendors, including an SQL database for information management, NetExpert from
Objective Systems, Inc. for equipment monitoring, Remedy for trouble request
tracking, and other software running tasks that monitor network utilization. The
Company has customized most of these platforms to ensure maximum Network
flexibility and efficiency. The systems also have sufficient capacity to expand
without significant design changes.
Billing. The Company is reviewing billing systems and will select an
industry-standard billing system and begin implementation in the third quarter
of 1998. The Company believes that billing requirements prior to full
implementation, expected in the fourth quarter of 1998, can be addressed with
existing systems. In order to augment the third party system that the Company
plans to utilize, the Company has adopted Radius Authentication software to
capture Internet session activity in order to feed the billing system for
usage-based services. The Company believes that this system offers the
flexibility and scalability necessarily to provide high quality Network billing
services. For example, the Company believes that this system will have the
ability to process 1 million records per hour to capture all relevant billing
information. While this system has been purchased and customized, it has yet to
be tested at production levels but is expected to be fully deployed by the end
of August 1998.
SUPPLIERS
The Company is dependent on third parties for key components of its network
infrastructure, including for leased lines, transmission services and networking
equipment, such as routers, switches and modems. The quantities and quality of
such networking equipment required by the Company are available only from
limited sources. The Company currently utilizes Lucent for ATM switching
products, including the Lucent LDR200 switch, Bay Networks for its Internet dial
access platform, Cisco for routers and Sun for servers. The Company has entered
into a Purchase Agreement with Yurie (which was acquired by Lucent in May 1998)
pursuant to which the Company agreed to purchase and Yurie agreed to provide a
minimum of $20.0 million of Yurie equipment and related products prior to
January 1, 1999. As of July 15, 1998 the Company had purchased $11.0 million of
equipment and products under this agreement. The Company also depends upon a
variety of LECs and IXCs to provide telecommunication services, including leased
line and collocation facilities. For long distance connections and backbone long
distance transmission facilities, the Company currently uses WorldCom. In
addition, the Company obtains bandwidth capacity under leased line connection
agreements with LECs, including RBOCs, or is provided telecommunications
services and leased physical space under local access/collocation agreements
with various CLECs, such as Focal, Intermedia, and others. The Company is also
actively pursuing agreements with additional CLECs in an effort to establish
relationships with a variety of telecommunication providers and thereby reduce
the cost of lease connectivity. See "Risk Factors -- Dependence on Suppliers"
and "-- Splitrock's Network -- Transmission Services."
The Company has an agreement with IBM to use the IBM Global Services
Network to cover market areas that are neither served by the Splitrock Network
nor the Legacy Network. These POPs currently account for approximately 30% of
all Prodigy-related traffic. The terms of the agreement provide that either
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party may, upon 60 days prior notice, terminate its respective obligations under
the contract for the remaining POP sites. In addition, under the terms of the
agreement with IBM, services at certain of the POPs in the IBM Global Services
Network are scheduled to be discontinued on September 30, 1998. These POPs
currently represent less than 2% of the Company's Prodigy-related traffic. As
part of the Phase II Expansion, the Company plans to deploy POPs to those
locations. The Company has also formulated contingency plans, including
providing toll free Internet dial access to users in these areas, should the
Company be unable to timely deploy POPs in those areas or IBM be unwilling to
continue to provide service to those POPs after September 30, 1998. See "Risk
Factors -- Dependence on Suppliers."
As part of the Company's strategy to replace remaining POPs covered by the
IBM Global Services Network and to complete the expansion of the Splitrock
Network, the Company will rely significantly upon third parties to provide
equipment and services and to deploy the remainder of the Splitrock Network.
Under the Ericsson Agreement, Ericsson will provide certain equipment and
services for, and deploy, 99 additional POP sites. In connection with this
agreement, Ericsson has provided the Company with a $5.0 million credit facility
to be used to pay amounts due under the Ericsson Agreement, which was repaid
upon consummation of the Unit Offering. The Company is in negotiations with
Ericsson for the deployment of the additional 231 POPs needed to complete the
Phase II Expansion. The Company expects that such negotiations will lead to an
agreement on similar terms and conditions as the Ericsson Agreement. There can
be no assurance that the Company and Ericsson will come to an agreement on the
deployment of the remaining 231 POPs required to complete the Network's
expansion. See "Risk Factors -- Suppliers" and "Description of Certain
Indebtedness."
The Company also engages third party vendors for routine maintenance,
on-call repair and certain related services. In addition to nine employees and
six individual contractors designated, trained and engaged by the Company as
field operation personnel, the Company has an agreement with IBM designed to
provide additional on-call field support personnel for maintenance, part
replacement and repairs for the Legacy Network until that network is
substantially decommissioned. In addition, during and following the Phase I
Buildout, WilTel has performed on-call services for replacement parts,
maintenance and repair services for the Splitrock Network. The agreement with
WilTel will expire on September 30, 1998. The Company is currently evaluating
and negotiating maintenance service proposals that are designed to replace the
agreements with IBM and WilTel and expand as the network infrastructure grows.
There can be no assurance that the Company will be able to enter into a
replacement maintenance agreement on acceptable terms, or at all. See "Risk
Factors -- Dependence on Suppliers."
COMPETITION
The industry in which the Company competes is extremely competitive. The
Company expects that competition will continue to intensify as customers seek
additional capacity to satisfy the continued growth of the Internet industry. In
addition, numerous competitors, including major telecommunications carriers, are
rapidly expanding their network capabilities. The Company believes that the
primary competitive factors for the provision of network services are quality of
service, network coverage, reliability, price, and product innovation.
Management believes it can compete effectively on these factors based on the
design of the Splitrock Network and industry experience at top management
levels.
The Company's current and prospective competitors generally may be divided
into two groups: (i) companies that provide Internet access services to ISPs
with both residential and small business customers and (ii) companies that
provide Internet access (including Internet dial access and transit), VPN and
other value added services to medium and large business customers.
ISP Internet Access Service. According to IDC, there are over 4,000 ISPs in
the United States, consisting of national, regional and local providers. The
Company intends to market Internet dial access services to these ISPs. The
Company's competitors in this market will be other companies that provide
Internet access service to ISPs as well as ISPs which possess backbone networks
thereby enabling them to provide capacity to other ISPs. Competitors in this
segment include Verio, Concentric, PSINet and Netcom. While the Company believes
that its status as an independent service provider distinguishes it from many of
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these competitors, some of these competitors have significantly greater market
presence, brand recognition and financial, technical and personnel resources
than the Company.
Corporate Internet Access and VPN. In the corporate Internet access
(including Internet dial access and transit) and VPN markets, competitors will
be comprised of network service providers that focus on medium and large
business customers as well as telecommunications carriers. Competitors will
include UUNet, GTE Internetworking (formally BBN)) and DIGEX. Many of the
network service providers that primarily focus on small business, including
Verio and Concentric, also have capabilities in these markets. In addition, all
of the major long distance companies, including AT&T Corporation ("AT&T"), MCI,
and Sprint, offer Internet access and VPN services and compete with the Company.
Many of these competitors, in addition to their substantially greater market
presence and financial, technical and personnel resources, also have large
existing commercial customer bases. Furthermore, many of these competitors have
the ability to bundle Internet access and VPN services with other services such
as Web browsing or, in the case of long distance companies, telephony. Such
bundling of services may have a material adverse effect on the Company's ability
to compete effectively and thus could have an adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that significant new competitors will enter the
network services market. The Company is aware that other companies, including
IXC Comm. and Level 3, are in the process of building or expanding networks that
will have the ability to provide services comparable to those of the Company. In
addition, many of the Company's competitors have the financial and operational
resources to construct networks similar to the Splitrock Network. For example,
Sprint recently announced that it is in the process of designing a network which
will contain ATM switches at every core, hub and remote site. There can be no
assurance that the Company will be able to compete effectively with such
companies.
Recent reforms in the federal regulation of the telecommunications industry
have also created greater opportunities for LECs, including the RBOCs, to enter
the Internet network services market and therefore compete with the Company.
Such increased competition could have a material adverse effect on the Company.
In order to address the Internet network service requirements of the current
business customers of long distance and local carriers, the Company believes
that there is a trend toward horizontal integration through acquisitions of,
joint ventures with, and the wholesale purchase of connectivity from, ISPs. The
WorldCom/MFS/UUNet consolidation (as well as the pending WorldCom/ MCI merger),
the Netcom/ ICG Communications Inc. merger, the Intermedia/DIGEX merger and
GTE's acquisition of BBN are indicative of this trend. Such consolidations may
result in the Company competing with larger companies with greater resources to
devote to the development of new competitive products and services and the
marketing of existing competitive products and services.
As a result of increased competition and integration in the industry, the
Company could encounter significant pricing pressure, which in turn could result
in significantly lower average selling prices of the Company's services. There
can be no assurance that the Company will be able to offset the effects of any
such lower prices with an increase in the number of its customers, growth in
sales to its customer base, higher revenue from enhanced services, cost
reductions or otherwise. In addition, the Company believes that the Internet
access and related services industry is likely to undergo further consolidation
in the near future, which could result in increased price and other competition
in these industries and, potentially, other portions of the industry, including
the market for VPN services. Increased price or other competition could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will have the
financial resources, technical expertise or marketing and support capabilities
to continue to compete successfully.
REGULATION
Overview. Although the Company is not currently subject to direct
regulation by the FCC or any other federal or state agency, it operates in a
highly regulated industry and therefore changes in the regulatory environment
relating to Internet related and other telecommunications services, including
regulatory changes which directly or indirectly affect telecommunications costs
or increase the likelihood or scope of competition
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from RBOCs or other telecommunication companies, could have a material adverse
effect on the Company's financial position or results of operations, including
by affecting the prices at which the Company offers it services or imposing
regulatory compliance and other costs on the Company.
Various existing federal and state regulations are currently the subject of
judicial proceedings, legislative hearings and administrative proposals which
could change, in varying degrees, the manner in which the industry operates.
Neither the outcome of these proceedings, nor their impact upon the
telecommunications industry generally, or on the Company particularly, can be
predicted at this time. In addition, over the past several years both the
federal and state governments have adopted new legislation and rules profoundly
affecting the telecommunications industry. No assurance can be given that the
changes in current legislation or new legislation, and the regulations adopted
by the FCC or state regulators pursuant to such legislation, would not have a
material adverse impact on the Company.
The Company Operates as an Unregulated Private Carrier. Unlike most
providers of telecommunications services, the Company does not offer services
indiscriminately to the public or to a broad class of customers, but instead
negotiates individual service contracts with a small number of select carriers.
As a result, it is classified as a "private carrier" as opposed to a "common
carrier" and is not subject to most federal and state regulations. If, in the
future, the Company broadens its customer base and/or provides services
according to standardized service arrangements instead of individually
negotiated contracts, it may become subject to common carrier regulation. If
this occurs, the Company may incur additional regulatory costs to which it is
not now subject.
Regulation of Internet Communications. To date, the FCC has exempted
Enhanced Service Providers ("ESPs"), including ISPs, from federal and state
regulations governing common carriers, including the obligation to pay access
charges and regulatory fees, including contributions to the Universal Services
Fund. Thus, to the extent that the Company provides Internet services and other
services employing Internet protocols, it is not currently subject to
regulation.
Some recent regulatory action indicates that ISPs may be subject to some
form of regulation in the future. The regulatory status of communications
services over the Internet is presently uncertain. For example, in an April 10,
1998 Report to Congress regarding Universal Service (the "Report"), the FCC
concluded that the provision of transmission capacity to ISPs constitutes
"telecommunications" under the Communications Act. The FCC has also indicated in
the Report that it would consider, in an upcoming proceeding, issues related to
whether ISPs that own transmission facilities and engage in data transport over
those facilities in order to provide information services are providing
telecommunications to themselves, and therefore ought to be required to
contribute to the Universal Service Fund. While the Report containing this
conclusion does not have the force of law, it provides a strong indication of
regulatory action that may be taken by the FCC in the future. A finding by the
FCC that ISPs and carriers providing service to ISPs must pay Universal Service
contributions could increase the Company's cost of doing business and have a
material adverse affect on the Company.
To the extent that the Company provides Internet telephony (i.e., a service
in which a voice transmission is made over a packet-switched interactive data
network), such service is deemed an enhanced service and is not currently
subject to federal or state regulation. There is no guarantee, however, that the
regulatory status of Internet telephony will not change in the future. If
Internet telephony does become subject to federal or state regulation in the
future, such a development could impose substantial new costs on the Company.
Therefore, there can be no assurance that new laws or regulations relating to
these services, or determinations that existing laws are applicable to them,
will not have a material adverse effect on the Company's business.
Potential Liability of ISPs. The law in the United States relating to the
liability of ISPs and providers of transmission capacity for information carried
on, disseminated through or hosted on their systems is currently unsettled. The
Communications Act and statutes enacted, or under consideration in some states,
impose civil and criminal liability upon ISPs, or providers of transmission
capacity to ISPs, for the transmission or dissemination of certain types of
information and materials. The imposition of such liability may require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources. Regulations, litigation,
or legislation could affect the demand for the Company's
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services. See "Risk Factors Regulatory Matters; Potential Liability for
Information Disseminated over the Internet."
TRADEMARKS AND TRADE NAMES
The Company filed federal trademark applications for the words "Splitrock"
and "A Carrier of Wisdom" on September 18, 1997, and its domain name
"splitrock.net" on March 6, 1998. The Company also filed separate federal
trademark applications for logos on the above dates, and for a logo on June 16,
1998. These applications are pending and the Company has no assurance that they
will be granted. Trademark applications for the "Splitrock" mark also have been
applied for in numerous foreign countries including Mexico, twelve Central and
South American countries, Canada, the European Community, Japan, South Korea,
Taiwan, China, Thailand, the Russian Federation, Poland and Australia.
"Splitrock Services, Inc." is a trade name of the Company.
EMPLOYEES
As of July 15, 1998, the Company had 74 full-time employees and 24
independent contract workers. None of the Company's employees are represented by
a union. The Company has experienced no strikes or work stoppages and considers
its relations with its employees to be satisfactory.
The Company believes that its ability to successfully implement its
business strategies will depend on its ability to attract and retain qualified
employees. The Company expects to hire approximately 30 and 75 additional
employees by the end of 1998 and the Phase II Expansion, respectively. In
addition, the Company expects to utilize additional independent contractors.
Independent contractors are expected to continue to represent approximately
20-25% of the Company's total workforce. While the Company is expecting to add
employees throughout its organization, the Company will focus on recruiting new
technical and sales and marketing employees. The Company expects to employ over
175 employees and independent contractors upon completion of the Phase II
Expansion in the second quarter of 1999. In order to attract and retain highly
qualified employees, the Company believes that it is important to provide a
competitive compensation program that aligns employees' interests with the
Company's. The Company's noncash benefit programs are designed to be comparable
to those offered by its competitors. See "Management." There can be no assurance
that the Company will be able to attract and retain the personnel necessary to
implement its strategies. See "Risk Factors -- Ability to Manage Growth".
INSURANCE
The Company has insurance coverage it believes to be adequate for the risks
of the businesses in which it is engaged. The Company carries property, general
liability and directors and officers insurance with basic policy limitations of
$5.0 million, $2.0 million and $5.0 million, respectively, subject to
deductibles, exclusions and self-insurance retention amounts. In addition, the
Company has a $5.0 million umbrella policy. Such coverage may not be adequate or
available to compensate the Company for all losses that may occur. The
occurrence of a significant loss not fully covered by insurance could have a
material adverse effect on the Company. See "Risk Factors -- Risk of System
Failure; Insurance."
PROPERTIES
Until recently the Company leased approximately 8,000 square feet of space
in The Woodlands, TX for its headquarters and administrative facilities. In
early July 1998 the Company moved its headquarters and administrative facilities
to a new facility containing approximately 25,000 square feet in The Woodlands,
TX. The lease on the new facility expires in 2003. The Woodlands, TX NOC is also
housed in the new facility.
The Company also subleases from Prodigy a facility of approximately 12,500
square feet in Yorktown, NY for the Company's Yorktown office and NOC. This
lease expires on February 28, 2001 but is subject to early termination on
December 31, 1999 upon three months written notice. The Company plans to move
its Yorktown, NY facility to another location in the New York metropolitan area.
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<PAGE> 77
In connection with its network operations, the Company leases space for
installed telecommunications equipment throughout the U.S. for those POPs
deployed in over 70 metropolitan markets. These leases have an average term of
three years and average monthly payments ranging up to several thousand dollars.
In many cases, the Company has the option to renew such leases. The Company
considers these facilities and properties to be suitable for its present needs.
The Company did not assume leases related to the Prodigy POPs in connection with
the Prodigy Transactions. The Company expects to enter additional leases as the
Phase II Expansion progresses.
LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings, nor are any
legal proceedings threatened by or against the Company.
MANAGEMENT
The following is information concerning the Board of Directors, executive
officers and other key employees of the Company:
<TABLE>
<CAPTION>
Name Age Principal Position With the Company
---- --- -----------------------------------
<S> <C> <C>
Kwok L. Li............................. 41 Chairman of the Board of Directors and Chief
Technical Officer
William R. Wilson...................... 50 President, Chief Executive Officer and
Director
James D. Long.......................... 43 Senior Vice President, Chief Financial Officer
and Director
Patrick J. McGettigan, Jr.............. 45 Senior Vice President, Secretary and General
Counsel
Clark McLeod........................... 51 Director
Samer Salameh.......................... 33 Director
Roy A. Wilkens......................... 55 Director
Todd Wilkens........................... 31 Vice President -- Engineering
Tracy Hammond.......................... 37 Controller
</TABLE>
Kwok L. Li has served as a Chairman of the Board since July 1997 and has
served as Chief Technical Officer of the Company since April 1998. Mr. Li is a
co-founder of the Company. Mr. Li has also been the Chairman and managing member
of Linsang since July 1997. Linsang is a technology investment company in which
Mr. Li owns a controlling interest. Mr. Li was a director of Yurie from 1995
until the consummation of the sale of Yurie to Lucent. Mr. Li also served as
Vice Chairman of Yurie from June 1997 until its sale to Lucent, as President and
Chief Operating Officer of Yurie from March 1996 to June 1997, and as Executive
Vice President and Chief Technical Officer of Yurie from August 1994 through
March 1996. From 1991 to 1994, Mr. Li was Director of Strategic Planning at
WilTel an interexchange carrier. From 1988 to 1991, he was Manager of Fiber
Access Systems Development for Bell Northern Research, Inc., a subsidiary
conducting technological research and development for Northern Telecom Limited.
Mr. Li is the primary technical architect of the Lucent LDR200 switch
technology. Mr. Li received a B.E.S. in electrical engineering from The Johns
Hopkins University in 1979.
William R. Wilson has served as President of the Company since its
formation and Chief Executive Officer of the Company since April 1998. Mr.
Wilson is a co-founder of the Company. Prior to assuming his position at the
Company, Mr. Wilson was the Chief Executive Officer of OneLine Management, a
telecommunications consulting firm specializing in strategic positioning founded
by Mr. Wilson in 1995. In that capacity, Mr. Wilson advised Carso and Telmex on
strategic matters. From 1988 to 1995, Mr. Wilson was Vice President of Strategic
Planning at WilTel. Previously, Mr. Wilson taught at Rice University, The
University of Texas at Austin, and The University of Michigan. Mr. Wilson holds
a Ph.D. in Social Psychology from The University of Michigan and an MBA from The
University of Texas at Austin.
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<PAGE> 78
James D. Long has served as Senior Vice President and Chief Financial
Officer of the Company since March 1998. From 1995 to 1997, Mr. Long was Senior
Vice President and Chief Financial Officer of CoreSource, Inc., a venture
capital backed healthcare service company, with responsibilities for general
management, financial management and corporate finance. From 1993 to 1995, Mr.
Long was a principal in Nightingale & Associates, a management consulting firm.
Mr. Long has experience with several other management consulting firms including
Deloitte & Touche and Price Waterhouse. Mr. Long holds a BA in Latin American
Economics and an MBA from the University of Texas.
Patrick J. McGettigan, Jr., has served as General Counsel of the Company
since September 1997, as Secretary since March 1998, and as Senior Vice
President since April 1998. Prior to joining the Company, Mr. McGettigan was in
the private practice of law, having been a partner in the firm he founded in the
early 1980s. Mr. McGettigan served as outside counsel to the Company when it was
formed in March 1997. While in private practice for 19 years, Mr. McGettigan
primarily represented closely held businesses in commercial litigation and
transactional matters. Mr. McGettigan received a Bachelor of Arts degree from
The University of Texas and his JD degree from South Texas College of Law, and
is a member of the State Bar of Texas.
Clark McLeod has served as a director of the Company since May 1998. Mr.
McLeod founded McLeodUSA, and has served as its Chairman of the Board and Chief
Executive Officer since its inception in 1991. McLeodUSA is a fully integrated
provider of telecommunications services in the Midwest region. Mr. McLeod's
previous business venture, Teleconnect, a long distance telecommunications
company, was founded in January 1980. This company later merged with
SouthernNet, Inc., forming Telecom*USA. The company grew to become the fourth
largest long distance telecommunications company in the U.S., and was purchased
by MCI in 1990 for $1.3 billion.
Samer Salameh has served as a director of the Company since April 1998.
Since September 1997, Mr. Salameh has been President, Chief Executive Officer,
and a director of Prodigy. From July 1994 until joining Prodigy, Mr. Salameh
served as Director, Long Distance Division of SBC Communications (formerly
Southwestern Bell), responsible for marketing, strategy, positioning, product
management and product development for Telmex, the leading provider of local and
long distance telephone services in Mexico. Before that, Mr. Salameh was
employed by MCI as a Product Manager in 1994 and as a Strategic Marketing
Manager from 1991 to 1993, and he was employed by Merl Industries, a management
consulting firm, as Vice President of Finance during 1993. Mr. Salameh holds a
Masters degree from the Fletcher School of Law and Diplomacy, a B.S. degree in
Management and Technology Transfer from Polytechnic University of New York and a
Baccalaureate degree with concentration in Math and Physics from Lycee Fenelon
in Paris.
Roy A. Wilkens has served as a director of the Company since April 1998.
Mr. Wilkens was President of The Williams Pipeline Company when he founded
WilTel Network Services as an operating unit of The Williams Companies, Inc. in
1985. He was Founder/Chief Executive Officer of WilTel Network Services from
1985 to 1997. In 1995, WilTel Network Services was acquired by LDDS
Communications, which now operates under the name WorldCom. Mr. Wilkens served
as Vice Chairman of WorldCom until his retirement in 1997. In 1992, Mr. Wilkens
was appointed by President George Bush to the National Security
Telecommunications Advisory Council. He has also served as chairman of both the
Competitive Telecommunications Association (CompTel) and the National
Telecommunications Network. Mr. Wilkens is a member of the board of directors of
Paging Network, Inc., UniDial Inc., Invensys Corporation Inc., and Qwest. Mr.
Wilkens is the father of Todd Wilkens, the Company's Vice
President -- Engineering.
Todd Wilkens has served as Vice President -- Engineering of the Company
since July 1997. From 1996 to 1997, Mr. Wilkens was Vice President, Engineering
and Operations, at Gridnet International, where he helped Gridnet, a start-up
Internet services company, implement a nationwide frame relay/ATM network. From
1993 to 1996, Mr. Wilkens was Senior Manager, Advanced Products Support, at
WorldCom where he helped build the Internet Support Organization which
specialized in building and operating ISP backbones. Prior to that, Mr. Wilkens
supported offshore communications in the Gulf of Mexico for Conoco/Dupont. Mr.
Wilkens holds a BSEE from Oklahoma State University. Mr. Wilkens is the son of
Roy A. Wilkens, a director of the Company.
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<PAGE> 79
Tracy Hammond joined the Company as Controller in September 1997. From 1995
to 1997, Ms. Hammond served as Vice President -- Finance and Administration of
Comsul, Ltd., a privately held national communications consulting firm. From
1992 to 1995, Ms. Hammond was Principal Financial Officer at Optex Biomedical, a
high-tech biomedical start-up company. Previously, Ms. Hammond worked for seven
years in Arthur Andersen's emerging business practice group, achieving the level
of audit manager. Ms. Hammond is a CPA, and holds a BS in Accountancy from The
University of Missouri.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established a compensation and an
audit committee. The audit committee is composed of Messrs. Long, Wilkens and
McLeod. The audit committee is responsible for recommending the firm to be
appointed as independent accountants to audit the Company's financial
statements, discussing the scope and results of the audit with the independent
accountants, reviewing the functions of the Company's management and independent
accountants with respect to the Company's financial statements and performing
such other related duties and functions as are deemed appropriate by the audit
committee and the board. The compensation committee is responsible for reviewing
and establishing the compensation structure for the Company's officers and
directors, including salary rates, participation in incentive, compensation and
benefit plans, stock options and other forms of compensation. The compensation
committee is composed of Messrs. Li, Wilson, Wilkens and Salameh.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation earned by or awarded to the chief executive officer of the Company
and each other executive officer of the Company for the first fiscal year of the
Company from inception (March 5, 1997) through December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) COMPENSATION ($) OPTIONS (#)
- --------------------------- ---- ---------- ---------------- ------------
<S> <C> <C> <C> <C>
Kwok L. Li..................................... 1997 -0- 10,600(1) -0-
Chairman of the Board and Chief
Technical Officer
William R. Wilson.............................. 1997 62,980 16,400(1) -0-
President and Chief Executive Officer
James D. Long.................................. 1997 -0- -0- -0-
Senior Vice President and
Chief Financial Officer(2)
Patrick J. McGettigan, Jr...................... 1997 46,933 65,000(4) 250,000
Senior Vice President, Secretary and
General Counsel(3)
</TABLE>
- ---------------
(1) The compensation for services rendered was paid in the form of shares of
Common Stock in May 1997.
(2) Mr. Long became an employee of the Company in March 1998.
(3) Mr. McGettigan became an employee of the Company in September 1997. Prior to
being employed by the Company, Mr. McGettigan performed legal services on
behalf of the Company. In 1997, Mr. McGettigan's former law firm received
approximately $18,000 from the Company.
(4) Granted as a bonus upon Mr. McGettigan becoming an employee of the Company.
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<PAGE> 80
OPTION GRANTS IN FISCAL YEAR 1997
The following table sets forth information concerning the grant of stock
options during the fiscal year ended December 31, 1997 to the executive officers
named in the Summary Compensation Table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE OR APPRECIATION FOR
UNDERLYING GRANTED TO BASE PRICES OPTION TERM(1)
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---- ----------- ------------ ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kwok L. Li................... -0- * * * * *
William R. Wilson............ -0- * * * * *
James D. Long(2)............. -0- * * * * *
Patrick J. McGettigan, Jr.... 250,000 13.3% .625 9/07 98,268 249,022
</TABLE>
- ---------------
* Not applicable.
(1) The potential realizable value through the expiration date of options has
been determined on the basis of a per share price at the time the options
were granted of $.625, compounded annually over ten years, net of the
exercise price. These values have been determined based upon assumed rates
of appreciation and are not intended to forecast the possible future
appreciation, if any, of the price or value of the Company's Common Stock.
(2) Mr. Long was granted an option to acquire 250,000 shares of Common Stock at
a price of $.625 per share upon his employment with the Company in 1998. The
Company will recognize compensation expense of $118,750 over the vesting
period of these options as they were granted at a discount from the then
fair market value of the Company's common stock.
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table shows information with respect to unexercised options
held by the executive officers named in the Summary Compensation Table as of
December 31, 1997. No stock options were exercised by any executive officers
during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 (#) DECEMBER 31, 1997(1) ($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kwok L. Li.................................... * * * *
William R. Wilson............................. * * * *
James D. Long................................. * * * *
Patrick J. McGettigan, Jr..................... 80,000 170,000 38,000 80,750
</TABLE>
- ---------------
* Not applicable.
(1) Options are "in-the-money" if the price of the Company's Common Stock
exceeds the exercise price of the options. The value of unexercised options
represents the difference between the exercise price of such options and the
value of the Company's Common Stock on December 31, 1997, which is based on
a valuation made by an independent firm and which was determined to be $1.10
per share.
1997 INCENTIVE SHARE PLAN
On June 16, 1997, the Company's 1997 Incentive Share Plan (the "Plan")
became effective. On April 1, 1998, the Board of Directors of the Company
approved and adopted an amendment and restatement of the Plan which was
subsequently approved and adopted by the stockholders of the Company on April
27, 1998. The purpose of the Plan is to provide employees, and certain
non-employee directors, and consultants with additional incentives by increasing
their ownership interests in the Company.
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<PAGE> 81
Individual awards under the Plan may take the form of one or more of (i)
either incentive or non-qualified stock options, (ii) stock appreciation rights,
(iii) restricted stock and (iv) other awards, the value of which is based in
whole or in part upon the value of the Common Stock. Options under the Plan have
a term of ten years and are generally granted with an exercise price equivalent
to market value at the date of grant. Individual option grants vest over time,
based upon a schedule approved by the Board of Directors, which is generally
four years. All of the Company's Common Stock options vest automatically upon a
change in control of the Company, as defined.
The Compensation Committee administers the Plan, determines the persons who
will receive awards and establishes the terms and conditions of those awards.
The President of the Company is also authorized, subject to certain limitations,
to grant awards to other employees. The maximum number of shares of Common Stock
that may be subject to outstanding awards is 20.0 million. As of July 15, 1998,
options for 3,404,500 shares had been granted. No options have been exercised
other than the option to purchase 1,000,000 shares granted to Mr. McLeod in May
1998, which was exercised in June 1998. See "-- Certain Relationships and
Related Transactions -- Financings." Shares of Common Stock which are
attributable to awards which have expired, terminated or been canceled or
forfeited are available for issuance or use in connection with future awards.
Awards under the Plan may be made until January 1, 2007. The Plan may be
amended by the Board of Directors without the consent of the stockholders of the
Company.
DIRECTOR COMPENSATION
The directors of the Company who are not also employees of the Company are
entitled to receive an annual fee of $10,000 and a fee of $500 for attending
each committee meeting not held on the same date as a regular meeting of
Directors (Mr. Wilkens and Mr. Salameh have waived all such cash compensation
for 1998), plus reimbursement for reasonable expenses incurred in conjunction
with attending meetings. Directors are also eligible for grants of awards under
the Plan. On May 28, 1998, each of the three outside directors was granted
options to purchase 80,000 shares of the Common Stock at $1.10 per share, with
options to purchase 20,000 of such shares vesting on each of the first four
anniversaries of the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1997, the compensation of the Company's executive officers was
determined by the Board of Directors. In 1998, the Board of Directors of the
Company appointed a compensation committee consisting of Kwok L. Li, William R.
Wilson, Samer Salameh and Roy Wilkens, who will determine the compensation of
the Company's executive officers consistent with guidelines established by the
Board of Directors. Mr. Li and Mr. Wilson are executive officers of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Employment Agreements. The Company has entered into employment agreements
with William R. Wilson (the "Wilson Agreement") and Patrick J. McGettigan, Jr.
(the "McGettigan Agreement"). The Wilson Agreement terminates on March 15, 2002,
and provides for the payment of an initial base salary at an annual rate of not
less than $150,000 and entitles him to participate in employee benefit plans
offered to senior executives. The McGettigan Agreement terminates on August 31,
1999, and provides for the payment of an initial base salary at an annual rate
of not less than $140,000 and entitles him to participate in employee benefit
plans offered to senior executives. The base salaries are subject to adjustment
by the Board of Directors or the Compensation Committee.
The Wilson Agreement contains certain confidentiality provisions and
provides for termination (a) for cause (i.e., final conviction of a felony or
crime involving moral turpitude or willful or grossly negligent violation of the
terms regarding confidentiality), (b) upon death or disability or (c) without
cause. If Mr. Wilson is terminated upon death or disability or without cause,
the Company is required to pay the base salary for the remaining term of the
Wilson Agreement. The Company has also indemnified Mr. Wilson pursuant to the
Wilson Agreement for actions taken as an officer and director. The Wilson
Agreement further provides that Mr. Wilson may engage in other business
endeavors without violating any of provisions of the
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<PAGE> 82
agreement and allows Mr. Wilson to terminate all obligations under the agreement
with 30 days written notice.
The McGettigan Agreement provides for termination for cause (i.e., willful
and material breach of the McGettigan Agreement, intentional nonperformance,
willful dishonesty, fraud or misconduct with respect to the business or
conviction of a felony). If Mr. McGettigan is terminated by the Company for any
reason other than cause, the Company is required to pay the base salary for the
remaining term of the McGettigan Agreement. In addition, Mr. McGettigan can
terminate all obligations under the McGettigan Agreement upon 60 days written
notice.
Financings. In March 1997, the Company issued to its founders, Kwok L. Li
and William R. Wilson, 400,000 and 600,000 shares, respectively, of its Common
Stock for $0.00167 per share. In May 1997, the Company approved the issuance to
Mr. Li and Mr. Wilson of 10.6 million and 16.4 million shares, respectively, of
the Company's Common Stock in consideration of services performed since March
1997.
In March 1997, Mr. Li loaned to the Company an aggregate of $750,000. Such
loans were repaid with interest on July 7, 1997. On June 6, 1997, Mr. Li
advanced $3.0 million to the Company and on June 19, 1997, Mr. Li advanced an
additional $7.0 million to the Company. Such advances were evidenced by a $10.0
million convertible note. On August 9, 1997, Linsang, the assignee of Mr. Li,
converted such note into 16.0 million shares of the Common Stock of the Company.
In December 1997, Linsang loaned $1.0 million to the Company. Such loan is
repayable 30 days after written demand or, if no demand is made, on December 1,
2002 and bears interest at the rate of 9.75% per annum beginning in February
1998. In January, March and June 1998, Linsang advanced an additional $3.0
million, $2.0 million and $5.0 million, respectively, to the Company on similar
terms. Such indebtedness was refinanced in connection with the Unit Offering. In
connection with such refinancing, Linsang purchased 11,000 Units in the Unit
Offering.
In August 1997, Linsang purchased 800,000 shares of the Common Stock for
$0.5 million. In addition, in August 1997, Linsang acquired 11.2 million shares
of Common Stock of the Company for $7.0 million pursuant to a subscription
agreement previously executed by Mr. Li and assigned to Linsang.
In August 1997, Roy Wilkens and Sandra Wilkens purchased 800,000 shares of
the Common Stock of the Company for $0.5 million. Mr. Wilkens became a member of
the Board of Directors of the Company in April 1998.
In September 1997, Orient Star, a wholly owned subsidiary of Carso,
purchased 20.0 million shares of Common Stock of the Company for $12.5 million.
The transaction price included an option, exercisable through September 18,
1998, to subscribe for an additional 5.0 million shares for $3.1 million. The
option, if exercised, would result in Orient Star holding approximately 30.2% of
the Common Stock of the Company. The Company expects Orient Star to exercise the
option. Samer Salameh, the President of Prodigy, an affiliate of Carso, became a
member of the Board of Directors of the Company in April 1998.
In June 1998, Clark McLeod, CEO of McLeodUSA, a regional telecommunications
firm in the Midwest, exercised in full a stock option previously granted to him
and purchased 1.0 million shares of Common Stock of the Company for $1.1
million. Mr. McLeod became a member of the Board of Directors of the Company in
May 1998.
Other. Kwok L. Li, the Chairman and Chief Technical Officer of the Company,
was also the Vice Chairman and a Director of Yurie, a principal supplier of the
Company, until its acquisition by Lucent. As of July 15, 1998, the Company has
purchased approximately $11.0 million of products and services from Yurie. The
Company has agreed to purchase and Yurie has agreed to supply a minimum of $20.0
million of standard Yurie products during the 18-month period commencing on July
1, 1997. See "Business -- Suppliers."
Samer Salameh, a Director of the Company, is President, Chief Executive
Officer, and a Director of Prodigy, the principal customer of the Company. See
"Management" and "Business -- Customers." During the fiscal year ended December
31, 1997, the Company charged Prodigy approximately $22.7 million under the
agreements between the Company and Prodigy.
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<PAGE> 83
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock as of July 15, 1998 by (i)
each executive officer and director of the Company, (ii) each stockholder known
by the Company to own beneficially 5% or more of the Company's common stock and
(iii) all directors and executive officers of the Company as a group. As of July
15, 1998 the Company had 77.8 million shares of Common Stock outstanding. The
Company effected a 100-for-1 stock split on June 3, 1997 and a 10-for-1 stock
split on August 8, 1997. All share amounts included in this Prospectus have been
adjusted to reflect the effect of these stock splits. All information contained
in this Prospectus relating to percentage ownership of the Common Stock does not
take into account the 2,642,613 shares of Common Stock issuable upon exercise of
the Warrants.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES PERCENTAGE
---- ---------- ----------
<S> <C> <C>
Kwok L. Li.................................................. 39,000,000(1) 50.1%
Linsang Partners, L.L.C. ................................... 28,000,000(2) 36.0%
William R. Wilson........................................... 17,000,000 21.8%
Clark McLeod................................................ 1,000,000 1.3%
Roy A. Wilkens.............................................. 800,000(3) 1.0%
James D. Long............................................... 80,000(4) *
Samer Salameh............................................... -0-(5) -0-
Patrick J. McGettigan, Jr. ................................. 80,000(4) *
Orient Star Holdings........................................ 25,000,000(6) 30.2%
Paseo de las Palmas #736
Col Lomas de Chapultepec
Mexico DF CP 11000
Directors and executive officers as a group (7 people)...... 57,960,000(7) 74.3%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes 28.0 million shares owned beneficially and of record by Linsang, a
limited liability company controlled by Mr. Li. Excludes 111,375 shares
issuable upon exercise of Warrants included as part of Units purchased by
Linsang in the Offering.
(2) Such shares are included in the shares shown as beneficially owned by Kwok
L. Li. Excludes 111,375 shares issuable upon exercise of Warrants included
as part of Units purchased by Linsang in the Offering.
(3) Such shares are held by Mr. Wilkens and Sandra L. Wilkens in joint tenancy.
(4) Consists of shares subject to stock options granted under the Plan that are
exercisable within 60 days of the date of this Offering.
(5) Excludes stock owned by Orient Star Holdings, a wholly owned subsidiary of
Carso. Carso is a controlling shareholder of Prodigy and Mr. Salameh is
President and Chief Executive Officer of Prodigy.
(6) Includes 5.0 million shares issuable upon exercise of an option exercisable
through September 18, 1998.
(7) See notes 1 through 5 above.
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<PAGE> 84
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of the material terms of certain indebtedness of
the Company.
In connection with the Company's agreement with Ericsson, Ericsson provided
a $5.0 million credit facility to the Company. See "Business Suppliers". Such
credit facility is evidenced by a Secured Promissory Note and Agreement dated
April 30, 1998, which provides for interest at the rate of 11% per annum on the
outstanding balance thereunder, payable monthly in arrears on the first business
day of each calendar month commencing on June 1, 1998. The Secured Promissory
Note and Agreement provided that all principal and accrued and unpaid interest
under such Secured Promissory Note and Agreement would become due and payable in
full upon the earlier of (i) the date the Company sells any of its equity
securities or debt instruments or securities (other than issuances of equities
securities to officers, directors, employees, or consultants in the ordinary
course of business) in an aggregate amount equal to or greater than the then
outstanding principal amount thereunder, and (ii) October 30, 1998. Thus, all
outstanding principal and accrued and unpaid interest under such Secured
Promissory Note and Agreement became due upon consummation of the Unit Offering.
Such Secured Promissory Note and Agreement was secured by a security interest in
the Company's Yurie ATM switches (with certain exceptions), Ericsson power
equipment, and concrete shelters. As of July 15, 1998, the outstanding principal
balance due under such Secured Promissory Note and Agreement was $1.5 million.
Such indebtedness was repaid with the proceeds of the Unit Offering.
The Company is indebted to Linsang, a stockholder of the Company controlled
by the Company's Chairman of the Board and Chief Technical Officer, Kwok L. Li,
for an aggregate of $11.0 million in principal, plus accrued interest, as a
result of advances made by Linsang to the Company. See "Management Certain
Relationships and Related Transactions." Such indebtedness, initially
represented by demand notes bearing annual interest of 9.75% and maturing on the
earlier of written demand or December 1, 2002, was exchanged for 11,000 Units in
connection with the Unit Offering.
As of March 31, 1998, the Company had outstanding total future commitments
relating to noncancelable capital and operating leases of $22.8 million and $2.6
million, respectively. Operating leases primarily relate to leases of the NOCs
and the Company's corporate offices. Capital leases primarily relate to Network
equipment and require payments on a monthly basis over periods ranging from 24
to 48 months, with implicit interest rates of 9.0% to 12.0%. As of March 31,
1998 the Company was required to make minimum capital and operating lease
payments of $6.8 million, $9.6 million, $7.2 million, $1.2 million, and $0.6
million in the last nine months of 1998, 1999, 2000, 2001, and 2002,
respectively.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company presently consists of 150.0
million shares of Common Stock and 25.0 million shares of Preferred Stock, $.001
par value per share ("Preferred Stock"). At July 15, 1998, there were 77.8
million outstanding shares of Common Stock and no shares of Preferred Stock
outstanding.
The following are summaries of the terms of the Common Stock and the
Preferred Stock. Such summaries do not purport to be complete and are subject in
all respects to the Certificate of Incorporation and By-laws of the Company.
COMMON STOCK
The holders of Common Stock are entitled to receive dividends when and as
declared by the Board of Directors of the Company out of funds legally available
therefor. See "Risk -- Factors Dividend Policy."
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Shares
of Common Stock do not have cumulative voting rights, which means that the
holders of more than 50% of such shares voting for the election of directors can
elect 100% of the directors if they choose to do so and, in such event, the
holders of the remaining shares so
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voting will not be able to elect any directors. See "Risk Factors -- Control by
Principal Stockholders and Management; Transactions with Related Parties."
Holders of Common Stock do not have any conversion, redemption or preemptive
rights. In the event of the dissolution, liquidation or winding up of the
Company, holders of Common Stock will be entitled to share ratably in any assets
remaining after the satisfaction in full of the prior rights of creditors,
including holders of the Company's indebtedness, and the liquidation preference
of any Preferred Stock then outstanding.
PREFERRED STOCK
Under Delaware law and the Company's Certificate of Incorporation, the
Company's Board of Directors has authority to issue, without further action by
stockholders, one or more series of Preferred Stock, and to determine at the
time of issuance of each such series the rights and preferences thereof
(including dividend rate, liquidation priority, benefit of a sinking fund,
redemption and conversion and voting rights, if any). The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power or other rights of the holders of Common Stock.
Holders of the Preferred Stock would be entitled to receive dividends, as
specifically provided with respect to each series, prior to the payment or
declaration of any dividends for the Common Stock.
CERTAIN BY-LAW PROVISIONS
The Company's By-laws provide additional notice requirements for
stockholder nominations of candidates for election to the Board of Directors and
proposals for other business that may be properly brought before a meeting of
stockholders.
DESCRIPTION OF THE NOTES
GENERAL
The Original Notes were issued, and the Exchange Notes are issuable, under
the Indenture dated as of July 24, 1998, between the Company and Bank of
Montreal Trust Company, as trustee (the "Trustee"), a copy of which has been
filed as an exhibit to the Registration Statement. The form and terms of the
Exchange Notes will be identical in all material respects to the form and terms
of the Original Notes, except that the Exchange Notes will have been registered
under the Securities Act and, therefore, will not bear legends restricting
transfer thereof. The Exchange Notes and the Original Notes are deemed the same
class of notes under the Indenture and are both entitled to the benefits
thereof. Whenever particular sections or defined terms of the Indenture not
otherwise defined herein are referred to, such sections or defined terms are
incorporated herein by reference.
The following summary of certain provisions of the Indenture, the Notes and
the Escrow and Disbursement 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 Indenture, including the definitions of certain terms therein and those
terms made a part thereof by the Trust Indenture Act of 1939, as amended, and
the Escrow Agreement. Capitalized terms used herein and not otherwise defined
have the meanings set forth in the section "Certain Definitions."
The Indenture provides for the issuance of up to $50.0 million aggregate
principal amount of additional Notes having identical terms and conditions to
the Notes offered hereby (the "Additional Notes"), subject to compliance with
the covenants contained in the Indenture. Any Additional Notes will be part of
the same issue as the Notes offered hereby and will vote on all matters with the
Notes offered hereby.
Principal of, premium, if any, and interest on the Notes is payable, and
the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee, at 88 Pine Street, 19th Floor, New
York,
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New York 10005), except that, at the option of the Company, payment of interest
may be made by check mailed to the registered holders of the Notes at their
registered addresses.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Original Notes are and the Exchange Notes will be senior obligations of
the Company and will mature on July 15, 2008. Each Note will bear interest at a
rate per annum shown on the front cover of this Prospectus from July 24, 1998,
or from the most recent date to which interest has been paid or provided for,
payable semiannually to Holders of record at the close of business on the
January 1 or July 1 immediately preceding the interest payment date on January
15 and July 15 of each year, commencing January 15, 1999.
DISBURSEMENT OF FUNDS; ESCROW ACCOUNT
The Company has deposited $56.6 million in Temporary Cash Investments, an
amount that, together with the interest received thereon, is sufficient to pay
when due the first four semi-annual interest payments on the Notes. Such amounts
will be deposited in an escrow account (the "Escrow Account") held by the Escrow
Agent for the benefit of the Trustee under the Indenture in accordance with the
Escrow and Disbursement Agreement. The Company will enter into the Escrow and
Disbursement Agreement, which will provide, among other things, that funds may
be disbursed from the Escrow Account only to pay interest on the Notes (or, if a
portion of the Notes has been retired by the Company, funds representing the
interest payment on the retired Notes may be paid to the Company). Pending such
disbursement, the Company will cause all funds contained in the Escrow Account
to be invested in Temporary Cash Investments. Interest earned on these Temporary
Cash Investments will be added to the Escrow Account.
Under the Escrow and Disbursement Agreement, the Company will grant to the
Trustee, for the benefit of the holders, a first priority and exclusive security
interest in the Escrow Account (the "Escrow Collateral"). The Escrow and
Disbursement Agreement will provide that the Trustee may foreclose on the Escrow
Collateral upon acceleration of the maturity of the Notes. Under the terms of
the Indenture, the proceeds of the Escrow Collateral will be applied, first, to
amounts owing to the Escrow Agent in respect of fees and expenses of the Escrow
Agent, and second, to the obligations of the Company to the holders under the
Notes and the Indenture. The ability of holders to realize upon the Escrow
Collateral may be subject to certain bankruptcy law limitations in the event of
the bankruptcy of the Company.
Upon payment in full of the first four scheduled semi-annual payments on
the Notes, if no Default or Event of Default has occurred and is continuing, the
Escrow Collateral, if any, then remaining will be released to the Company.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to July 15, 2003. On or after such
date, the Notes will be redeemable at the option of the Company, in whole or in
part, on not less than 30 nor more than 60 days prior notice, at the following
redemption prices (expressed as percentages of principal amount), plus accrued
and unpaid interest and liquidated damages (if any) to the redemption date
(subject to the right of holders of record on the relevant
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<PAGE> 87
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on July 15 of the years set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................................ 105.875%
2004........................................................ 103.917%
2005........................................................ 101.958%
2006 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to July 15, 2001, the
Company may redeem up to a maximum of 35% of the original aggregate principal
amount of the Notes (calculated giving effect to any issuance of Additional
Notes) with the Net Cash Proceeds of one or more Equity Offerings by the
Company, at a redemption price equal to 111.75% of the principal amount thereof,
plus accrued and unpaid interest and liquidated damages, if any, to date of
redemption (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date); provided,
however, that at least 65% of the original aggregate principal amount of the
Notes remains outstanding immediately after each such redemption (calculated
giving effect to any issuance of Additional Notes). Any such redemption shall be
made within 60 days of such Equity Offering upon not less than 30 nor more than
60 days notice mailed to each holder of Notes being redeemed and otherwise in
accordance with the procedures set forth in the Indenture.
SELECTION
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the notice
of redemption relating to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
RANKING
The indebtedness evidenced by the Notes will be unsecured Senior
Indebtedness of the Company, will rank pari passu in right of payment with all
existing and future Senior Indebtedness of the Company and will be senior in
right of payment to all existing and future Subordinated Obligations of the
Company. The Notes will also be effectively subordinated to any Secured
Indebtedness of the Company and its subsidiaries to the extent of the value of
the assets securing such Indebtedness.
At March 31, 1998, after giving pro forma effect to the Offering and the
application of the proceeds therefrom, the Company would have had $21.1 million
of Indebtedness outstanding (other than the Notes), all of which would have been
Senior Indebtedness and all of which would have been Secured Indebtedness. The
Company currently does not have any Subsidiaries.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company may incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "-- Certain Covenants Limitation on
Indebtedness".
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CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Company to repurchase
all or any part of such Holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest and liquidated
damages, if any, to the date of repurchase (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); provided, however, that notwithstanding the occurrence
of a Change of Control, the Company shall not be obligated to repurchase the
Notes pursuant to this section in the event that it has exercised its right to
redeem all the Notes under the terms of the section titled "Optional
Redemption":
(i) prior to the first public offering of common stock of the Company,
the Permitted Holders cease to be the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a
majority in the aggregate of the total voting power of the Voting Stock of
the Company, whether as a result of issuance of securities of the Company,
any merger, consolidation, liquidation or dissolution of the Company, any
direct or indirect transfer of securities by any Permitted Holder or
otherwise (for purposes of this clause (i) and clause (ii) below, the
Permitted Holders shall be deemed to beneficially own any Voting Stock of
an entity (the "specified entity") held by any other entity (the "parent
entity") so long as the Permitted Holders beneficially own (as so defined),
directly or indirectly, in the aggregate a majority of the voting power of
the Voting Stock of the parent entity);
(ii) on the date of or after the first public offering of common stock
of the Company referred in clause (i), (A) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act), other than one or
more Permitted Holders, is or becomes the beneficial owner (as defined in
clause (i) above, except that for purposes of this clause (ii) such person
shall be deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 35% of the total voting power of the Voting Stock of the Company
and (B) the Permitted Holders "beneficially own" (as defined in clause (i)
above), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than such other
person and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the Board of
Directors (for the purposes of this clause (ii), such other person shall be
deemed to beneficially own any Voting Stock of a specified entity held by a
parent entity, if such other person is the beneficial owner (as defined in
this clause (ii)), directly or indirectly, of more than 35% of the voting
power of the Voting Stock of such parent entity and the Permitted Holders
"beneficially own" (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent entity and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the board of directors of such parent entity);
(iii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (together
with any new directors whose election by such Board of Directors or whose
nomination for election by the stockholders of the Company was approved by
a vote of 66 2/3% of the directors of the Company 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 of Directors of the Company then in
office;
(iv) the adoption of a plan relating to the liquidation or dissolution
of the Company; or
(v) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration,
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securities of the surviving Person or transferee that represent immediately
after such transaction, at least a majority of the aggregate voting power
of the Voting Stock of the surviving Person or transferee.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee (the "Change of Control Offer")
stating: (1) that a Change of Control has occurred and that such Holder has the
right to require the Company to purchase such Holder's Notes at a purchase price
in cash equal to 101% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, to the date of repurchase (subject to
the right of Holders of record on the relevant record date to receive interest
on the relevant interest payment date); (2) the circumstances and relevant facts
and financial information regarding such Change of Control; (3) the repurchase
date (which shall be no earlier than 30 days nor later than 60 days from the
date such notice is mailed); and (4) the instructions determined by the Company,
consistent with this covenant, that a Holder must follow in order to have its
Notes purchased.
The Company will not be required to make a Change of Control Offer upon 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 set forth
in the Indenture 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.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any 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 paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchaser. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company to incur additional Indebtedness are contained in the
covenants described under "Certain Covenants -- Limitation on Indebtedness",
"Certain Covenants -- Limitation on Liens" and "Certain Covenants -- Limitation
on Sale/Leaseback Transactions". Such restrictions can only be waived with the
consent of the holders of a majority in principal amount of the Notes then
outstanding. Except for the limitations contained in such covenants, however,
the Indenture will not contain any covenants or provisions that may afford
holders of the Notes protection in the event of a highly leveraged transaction.
Future Senior Indebtedness of the Company may contain prohibitions of
certain events which would constitute a Change of Control or require such Senior
Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the Holders of their right to require the Company to repurchase the Notes
could cause a default under such Senior Indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the Holders upon a
repurchase may be limited by the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary
to make any required repurchases. The provisions under the Indenture relative to
the Company's obligation to make an offer to repurchase the Notes as a result of
a Change of Control may be waived or modified with the written consent of the
holders of a majority in principal amount of the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness;
provided, however, that the Company may Incur Indebtedness if on the date of
such Incurrence and after giving effect thereto the Debt to Annualized
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Operating Cash Flow Ratio would be less than or equal to 6.0:1.0 if such
Indebtedness is Incurred prior to July 15, 2001 and less than or equal to
5.5:1.0 if such Indebtedness is Incurred on or after such date.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Bank Indebtedness in an aggregate principal amount not to exceed
$75.0 million less the aggregate amount of all repayments of principal
applied to permanently reduce any such Indebtedness;
(ii) Indebtedness of the Company owed to and held by any Wholly Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owed to and held by
the Company or any Wholly Owned Subsidiary; provided, however, that (i) any
subsequent issuance or transfer of any Capital Stock or any other event
that results in any such Wholly Owned Subsidiary ceasing to be a Wholly
Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or a Wholly Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof and (ii) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in cash
of all obligations with respect to the Notes;
(iii) Indebtedness (A) represented by the Notes (not including any
Additional Notes), (B) outstanding on the Closing Date (other than the
Indebtedness described in clauses (i) and (ii) above), (C) consisting of
Refinancing Indebtedness Incurred in respect of any Indebtedness described
in this clause (iii) (including Indebtedness Refinancing) or the foregoing
paragraph (a), (D) consisting of Guarantees of any Indebtedness permitted
under clauses (i) and (ii) of this paragraph (b) and (E) consisting of any
Guarantees of the Notes;
(iv) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such Restricted Subsidiary was
acquired by the Company (other than Indebtedness Incurred as consideration
in, or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Subsidiary of or was
otherwise acquired by the Company); provided, however, that on the date
that such Restricted Subsidiary is acquired by the Company, the Company
would have been able to Incur $1.00 of additional Indebtedness pursuant to
the foregoing paragraph (a) after giving effect to the Incurrence of such
Indebtedness pursuant to this clause (iv) and (B) Refinancing Indebtedness
Incurred by a Restricted Subsidiary in respect of Indebtedness Incurred by
such Restricted Subsidiary pursuant to this clause (iv);
(v) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds provided by the
Company and the Restricted Subsidiaries in the ordinary course of their
business, and (B) under Hedging Obligations entered into for bona fide
hedging purposes of the Company in the ordinary course of business;
provided, however, that such Hedging Obligations do not increase the
Indebtedness of the Company outstanding at any time other than as a result
of fluctuations in interest rates or currency exchange rates or by reason
of fees, indemnities and compensation payable thereunder;
(vi) Purchase Money Indebtedness, provided that the amount of such
Purchase Money Indebtedness does not exceed the lesser of 80% of (a) the
Fair Market Value of or (b) the cost of the construction, installation,
acquisition, lease, development or improvement of, the applicable
Telecommunications Assets;
(vii) Contribution Indebtedness; or
(viii) Indebtedness (other than Indebtedness permitted to be Incurred
pursuant to the foregoing paragraph (a) or any other clause of this
paragraph (b)) in an aggregate principal amount on the date of Incurrence
that, when added to all other Indebtedness Incurred pursuant to this clause
(viii) and then outstanding, shall not exceed $40.0 million.
(c) Notwithstanding the foregoing, the Company may not Incur any
Indebtedness pursuant to paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to repay, prepay, redeem, defease,
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retire, refund or refinance any Subordinated Obligations unless such
Indebtedness will be subordinated to the Notes to at least the same extent as
such Subordinated Obligations.
(d) Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that the Company or any Restricted Subsidiary may Incur
pursuant to this covenant shall not be deemed to be exceeded solely as a result
of fluctuations in the exchange rates of currencies. For purposes of determining
the outstanding principal amount of any particular Indebtedness Incurred
pursuant to this covenant, (i) Indebtedness permitted by this covenant need not
be permitted solely by reference to one provision permitting such Indebtedness
but may be permitted in part by one such provision and in part by one or more
other provisions of this covenant permitting such Indebtedness and (ii) in the
event that Indebtedness meets the criteria of more than one of the types of
Indebtedness described in this covenant, the Company, in its sole discretion,
shall classify such Indebtedness and only be required to include the amount of
such Indebtedness in one of such clauses. Once so classified, such Indebtedness
shall retain such classification until repaid.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) or similar payment to the direct or indirect holders of its Capital
Stock except dividends or distributions payable solely in its Capital Stock
(other than Disqualified Stock) and except dividends or distributions payable to
the Company or another Restricted Subsidiary (and, if such Restricted Subsidiary
has stockholders other than the Company or other Restricted Subsidiaries, to its
other stockholders on a pro rata basis), (ii) purchase, redeem, retire or
otherwise acquire for value any Capital Stock of the Company or any Restricted
Subsidiary held by Persons other than the Company or another Restricted
Subsidiary, (iii) purchase, repurchase, redeem, defease or otherwise acquire or
retire for value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment any Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of acquisition) or
(iv) make any Investment (other than a Permitted Investment) in any Person (any
such dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment being herein referred to as a "Restricted
Payment") if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default will have occurred and be continuing (or would
result therefrom); (2) the Company could not Incur at least $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "-- Limitation
on Indebtedness"; or (3) the aggregate amount of such Restricted Payment and all
other Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination will be
conclusive and evidenced by a resolution of the Board of Directors) declared or
made subsequent to the Closing Date would exceed the sum of: (A)(i) 100% of
Consolidated Operating Cash Flow accrued during the period (treated as one
accounting period) from the beginning of the fiscal quarter immediately
following the fiscal quarter during which the Closing Date occurs to the end of
the most recent fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Operating Cash Flow during
such period is a deficit, minus 100% of such deficit), minus (ii) 150% of
Consolidated Interest Expense accrued during the period (treated as one
accounting period) from the beginning of the fiscal quarter immediately
following the fiscal quarter during which the Closing Date occurs to the end of
the most recent fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment; plus, (B) the aggregate Net Cash Proceeds received by the
Company from the issue or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Closing Date (other than an issuance or sale to (x) a
Subsidiary of the Company or (y) an employee stock ownership plan or other trust
established by the Company or any of its Subsidiaries); plus, (C) the amount by
which Indebtedness of the Company or its Restricted Subsidiaries is reduced on
the Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Closing Date of any Indebtedness of
the Company or its Restricted Subsidiaries issued after the Closing Date which
is convertible or exchangeable for Capital Stock (other than Disqualified Stock)
of the Company (less the amount of any cash or the fair market value of other
property distributed by the Company or any Restricted Subsidiary upon such
conversion or exchange); plus, (D) the amount equal to the net reduction in
Investments in Unrestricted Subsidiaries resulting from (i) payments of
dividends, repayments of the
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principal of loans or advances or other transfers of assets to the Company or
any Restricted Subsidiary from Unrestricted Subsidiaries or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in
each case as provided in the definition of "Investment") not to exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously made
by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary,
which amount was included in the calculation of the amount of Restricted
Payments; and less, (E) the aggregate principal amount of any outstanding
Contribution Indebtedness or, if less, the Cash Contribution Amount.
(b) The provisions of the foregoing paragraph (a) will not prohibit: (i)
any purchase, repurchase, retirement or other acquisition or retirement for
value of Capital Stock of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary of the Company or an employee stock ownership plan or other trust
established by the Company or any of its Subsidiaries); provided, however, that
such purchase, repurchase, retirement or other acquisition or retirement for
value will be excluded in the calculation of the amount of Restricted Payments;
(ii) any purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Obligations of the Company made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company that is permitted to be Incurred pursuant to
paragraph (b) of the covenant described under "-- Limitation on Indebtedness" or
Capital Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or other trust established by the Company or any of its
Subsidiaries); provided, however, that such purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value will be excluded in the
calculation of the amount of Restricted Payments; (iii) any purchase or
redemption of Subordinated Obligations from Net Available Cash to the extent
permitted by the covenant described under "-- Limitation on Sales of Assets and
Subsidiary Stock"; provided, however, that such purchase or redemption will be
included in the calculation of the amount of Restricted Payments; (iv) dividends
paid within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with this covenant; provided,
however, that such dividend will be included in the calculation of the amount of
Restricted Payments; or (v) the repurchase or other acquisition of shares of, or
options to purchase shares of, common stock of the Company or any of its
Subsidiaries from employees, former employees, directors or former directors of
the Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to the
terms of agreements (including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors under which such individuals
purchase or sell or are granted the option to purchase or sell, shares of such
common stock; provided, however, that the aggregate amount of such repurchases
shall not exceed $1.0 million in any calendar year and $3.0 million in the
aggregate; provided further, that such repurchases and other acquisitions shall
be included in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligations owed to the Company, (ii)
make any loans or advances to the Company or (iii) transfer any of its property
or assets to the Company, except: (1) any encumbrance or restriction pursuant to
(A) an agreement in effect at or entered into on the Closing Date or (B) an
agreement entered into in connection with the Incurrence of Indebtedness
permitted under clause (b)(i) or (b)(vi) of the covenant described under
"-- Limitation on Indebtedness", provided that the chief financial officer of
the Company has determined in good faith that any restriction incurred pursuant
to this clause (B) is customary for similar Incurrences of Indebtedness; (2) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary
prior to the date on which such Restricted Subsidiary was acquired by the
Company (other than Indebtedness Incurred as consideration in, in contemplation
of, or to provide all or any portion of the funds or credit support utilized to
consummate the transaction or series of related transactions pursuant to which
such Restricted Subsidiary became a Restricted Subsidiary or was otherwise
acquired by the Company) and outstanding on such date; (3) any encumbrance or
restriction
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pursuant to an agreement effecting a Refinancing of Indebtedness Incurred
pursuant to an agreement referred to in clause (1) or (2) of this covenant or
this clause (3) or contained in any amendment to an agreement referred to in
clause (1) or (2) of this covenant or this clause (3); provided, however, that
the encumbrances and restrictions contained in any such refinancing agreement or
amendment are no less favorable to the Noteholders than the encumbrances and
restrictions contained in such predecessor agreements; (4) in the case of clause
(iii), any encumbrance or restriction (A) that restricts in a customary manner
the subletting, assignment or transfer of any property or asset that is subject
to a lease, license or similar contract, or (B) contained in security agreements
securing Indebtedness of a Restricted Subsidiary to the extent such encumbrance
or restriction restricts the transfer of the property subject to such security
agreements; and (5) with respect to a Restricted Subsidiary, any restriction
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person assuming
sole responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the Fair Market Value of the shares
and assets subject to such Asset Disposition, (ii) at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents and (iii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be) (A) first, to the extent the
Company elects (or is required by the terms of any Bank Indebtedness) to (x)
reinvest in Telecommunications Assets (including by means of an Investment in
Telecommunications Assets by a Restricted Subsidiary with Net Available Cash
received by the Company or another Restricted Subsidiary) or (y) prepay, repay,
redeem or purchase Bank Indebtedness of the Company Incurred pursuant to clause
(b)(i) of the covenant described under "-- Limitation on Indebtedness", in each
case within 180 days after the later of the date of such Asset Disposition or
the receipt of such Net Available Cash; (B) second, to the extent of the balance
of such Net Available Cash after application in accordance with clause (A), to
make an Offer (as defined below) to purchase Notes pursuant to and subject to
the conditions set forth in section (b) of this covenant within 365 days after
the later of such Asset Disposition or the receipt of such Net Available Cash;
provided, however, that if the Company elects (or is required by the terms of
any other Senior Indebtedness), such Offer may be made ratably to purchase the
Notes and other Senior Indebtedness of the Company, and (C) third, to fund (to
the extent consistent with any other applicable provision in the Indenture) any
corporate purpose. Notwithstanding the foregoing provisions of this covenant,
the Company and the Restricted Subsidiaries will not be required to apply any
Net Available Cash in accordance with this covenant except to the extent that
the aggregate Net Available Cash from all Asset Dispositions that is not applied
in accordance with this covenant exceeds $5.0 million.
For the purposes of this covenant, the following are deemed to be cash: (x)
the assumption of Indebtedness of the Company (other than Disqualified Stock of
the Company) or any Restricted Subsidiary and the release of the Company or such
Restricted Subsidiary from all liability on such Indebtedness in connection with
such Asset Disposition and (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are converted by the Company or
such Restricted Subsidiary into cash within 60 days of such receipt.
(b) In the event of an Asset Disposition that requires the purchase of
Notes (and other Senior Indebtedness) pursuant to clause (a)(iii)(B) of this
covenant, the Company will be required to purchase Notes (and other Senior
Indebtedness) tendered pursuant to an offer by the Company for the Notes (and
other Senior Indebtedness) (the "Offer") at a purchase price of 100% of their
principal amount plus accrued and unpaid interest and liquidated damages, if
any, to the date of purchase in accordance with the procedures (including
prorating in the event of oversubscription), set forth in the Indenture. If the
aggregate purchase price of Notes (and other Senior Indebtedness) tendered
pursuant to the Offer is less than the Net Available Cash allotted to the
purchase of the Notes (and other Senior Indebtedness), the Company may apply the
remaining Net Available Cash in accordance with clause (a)(iii)(C) of this
covenant. The Company will not be required to make an Offer for Notes (and other
Senior Indebtedness) pursuant to this covenant if the Net
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Available Cash available therefor (after application of the proceeds as provided
in clause (a)(iii)(A)) is less than $5.0 million for any particular Asset
Disposition (which lesser amount will be carried forward for purposes of
determining whether an Offer is required with respect to the Net Available Cash
from any subsequent Asset Disposition).
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any 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 by virtue thereof.
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction (including the purchase, sale, lease or exchange of
any property or the rendering of any service) with any Affiliate of the Company
(an "Affiliate Transaction") unless such transaction is on terms (i) that are no
less favorable to the Company or such Restricted Subsidiary, as the case may be,
than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate, (ii) that, in
the event such Affiliate Transaction involves an aggregate amount in excess of
$1.0 million, (1) are set forth in writing and (2) have been approved by a
majority of the members of the Board of Directors having no personal stake in
such Affiliate Transaction and (iii) that, in the event such Affiliate
Transaction involves an amount in excess of $20.0 million, have been determined
by a nationally recognized appraisal or investment banking firm to be fair, from
a financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) will not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"-- Limitation on Restricted Payments", (ii) any issuance of securities, or
other payments, awards or grants in cash, securities or otherwise pursuant to,
or the funding of, employment arrangements, stock options and stock ownership
plans approved by the Board of Directors, (iii) the grant of stock options or
similar rights to employees and directors of the Company pursuant to plans
approved by the Board of Directors, (iv) loans or advances to employees in the
ordinary course of business in accordance with past practices of the Company,
but in any event not to exceed $2.0 million in the aggregate outstanding at any
one time, (v) the payment of reasonable fees to directors of the Company and its
Subsidiaries who are not employees of the Company or its Subsidiaries, (vi) any
transaction between the Company and a Wholly Owned Subsidiary or between Wholly
Owned Subsidiaries or (vii) any transaction pursuant to, and on the terms set
forth in, the Prodigy Agreement.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company will not permit (a) any Restricted Subsidiary of the
Company to issue any Capital Stock except for (i) Capital Stock issued or sold
to, held by or transferred to the Company or a Wholly Owned Subsidiary, (ii)
Capital Stock issued by a Person prior to the time (A) such Person becomes a
Restricted Subsidiary of the Company, (B) such Person merges with or into a
Restricted Subsidiary of the Company or (C) a Restricted Subsidiary of the
Company merges with or into such Person; provided that such Capital Stock was
not issued or Incurred by such Person in anticipation of the type of transaction
contemplated by subclause (A), (B) or (C) (excluding for purposes of this
proviso, shares of Capital Stock issued in connection with customary accelerated
vesting provisions contained in option or similar plans or agreements which are
accelerated as a result of a change of control of such Person and which option
or similar plans or agreements were not adopted or implemented solely in
anticipation of or in connection with such transaction) or (b) any person (other
than the Company or a Wholly Owned Subsidiary) to acquire Capital Stock of any
Restricted Subsidiary of the Company from the Company or any Restricted
Subsidiary of the Company, except, in the case of each of clause (a) or (b), (1)
upon the acquisition of all the outstanding Capital Stock of such Restricted
Subsidiary in accordance with the covenant described under "-- Limitation on
Sales of Assets and Subsidiary Stock", (2) if, immediately after giving effect
to such issuance or sale, such Restricted Subsidiary would no longer constitute
a Restricted Subsidiary, and any Investment in such Person remaining after
giving effect to such issuance or sale would have been permitted to be made
pursuant to the covenant described under "-- Limitation on Restricted Payments"
if made on the date of such issuance or sale, and (3) if required, the issuance,
transfer, conveyance, sale or other disposition of directors' qualifying shares.
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Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its property or assets (including
Capital Stock of a Restricted Subsidiary), whether owned at the Closing Date or
thereafter acquired, other than Permitted Liens, without effectively providing
that the Notes shall be secured equally and ratably with (or prior to) the
obligations so secured for so long as such obligations are so secured; provided,
that if such obligations are expressly subordinated to the Notes or the
Subsidiary Guarantees the Lien securing such obligations will be subordinated
and junior to the Lien securing the Notes with the same relative priority as
such obligations have with respect to the Notes or the Subsidiary Guarantees.
Commission Reports. Notwithstanding that the Company may not be subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act the
Company will file with the Commission and provide the Trustee and Noteholders
and prospective Noteholders (upon request) within 15 days after it files them
with the Commission, copies of its annual report and the information, documents
and other reports that are specified in Sections 13 and 15(d) of the Exchange
Act. In addition, following a public offering of the common stock of the
Company, the Company shall furnish to the Trustee and the Noteholders, promptly
upon their becoming available, copies of the annual report to stockholders and
any other information provided by the Company to its public stockholders
generally. The Company also will comply with the other provisions of Section
314(a) of the TIA.
Future Subsidiary Guarantors. The Company will cause each Restricted
Subsidiary that Incurs Indebtedness to become a Subsidiary Guarantor, and
execute and deliver to the Trustee a supplemental indenture pursuant to which
such Restricted Subsidiary will Guarantee payment of the Notes. Each Subsidiary
Guarantee will be limited to an amount not to exceed the maximum amount that can
be Guaranteed by that Restricted Subsidiary without rendering the Subsidiary
Guarantee, as it relates to such Restricted Subsidiary, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
Limitation on Lines of Business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business other than a
Telecommunications Business.
Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (a) the Company or such
Restricted Subsidiary would be entitled to (i) Incur Indebtedness in an amount
equal to the Attributable Debt with respect to such Sale/Leaseback Transaction
pursuant to the covenant described under "-- Limitation on Indebtedness" and
(ii) create a Lien on such property securing such Attributable Debt without
equally and ratably securing the Notes pursuant to the covenant described under
"-- Limitation on Liens", (b) the net proceeds received by the Company or such
Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the fair market value (as determined in good faith by the Board
of Directors) of such property and (c) the transfer of such property is
permitted by, and the Company applies the proceeds of such transaction in
compliance with, the covenant described under "-- Limitation on Sale of Assets
and Subsidiary Stock".
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company") will
be a corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) will expressly assume, by a supplemental indenture and
other appropriate documents, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes,
the Indenture and the Escrow and Disbursement Agreement; (ii) immediately after
giving effect to such transaction (and treating any Indebtedness which becomes
an obligation of the Successor Company or any Restricted Subsidiary as a result
of such transaction as having been Incurred by the Successor Company or such
Restricted Subsidiary at the time of such transaction), no Default shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction, the Successor Company would be able to Incur an
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additional $1.00 of Indebtedness under paragraph (a) of the covenant described
under "-- Certain Covenants -- Limitation on Indebtedness"; (iv) the Company
shall have delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture and other appropriate documents (if any) comply with the
Indenture and the Escrow and Disbursement Agreement; (v) the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that the Holders
will not recognize income, gain or loss for Federal income tax purposes as a
result of such transaction 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 transaction had not occurred; and (vi) the Company shall have delivered to
the Trustee an Opinion of Counsel (subject to customary exceptions) to the
effect that any Subsidiary Guarantee shall remain in full force and effect after
such transaction.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture and the
Escrow and Disbursement Agreement, but the predecessor Company in the case of a
conveyance, transfer or lease of all or substantially all its assets will not be
released from the obligation to pay the principal of and interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, all or substantially all of
its assets to any Person unless: (i) the resulting, surviving or transferee
Person will be a corporation organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia, and such
Person (if not a Subsidiary Guarantor) will expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of such Subsidiary Guarantor under its Subsidiary
Guarantee; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the resulting,
surviving or transferee Person as a result of such transaction as having been
incurred by such Person at the time of such transaction), no Default shall have
occurred and be continuing; and (iii) the Company shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture.
Notwithstanding the foregoing, (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (b) the Company may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
jurisdiction to realize tax or other benefits.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due and payable, continued for 30 days,
(ii) a default in the payment of principal of any Note when due and payable at
its Stated Maturity, upon required redemption or repurchase, upon declaration or
otherwise, (iii) the failure by the Company to comply with its obligations under
the covenant described under "-- Merger and Consolidation", (iv) the failure by
the Company to comply for 30 days after notice with any of its obligations under
the covenants described under "-- Change of Control" or "-- Certain Covenants"
(in each case, other than a failure to purchase Notes) or any of its agreements
contained in the Escrow and Disbursement Agreement, (v) the failure by the
Company to comply for 60 days after notice with its other agreements contained
in the Notes or the Indenture, (vi) the failure by the Company or any Subsidiary
to pay any Indebtedness within any applicable grace period after final maturity
or the acceleration of any such Indebtedness by the holders thereof because of a
default if the total amount of such Indebtedness unpaid or accelerated exceeds
$5.0 million or its foreign currency equivalent (the "cross acceleration
provision") and such failure continues for 10 days after receipt of the notice
specified in the Indenture, (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary (the "bankruptcy
provisions"), (viii) the rendering of any judgment or decree for the payment of
money in excess of $5.0 million or its foreign currency equivalent against the
Company or a Significant Subsidiary if (A) an enforcement proceeding thereon is
commenced by any creditor or (B) such judgment or decree remains outstanding for
a period of 60 days following such judgment and is not discharged, waived or
stayed (the "judgment default provision"), (ix) any Subsidiary Guarantee ceases
to be in full force and effect (except as contemplated by the terms thereof) or
any Subsidiary Guarantor or Person acting by or on behalf of such
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Subsidiary Guarantor denies or disaffirms such Subsidiary Guarantor's
obligations under the Indenture or any Subsidiary Guarantee and such Default
continues for 10 days after receipt of the notice specified in the Indenture, or
(x) the Company challenging the Lien on the Escrow Collateral under the Escrow
and Disbursement Agreement prior to the time that the Escrow Collateral is to be
released to the Company, the Escrow Collateral becoming subject to any lien
other than liens under the Escrow Agreement or the Escrow and Disbursement
Agreement becomes, or the Company asserts that the Escrow and Disbursement
Agreement is, invalid and unenforceable, other than in accordance with its
terms.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is 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.
However, a default under clauses (iv), (v), (vi) or (ix) will not
constitute an Event of Default until the Trustee or the Holders of at least 25%
in principal amount of the outstanding Notes notify the Company of the default
and the Company does not cure such default within the time specified in clauses
(iv), (v), (vi) or (ix) hereof after receipt of such notice.
If an Event of Default (other than an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the Company) occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the outstanding Notes by notice to the Company may declare the principal of and
accrued but unpaid interest on all the Notes to be due and payable. Upon such a
declaration, such principal and interest will be due and payable immediately. If
an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Company occurs, the principal of and interest on all the
Notes will become immediately due and payable without any declaration or other
act on the part of the Trustee or any Holders. Under certain circumstances, the
Holders of a majority in principal amount of the outstanding Notes may rescind
any such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee in writing to pursue the remedy, (iii) such Holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity and (v)
the Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other Holder or that would involve the Trustee in personal liability. Prior
to taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any Note (including payments pursuant to the redemption provisions of such
Note), the Trustee may withhold notice if and so long as a committee of its
Trust Officers in good faith determines that withholding notice is in the
interests of the Noteholders. In addition, the Company is required to deliver to
the Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
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the previous year. The Company also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Events of Default, their status and what action the
Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture or the Notes may be amended
with the written consent of the Holders of a majority in principal amount of the
Notes then outstanding and any past default or compliance with any provisions
may be waived with the consent of the Holders of a majority in principal amount
of the Notes then outstanding. However, without the consent of each Holder of an
outstanding Note affected, no amendment may, among other things, (i) reduce the
amount of Notes whose Holders must consent to an amendment, (ii) reduce the rate
of or extend the time for payment of interest or any liquidated damages on any
Note, (iii) reduce the principal of or extend the Stated Maturity of any Note,
(iv) reduce the premium payable upon the redemption of any Note or change the
time at which any Note may be redeemed as described under "-- Optional
Redemption", (v) make any Note payable in money other than that stated in the
Note, (vi) impair the right of any Holder to receive payment of principal of and
interest or any liquidated damages on such Holder's Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on or
with respect to such Holder's Notes, (vii) make any change in the amendment
provisions which require each Holder's consent or in the waiver provisions,
(viii) modify the Subsidiary Guarantees in any manner adverse to the Holders, or
(ix) modify the provisions of the Escrow and Disbursement Agreement or the
Indenture relating to the Escrow Collateral in any manner adverse to the Holders
or release any of the Escrow Collateral from the Lien under the Escrow and
Disbursement Agreement or permit any other obligation to be secured by the
Escrow Collateral.
Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
under the Indenture, to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of the
Code), to add additional Guarantees with respect to the Notes, to secure the
Notes, to add to the covenants of the Company for the benefit of the Noteholders
or to surrender any right or power conferred upon the Company, to make any
change that does not adversely affect the rights of any Holder, subject to the
provisions of the Indenture, to provide for the issuance of the Exchange Notes,
or Additional Notes or to comply with any requirement of the Commission in
connection with the qualification of the Indenture under the TIA.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Noteholder to pay any taxes
required by law or permitted by the Indenture. The Company is not required to
transfer or exchange any Note selected for redemption or to transfer or exchange
any Note for a period of 15 days prior to a selection of Notes to be redeemed.
The Notes will be issued in registered form and the registered holder of a Note
will be treated as the owner of such Note for all purposes.
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DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under "-- Certain Covenants", the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant Subsidiaries
and the judgment default provision described under "-- Defaults", the provisions
described under "Change of Control" and the limitations contained in clause
(iii) under the first paragraph of "-- Merger and Consolidation" ("covenant
defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "-- Defaults" or because of the
failure of the Company to comply with clause (iii) under the first paragraph of
"-- Merger and Consolidation".
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amounts and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
The Bank of Montreal Trust Company is to be the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
BOOK ENTRY, DELIVERY AND FORM
Except as described in the next paragraph, the Exchange Notes (and the
related guarantees) initially will be represented by a single permanent global
certificate in definitive, fully registered form (the "Global Note"). The Global
Note will be deposited promptly after the Expiration Date with, or on behalf of,
The Depository Trust Company, New York, New York (the "Depositary") and
registered in the name of a nominee of the Depositary. Notes (i) originally
purchased by or transferred to "foreign purchasers" or (ii) held by qualified
institutional buyers or Accredited Investors (as defined in Regulation D under
the Securities Act) who are not "qualified institutional buyers" (as defined in
Rule 144A under the Securities Act) ("QIBs") who elect to take physical delivery
of their certificates instead of holding their interests through the Global Note
(and which are thus ineligible to trade through the Depositary) (collectively
referred to herein as the "Non-Global Purchasers") will be issued in registered
form (the "Certificated Security"). Upon the transfer to a QIB of any
Certificated Security initially issued to a Non-Global Purchaser, such
Certificated Security will, unless the transferee requests otherwise or the
Global Note has previously been
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exchanged in whole for Certificated Securities, be exchanged for an interest in
the Global Note. For a description of the restrictions on the transfer of
Certificated Securities and any interest in the Global Note.
The Global Note. The Company expects that pursuant to procedures
established by the Depositary (i) upon the issuance of the Global Note, the
Depositary or its custodian will credit, on its internal system, the principal
amount of Notes of the individual beneficial interests represented by such
Global Note to the respective accounts of persons who have accounts with such
depositary and (ii) ownership of beneficial interests in the Global Note will be
shown on, and the transfer of such ownership will be effected only through,
records maintained by the Depositary or its nominee (with respect to interests
of participants) and the records of participants (with respect to interests of
persons other than participants). Such accounts initially will be designated by
or on behalf of the Initial Purchaser and ownership of beneficial interests in
the Global Note will be limited to persons who have accounts with the Depositary
("participants") or persons who hold interests through participants. QIBs may
hold their interests in the Global Note directly through the Depositary if they
are participants in such system, or indirectly through organizations which are
participants in such system. So long as the Depositary, or its nominee, is the
registered owner or holder of the Notes, the Depositary or such nominee, as the
case may be, will be considered the sole owner or holder of the Notes
represented by such Global Note for all purposes under the Indenture. No
beneficial owner of an interest in the Global Note will be able to transfer that
interest except in accordance with the procedures of the Depositary, in addition
to those provided under the Indenture with respect to the Notes.
The Depositary has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a "banking
organization" within the meaning of the New York Banking Law, (iii) a member of
the Federal Reserve System, (iv) a "clearing corporation" within the meaning of
the Uniform Commercial Code, as amended, and (v) a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. The Depositary was created to hold
securities for its participants (collectively, the "Participants") and
facilitates the clearance and settlement of securities transactions between
Participants through electronic book-entry changes to the accounts of its
Participants, thereby eliminating the need for physical transfer and delivery of
certificates. Participants in the Depositary include securities brokers and
dealers (including the Initial Purchaser), banks and trust companies, clearing
corporations and certain other organizations. Indirect access to the system of
the Depositary is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly. Investors who are not Participants may beneficially own
securities held by or on behalf of the Depositary only through Participants or
Indirect Participants.
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the Securities represented by
a global security to such persons may be limited. In addition, because the
Depositary can act only on behalf of its Participants, who in turn act on behalf
of persons who hold interests through Participants, the ability of a person
having an interest in Securities represented by a global security to pledge or
transfer such interest to persons or entities that do not participate in the
system of the Depositary, or to otherwise take actions in respect of such
interest, may be affected by the lack of a physical definitive security in
respect of such interest.
Payments with respect to the principal of, premium, if any, Liquidated
Damages, if any, and interest on, any Notes represented by the Global Note on
the applicable record date will be payable by the Trustee to or at the direction
of the Depositary or its nominee in its capacity as the registered holder of the
Global Note. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the Notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving payment thereon
and for any and all other purposes whatsoever. Accordingly, neither the Company
nor the Trustee has or will have any responsibility or liability for the payment
of such amounts to owners of beneficial interests in the Global Note (including
principal, premium, if any, Liquidated Damages, if any, and interest). Payments
by the Participants and the Indirect Participants to the owners of beneficial
interests in the Global Note will be governed by standing instructions and
customary industry practice and will be the responsibility of the Participants
or the Indirect Participants and the Depositary. Transfers between Participants
in the Depositary will be effected in accordance with the procedures of the
Depositary, and will be settled in same-day funds.
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CERTIFICATED NOTES
If (i) the Company notifies the Trustee in writing that the Depositary is
no longer willing or able to act as a depositary or the Depositary ceases to be
registered as a clearing agency under the Exchange Act and a successor
depositary is not appointed within 90 days of such notice or cessation, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Notes in definitive form or (iii) upon the occurrence of certain
other events, then, upon surrender by the Depositary of the Global Note,
Certificated Notes will be issued to each person that the Depositary identifies
as the beneficial owner of the Notes represented by the Global Note. Upon any
such issuance, the Trustee is required to register such Certificated Notes in
the name of such person or persons (or the nominee of any thereof) and cause the
same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the related Notes and each such person may conclusively
rely on, and shall be protected in relying on, instructions from the Depositary
for all purposes.
CERTAIN DEFINITIONS
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. 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
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Transactions with Affiliates" only, "Affiliate" shall also mean any
beneficial owner of shares representing 5% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Voting Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation, or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any division
or line of business of the Company or any Restricted Subsidiary or (iii) any
other assets of the Company or any Restricted Subsidiary other than inventory or
obsolete assets sold in the ordinary course of business of the Company or such
Restricted Subsidiary (other than, in the case of (i), (ii) and (iii) above, (x)
a disposition by a Restricted Subsidiary to the Company or by the Company or a
Restricted Subsidiary to a Wholly Owned Subsidiary, (y) for purposes of the
provisions described under "-- Certain Covenants -- Limitation on Sales of
Assets and Subsidiary Stock" only, a disposition subject to the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments" and
(z) a disposition of assets with a fair market value of less than $250,000).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in a Sale/
Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any Indebtedness outstanding under any credit or
similar agreement with a financial institution which provides for revolving
credit loans, term loans or letters of credit or other credit
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facilities, as amended, waived, restated, supplemented, extended, replaced,
refinanced or otherwise modified from time to time.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be prepaid by the lessee without payment of a
penalty.
"Cash Contribution Amount" means the aggregate amount of cash contributions
made to the capital of the Company described in the definition of "Contribution
Indebtedness".
"Closing Date" means the date of the Indenture.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Consolidated Restricted Subsidiaries, plus, to
the extent Incurred by the Company and its Subsidiaries in such period but not
included in such interest expense, (i) interest expense attributable to
Capitalized Lease Obligations and the interest expense relating to Attributable
Debt, (ii) amortization of debt discount and debt issuance costs, (iii)
capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts
and other fees and charges attributable to letters of credit and bankers'
acceptance financing, (vi) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary, (vii) net costs associated with Hedging Obligations
(including amortization of fees), (viii) dividends in respect of all
Disqualified Stock of the Company and all Preferred Stock of the Subsidiaries of
the Company to the extent held by Persons other than the Company or a Wholly
Owned Subsidiary, (ix) interest Incurred in connection with investments in
discontinued operations and (x) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries for such period; provided, however,
that there shall not be included in such Consolidated Net Income: (i) any net
income or loss of any Person (other than the Company) if such Person is not a
Restricted Subsidiary, except that (A) subject to the limitations contained in
clause (iv) below, the Company's equity in the net income of any such Person for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such period
to the Company or a Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution made to a Restricted
Subsidiary, to the limitations contained in clause (iii) below) and (B) the
Company's equity in a net loss of any such Person (including any Unrestricted
Subsidiary) for such period shall be included in determining such Consolidated
Net Income; (ii) any net income (or loss) of any Person acquired by the Company
or a Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition; (iii) any net income (or loss) of any Restricted
Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except that (A)
subject to the limitations contained in clause (iv) below, the Company's equity
in the net income of any such Restricted Subsidiary for
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such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Restricted Subsidiary
during such period to the Company or another Restricted Subsidiary as a dividend
or other distribution (subject, in the case of a dividend or other distribution
made to another Restricted Subsidiary, to the limitation contained in this
clause) and (B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such Consolidated
Net Income; (iv) any gain (but not loss) realized upon the sale or other
disposition of any asset of the Company or its Consolidated Subsidiaries
(including pursuant to any Sale/Leaseback Transaction) that is not sold or
otherwise disposed of in the ordinary course of business and any gain (but not
loss) realized upon the sale or other disposition of any Capital Stock of any
Person; (v) any extraordinary gain or loss; and (vi) the cumulative effect of a
change in accounting principles. Notwithstanding the foregoing, for the purpose
of the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments" only, there shall be excluded from Consolidated Net Income
any dividends, repayments of loans or advances or other transfers of assets from
Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the
extent such dividends, repayments or transfers increase the amount of Restricted
Payments permitted under such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Operating Cash Flow" for any period means the Consolidated
Net Income for such period, plus the following to the extent deducted in
calculating such Consolidated Net Income: (i) income tax expense of the Company
and its Consolidated Restricted Subsidiaries, (ii) Consolidated Interest
Expense, (iii) depreciation expense of the Company and its Consolidated
Restricted Subsidiaries, (iv) amortization expense of the Company and its
Consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid cash item that was paid in a prior period) and (v) all
other non-cash charges of the Company and its Consolidated Restricted
Subsidiaries (excluding any such non-cash charge to the extent it represents an
accrual of or reserve for cash expenditures in any future period) in each case
for such period. Notwithstanding the foregoing, the provision for taxes based on
the income or profits of, and the depreciation and amortization and non-cash
charges of, a Restricted Subsidiary of the Company shall be added to
Consolidated Net Income to compute Consolidated Operating Cash Flow only to the
extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating Consolidated Net Income and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Restricted Subsidiary without prior approval
(that has not been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
stockholders.
"Consolidation" means the consolidation of the amounts of each Restricted
Subsidiary with those of the Company in accordance with GAAP consistently
applied; provided, however, that "Consolidation" will not include consolidation
of the accounts of any Unrestricted Subsidiary, but the interest of the Company
or any Restricted Subsidiary in an Unrestricted Subsidiary will be accounted for
as an investment. The term "Consolidated" has a correlative meaning.
"Contribution Indebtedness" means Indebtedness of the Company in an
aggregate principal amount not greater than twice the aggregate amount of the
Net Cash Proceeds received by the Company from contributions made to the capital
of the Company after the date hereof, provided that such Contribution
Indebtedness (i) has a Stated Maturity later than the Stated Maturity of the
Notes, (ii) is Incurred substantially concurrently with such cash contribution,
and (iii) is so designated as Contribution Indebtedness, pursuant to an
Officers' Certificate, on the Incurrence date thereof.
"Currency Agreement" means with respect to any Person, any foreign exchange
contract, currency swap agreement or any similar agreement or arrangement to
which such Person is a party or of which it is a beneficiary.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a) the
Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) four times the Consolidated Operating Cash Flow for
the latest fiscal quarter for which financial information is available
immediately preceding such Determination Date (the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the Measurement
Period immediately prior to the relevant Determination Date,
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(i) any Person that is a Restricted Subsidiary on the Determination Date (or
would become a Restricted Subsidiary on such Determination Date in connection
with the transaction that requires the determination of such Consolidated
Operating Cash Flow) will be deemed to have been a Restricted Subsidiary at all
times during such Measurement Period, (ii) any Person that is not a Restricted
Subsidiary on such Determination Date (or would cease to be a Restricted
Subsidiary on such Determination Date in connection with the transaction that
requires the determination of such Consolidated Operating Cash Flow) will be
deemed not to have been a Restricted Subsidiary at any time during such
Measurement Period, and (iii) if the Company or any Restricted Subsidiary shall
have in any manner (x) acquired (through an acquisition or the commencement of
activities constituting such operating business) or (y) disposed of (by an Asset
Disposition 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 such Determination Date, such
calculation will be made on a pro forma basis in accordance with GAAP as if all
such transactions had been consummated prior to the first day of such
Measurement Period (it being understood that in calculating Consolidated
Operating Cash Flow, the exclusions set forth in clauses (i) through (vi) of the
definition of Consolidated Net Income shall apply to a Person which has been
acquired as if it were a Restricted Subsidiary).
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"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 exercisable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Notes; provided, however, 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 first anniversary of the Stated Maturity of the
Securities shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the provisions of the
covenants described under "-- Change of Control" and "-- Certain
Covenants -- Limitation on Sale of Assets and Subsidiary Stock".
"Equity Offering" means any public or private sale of common stock or
Preferred Stock of the Company (other than Disqualified Stock) other than any
sale to a Permitted Holder.
"Escrow Account" means an escrow account for the deposit of approximately
$56.6 million of the net proceeds from the sale of the Notes under the Escrow
and Disbursement Agreement.
"Escrow Agent" means The Chase Manhattan Bank as Escrow Agent under the
Escrow and Disbursement Agreement, or any successor thereto appointed pursuant
to such agreement.
"Escrow and Disbursement Agreement" means the Escrow and Disbursement
Agreement, dated as of the Closing Date, by and among the Escrow Agent, the
Trustee and the Company, governing the disbursement of funds from the Escrow
Account.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arm's-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 of Directors of
the Company acting in good faith and shall be evidenced by a resolution of the
Board of Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronounce-
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ments of the Financial Accounting Standards Board, (iii) such other statements
by such other entities as approved by a significant segment of the accounting
profession and (iv) the rules and regulations of the Commission governing the
inclusion of financial statements (including pro forma financial statements) in
periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the Commission. All
ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, 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. The term "Guarantor" shall mean any Person Guaranteeing
any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or any Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Person at the time it becomes a Subsidiary. The term "Incurrence" when used as a
noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money; (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments; (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto); (iv) all obligations
of such Person to pay the deferred and unpaid purchase price of property or
services (except Trade Payables), which purchase price is due more than six
months after the date of placing such property in service or taking delivery and
title thereto or the completion of such services; (v) Capitalized Lease
Obligations and all Attributable Debt of such Person; (vi) the amount of all
obligations of such Person with respect to the redemption, repayment or other
repurchase of any Disqualified Stock or, with respect to any Subsidiary of such
Person, any Preferred Stock (but excluding, in each case, any accrued
dividends); (vii) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided, however, that the amount of Indebtedness of such Person shall
be the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other Persons;
(viii) to the extent not otherwise included in this definition, Hedging
Obligations of such Person; and (ix) all obligations of the type referred to in
clauses (i) through (viii) of other Persons and all dividends of other Persons
for the payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee. 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, upon the occurrence of the
contingency giving rise to the obligation, of any contingent obligations at such
date.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap
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agreement, interest rate collar agreement, interest rate hedge agreement or
other similar agreement or arrangement as to which such Person is party or a
beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extension of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments", (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Legal Holiday" means a Saturday, Sunday or other day on which banking
institutions in New York State are authorized or required by law to close.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and proceeds from the
sale or other disposition of any securities received as consideration, but only
as and when received, but excluding any other consideration received in the form
of assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other non-cash form) therefrom, in each case net
of (i) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all Federal, state, provincial, foreign and local
taxes required to be paid or accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security agreement of any kind with respect to
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) appropriate amounts to
be provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the property or other assets disposed of in such
Asset Disposition and retained by the Company or any Restricted Subsidiary after
such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock
or any equity contribution, means the cash proceeds of such issuance, sale or
contribution net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees actually incurred in connection with such issuance, sale or
contribution and net of taxes paid or payable as a result thereof.
"Noteholder" or "Holder" means the Person in whose name a Note is
registered on the registrar's books.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
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"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Holders" means Kwok L. Li, William R. Wilson and Linsang
Partners, LLC and any Person acting in the capacity of an underwriter in
connection with a public or private offering of the Company's Capital Stock.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, a Restricted Subsidiary or a Person that will,
upon the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Telecommunications Business; (ii) another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary; provided, however, that such Person's primary business is
a Telecommunications Business; (iii) Temporary Cash Investments; (iv)
receivables owing to the Company or any Restricted Subsidiary if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; provided, however, that such trade terms
may include such concessionary trade terms as the Company or any such Restricted
Subsidiary deems reasonable under the circumstances; (v) Investments in prepaid
expenses; (vi) loans or advances to employees made in the ordinary course of
business of the Company or such Restricted Subsidiary and not exceeding $2.0
million in the aggregate outstanding at any one time; (vii) stock, obligations
or securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments; (viii) any Person to the extent such Investment
represents the non-cash portion of the consideration received for an Asset
Disposition that was made pursuant to and in compliance with the covenant
described under "-- Certain Covenants -- Limitation on Sale of Assets and
Subsidiary Stock"; (ix) Investments made prior to the Closing Date; (x)
Investments in Telecommunications Assets not to exceed $30.0 million at any one
time outstanding; and (xi) other Investments, not to exceed the greater of (a)
10% of Total Assets of the Company at the time of such Investment (with the fair
market value of each Investment being measured at the time made and without
giving effect to subsequent changes in value) and (b) $30.0 million.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker'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 of 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; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet due or payable or subject to
penalties for non-payment or which are being contested in good faith by
appropriate proceedings; (d) Liens in favor of issuers of surety bonds issued
pursuant to the request of and for the account of such Person in the ordinary
course of its business; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights-of-way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens to secure Indebtedness permitted pursuant to
clauses (b)(i) and (b)(vi) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness"; (g) Liens existing on the Closing
Date; (h) Liens on property or shares of stock of another Person at the time
such other Person becomes a Subsidiary of such Person; provided, however, that
such Liens are not created, Incurred or assumed in connection with, or in
contemplation of, such other Person becoming such a Subsidiary; provided
further, however, that such Liens do not extend to any other property owned by
such Person or any of its Subsidiaries; (i) Liens on property at
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the time such Person or any of its Subsidiaries acquires the property, including
any acquisition by means of a merger or consolidation with or into such Person
or any Subsidiary of such Person; provided, however, that such Liens are not
created, Incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that the Liens do not extend to any
other property owned by such Person or any of its Subsidiaries; (j) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a wholly owned Subsidiary of such Person; (k) Liens securing
obligations under Interest Rate Agreements so long as such obligations under
Interest Rate Agreements relate to Indebtedness that is, and is permitted under
the Indenture to be, secured by a Lien on the same property securing such
obligations under Interest Rate Agreements; (l) Liens to secure any Refinancing
(or successive Refinancings) as a whole, or in part, of any Indebtedness secured
by any Lien referred to in the foregoing clauses (f), (g), (h) and (i);
provided, however, that (x) such new Lien shall be limited to all or part of the
same property that secured the original Lien (plus improvements to or on such
property) and (y) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (A) the outstanding principal
amount or, if greater, committed amount of the Indebtedness secured by Liens
described under clauses (f), (g), (h) or (i) at the time the original Lien
became a Permitted Lien under the Indenture and (B) an amount necessary to pay
any fees and expenses, including premiums, related to such Refinancings; and (m)
Liens in favor of the Trustee arising under the provisions of the Escrow and
Disbursement Agreement and the provisions of the Indenture relating thereto.
Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clauses (f), (h) or (i) above to the extent such Lien applies to
any Telecommunications Assets acquired directly or indirectly from Net Available
Cash pursuant to the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock".
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Prodigy Agreement" means the Splitrock Full Service Agreement dated as of
June 24, 1997 between the Company and Prodigy, Inc. as in effect on the date
hereof.
"Purchase Money Indebtedness" means Secured Indebtedness (including
Capitalized Lease Obligations, mortgage financings and purchase money
obligations) incurred for the purpose of financing all or any part of the cost
of construction, installation, acquisition, lease, development or improvement by
the Company or any Restricted Subsidiary of any Telecommunications Assets of the
Company or any Restricted Subsidiary and 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 provided, however, that (i) the security agreement or
conditional sales or other title retention contract pursuant to which a Lien on
such assets is created shall be entered into within 180 days after the purchase
or acquisition of such assets and shall at all times be confined solely to the
assets so purchased or acquired, any additions, replacements, modifications and
accessions thereto and any proceeds and products therefrom, (ii) at no time
shall the aggregate principal amount of the outstanding Indebtedness secured
thereby be increased, except in connection with the purchase of additions and
accessions thereto and except in respect of fees and other obligations in
respect of such Indebtedness and (iii) the Indebtedness secured thereby shall be
with recourse solely to the assets so purchased or acquired, any additions,
replacements, modifications and accessions thereto and any proceeds and products
therefrom.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
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"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) any Indebtedness of the Company or any Restricted
Subsidiary existing on the date of the Indenture or Incurred in compliance with
the Indenture (including Indebtedness of the Company that Refinances Refinancing
Indebtedness); provided, however, that (i) the Refinancing Indebtedness has a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
Refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced, (iii) such Refinancing
Indebtedness is Incurred in an aggregate principal amount (or if issued with
original issue discount, an aggregate issue price) that is equal to or less than
the aggregate principal amount (or if issued with original issue discount, the
aggregate accreted value) then outstanding of the Indebtedness being Refinanced
and (iv) if the Indebtedness being Refinanced is subordinated in right of
payment to the Notes, such Refinancing Indebtedness is subordinated in right of
payment to the Notes at least to the same extent as the Indebtedness being
Refinanced; provided further, however, that Refinancing Indebtedness shall not
include (x) Indebtedness of a Restricted Subsidiary that Refinances Indebtedness
of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary
that Refinances Indebtedness of an Unrestricted Subsidiary.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired by the Company or a Restricted Subsidiary whereby
the Company or a Restricted Subsidiary transfers such property to a Person and
the Company or such Restricted Subsidiary leases it from such Person, other than
leases between the Company and a Wholly Owned Subsidiary or between Wholly Owned
Subsidiaries.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" of the Company means the principal of, premium (if
any) and accrued and unpaid interest on (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization of the Company,
regardless of whether or not a claim for post-filing interest is allowed in such
proceedings), and fees and other amounts owing in respect of, Bank Indebtedness
and all other Indebtedness of the Company, whether outstanding on the Closing
Date or thereafter Incurred, unless in the instrument creating or evidencing the
same or pursuant to which the same is outstanding it is provided that such
obligations are subordinated in right of payment to the Notes; provided,
however, that Senior Indebtedness shall not include (i) any obligation of the
Company to any Subsidiary, (ii) any liability for Federal, state, local or other
taxes owed or owing by the Company, (iii) any accounts payable or other
liability to trade creditors arising in the ordinary course of business
(including Guarantees thereof or instruments evidencing such liabilities), (iv)
any Indebtedness or obligation of the Company (and any accrued and unpaid
interest in respect thereof) that by its terms is subordinate or junior in any
respect to any other Indebtedness or obligation of the Company, including any
Subordinated Obligations, (v) any obligations with respect to any Capital Stock,
or (vi) any Indebtedness Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the Commission.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means, with respect to any Person, any
Indebtedness of such Person (whether outstanding on the Closing Date or
thereafter Incurred) that is subordinate or junior in right of payment to the
Notes or any other indebtedness of such Person pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including
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partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"Subsidiary Guarantee" means each Guarantee of the obligations with respect
to the Notes issued by a Person pursuant to the terms of the Indenture.
"Subsidiary Guarantor" means any Person that has issued a Subsidiary
Guarantee.
"Telecommunications Assets" means all assets (including Capital Stock),
rights (contractual or otherwise) and properties, real or personal, whether
tangible or intangible, used or intended for use in connection with a
Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, data, video or voice through
owned or leased transmission facilities, (ii) constructing, creating, developing
or marketing networks, related network transmission equipment, software and
other devices for use in a communication business or (iii) evaluating,
participating or pursuing any other activity or opportunity that is primarily
related to those identified in (i) or (ii) above; provided that the
determination of what constitutes a Telecommunications Business shall be made in
good faith by the Board of Directors of the Company.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company that is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by the
United States of America having capital, surplus and undivided profits
aggregating in excess of $500.0 million (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act), (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America or any foreign country recognized
by the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Service, a division of The McGraw-Hill Companies, Inc. ("S&P"), and (v)
investments in securities with maturities of six months or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or "A" by Moody's Investors
Service, Inc.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
sec.sec. 77aaa-77bbbb) as in effect on the date of the Indenture.
"Total Assets" means, with respect to any Person, the total Consolidated
assets of such Person and its Restricted Subsidiaries, as shown on the most
recent balance sheet of such Person.
"Total Consolidated Indebtedness" means, as of any date of determination,
an amount equal to the aggregate amount of all Indebtedness of the Company and
its Restricted Subsidiaries, determined on a Consolidated basis in accordance
with GAAP, outstanding as of such date of determination, after giving effect to
any Incurrence of Indebtedness and the application of the proceeds therefrom
giving rise to such determination.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
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"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless (a) such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; (b) a Default or
Event of Default shall have occurred and be continuing; or (c) immediately after
giving effect to such designation, the Company would not be able to Incur $1.00
of Indebtedness under paragraph (a) of the covenant entitled "-- Limitation on
Indebtedness"; provided, however, that either (A) the Subsidiary to be so
designated has total Consolidated assets of $1,000 or less or (B) if such
Subsidiary has Consolidated assets greater than $1,000, then such designation
would be permitted under the covenant titled "-- Limitation on Restricted
Payments". The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness" and (y) no Default shall have occurred
and be continuing. Any such designation of a Subsidiary as a Restricted
Subsidiary or Unrestricted Subsidiary by the Board of Directors shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution of the Board of Directors giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.
DESCRIPTION OF THE WARRANTS
The Warrants were issued pursuant to a Warrant Agreement dated July 24,
1998 (the "Warrant Agreement"), between the Company and Bank of Montreal Trust
Company, as warrant agent (the "Warrant Agent"). The following summary of
certain provisions of the Warrant Agreement does not purport to be complete and
is qualified in its entirety by reference to all of the provisions of the
Warrant Agreement, including the definitions therein of certain terms.
Capitalized terms in this "Description of the Warrants" not defined in this
Offering Memorandum have the meanings assigned to them in the Warrant Agreement.
GENERAL
Each Warrant, when exercised, will entitle the holder thereof to purchase
10.125 shares of Common Stock from the Company at a price (the "Exercise Price")
of $0.01 per share. The Exercise Price and the number of shares of Common Stock
issuable upon exercise of a Warrant are both subject to adjustment in certain
cases. See "-- Adjustments" below. The Warrants initially entitle the holders
thereof to acquire, in the aggregate, 2,642,613 shares of Common Stock.
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The Warrants may be exercised at any time after the first anniversary of
the Issue Date; provided, however, that holders of Warrants will be able to
exercise their Warrants only if the Common Shelf Registration Statement (as
defined) relating to the Common Stock underlying the Warrants is effective or
the exercise of such Warrants is exempt from the registration requirements of
the Securities Act, and such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states or other
jurisdictions in which such holders reside. Unless earlier exercised, the
Warrants will expire on July 15, 2008. The Company will give notice of
expiration not less than 90 nor more than 120 days before the Expiration Date to
the registered holders of the then outstanding Warrants. If the Company fails to
give such notice, the Warrants will nevertheless expire and become void on the
Expiration Date. The Warrants will not trade separately from the Notes until the
Separation Date.
At the Company's option, fractional shares of Common Stock may not be
issued upon exercise of the Warrants. If any fraction of a share of Common Stock
would, except for the foregoing provision, be issuable upon the exercise of any
such Warrant (or specified portion thereof), the Company will pay an amount in
cash equal to the Current Market Value per share of Common Stock, as determined
on the day immediately preceding the date the Warrant is presented for exercise,
multiplied by such fraction, computed to the nearest whole cent.
Certificates for Warrants will be issued in fully registered form only. No
service charge will be made for registration of transfer or exchange upon
surrender of any Warrant Certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Warrant Certificates.
In the event a bankruptcy, reorganization or similar proceeding is
commenced by or against the Company, a bankruptcy court may hold that
unexercised Warrants are executory contracts which may be subject to rejection
by the Company with approval of the bankruptcy court. As a result, holders of
the Warrants may, even if sufficient funds are available, not be entitled to
receive any consideration or may receive an amount less than they would be
entitled to if they had exercised their Warrants prior to the commencement of
any such bankruptcy, reorganization or similar proceeding.
CERTAIN TERMS
Exercise
In order to exercise all or any of the Warrants, the holder thereof is
required to surrender to the Warrant Agent the related Warrant Certificate and
pay in full the Exercise Price for each share of Common Stock or other
securities issuable upon exercise of such Warrants. The Exercise Price may be
paid (i) in cash or by certified or official bank check or by wire transfer to
an account designated by the Company for such purpose or (ii) without the
payment of cash, by reducing the number of shares of Common Stock that would be
obtainable upon the exercise of a Warrant and payment of the Exercise Price in
cash so as to yield a number of shares of Common Stock upon the exercise of such
Warrant equal to the product of (a) the number of shares of Common Stock for
which such Warrant is exercisable as of the date of exercise (if the Exercise
Price were being paid in cash) and (b) the Cashless Exercise Ratio (the
"Cashless Exercise"). The "Cashless Exercise Ratio" shall equal a fraction, the
numerator of which is the excess of the Current Market Value per share of Common
Stock on the Exercise Date over the Exercise Price per share as of the Exercise
Date and the denominator of which is the Current Market Value per share of the
Common Stock on the Exercise Date. Upon surrender of a Warrant Certificate
representing more than one Warrant in connection with the holder's option to
elect a Cashless Exercise, the number of shares of Common Stock deliverable upon
a Cashless Exercise shall be equal to the number of shares of Common Stock
issuable upon the exercise of Warrants that the holder specifies are to be
exercised pursuant to a Cashless Exercise multiplied by the Cashless Exercise
Ratio. All provisions of the Warrant Agreement shall be applicable with respect
to a surrender of a Warrant Certificate pursuant to a Cashless Exercise for less
than the full number of Warrants represented thereby.
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No Rights as Stockholders
The holders of unexercised Warrants are not entitled, by virtue of being
such holders, to receive dividends, to vote, to consent, to exercise any
preemptive rights or to receive notice as stockholders of the Company in respect
of any stockholders' meeting for the election of directors of the Company or any
other purpose, or to exercise any other rights whatsoever as stockholders of the
Company.
Mergers, Consolidations, etc.
If the Company consolidates with, merges with or into, or sells all or
substantially all of its assets to, another Person, each Warrant thereafter will
entitle the holder thereof to receive upon exercise thereof, per share of Common
Stock for which such Warrant is exercisable, the number of shares of common
stock or other securities or property which the holder of a share of Common
Stock is entitled to receive upon completion of such consolidation, merger or
sale of assets. However, if (i) the Company consolidates with, merges with or
into, or sells all or substantially all of its assets to, another Person and, in
connection therewith, the consideration payable to the holders of Common Stock
in exchange for their shares is payable solely in cash or (ii) there is a
dissolution, liquidation or winding-up of the Company, then the holders of the
Warrants will be entitled to receive distributions on an equal basis with the
holders of Common Stock or other securities issuable upon exercise of the
Warrants, as if the Warrants had been exercised immediately prior to such event,
less the Exercise Price. Upon receipt of such payment, if any, the Warrants will
expire and the rights of the holders thereof will cease. In the case of any such
merger, consolidation or sale of assets, the surviving or acquiring person and,
in the event of any dissolution, liquidation or winding-up of the Company, the
Company, must deposit promptly with the Warrant Agent the funds, if any,
required to pay the holders of the Warrants. After such funds and the
surrendered Warrant Certificates are received, the Warrant Agent is required to
deliver a check in such amount as is appropriate (or, in the case of
consideration other than cash, such other consideration as is appropriate) to
such Persons as it may be directed in writing by the holders surrendering such
Warrants.
ADJUSTMENTS
The number of shares of Common Stock issuable upon the exercise of the
Warrants and the Exercise Price will be subject to adjustment in certain events
including: (i) the payment by the Company of certain dividends (or other
distributions) on the Common Stock of the Company including dividends or
distributions payable in shares of Common Stock or other shares of the Company's
capital stock, (ii) subdivisions, combinations and certain reclassifications to
the Common Stock, (iii) the issuance to all holders of Common Stock of rights,
options or warrants entitling them to subscribe for shares of Common Stock, or
of securities convertible into or exchangeable or exercisable for shares of
Common Stock, for a consideration per share which is less than the Current
Market Value per share of the Common Stock, (iv) the issuance of shares of
Common Stock for a consideration per share which is less than the Current Market
Value per share of the Common Stock, and (v) the distribution to all holders of
the Common Stock of any of the Company's assets, debt securities or any rights
or warrants to purchase securities (excluding those rights and warrants referred
to in the foregoing clause (iii) and cash dividends and other cash distributions
from current or retained earnings other than any Extraordinary Cash Dividend).
No adjustment to the number of shares of Common Stock issuable upon the exercise
of the Warrants and the Exercise Price will be required in certain events
including: (i) the issuance of shares of Common Stock in bona fide public
offerings that are underwritten or in which a placement agent is retained by the
Company, (ii) the issuance of shares of Common Stock (including upon exercise of
options) pursuant to the terms of and in order to give effect to the 1997
Incentive Share Plan and (iii) the issuance of shares of Common Stock in
connection with acquisitions other than to affiliates of the Company.
In the event of a distribution to holders of Common Stock which results in
an adjustment to the number of shares of Common Stock or other consideration for
which a Warrant may be exercised, the holders of the Warrants may, in certain
circumstances, be deemed to have received a distribution subject to United
States Federal income tax as a dividend. See "Certain Federal Income Tax
Considerations".
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No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least one percent in the Exercise
Price; provided, however, that any adjustment which is not made as a result of
this paragraph will be carried forward and taken into account in any subsequent
adjustment.
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent
of the holders of the Warrants, may amend or supplement the Warrant Agreement
for certain purposes, including curing defects or inconsistencies or making any
change that does not adversely affect the rights of any holder. Any amendment or
supplement to the Warrant Agreement that has an adverse effect on the interests
of the holders of the Warrants shall require the written consent of the holders
of a majority of the then outstanding Warrants. The consent of each holder of
the Warrants affected shall be required for any amendment pursuant to which the
Exercise Price would be increased or the number of shares of Common Stock
issuable upon exercise of Warrants would be decreased (other than pursuant to
adjustments provided in the Warrant Agreement).
REGISTRATION RIGHTS
Registration of Warrants. The Company is required under the Warrant
Agreement to file a shelf registration statement under the Securities Act
covering the resale of the Warrants by the holders thereof (the "Warrant Shelf
Registration Statement") within 45 days after the Issue Date and to use its best
efforts to cause the Warrant Shelf Registration Statement to be declared
effective under the Securities Act within 105 days after the date of original
issuance of the Warrants and to remain effective until the earliest of (i) such
time as all of the Warrants have been sold thereunder, (ii) two years after its
effective date and (iii) such time as the Warrants can be sold without
restriction under the Securities Act.
Each holder of Warrants that sells such Warrants pursuant to the Warrant
Shelf Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to the
purchaser, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by certain
provisions of the Warrant Agreement which are applicable to such holder
(including certain indemnification obligations). In addition, each holder of
Warrants will be required to deliver information to be used in connection with
the Warrant Shelf Registration Statement in order to have its Warrants included
in the Warrant Shelf Registration Statement.
Registration of Underlying Common Stock. The Company is required under the
Warrant Agreement to file a shelf registration statement under the Securities
Act covering the issuance of shares of Common Stock to the holders of the
Warrants upon exercise of the Warrants by the holders thereof (the "Common Shelf
Registration Statement") and to use its best efforts to cause the Common Shelf
Registration Statement to be declared effective on or before 365 days after the
Issue Date and to remain effective until the earlier of (i) such time as all
Warrants have been exercised and (ii) the Expiration Date.
During any consecutive 365-day period, the Company shall be entitled to
suspend the availability of each of the Warrant Shelf Registration Statement and
the Common Shelf Registration Statement for up to two 45 consecutive-day periods
(except for the 45 consecutive-day period immediately prior to the Expiration
Date) if the Board of Directors of the Company determines in the exercise of its
reasonable judgment that there is a valid business purpose for such suspension
and provides notice that such determination was made to the holders of the
Warrants; provided, however, that in no event shall the Company be required to
disclose the business purpose for such suspension if the Company determines in
good faith that such business purpose must remain confidential. There can be no
assurance that the Company will be able to file, cause to be declared effective,
or keep a registration statement continuously effective until all of the
Warrants have been exercised or have expired.
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CERTAIN DEFINITIONS
The Warrant Agreement contains, among others, the following definitions:
"Current Market Value" per share of Common Stock or any other security
at any date means (i) if the security is not registered under the Exchange
Act, (a) the value of the security, determined in good faith by the Board
of Directors of the Company and certified in a board resolution, based on
the most recently completed arm's-length transaction between the Company
and a Person other than an Affiliate of the Company, the closing of which
shall have occurred on such date or within the six-month period preceding
such date, or (b) if no such transaction shall have occurred on such date
or within such six-month period, the value of the security as determined by
a nationally recognized investment banking firm or (ii) if the security is
registered under the Exchange Act, the average of the daily closing bid
prices (or the equivalent in an over-the-counter market) for each Business
Day during the period commencing 15 Business Days before such date and
ending on the date one day prior to such date, or if the security has been
registered under the Exchange Act for less than 15 consecutive Business
Days before such date, then the average of the daily closing bid prices (or
such equivalent) for all of the Business Days before such date for which
daily closing bid prices are available; provided, however, that if the
closing bid price is not determinable for at least ten Business Days in
such period, the "Current Market Value" of the security shall be determined
as if the security were not registered under the Exchange Act.
"Issue Date" means the date on which the Warrants are initially
issued.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Warrant Certificates" mean the registered certificates (including the
Global Warrants (as defined)) issued by the Company under the Warrant
Agreement representing the Warrants.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of material United States Federal income tax
consequences relevant in the opinion of Winstead Sechrest & Minick P.C., counsel
to the Company, to the Exchange Offer and the acquisition, ownership and
disposition of the Exchange Notes, but does not purport to be a complete
analysis of all potential tax effects. This summary is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations
thereunder (the "Regulations"), published rulings and court decisions, all as in
effect and existing on the date hereof and all of which are subject to change at
any time, which change may be retroactive. Such counsel has relied upon
representations by the Company and its officers with respect to factual matters
for purposes of this summary. This summary is not binding on the Internal
Revenue Service or on the courts, and no ruling will be requested from the
Internal Revenue Service on any issues described below. There can be no
assurance that the Internal Revenue Service will not take a different position
concerning the matters discussed below and that such positions of the Internal
Revenue Service would not be sustained.
This summary applies only to U.S. Holders (as defined below) that are the
initial holders of the Original Notes and the Exchange Notes, who acquired the
Notes for cash and who hold the Notes as capital assets. It does not address the
tax consequences to taxpayers who are subject to special rules (such as
financial institutions, tax-exempt organizations, insurance companies, dealers
in securities or currencies and persons who hold Notes as a hedge or as a
position in a "straddle" for tax purposes). A "U.S. Holder" means a beneficial
owner of a Note who purchased the Notes pursuant to the offering of the Original
Notes that is for U.S. federal income tax purposes (i) a citizen or resident of
the United States; (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political subdivision
thereof; (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or (iv) a trust if (A) a court within the
United States is able to exercise primary supervision over the
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<PAGE> 116
administration of the trust and (B) one or more U.S. fiduciaries have the
authority to control all substantial decisions of the trust.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH HOLDER OF A
NOTE IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE
IMPACT OF SUCH HOLDER'S TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF
THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES.
THE EXCHANGE
The exchange of the Original Notes for the Exchange Notes pursuant to the
Exchange Offer should not be a taxable event to the holder and thus the holder
should not recognize any taxable gain or loss as a result of the exchange. A
holder's adjusted tax basis in the Exchange Notes will be the same as its
adjusted tax basis in the Original Notes exchanged therefor, and its holding
period for the Original Notes will be included in its holding period for the
Exchange Notes. To the extent that a holder acquired the Original Notes at a
market discount or with amortizable bond premium, such discount or premium would
generally carry over to the Exchange Notes received in exchange for the Original
Notes. Such holders should consult their tax advisers regarding the United
States federal income tax treatment of market discount or amortizable bond
premium.
TAXATION OF THE NOTES
The stated interest payable on the Notes generally will be taxable to a
holder of Notes as ordinary income at the time that it is paid or accrued in
accordance with the holder's method of accounting for Federal income tax
purposes.
The Notes were issued with de minimis original issue discount ("OID") for
Federal income tax purposes. A debt instrument generally is issued with de
minimis OID if the amount by which its stated redemption price at maturity
exceeds its issue price is less than the product of .0025 multiplied by the
product of the stated redemption price at maturity and the number of complete
years to maturity from the issue date. De minimis OID is recognized as capital
gain upon the redemption, sale or other taxable disposition of the debt
instrument.
The issue price of the Notes is determined by allocating the "issue price"
of the Units between the Notes and the Warrants based on their relative fair
market values. The issue price of the Units was the first price at which a
substantial amount of the Units were sold for money. For purposes of determining
the issue price of the Notes, sales to bond houses, brokers or similar persons
or organizations acting in the capacity of underwriters, placement agents or
wholesalers are ignored. For purposes of determining whether OID is de minimis,
the issue price of the Notes is equal to the amount so allocated to the Notes.
The Company's allocation will be binding on a holder (but not on the Internal
Revenue Service) unless the holder discloses a different allocation on an
attachment to the holder's timely filed Federal income tax return for the
taxable year that includes the acquisition date of the Unit. The Company intends
to allocate 98.9% and 1.1% of the initial issue price of the Units to the Notes
and the Warrants, respectively.
Sale, Retirement or Other Taxable Disposition. Gain or loss upon a sale or
other disposition of a Note will be measured by the difference between the
amount of cash and the fair market value of property received with respect to
such sale and the holder's adjusted tax basis in such Note. A holder's adjusted
tax basis in a Note generally will be equal to the portion of the cost of the
Unit allocated to the Note (i.e., in the case of an initial purchaser in the
Offering, the Note's issue price. Such gain or loss generally will be capital
gain or loss, and will be long-term capital gain or loss if the holder held the
Note for more than one year.
Effect of Change of Control. Upon a Change of Control, each holder will
have the right to require the Company to repurchase all or any part of such
holder's Notes for a price equal to 101% of the principal amount thereof plus
accrued and unpaid interest and liquidated damages, if any, to the date of
payment. Under the Regulations, a provision such as the Change of Control
redemption requirement will not affect the
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<PAGE> 117
yield or maturity date of the Notes unless, based on all facts and circumstances
as of the date of issuance, it is more likely than not that a Change of Control
giving rise to the redemption will occur. The Company will not treat the Change
of Control redemption provision of the Notes as affecting the calculation of the
yield to maturity of any Note.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The backup withholding and information reporting requirements may apply to
certain payments of principal and interest on a Note and to certain payments or
proceeds of the sale or retirement of a Note. The Company, its agent, a broker,
the Trustee or any paying agent, as the case may be, is required to withhold tax
from any payment that is subject to backup withholding at a rate of 31% of such
payment if the holder fails to furnish its taxpayer identification number
(social security number or employer identification number), to certify that such
holder is not subject to backup withholding rules. Certain holders (including,
among others, all corporations) are not subject to the backup withholding and
reporting requirements.
Under current Treasury regulations, backup withholding and information
reporting do not apply to payments made by the Company or any agent thereof (in
its capacity as such) to a holder of a Note who has provided the required
certification under penalties of perjury that it is not a U.S. Holder or has
otherwise established an exemption (provided that neither the Company nor such
agent has actual knowledge that the holder is a U.S. Holder or that the
conditions of any other exemption are not in fact satisfied).
Any amounts withheld under the backup withholding rules from a payment to a
holder may be claimed as a credit against such holder's United States federal
income tax liability.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired as a result
of market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
The Company will not receive any proceeds from any sales of the Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to the purchaser 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 Exchange Notes. Any
broker-dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange 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 broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requires such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer, other than commissions or concessions of any
brokers or dealers, and will indemnify the holders of the Original Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
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LEGAL MATTERS
Certain legal matters with respect to the Exchange Notes being offered
hereby will be passed upon for the Company by Winstead Sechrest & Minick P.C.,
Houston, Texas.
EXPERTS
The financial statements of Splitrock Services, Inc., as of December 31,
1997 and for the period from inception (March 5, 1997) to December 31, 1997
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.
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GLOSSARY
ATM........................ Asynchronous Transfer Mode. A communications
standard that provides for information transfer in
the form of fixed-length cells of 53 bytes each.
The ATM format can be used to deliver data, video
and voice traffic at varying rates.
Backbone................... A centralized high-speed network that interconnects
smaller, independent networks.
Bandwidth.................. Bandwidth. The number of bits of information which
can move over a communications medium in a given
amount of time; the capacity of a
telecommunications circuit/network to carry data,
video and voice information. Typically measured in
Kbps and Mbps. Bandwidth from public networks is
typically available to business and residential
end-users in increments from 56 Kbps to T-3.
CLEC....................... Competitive local exchange carrier.
Dedicated lines............ Telecommunications lines dedicated or reserved for
use by particular customers along predetermined
routes.
Ethernet................... A LAN protocol which supports data transfer rates
of up to 10 Mbps.
Extranet................... An Intranet expanded to include selected business
partners through secured links on the Internet.
56k........................ Equivalent to a single high-speed telephone service
line; capable of transmitting one voice call or 56
Kbps of data. Currently in widespread use by medium
and large businesses primarily for entry level
high-speed data and very low-speed video
applications.
Frame relay................ A communications standard that is optimized for
efficient switching of variable-length data
packets.
Host....................... A computer with direct access to the Internet.
ILEC....................... Incumbent local exchange carrier.
Internet................... An open global network of interconnected
commercial, educational and governmental computer
networks which utilize TCP/IP, a common
communications protocol.
Internet dial access....... Communications circuit that is established by a
switched-circuit connection using the telephone
network.
Intranet................... A TCP/IP based network and Web site which is
securely isolated from the Internet and serves the
internal needs of a company or institution.
IP......................... Internet protocol. Network protocols that allow
computers with different architectures and
operating system software to communicate with other
computers on the Internet.
ISDN....................... Integrated Services Digital Network. A network that
provides digital, voice and data services through a
single medium.
ISP........................ Internet service provider. Companies formed to
provide access to the Internet to consumers and
business customers via local networks.
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IXC........................ Interexchange Carrier. A telecommunications company
that provides telecommunications services between
local exchanges on an interstate or intrastate
basis.
K or Kbps.................. Kilobits per second. A measure of digital
information transmission rates. One kilobit equals
1,000 bits of digital information. Normally, 10
bits are used for each alpha-numeric character.
LAN........................ Local Area Network. A data communications network
designed to interconnect personal computers,
workstations, minicomputers, file servers and other
communications and computing devices within a
localized environment.
LEC........................ Local Exchange Carrier. A telecommunications
company that provides telecommunications services
in a geographic area in which calls generally are
transmitted without toll charges.
Mbps....................... Megabits per second. A measure of digital
information transmission rates. One megabit equals
1,000 kilobits.
Modem...................... A device for transmitting information over an
analog communications channel such as a POTS
telephone circuit.
NAP........................ Network access point.
Network.................... A collection of distributed computers which share
data and information through inter-connected lines
of communication.
NOC........................ Network operations center.
OC-3....................... An optical data communications line capable of
transmitting data at 155 Mbps.
Peering.................... The commercial practice under which nationwide ISPs
exchange each other's traffic, in most cases
without the payment of settlement charges.
POPs....................... Points-of-Presence. An interlinked group of modems,
routers and other computer equipment, located in a
particular city or metropolitan area, that allows a
nearby subscriber to access the Internet through a
local telephone call or using a short-distance
permanent data circuit.
PRI........................ Primary Rate Interface. ISDN interface to primary
rate access.
Protocol................... A formal description of message formats and the
rules two or more machines must follow in order to
communicate.
PSTN....................... Public Switched Telephone Network. That portion of
a local exchange company's network available to all
users generally on a shared basis (i.e., not
dedicated to a particular user).
RBOC....................... Regional Bell Operating Company.
Router..................... A device that receives and transmits data packets
between segments in a network or different
networks.
Server..................... Software that allows a computer to offer a service
to another computer. Other computers contact the
server program by means of matching client
software. The term also refers to the computer on
which server software runs.
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SS7........................ Signaling System No. 7. The current (seventh)
version of the protocol used by switches to
establish a connection or call feature between
central offices.
Standards compliant........ A network or system that is compatible with
established industry standards or protocols.
TCP/IP..................... Transmission Control Protocol/Internet Protocol. A
compilation of network and transport-level
protocols that allow computers with different
architectures and operating system software to
communicate with other computers on the Internet.
T-1........................ A data communications line capable of transmitting
data at 1.5 Mbps.
T-3 or DS-3................ A data communications line capable of transmitting
data at 45 Mbps.
UNIX....................... A computer operating system for workstations and
personal computers and noted for its portability
and communications functionality.
VPN........................ Virtual Private Network. A network providing secure
transmission of IP traffic through the Internet.
WAN........................ Wide Area Network. A network spanning a wide
geographic area.
Web or World Wide Web...... A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication
of graphics, video and sound.
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SPLITROCK SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants......................... F-2
Balance Sheet as of December 31, 1997..................... F-3
Statement of Operations for the Period from Inception
(March 5, 1997) Through December 31, 1997.............. F-4
Statement of Stockholders' Equity for the Period from
Inception (March 5, 1997) Through December 31, 1997.... F-5
Statement of Cash Flows for the Period from Inception
(March 5, 1997) Through December 31, 1997.............. F-6
Notes to Financial Statements............................. F-7
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Condensed Balance Sheets as of March 31, 1998 and December
31, 1997............................................... F-14
Condensed Statement of Operations for the Three Months
Ended March 31, 1998................................... F-15
Condensed Statement of Stockholders' Equity for the Three
Months Ended March 31, 1998............................ F-16
Condensed Statement of Cash Flows for the Three Months
Ended March 31, 1998................................... F-17
Notes to Condensed Financial Information.................. F-18
</TABLE>
F-1
<PAGE> 123
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Splitrock Services, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Splitrock Services, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
period from inception (March 5, 1997) to December 31, 1997 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 audit. We conducted our audit
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 audit provides a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
April 2, 1998
F-2
<PAGE> 124
SPLITROCK SERVICES, INC.
BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 7,710
Restricted cash equivalent................................ 3,472
Accounts receivable....................................... 4,252
Prepaids and other current assets......................... 221
--------
Total current assets.............................. 15,655
Property and equipment, net................................. 38,504
Other assets................................................ 229
--------
$ 54,388
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations........... $ 11,010
Accounts payable.......................................... 3,086
Accrued liabilities....................................... 5,775
--------
Total current liabilities......................... 19,871
Capital lease obligations................................... 13,110
Note payable to stockholder................................. 1,000
--------
Total liabilities................................. 33,981
Stockholders' equity:
Common Stock, $.001 par value, 150,000,000 shares
authorized, 76,800,000 shares issued and outstanding... 77
Additional paid-in capital................................ 30,451
Accumulated deficit....................................... (10,121)
--------
Total stockholders' equity........................ 20,407
--------
Commitments and contingencies (Note 6)...................... --
--------
$ 54,388
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
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SPLITROCK SERVICES, INC.
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION (MARCH 5, 1997) THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
Revenue..................................................... $ 22,708
Operating expenses:
Network personnel costs................................... 437
Network operating costs................................... 1,925
Legacy Network costs...................................... 25,341
Severance costs........................................... 463
Selling, general and administrative....................... 1,276
Depreciation and amortization............................. 3,500
--------
32,942
--------
Loss from operations........................................ (10,234)
Other income (expense):
Interest income........................................... 348
Interest expense.......................................... (235)
--------
Loss before income taxes.................................... (10,121)
Provision for income taxes.................................. --
--------
Net loss.................................................... $(10,121)
========
Loss per share -- basic and diluted......................... $ (0.24)
========
Weighted average shares -- basic and diluted................ 42,824
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
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SPLITROCK SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (MARCH 5, 1997) THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------- ADDITIONAL COMMON
PAR PAID-IN STOCK ACCUMULATED
SHARES VALUE CAPITAL WARRANTS DEFICIT TOTAL
------ ----- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization.............. 28,000 $28 -- -- -- $ 28
Issuances of Common Stock for cash
of $0.625 per share and
warrants.......................... 48,800 49 $30,451 -- -- 30,500
Net loss............................ $(10,121) (10,121)
------ --- ------- -- -------- --------
Balance at December 31, 1997........ 76,800 $77 $30,451 -- $(10,121) $ 20,407
====== === ======= == ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 127
SPLITROCK SERVICES, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM INCEPTION (MARCH 5, 1997) THROUGH DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(10,121)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 3,500
Increase in accounts receivable........................ (4,252)
Increase in prepaids and other current assets.......... (221)
Increase in accounts payable and accrued liabilities... 8,861
--------
Net cash used by operating activities............. (2,233)
--------
Cash flows from investing activities:
Purchase of equipment..................................... (16,969)
Increase in other assets.................................. (229)
--------
Net cash used by investing activities............. (17,198)
--------
Cash flows from financing activities:
Sale of common stock and warrants......................... 30,528
Proceeds from notes payable to stockholder................ 1,750
Proceeds from sale-leaseback of equipment................. 1,152
Payments on notes payable to stockholder.................. (750)
Payments on capital lease obligations..................... (2,067)
Restriction of cash under credit agreement................ (3,472)
--------
Net cash provided by financing activities......... 27,141
--------
Increase in cash and cash equivalents....................... 7,710
Cash and cash equivalents:
Beginning of period....................................... --
--------
End of period............................................. $ 7,710
========
Supplemental cash flow information:
Cash paid for interest.................................... $ 235
========
Noncash investing and financing activities:
Assumption of capital lease obligations and other
liabilities (Note 2)................................... $ 5,900
========
Capital lease obligations incurred........................ $ 20,916
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 128
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM INCEPTION (MARCH 5, 1997) THROUGH DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Splitrock Services, Inc. (the "Company") was formed as a Texas corporation
on March 5, 1997. The Company was formed to build a nationwide, facilities-based
telecommunications network with the goal of providing telecommunications
services. The Company has designed and is in the process of deploying a network
based on Asynchronous Transfer Mode (ATM) switching technology which it believes
will provide high quality communications services on a flexible multi-service
platform. This platform flexibility will allow the Company to expand its service
offerings to provide fully integrated data, video and voice services and to
incorporate future technological innovations into its Network architecture with
a lower incremental investment than that required by other, less flexible,
networks. On June 24, 1997, the Company entered into a four-year service
agreement to provide Internet dial access services to Prodigy (Note 2).
During 1997, the Company launched the network construction program based on
ATM technology. This program was organized in two phases. As of December 31,
1997, the Company was in Phase I of the Network build which encompassed the
replacement of the network facilities previously owned by Prodigy (Note 2). The
Company anticipates the completion of Phase I in the first half of 1998.
In addition to the development of a new telecommunications network, the
Company has been engaged in recruiting management and operational personnel and
structuring financing for the Company's operations. The development of the
network will require substantial capital expenditures. Management of the Company
believes that funding from affiliates of its stockholders or other sources will
be sufficient to fund the Company's operations for the next twelve months.
The following is a summary of the Company's significant accounting
policies:
Revenue Recognition. The Company recognizes revenue as services are
provided under its agreement with its customer. Prodigy was the Company's
only customer through December 31, 1997. Prodigy may terminate it's
agreement with the Company without payment in the event of certain defaults
by the Company, including documented failures (without cure) to meet
certain network performance standards.
Legacy Network Costs. The Legacy Network refers to certain assets
which the Company acquired from Prodigy on July 1, 1997 related to
Prodigy's existing network infrastructure in order to provide services to
Prodigy while the Splitrock Network is being fully deployed (Note 2).
Legacy Network costs include amounts incurred under a network
infrastructure support agreement with Prodigy. These costs include all
expenses incurred in connection with the operation of the Legacy Network,
including facility fees, line charges, personnel costs, occupancy costs and
equipment maintenance costs.
Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization of new property and equipment, including
assets under capital leases, is provided upon installation using the
straight-line method over the estimated useful lives of three to five
years. Previously used equipment is depreciated over its estimated useful
life of nine months to three years.
Long-Lived Assets. The Company reviews for the impairment of
long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The carrying amount
of a long-lived asset is considered impaired when anticipated undiscounted
cash flows expected to result from the use of the asset and its eventual
disposition are less than its carrying amount. The Company believes that no
material impairment exists at December 31, 1997.
Income Taxes. Deferred tax assets and liabilities are determined based
on the temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities using the enacted tax
rates in effect in the years in which the differences are expected to
reverse. In estimating
F-7
<PAGE> 129
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
future tax consequences, all expected future events are considered other
than enactments of changes in the tax law or rates.
Cash and Cash Equivalents. The Company considers highly liquid
investments with an original maturity of three months or less from the date
of purchase to be classified as cash and cash equivalents. The restricted
cash equivalent is a three-month time deposit held as collateral on a
letter of credit.
Concentration of Credit Risk. Financial instruments which potentially
subject the Company to concentration of credit risk are primarily cash and
cash equivalents and receivables. The Company's cash investment policies
limit investments to short-term, investment grade instruments with quality
financial institutions. The Company's revenues and its trade receivable
balance for the period ended December 31, 1997 were derived solely from
services provided to Prodigy, the Company's sole customer during this
period. Any interruption of this relationship could adversely affect the
Company. Management believes that the risk of incurring material losses
related to these credit risks are remote.
Net Loss Per Share In February 1997, Statement of Financial Accounting
Standards No. 128 ("FAS 128") Earnings Per Share was issued. FAS 128 is
effective for both interim and annual periods ending after December 15,
1997. The Company adopted the pronouncement for the period ended December
31, 1997. FAS 128 requires the Company to report both basic earnings per
share, which is based on the weighted average number of common shares
outstanding, and diluted earnings per share, which is based on the weighted
average number of common shares outstanding and all dilutive potential
common shares outstanding. At December 31, 1997, options to acquire
1,880,000 shares of common stock at the exercise price of $0.625 and
warrants to purchase 5,000,000 shares of common stock at $0.625 were not
included in the computation of diluted earnings per share because their
effect is anti-dilutive.
Stock-Based Compensation. The Company has adopted Statement of
Financial Accounting Standards No. 123 ("FAS 123"), Accounting for
Stock-Based Compensation, for disclosure purposes. Under FAS 123, the
Company measures compensation expense for its stock-based employee
compensation plan using the intrinsic value method prescribed in APB No.
25, Accounting for Stock Issued to Employees, and provides disclosure of
the effect of net income as if the fair value-based method prescribed in
FAS 123 has been applied in measuring compensation expense.
Fair Values of Financial Instruments. Due to the short-term nature of
the Company's financial instruments, as well as their interest rates and
terms, management believes the carrying value of the Company's assets and
liabilities approximates their fair values.
Use of Estimates. The preparation of the Company's financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, as well as
disclosures of contingent assets and liabilities. Because of inherent
uncertainties in this process, actual future results could differ from
those expected at the reporting date. Management believes the estimates are
reasonable.
New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, and No. 131, Disclosures about Segments of
an Enterprise and Related Information. In February 1998, the Board issued
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits. The Company will adopt these statements in 1998. The Company does
not expect their adoption to have a material effect on the Company's
financial position or results of operations.
F-8
<PAGE> 130
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. PRODIGY TRANSACTIONS
On June 24, 1997, the Company entered a four-year Full Service Agreement
with Prodigy, in which the Company agreed to provide certain network services to
Prodigy from July 1, 1997 through June 30, 2001 for a price per hour of usage as
stipulated, subject to minimum and maximum amounts. Monthly minimum service
commitments set each year under this four-year contract range from $3,000 to
$4,500. Monthly maximum service commitments are based on average usage per
subscriber and the number of subscribers. Prodigy may terminate the Full Service
Agreement without payment in an event of default by the Company; such defaults
include documented failures (without cure) to meet certain network performance
standards. The Company is subject to several financial covenants through June
30, 1999 under this agreement, including the maintenance of at least $5,000 in
net tangible worth. The agreement also allows Prodigy to terminate its
arrangement with the Company at any time upon the payment of a termination
charge.
Also on June 24, 1997, the Company entered into a Definitive Agreement with
Prodigy pursuant to which the Company acquired selected data transmission
equipment from Prodigy. In consideration for the equipment, the Company assumed
approximately $5,900 in equipment lease obligations and other liabilities.
The Company also entered into an agreement with Prodigy in which Prodigy
agreed to provide certain network infrastructure support for the Company for the
period July 1, 1997 through December 31, 1997. The Company incurred expenses of
$25,804 (which includes $463 of severance costs) under this agreement during
1997, of which $5,194 remained payable to Prodigy at December 31, 1997. These
services included the services of selected Prodigy employees and services
provided under vendor arrangements related to the Prodigy network
infrastructure. The costs of these services and other reasonable and customary
charges incurred by Prodigy in connection with the continued operations of the
network during this transition period are reimbursable by the Company. The
Company assumed no contractual liabilities of any services related to Prodigy's
existing network infrastructure as part of the transition agreement.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Network equipment........................................... $ 3,464
Office and other equipment.................................. 94
Network equipment under construction........................ 12,248
-------
15,806
Less -- accumulated depreciation............................ (103)
-------
Purchased property and equipment, net............. 15,703
-------
Leased network equipment.................................... 13,648
Leased office and other equipment........................... 388
Leased network equipment under construction................. 12,162
-------
26,198
Less -- accumulated amortization............................ (3,397)
-------
Leased property and equipment, net................ 22,801
-------
Property and equipment, net................................. $38,504
=======
</TABLE>
F-9
<PAGE> 131
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INDEBTEDNESS
The components of indebtedness are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Capital lease obligations................................... $ 24,120
Note payable to stockholder................................. 1,000
--------
25,120
Less -- current maturities.................................. (11,010)
--------
$ 14,110
========
</TABLE>
Capital leases require payments on a monthly basis over periods ranging
from 24 to 48 months, with implicit interest rates of 9% to 12%.
In December 1997, the Company borrowed $1,000 from a stockholder. The
unsecured note has a stated rate of interest of 9.75% and provides for monthly
interest payments beginning February 1, 1998, with the principal due on demand
after December 31, 1998, and maturing December 31, 2002.
5. INCOME TAXES
A provision for income taxes for the period ended December 31, 1997 has not
been recognized as the Company had operating losses for both tax and financial
reporting purposes. Due to the uncertainty surrounding the timing of realizing
the benefits of its favorable tax attributes in future tax returns, the Company
has recorded a full valuation allowance against its otherwise recognizable net
deferred tax asset.
Deferred tax assets at December 31, 1997 consist of the following:
<TABLE>
<S> <C>
Net operating loss carryforward............................. $ 3,248
Depreciation................................................ 167
Other....................................................... 21
-------
Gross deferred tax assets......................... 3,436
Valuation allowance......................................... (3,436)
-------
Net deferred tax assets........................... $ --
=======
</TABLE>
The Company's net operating loss carryforward of approximately $9,500
expires in 2012. Certain changes in ownership of the Company could result in
limitations on the Company's ability to utilize the losses.
6. COMMITMENTS AND CONTINGENCIES
The Company leases office space, equipment facilities and equipment under
noncancelable operating and capital leases expiring through the year 2002. Rent
expense for noncancelable operating leases amounted to $218 in 1997.
The Company leases telephone lines ("line costs") from competitive local
exchange suppliers, interchange carriers and long distance telephone companies
primarily for access and transport purposes. These line costs are leased under
both cancelable and noncancelable operating leases over periods up to three
years and are included in Legacy Network costs on the statement of operations.
Certain cancellation charges could become applicable upon termination of a
number of these agreements. Line costs incurred during the period from inception
(March 5, 1997) to December 31, 1997 comprise a substantial portion of the
Legacy Network costs.
F-10
<PAGE> 132
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments by year and in the aggregate related to
noncancelable operating and capital leases at December 31, 1997 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- -------
<S> <C> <C> <C>
1998.................................................... $12,049 $ 457 $12,506
1999.................................................... 7,893 553 8,446
2000.................................................... 5,548 553 6,101
2001.................................................... 427 565 992
2002.................................................... -- 578 578
------- ------ -------
Total minimum lease payments.................. 25,917 $2,706 $28,623
======= ====== =======
Less amount representing interest..................... (1,797)
-------
Present value of minimum capital lease payments......... $24,120
=======
</TABLE>
The Company has an agreement to purchase certain network equipment from the
Vendor (Note 9) over an eighteen-month period ending December 31, 1998. Total
commitments remaining under the agreement approximated $9,045 at December 31,
1997.
The Company has an outstanding letter of credit in the amount of $3,472 as
of December 31, 1997. This letter of credit is maintained as security for
performance under a certain capital lease obligation. This letter of credit is
secured by the restricted cash equivalent shown on the balance sheet.
As of December 31, 1997, the Company has an agreement with a
telecommunications company to pay a minimum of $1,266 for network installation
services over a period ending June 30, 1998. Total commitments remaining under
this agreement approximated $1,160 at December 31, 1997.
7. COMMON STOCK EXCHANGE
The Company effected a 1-for-100 stock exchange on June 3, 1997 and a
1-for-10 stock exchange on August 8, 1997. All share amounts included in these
financial statements have been adjusted to reflect the effect of the stock
exchanges.
8. STOCK OPTIONS
The Company's 1997 Incentive Share Plan (the Plan) provides that options to
purchase up to 20,000,000 shares of common stock may be granted to certain
directors, employees or consultants of the Company. Options under the Plan have
a term of ten years and are granted with an exercise price equivalent to market
value at the date of grant. Individual option grants vest over time, based upon
a schedule approved by the Board of Directors, which is generally four years.
All of the Company's common stock options vest automatically upon a change in
control of the Company, as defined.
The following summarizes the activity for the Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Balance, March 5, 1997...................................... -- --
Granted................................................... 1,880,000 $0.625
Exercised................................................. -- --
Canceled.................................................. -- --
--------- ------
Balance, December 31, 1997.................................. 1,880,000 $0.625
</TABLE>
F-11
<PAGE> 133
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT REMAINING AVERAGE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
-------- ------------ ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.625...................... 1,880,000 9.58 years $0.625 257,000 $0.625
</TABLE>
The Company has adopted the disclosure-only provisions of FAS No. 123.
Accordingly, no compensation cost has been recognized for fixed options granted
to Company employees. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date for awards in 1997
consistent with the provisions of SFAS No. 123, the Company's pro forma net loss
would have been as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net loss................................................ $(10,141)
</TABLE>
Options granted in 1997 had weighted-average fair values of $0.077. The
Company used the minimum value method to estimate the fair values of options for
the above pro forma information. For purposes of the minimum value method, the
Company used average U.S. government security interest rates for its risk-free
interest rates, assumed no volatility or future dividends and assumed expected
life of the options of five years in 1997.
9. RELATED PARTY TRANSACTIONS
The Company's chairman of the Board of Directors (the Chairman), who is
also a shareholder of the Company, is the Chief Technical Officer and assistant
vice chairman and stockholder of a vendor (the Vendor) from which the Company
purchased approximately $16,500 in equipment through December 31, 1997.
Remaining commitments pursuant to a purchase agreement with the vendor
approximate $9,045 at December 31, 1997.
The Company also retained the Vendor to perform assembly services related
to the deployment of network equipment to the field. The Company incurred
approximately $1,500 for these services of which approximately $990 were
expensed in 1997.
A stockholder (an affiliate of the Chairman) has agreed to lend up to
$10,000 to the Company for the purchase of certain network equipment. As of
December 31, 1997, this affiliate had loaned $1,000 to the Company. During the
three months ended March 31, 1998 the affiliate made further advances under this
agreement (Note 10).
In September 1997, a wholly-owned subsidiary of a major stockholder of
Prodigy, the Company's sole customer, purchased 20,000,000 shares of the Company
for $0.625 per share and paid $0.1 for a warrant to purchase an additional
5,000,000 shares of the Company through September 18, 1998 for $0.625 per share.
F-12
<PAGE> 134
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS
In March, 1998, the Company exercised its early purchase option under a
capital lease arrangement with AT&T Capital Corporation. The Company paid $3,455
to liquidate the obligation. Accordingly, the obligation is classified as
current indebtedness as of December 31, 1997.
In January 1998, the Company borrowed $3,000 from a stockholder. The note
has a stated rate of interest of 9.75% and provides for monthly interest
payments beginning March 1, 1998, with the principal due on demand after
December 31, 1998. The note matures on December 31, 2002. The Company borrowed
$2,000 from the same stockholder in March 1998 on terms substantially the same
as the previous note.
F-13
<PAGE> 135
SPLITROCK SERVICES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 7,710 $ 3,349
Restricted cash equivalent................................ 3,472 --
Accounts receivable....................................... 4,252 6,608
Prepaids and other current assets......................... 221 312
-------- --------
Total current assets.............................. 15,655 10,269
Property and equipment, net................................. 38,504 40,506
Other assets................................................ 229 320
-------- --------
$ 54,388 $ 51,095
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital leases...................... $ 11,010 $ 8,452
Accounts payable.......................................... 3,086 1,551
Accrued liabilities....................................... 5,775 5,761
-------- --------
Total current liabilities......................... 19,871 15,764
Capital lease obligations................................... 13,110 12,622
Notes payable to stockholder................................ 1,000 6,000
-------- --------
Total liabilities................................. 33,981 34,386
-------- --------
Stockholders' equity:
Common stock.............................................. 77 77
Additional paid-in capital................................ 30,451 30,451
Accumulated deficit....................................... (10,121) (13,819)
-------- --------
Total stockholders' equity........................ 20,407 16,709
-------- --------
Commitments and contingencies............................... -- --
-------- --------
$ 54,388 $ 51,095
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
F-14
<PAGE> 136
SPLITROCK SERVICES, INC.
CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
Revenue..................................................... $16,494
Operating Expenses:
Network personnel costs................................... 1,051
Network operating costs................................... 3,127
Legacy Network costs...................................... 12,295
Selling, general and administrative....................... 657
Depreciation and amortization............................. 2,820
-------
Total operating expenses.......................... 19,950
-------
Loss from operations........................................ (3,456)
Other income (expense):
Interest income........................................... 107
Interest expense.......................................... (349)
-------
Loss before income taxes.................................... (3,698)
-------
Provision for income taxes.................................. --
-------
Net loss.......................................... $(3,698)
=======
Loss per share -- basic and diluted......................... $ 0.05
=======
Weighted average shares -- basic and diluted................ 76,800
=======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
F-15
<PAGE> 137
SPLITROCK SERVICES, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
PAR PAID-IN STOCK ACCUMULATED
SHARES VALUE CAPITAL WARRANTS DEFICIT TOTAL
------ ----- ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997......... 76,800 $77 $30,451 -- $(10,121) $20,407
Net loss............................. -- -- -- -- (3,698) (3,698)
------ --- ------- -- -------- -------
Balance at March 31, 1998............ 76,800 $77 $30,451 -- $(13,819) $16,709
====== === ======= == ======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
F-16
<PAGE> 138
SPLITROCK SERVICES, INC.
CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
Operating activities:
Net loss.................................................. $(3,698)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 2,820
Changes in operating assets and liabilities:
Accounts receivable.................................... (2,356)
Prepaids and other current assets...................... (91)
Accounts payable....................................... (1,535)
Accrued liabilities.................................... (14)
-------
Net cash used by operating activities............. (4,874)
-------
Investing activities:
Purchase of property and equipment........................ (2,649)
Increase in other assets.................................. (91)
-------
Net cash used by investing activities............. (2,740)
-------
Financing activities:
Release of restriction on cash under credit agreement..... 3,472
Principal payments on capital leases...................... (5,219)
Borrowings under notes payable to stockholder............. 5,000
-------
Net cash provided by financing activities......... 3,253
-------
Net decrease in cash........................................ (4,361)
Cash and equivalents at beginning of period................. 7,710
-------
Cash and equivalents at end of period....................... $ 3,349
=======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
F-17
<PAGE> 139
SPLITROCK SERVICES, INC.
NOTES TO CONDENSED FINANCIAL INFORMATION
THREE MONTHS ENDED MARCH 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed balance sheet of Splitrock Services, Inc. (the Company) as of
December 31, 1997 and March 31, 1998, the condensed statements of operations for
the three months ended March 31, 1998, the condensed statement of stockholders'
equity for the three months ended March 31, 1998 and the condensed statements of
cash flows for the three months ended March 31, 1998 are unaudited. They do not
include all information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, such
financial statements include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of financial position,
results of operations, and cash flows for the periods presented.
Condensed financial statements for the period from Inception (March 5,
1997) through March 31, 1997 are not included for comparative purposes as the
balances were insignificant and the related statements are not considered
meaningful.
The condensed balance sheet at December 31, 1997 was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. The financial statements presented herein should
be read in connection with the Company's financial statements as of December 31,
1997 and for the period from Inception (March 5, 1997) to December 31, 1997.
2. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company was incorporated in Texas on March 5, 1997 and reincorporated
in Delaware on May 8, 1998.
The Company was formed to build a nationwide, facilities-based
telecommunications network with the goal of providing telecommunications
services on an advanced nationwide network. The Company has designed and is in
the process of deploying a network based on Asychronous Transfer Mode (ATM)
technology which it believes will provide high quality communications services
on a flexible multi-service platform.
During 1997, the Company launched a major network rebuilding program based
on ATM technology. This program was organized in two phases. As of March 31,
1998, the Company was in Phase I of the network build which encompassed the
buildout of the nationwide ATM backbone and operational points of presence in 70
metropolitan areas.
In addition to the development of a new telecommunications network and
implementing Phase I, the Company has been engaged in recruiting management and
operational personnel and structuring financing for the Company's operations.
Upon completion of the network build, the Company will offer basic
transport services to other internet service providers and will be positioned to
provide other value-added data, voice and video products to business customers.
Revenue Recognition. The Company recognizes revenue as services are
provided under its agreement with its customer. Prodigy was the Company's only
customer through March 31, 1998. Prodigy may terminate its agreement with the
Company without payment in the event of certain defaults by the Company,
including documented failures (without cure) to meet certain network performance
standards.
Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization of new property and equipment, including assets
under capital leases, is provided upon installation using the
F-18
<PAGE> 140
SPLITROCK SERVICES, INC.
NOTES TO CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
straight-line method over their estimated useful lives of three to five years.
Previously used equipment is depreciated over its estimated useful life of nine
months to three years.
Net Loss Per Share. In February 1997, Financial Accounting Standard No. 128
("FAS 128") Earnings Per Share was issued. FAS 128 is effective for both interim
and annual periods ending after December 15, 1997. The Company adopted the
pronouncement for the period ended December 31, 1997. FAS 128 requires the
Company to report both basic earnings per share, which is based on the weighted
average number of common shares outstanding, and diluted earnings per share,
which is based on the weighted average number of common shares outstanding and
all dilutive potential common shares outstanding. At March 31, 1998, options to
acquire 2,095,500 shares of common stock at the exercise price of $0.625 and
warrants to purchase 5,000,000 shares of common stock at $0.625 were not
included in the computation of diluted earnings per share because the Company
recorded a loss from operations and a net loss, which would have resulted in
anti-dilution.
Comprehensive Income. Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income. This Statement establishes standards for reporting and display of
comprehensive income and its components. For the three-month period ended March
31, 1998 comprehensive net loss, as determined under Statement No. 130, was the
same as net loss as reported in the Statement of Operations.
New Accounting Pronouncement. On June 15, 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 (January 1, 2000 for the Company). FAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Management of the Company anticipates that, due to its expected
limited or no use of derivative instruments, the adoption of FAS 133 will not
have a significant effect on the Company's results of operations or its
financial position.
3. INDEBTEDNESS
Components of indebtedness are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Capital lease obligations................................... $ 24,120 $21,074
Notes payable to stockholder................................ 1,000 6,000
-------- -------
25,120 27,074
Less -- current maturities.................................. (11,010) (8,452)
-------- -------
$ 14,110 $18,622
======== =======
</TABLE>
In January 1998, the Company borrowed $3,000 from a stockholder. The note
has a stated rate of interest of 9.75% and provides for monthly interest
payments beginning March 1, 1998, with the principal due on demand after
December 31, 1998. The note matures on December 31, 2002. The Company borrowed
$2,000 from the same stockholder in March 1998 on terms substantially the same
as the previous note.
F-19
<PAGE> 141
SPLITROCK SERVICES, INC.
NOTES TO CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
In March 1998, the Company exercised its early purchase option under a
capital lease arrangement with AT&T Capital Corporation. The Company paid $3,455
to liquidate the obligation.
4. INCOME TAXES
A provision for income taxes for the three months ended March 31, 1998 has
not been recognized as the Company had operating losses for both tax and
financial reporting purposes. Certain changes in the ownership of the Company
could result in limitations on the Company's ability to utilize the losses.
5. SUBSEQUENT EVENTS
In April 1998, the Company entered into an agreement with a
telecommunications equipment supplier to obtain equipment and services for the
deployment of 99 points of presence. The Company obtained a $5,000 credit
facility from the same company (the Lender) to be used solely for the purchase
of such equipment and services. Borrowings on the credit facility bear an annual
rate of interest at 11%, with interest payable monthly, commencing on June 1,
1998. All principal and accrued interest is due the earlier of (i) the date the
Company sells any of its equity securities or debt instruments (other than
issuances to officers, directors, employees or consultants in the ordinary
course of business) and the net proceeds to the Company are in an aggregate
amount equal to or greater than the then outstanding principal amount of the
credit facility or (ii) October 30, 1998. The Lender may extend the maturity to
April 1, 2001 subject to the issuance of a transferable, noncallable stock
purchase warrant giving the Lender the right to purchase 1,111,000 shares of the
Company's common stock at an exercise price based upon the lower of $1.00 per
share or the lowest price at which shares of common stock are issued during the
period from the date the warrants are issued to the date the warrants expire
(eight years following issuance). Upon extension, the credit facility will have
a stated rate of interest of LIBOR plus 5.75% and a default rate of interest on
all amounts not paid when due of an additional 2%. The extended facility
provides for monthly interest payments through January 2, 1999, with the
principal due in ten equal consecutive quarterly installments commencing on
January 2, 1999.
A director of the Company exercised an option to purchase one million
shares of Company common stock for $1,100 in June 1998.
In June 1998, the Company borrowed $5,000 from a stockholder. The note
bears substantially the same terms as the previous stockholder notes.
On July 21, 1998, the Company sold 261,000 Units consisting of $261,000
principal amount of 11 3/4% Senior Notes due 2008 and Warrants to purchase
2,642,613 shares of common stock (the Offering). In connection with the
Offering, the Company repaid the amount outstanding, approximately $1,500, under
the $5,000 credit facility discussed above and refinanced $11,000 of
indebtedness owed to a stockholder. In connection with the refinancing, the
stockholder purchased 11,000 Units in the Offering. The net proceeds to the
Company, after expenses, approximated $239,000.
F-20
<PAGE> 142
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS OFFERING MEMORANDUM, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS OFFERING MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS OFFERING MEMORANDUM NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary...............................
Risk Factors..........................
Use of Proceeds.......................
Capitalization........................
The Exchange Offer....................
Selected Historical and Unaudited Pro
Forma Financial Data................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Industry Overview.....................
Business..............................
Management............................
Principal Stockholders................
Description of Certain Indebtedness...
Description of Capital Stock..........
Description of the Notes..............
Description of the Warrants...........
Certain Federal Income Tax
Considerations......................
Plan of Distribution..................
Legal Matters.........................
Independent Accountants...............
Glossary..............................
Index to Financial Statements......... F-1
</TABLE>
---------------------
UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
(SPLITROCK LOGO)
$250,000,000
SPLITROCK SERVICES, INC.
OFFER TO EXCHANGE
11 3/4% SERIES B SENIOR NOTES DUE 2008
FOR OUTSTANDING 11 3/4% SENIOR NOTES
DUE 2008
-----------------
PROSPECTUS
-----------------
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 143
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Splitrock is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware ("Section 145")
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or enterprise, including an
employee benefit plan. The indemnity may include expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided that such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
that his conduct was unlawful, except that no indemnification shall be made in
connection with any action or suit by or in the right of the corporation to
procure a judgment in its favor in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
that such court deems proper. The termination of any action, suit, or proceeding
by judgment, order, settlement, conviction or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
Section 145 also provides that to the extent that a director, officer,
employee or agent of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to above, or in
defense of any claim, issue or matter therein, the corporation must indemnify
him against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Section 145 further provides that any indemnification (unless ordered by a
court) must be made only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth above. Section 145 also provides that expenses (including attorneys' fees)
incurred by an officer or director in defending or settling any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation 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 is ultimately determined that he is not
entitled to be indemnified by the corporation. Additionally, Section 145
provides that the indemnification and advancement of expenses provided by, or
granted pursuant to, Section 145 shall not exclude any other rights to which a
person seeking indemnification or advancement of expenses may be entitled under
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
Article IX of Splitrock's Certificate of Incorporation requires Splitrock
to indemnify Splitrock's directors and officers to the extent permitted under
Section 145.
Article VII of Splitrock's Bylaws also provides that Splitrock shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action, suit, or proceeding whether
civil, criminal, administrative, or investigative, by reason of the fact that he
is or was a director or officer of Splitrock, or is or was serving at the
request of Splitrock as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or other enterprise, in
accordance with provisions corresponding to Section 145. Further, Splitrock's
Bylaws provide that any person, other than an officer or director, who was or is
a party or is threatened to be made a party to any threatened, pending, or
completed
II-1
<PAGE> 144
action, suit or proceeding, whether civil, criminal, administrative, or
investigative, by reason of the fact that he is or was an employee or agent of
Splitrock, or was serving at the request of Splitrock as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust, or
other enterprise, and who desires indemnification shall make written application
for such indemnification to the Board of Directors for its determination that
indemnification is appropriate, and if so, to what extent.
Section 145 further provides that a corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the authority to indemnify him
against such liability and expenses under the provisions described in the
preceding paragraphs. Splitrock maintains liability insurance covering its
directors and officers.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
permits a Delaware corporation to include a provision in its Certificate of
Incorporation eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the General Corporation Law of the State of
Delaware (providing for liability of directors for unlawful payment of dividends
or unlawful stock purchases or redemptions), or (iv) for any transaction from
which the director derived an improper personal benefit. Article VIII of
Splitrock's Certificate of Incorporation eliminates liability of directors of
Splitrock to Splitrock or its shareholders for monetary damages for breach of
fiduciary duty to the extent permitted by Section 102(b)(7) of the General
Corporation Law of the State of Delaware.
The foregoing discussion is qualified in its entirety by reference to the
General Corporation Law of the State of Delaware and Splitrock's Certificate of
Incorporation and Bylaws.
Splitrock's Bylaws also provide that Splitrock may indemnify, to the extent
of the provisions set forth therein, any person other than an officer or
director who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was an employee or agent of Splitrock, or was serving at the request of
Splitrock as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, if such person makes
written application for such indemnification to the Splitrock Board and the
Splitrock Board determines that indemnification is appropriate and the extent
thereof.
Splitrock's Bylaws further provide that the indemnification described
therein is not exclusive, and shall not exclude any other rights to which the
person seeking to be indemnified may be entitled under statute, any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, both
as to action in his official capacity and to his action in another capacity
while holding such office.
The above discussion of Section 145 and of Splitrock's Certificate of
Incorporation and Bylaws is not intended to be exhaustive and is respectively
qualified in its entirety by such statute, the Certificate of Incorporation and
the By-laws.
II-2
<PAGE> 145
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1.1 -- Purchase Agreement dated July 21, 1998 between the
Company and Chase Securities Inc.
2.1 -- Plan of Merger effective May 8, 1998 between the Company
and Splitrock Services, Inc., a Texas corporation.
3.1 -- Certificate of Incorporation of the Company filed with
the Secretary of State of the State of Delaware on April
15, 1998.
3.2 -- Bylaws of the Company, adopted April 27, 1998.
4.1 -- Specimen 11 3/4% Senior Note due 2008.
4.2 -- Specimen 11 3/4% Series B Senior Note due 2008 (to be
filed by amendment).
4.3 -- Escrow and Disbursement Agreement dated as of July 24,
1998, among The Chase Manhattan Bank (as escrow agent),
Bank of Montreal Trust Company, and the Company.
4.4 -- Indenture dated as of July 24, 1998, between Bank of
Montreal Trust Company (as trustee) and the Company,
including table of contents and cross-reference sheet.
4.5 -- Exchange and Registration Rights Agreement dated as of
July 24, 1998 between Chase Securities Inc. and the
Company.
5 -- Opinion of Winstead Sechrest & Minick P.C.
10.1 -- Splitrock Full Service Agreement dated as of June 24,
1997 between the Company and Prodigy Services
Corporation.
10.2 -- Definitive Agreement dated as of June 24, 1997 by and
between Prodigy Services Corporation and the Company.
10.3 -- Transition Services Agreement dated as of June 24, 1997
between Prodigy Services Corporation and the Company.
10.4 -- Network Implementation Agreement effective as of April
23, 1998 by and between the Company and Ericsson, Inc.
10.5 -- Security Agreement dated as of April 30, 1998 by and
between the Company and Ericsson.
10.6 -- Yurie Equipment Purchase Agreement effective July 1, 1997
between the Company and Yurie.
10.7 -- Customer Service Agreement effective April 1, 1998
between the Company and IBM Global Services Network.
10.8 -- IBM Customer Agreement effective April 1, 1998 between
the Company and International Business Machines
Corporation
10.9 -- Product Support Services Agreement dated February 27,
1998, together with Addendum effective March 1, 1998
10.10 -- Option Agreement dated May 28, 1998 between the Company
and Clark McLeod.
10.11 -- Form of Notes between the Company and Linsang.
10.12 -- Warrant Agreement dated as of July 24, 1998 between the
Company and Bank of Montreal Trust Company, as Warrant
Agent.
10.13 -- 1997 Incentive Share Plan.
10.14 -- Employment Agreement effective September 1, 1997 between
William R. Wilson and the Company (to be filed by
amendment).
</TABLE>
II-3
<PAGE> 146
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.15 -- Employment Agreement effective September 1, 1997 between
Patrick J. McGettigan, Jr. and the Company.
10.16 -- Option to subscribe to purchase 5,000,000 shares of
common stock of the Company for $3.1 million, registered
in the name of Orient Star.
12 -- Statement re computation of ratios.
23.1 -- Consent of Winstead Sechrest & Minick P.C. (set forth in
Exhibit 5).
23.2 -- Consent of PricewaterhouseCoopers LLP.
24 -- Powers of Attorney(3).
25 -- Statement of Eligibility of Bank of Montreal Trust
Company.
27 -- Financial Data Schedule
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Letter to Brokers.
99.4 -- Form of Letter to Clients.
99.5 -- Instructions to Registered Holder and/or Book Entry
Transfer Participant from Beneficial Owner.
99.6 -- Guidelines for Certificate of Taxpayer Identification
Number on Substitute Form W-9.
</TABLE>
(b) Financial Statement Schedules attached as Exhibit 27.
ITEM 22. UNDERTAKINGS
(i) The undersigned registrant hereby undertakes that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form. Every prospectus (i) that is filed in accordance with the
undertaking above or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining liability under the Securities Act, 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.
(ii) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(iii) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(iv) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described in Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
II-4
<PAGE> 147
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE> 148
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of The
Woodlands, the State of Texas, on August 12, 1998.
SPLITROCK SERVICES, INC.
By: /s/ WILLIAM R. WILSON
----------------------------------
William R. Wilson
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM R. WILSON President, Chief Executive August 12, 1998
- ----------------------------------------------------- Officer and Director
(William R. Wilson) (Principal Executive Officer)
/s/ JAMES D. LONG Senior Vice President, Chief August 12, 1998
- ----------------------------------------------------- Financial Officer and
(James D. Long) Director (Principal
Accounting Officer)
/s/ KWOK L. LI Chairman of the Board, Director August 12, 1998
- -----------------------------------------------------
(Kwok L. Li)
/s/ CLARK MCLEOD Director August 12, 1998
- -----------------------------------------------------
(Clark McLeod)
/s/ SAMER SALAMEH Director August 11, 1998
- -----------------------------------------------------
(Samer Salameh)
/s/ ROY A. WILKENS Director August 12, 1998
- -----------------------------------------------------
(Roy A. Wilkens)
</TABLE>
II-6
<PAGE> 149
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1.1 -- Purchase Agreement dated July 21, 1998 between the
Company and Chase Securities Inc.
2.1 -- Plan of Merger effective May 8, 1998 between the Company
and Splitrock Services, Inc., a Texas corporation.
3.1 -- Certificate of Incorporation of the Company filed with
the Secretary of State of the State of Delaware on April
15, 1998.
3.2 -- Bylaws of the Company, adopted April 27, 1998.
4.1 -- Specimen 11 3/4% Senior Note due 2008.
4.2 -- Specimen 11 3/4% Series B Senior Note due 2008 (to be
filed by amendment).
4.3 -- Escrow and Disbursement Agreement dated as of July 24,
1998, among The Chase Manhattan Bank (as escrow agent),
Bank of Montreal Trust Company, and the Company.
4.4 -- Indenture dated as of July 24, 1998, between Bank of
Montreal Trust Company (as trustee) and the Company,
including table of contents and cross-reference sheet.
4.5 -- Exchange and Registration Rights Agreement dated as of
July 24, 1998 between Chase Securities Inc. and the
Company.
5 -- Opinion of Winstead Sechrest & Minick P.C.
10.1 -- Splitrock Full Service Agreement dated as of June 24,
1997 between the Company and Prodigy Services
Corporation.
10.2 -- Definitive Agreement dated as of June 24, 1997 by and
between Prodigy Services Corporation and the Company.
10.3 -- Transition Services Agreement dated as of June 24, 1997
between Prodigy Services Corporation and the Company.
10.4 -- Network Implementation Agreement effective as of April
23, 1998 by and between the Company and Ericsson, Inc.
10.5 -- Security Agreement dated as of April 30, 1998 by and
between the Company and Ericsson.
10.6 -- Yurie Equipment Purchase Agreement effective July 1, 1997
between the Company and Yurie.
10.7 -- Customer Service Agreement effective April 1, 1998
between the Company and IBM Global Services Network.
10.8 -- IBM Customer Agreement effective April 1, 1998 between
the Company and International Business Machines
Corporation
10.9 -- Product Support Services Agreement dated February 27,
1998, together with Addendum effective March 1, 1998
10.10 -- Option Agreement between dated June , 1998 the Company
and Clark McLeod.
10.11 -- Form of Notes between the Company and Linsang.
10.12 -- Warrant Agreement dated as of July 24, 1998 between the
Company and Bank of Montreal Trust Company, as Warrant
Agent.
10.13 -- 1997 Incentive Share Plan.
10.14 -- Employment Agreement effective September 1, 1997 between
William R. Wilson and the Company (to be filed by
amendment).
10.15 -- Employment Agreement effective September 1, 1997 between
Patrick J. McGettigan, Jr. and the Company.
</TABLE>
<PAGE> 150
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.16 -- Warrant to purchase 5,000,000 shares of common stock of
the Company for $3.1 million, registered in the name of
Orient Star.
12 -- Statement re computation of ratios.
23.1 -- Consent of Winstead Sechrest & Minick P.C. (set forth in
Exhibit 5).
23.2 -- Consent of PricewaterhouseCoopers LLP.
24 -- Powers of Attorney (3).
25 -- Statement of Eligibility of Bank of Montreal Trust
Company.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Letter to Brokers.
99.4 -- Form of Letter to Clients.
99.5 -- Instructions to Registered Holder and/or Book Entry
Transfer Participant from Beneficial Owner.
99.6 -- Guidelines for Certificate of Taxpayer Identification
Number on Substitute Form W-9.
</TABLE>
<PAGE> 1
EXHIBIT 1.1
SPLITROCK SERVICES, INC.
261,000 Units Consisting of $261,000,000 Principal Amount of
11 3/4% Senior Notes due 2008 and Warrants
to Purchase 2,642,613 Shares of Common Stock
PURCHASE AGREEMENT
July 21, 1998
CHASE SECURITIES INC.
270 Park Avenue, 4th floor
New York, New York 10017
Ladies and Gentlemen:
Splitrock Services, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell 261,000 units (the "Units"), each Unit
consisting of $1,000 principal amount of the Company's 11 3/4% Senior Notes due
2008 (the "Notes") and one warrant (a "Warrant") to purchase 10.124954 shares
of common stock, par value $.001 per share ("Common Stock"), of the Company.
The Notes will be issued pursuant to an Indenture to be dated as of July 24,
1998 (the "Indenture") between the Company and the Bank of Montreal Trust
Company, as trustee (the "Trustee") and will be guaranteed on a senior,
unsecured basis by each of the Company's future Restricted Subsidiaries (as
defined in the Indenture) that incurs indebtedness (the "Subsidiary
Guarantors"). The Warrants will be issued pursuant to a warrant agreement (the
"Warrant Agreement") between the Company and the Bank of Montreal Trust
Company, as Warrant Agent (the "Warrant Agent"). The Units, the Notes and the
Warrants are collectively referred to herein as the "Securities". The Company
hereby confirms its agreement with Chase Securities Inc. ("CSI" or the "Initial
Purchaser") concerning the purchase of the Units from the Company by the
Initial Purchaser.
The Securities will be offered and sold to the Initial
Purchaser without being registered under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance upon an exemption therefrom. The Company
has prepared a preliminary offering memorandum dated June 29, 1998 (the
"Preliminary Offering Memorandum") and will prepare an offering memorandum
dated the date hereof (the "Offering Memorandum") setting forth information
concerning the Company and the Securities. Copies of the Preliminary Offering
Memorandum have been, and copies of the Offering Memorandum will be, delivered
by the Company to the Initial Purchaser pursuant to the terms of this
Agreement. Any references herein to the Preliminary Offering Memorandum and
the Offering Memorandum shall be deemed to include all amendments and
supplements thereto, unless otherwise noted. The Company hereby confirms that
it has authorized the use of the Preliminary Offering Memorandum and the
Offering Memorandum in connection with the offering and resale of the
Securities by the Initial Purchaser in accordance with Section 2.
Holders of the Notes (including the Initial Purchaser and its
direct and indirect transferees) will be entitled to the benefits of an
Exchange and Registration Rights
<PAGE> 2
2
Agreement, substantially in the form attached hereto as Annex A (the
"Registration Rights Agreement"), pursuant to which the Company will agree to
file with the Securities and Exchange Commission (the "Commission") (i) a
registration statement under the Securities Act (the "Exchange Offer
Registration Statement") registering an issue of senior notes of the Company
(the "Exchange Notes") which are identical in all material respects to the
Notes (except that the Exchange Notes will not contain terms with respect to
transfer restrictions) and (ii) under certain circumstances, a shelf
registration statement pursuant to Rule 415 under the Securities Act (the
"Shelf Registration Statement").
Holders of the Warrants will be entitled to the benefit of
certain registration rights under the Warrant Agreement pursuant to which the
Company will agree to file with the Commission (i) a shelf registration
statement (the "Warrant Shelf Registration Statement") under the Securities Act
covering the resale of the Warrants and (ii) a shelf registration statement
under the Securities Act covering the issuance of shares of Common Stock to
Holders of the Warrants upon their exercise.
Pursuant to an escrow and disbursement agreement (the "Escrow
Agreement") the Company will deposit with The Chase Manhattan Bank, as escrow
agent (the "Escrow Agent"), an amount in cash or Temporary Cash Investments
that, together with the interest received thereon, will be sufficient to pay
when due the first four semi-annual interest payments on the Notes.
Capitalized terms used but not defined herein shall have the
meanings given to such terms in the Offering Memorandum.
1. Representations, Warranties and Agreements of the Company.
The Company represents and warrants to, and agrees with, the Initial Purchaser
on and as of the date hereof and the Closing Date (as defined in Section 3)
that:
(a) Each of the Preliminary Offering Memorandum and the
Offering Memorandum, as of its respective date, did not, and on the
Closing Date the Offering Memorandum will not, contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided that the Company makes no representation or
warranty as to information contained in or omitted from the
Preliminary Offering Memorandum or the Offering Memorandum in reliance
upon and in conformity with written information relating to the
Initial Purchaser furnished to the Company by or on behalf of the
Initial Purchaser specifically for use therein (the "Initial
Purchaser's Information").
(b) Each of the Preliminary Offering Memorandum and the
Offering Memorandum, as of its respective date, contains all of the
information that, if requested by a prospective purchaser of the
Securities, would be required to be provided to such prospective
purchaser pursuant to Rule 144A(d)(4) under the Securities Act.
(c) Assuming the accuracy of the representations and
warranties of the Initial Purchaser contained in Section 2 and its
compliance with the agreements set forth therein, it is not necessary,
in connection with the issuance and sale of the Securities to the
Initial Purchaser and the offer, resale and delivery of the Securities
by the
<PAGE> 3
3
Initial Purchaser in the manner contemplated by this Agreement and the
Offering Memorandum, to register the Securities under the Securities
Act or to qualify the Indenture under the Trust Indenture Act of 1939,
as amended (the "Trust Indenture Act").
(d) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Delaware,
is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which its ownership or lease of
property or the conduct of its business requires such qualification,
and has all power and authority necessary to own or hold its
properties and to conduct the business in which it is engaged, except
where the failure to so qualify or have such power or authority would
not, singularly or in the aggregate, have a material adverse effect on
the condition (financial or otherwise), results of operations,
business or prospects of the Company (a "Material Adverse Effect").
(e) As of the Closing Date, the Company will have an
authorized capitalization as set forth in the Offering Memorandum
under the heading "Capitalization"; all of the outstanding shares of
capital stock of the Company have been duly and validly authorized and
issued and are fully paid and non-assessable; the capital stock of the
Company conforms in all material respects to the description thereof
contained in the Offering Memorandum; when the Units are delivered and
paid for pursuant to this Agreement on the Closing Date, the Warrants
will be convertible into shares of Common Stock ("Underlying Shares")
in accordance with their terms; and the Underlying Shares initially
issuable upon conversion of such Warrants have been duly and validly
authorized and reserved for issuance upon such conversion and, when
issued upon such conversion, will be validly issued, fully paid and
nonassessable. The Company does not have any subsidiaries.
(f) The Company has full right, power and authority to
execute and deliver this Agreement, the Indenture, the Registration
Rights Agreement, the Escrow Agreement, the Notes, the Warrants and
the Warrant Agreement (collectively, the "Transaction Documents") and
to perform its obligations hereunder and thereunder; and all corporate
action required to be taken for the due and proper authorization,
execution and delivery of each of the Transaction Documents and the
consummation of the transactions contemplated thereby have been duly
and validly taken.
(g) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and legally binding
agreement of the Company.
(h) The Registration Rights Agreement has been duly
authorized by the Company and, when duly executed and delivered in
accordance with its terms by each of the parties thereto, will
constitute a valid and legally binding agreement of the Company
enforceable against the Company in accordance with its terms, except
to the extent that such enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws affecting creditors' rights
generally and by general equitable principles (whether considered in a
proceeding in equity or at law).
(i) The Indenture has been duly authorized by the Company
and, when duly executed and delivered in accordance with its terms by
each of the parties thereto, will constitute a valid and legally
binding agreement of the Company enforceable
<PAGE> 4
4
against the Company in accordance with its terms, except to the extent
that such enforceability may be limited by applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws affecting creditors' rights generally and by
general equitable principles (whether considered in a proceeding in
equity or at law). On the Closing Date, the Indenture will conform in
all material respects to the requirements of the Trust Indenture Act
and the rules and regulations of the Commission applicable to an
indenture which is qualified thereunder.
(j) The Warrant Agreement has been duly authorized by the
Company and, when duly executed and delivered in accordance with its
terms by each of the parties thereto, will constitute a valid and
legally binding agreement of the Company enforceable against the
Company in accordance with its terms, except to the extent that such
enforceability may be limited by applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar
laws affecting creditors' rights generally and by general
equitable principles (whether considered in a proceeding in equity or
at law).
(k) The Escrow Agreement has been duly authorized by the
Company and, when duly executed and delivered in accordance with its
terms by each of the parties thereto, will constitute a valid and
legally binding agreement of the Company enforceable against the
Company in accordance with its terms, except to the extent that such
enforceability may be limited by applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar
laws affecting creditors' rights generally and by general equitable
principles (whether considered in a proceeding in equity or at law).
(l) The Notes have been duly authorized by the Company and,
when duly executed, authenticated, issued and delivered as provided in
the Indenture and paid for as provided herein, will be duly and
validly issued and outstanding and will constitute valid and legally
binding obligations of the Company, entitled to the benefits of the
Indenture and enforceable against the Company, in accordance with
their terms, except to the extent that such enforceability may be
limited by applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws affecting creditors'
rights generally and by general equitable principles (whether
considered in a proceeding in equity or at law).
(m) The Warrants have been duly authorized by the Company
and, when duly executed, authenticated, issued and delivered as
provided in the Warrant Agreement will be duly and validly issued and
outstanding and will constitute valid and legally binding obligations
of the Company, entitled to the benefits of the Warrant Agreement and
enforceable against the Company, in accordance with their terms,
except to the extent that such enforceability may be limited by
applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws affecting creditors'
rights generally and by general equitable principles (whether
considered in a proceeding in equity or at law).
(n) Each Transaction Document conforms in all material
respects to the description thereof contained in the Offering
Memorandum.
<PAGE> 5
5
(o) The execution, delivery and performance by the Company of
each of the Transaction Documents, the issuance, authentication, sale
and delivery of the Securities and compliance by the Company with the
terms thereof and the consummation of the transactions contemplated by
the Transaction Documents will not conflict with or result in a breach
or violation of any of the terms or provisions of, or constitute a
default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company
pursuant to, any material indenture, mortgage, deed of trust, loan
agreement or other material agreement or instrument to which the
Company is a party or by which the Company is bound or to which any of
the property or assets of the Company is subject, nor will such
actions result in any violation of the provisions of the charter or
by-laws of the Company or any statute or any judgment, order, decree,
rule or regulation of any court or arbitrator or governmental agency
or body having jurisdiction over the Company or any of its properties
or assets; and no consent, approval, authorization or order of, or
filing or registration with, any such court or arbitrator or
governmental agency or body under any such statute, judgment, order,
decree, rule or regulation is required for the execution, delivery and
performance by the Company of the Transaction Documents, the issuance,
authentication, sale and delivery of the Securities and compliance by
the Company with the terms thereof and the consummation of the
transactions contemplated by the Transaction Documents, except for
such consents, approvals, authorizations, filings, registrations or
qualifications (i) which shall have been obtained or made prior to the
Closing Date and (ii) as may be required to be obtained or made under
the Securities Act and applicable state securities laws as provided in
the Registration Rights Agreement and the Warrant Agreement.
(p) PricewaterhouseCoopers LLP (the successor entity to Price
Waterhouse LLP), are independent certified public accountants with
respect to the Company within the meaning of Rule 101 of the Code of
Professional Conduct of the American Institute of Certified Public
Accountants ("AICPA") and its interpretations and rulings thereunder.
The historical financial statements (including the related notes)
contained in the Offering Memorandum have been prepared in accordance
with generally accepted accounting principles consistently applied
throughout the periods covered thereby and fairly present the
financial position of the entities purported to be covered thereby at
the respective dates indicated and the results of their operations and
their cash flows for the respective periods indicated; and the
historical financial information contained in the Offering Memorandum
under the headings "Summary--Summary Historical and Unaudited Pro
Forma Financial Data", "Capitalization", "Selected Historical and
Unaudited Pro Forma Financial Data", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Management--Executive Compensation" are derived from the accounting
records of the Company and fairly present the information purported to
be shown thereby. The pro forma financial information contained in
the Offering Memorandum has been prepared on a basis consistent with
the historical financial statements contained in the Offering
Memorandum (except for the pro forma adjustments specified therein),
includes all material adjustments to the historical financial
information to reflect the transactions described in the Offering
Memorandum, gives effect to assumptions made on a reasonable basis and
fairly presents the historical and proposed transactions contemplated
by the Offering Memorandum and the Transaction Documents. The other
historical financial and
<PAGE> 6
6
statistical information and data included in the Offering Memorandum
are, in all material respects, fairly presented.
(q) There are no legal or governmental proceedings pending to
which the Company is a party or of which any property or assets of the
Company is the subject which, (A) singularly or in the aggregate, if
determined adversely to the Company, could reasonably be expected to
have a Material Adverse Effect or (B) question the validity or
enforceability of any of the Transaction Documents or any action taken
or to be taken pursuant thereto; and to the best knowledge of the
Company, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others.
(r) No action has been taken and no statute, rule, regulation
or order has been enacted, adopted or issued by any governmental
agency or body which prevents the issuance of the Securities or
suspends the sale of the Securities in any jurisdiction; no
injunction, restraining order or order of any nature by any federal or
state court of competent jurisdiction has been issued with respect to
the Company which would prevent or suspend the issuance or sale of the
Securities or the use of the Preliminary Offering Memorandum or the
Offering Memorandum in any jurisdiction; no action, suit or proceeding
is pending against or, to the best knowledge of the Company,
threatened against or affecting the Company before any court or
arbitrator or any governmental agency, body or official, domestic or
foreign, which could reasonably be expected to interfere with or
adversely affect the issuance of the Securities or in any manner draw
into question the validity or enforceability of any of the Transaction
Documents or any action taken or to be taken pursuant thereto; and the
Company has complied with any and all requests by any securities
authority in any jurisdiction for additional information to be
included in the Preliminary Offering Memorandum and the Offering
Memorandum.
(s) The Company is not (i) in violation of its charter or
by-laws, (ii) in default in any material respect, and no event has
occurred which, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any term,
covenant or condition contained in any material indenture, mortgage,
deed of trust, loan agreement or other material agreement or
instrument to which it is a party or by which it is bound or to which
any of its property or assets is subject or (iii) in violation in any
material respect of any law, ordinance, governmental rule, regulation
or court decree to which it or its property or assets may be subject.
(t) As of the Closing Date the Trustee will have a valid and
perfected first priority security interest in the Escrow Collateral
for the benefit of the Holders.
(u) The Company possesses all material licenses, certificates,
authorizations and permits issued by, and have made all declarations
and filings with, the appropriate federal, state or foreign regulatory
agencies or bodies which are necessary or desirable for the ownership
of its properties or the conduct of its business as described in the
Offering Memorandum, except where the failure to possess or make the
same would not, singularly or in the aggregate, have a Material
Adverse Effect, and the Company has not received notification of any
revocation or modification of any such license, certificate,
authorization or permit or has any reason to believe that any such
license, certificate, authorization or permit will not be renewed in
the ordinary course.
<PAGE> 7
7
(v) The Company has filed all federal, state, local and
foreign income and franchise tax returns required to be filed through
the date hereof and have paid all taxes due thereon, and no tax
deficiency has been determined adversely to the Company which has had
(nor does the Company have any knowledge of any tax deficiency which,
if determined adversely to the Company, could reasonably be expected
to have) a Material Adverse Effect.
(w) The Company is not (i) an "investment company" or a
company "controlled by" an investment company within the meaning of
the Investment Company Act of 1940, as amended (the "Investment
Company Act"), and the rules and regulations of the Commission
thereunder or (ii) a "holding company" or a "subsidiary company" of a
holding company or an "affiliate" thereof within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
(x) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) The Company has insurance covering its properties,
operations, personnel and businesses, which insurance is in amounts
and insures against such losses and risks as are adequate to protect
the Company and its business. The Company has not received notice
from any insurer or agent of such insurer that capital improvements or
other expenditures are required or necessary to be made in order to
continue such insurance.
(z) The Company owns or possesses adequate rights to use all
material patents, patent applications, trademarks, service marks,
trade names, trademark registrations, service mark registrations,
copyrights, licenses and know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) necessary for the conduct of its
business; and the conduct of its business will not conflict in any
material respect with, and the Company has not received any notice of
any claim of conflict with, any such rights of others.
(aa) The Company has good and marketable title in fee simple
to, or has valid rights to lease or otherwise use, all items of real
and personal property which are material to the business of the
Company, in each case free and clear of all liens, encumbrances,
claims and defects and imperfections of title except such as (i) do
not materially interfere with the use made and proposed to be made of
such property by the Company or (ii) could not reasonably be expected
to have a Material Adverse Effect.
(bb) No labor disturbance by or dispute with the employees of
the Company exists or, to the best knowledge of the Company, is
contemplated or threatened.
<PAGE> 8
8
(cc) No "prohibited transaction" (as defined in Section 406 of
the Employee Retirement Income Security Act of 1974, as amended,
including the regulations and published interpretations thereunder
("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as
amended from time to time (the "Code")) or "accumulated funding
deficiency" (as defined in Section 302 of ERISA) or any of the events
set forth in Section 4043(b) of ERISA (other than events with respect
to which the 30-day notice requirement under Section 4043 of ERISA has
been waived) has occurred with respect to any employee benefit plan of
the Company which could reasonably be expected to have a Material
Adverse Effect; each such employee benefit plan is in compliance in
all material respects with applicable law, including ERISA and the
Code; the Company has not incurred and does not expect to incur
liability under Title IV of ERISA with respect to the termination of,
or withdrawal from, any pension plan for which the Company would have
any liability; and each such pension plan that is intended to be
qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by
failure to act, which could reasonably be expected to cause the loss
of such qualification.
(dd) There has been no storage, generation, transportation,
handling, treatment, disposal, discharge, emission or other release of
any kind of toxic or other wastes or other hazardous substances by,
due to or caused by the Company (or, to the best knowledge of the
Company, any other entity (including any predecessor) for whose acts
or omissions the Company is or could reasonably be expected to be
liable) upon any of the property now or previously owned or leased by
the Company, or upon any other property, in violation of any statute
or any ordinance, rule, regulation, order, judgment, decree or permit
or which would, under any statute or any ordinance, rule (including
rule of common law), regulation, order, judgment, decree or permit,
give rise to any liability, except for any violation or liability that
could not reasonably be expected to have, singularly or in the
aggregate with all such violations and liabilities, a Material Adverse
Effect; and there has been no disposal, discharge, emission or other
release of any kind onto such property or into the environment
surrounding such property of any toxic or other wastes or other
hazardous substances with respect to which the Company has knowledge,
except for any such disposal, discharge, emission or other release of
any kind which could not reasonably be expected to have, singularly or
in the aggregate with all such discharges and other releases, a
Material Adverse Effect.
(ee) Neither the Company nor, to the best knowledge of the
Company, any director, officer, agent, employee or other person
associated with or acting on behalf of the Company has (i) used any
corporate funds for any unlawful contribution, gift, entertainment or
other unlawful expense relating to political activity; (ii) made any
direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; (iii) violated
or is in violation of any provision of the Foreign Corrupt Practices
Act of 1977; or (iv) made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment.
(ff) On and immediately after the Closing Date, the Company
(after giving effect to the issuance of the Securities and to the
other transactions related thereto as described in the Offering
Memorandum) will be Solvent. As used in this paragraph, the term
"Solvent" means, with respect to a particular date, that on such date
(i) the
<PAGE> 9
9
present fair market value (or present fair saleable value) of the
assets of the Company is not less than the total amount required to
pay the probable liabilities of the Company on its total existing
debts and liabilities (including contingent liabilities) as they
become absolute and matured, (ii) the Company is able to realize upon
its assets and pay its debts and other liabilities, contingent
obligations and commitments as they mature and become due in the
normal course of business, (iii) assuming the sale of the Securities
as contemplated by this Agreement and the Offering Memorandum, the
Company is not incurring debts or liabilities beyond its ability to
pay as such debts and liabilities mature and (iv) the Company is not
engaged in any business or transaction, and is not about to engage in
any business or transaction, for which its property would constitute
unreasonably small capital after giving due consideration to the
prevailing practice in the industry in which the Company is engaged.
In computing the amount of such contingent liabilities at any time, it
is intended that such liabilities will be computed at the amount that,
in the light of all the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an
actual or matured liability.
(gg) Except for the Warrants and except as otherwise
described in the Offering Memorandum, there are no outstanding
subscriptions, rights, warrants, calls or options to acquire, or
instruments convertible into or exchangeable for, or agreements or
understandings with respect to the sale or issuance of, any shares of
capital stock of or other equity or other ownership interest in the
Company.
(hh) The Company does not own any "margin securities" as that
term is defined in Regulation U of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"), and none of the
proceeds of the sale of the Securities will be used, directly or
indirectly, for the purpose of purchasing or carrying any margin
security, for the purpose of reducing or retiring any indebtedness
which was originally incurred to purchase or carry any margin security
or for any other purpose which might cause any of the Securities to be
considered a "purpose credit" within the meanings of Regulation T, U
or X of the Federal Reserve Board.
(ii) The Company is not a party to any contract, agreement or
understanding with any person that would give rise to a valid claim
against the Company or the Initial Purchaser for a brokerage
commission, finder's fee or like payment in connection with the
offering and sale of the Securities.
(jj) The Securities satisfy the eligibility requirements of
Rule 144A(d)(3) under the Securities Act.
(kk) Neither the Company nor any of its affiliates has,
directly or through any agent, sold, offered for sale, solicited
offers to buy or otherwise negotiated in respect of, any security (as
such term is defined in the Securities Act), which is or will be
integrated with the sale of the Securities in a manner that would
require registration of the Securities under the Securities Act.
(ll) None of the Company or any of its affiliates or any other
person acting on its or their behalf has engaged, 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
Securities Act.
<PAGE> 10
10
(mm) There are no securities of the Company registered under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or listed on a national securities exchange or quoted in a U.S.
automated inter-dealer quotation system.
(nn) The Company has not taken nor will it take, directly or
indirectly, any action prohibited by Regulation M under the Exchange
Act in connection with the offering of the Securities.
(oo) No forward-looking statement (within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act)
contained in the Preliminary Offering Memorandum or the Offering
Memorandum has been made or reaffirmed without a reasonable basis or
has been disclosed other than in good faith.
(pp) The Company does not do business with the government of
Cuba or with any person or affiliate located in Cuba within the
meaning of Florida Statutes Section 517.075.
(qq) The Company is currently evaluating its operations and
systems to determine the risk of computer hardware and software used
by it becoming unable to recognize and properly execute date-sensitive
functions involving certain dates prior to and any dates after
December 31, 1999 (the "year-2000 issue"), and has determined that
such risk will be remedied on a timely basis without material expense
and will not have a Material Adverse Effect; and the Company believes,
after due inquiry of its customers and certain suppliers, that each
customer, supplier and financial service organization used or serviced
by the Company has remedied or will remedy on a timely basis the
year-2000 issue, except to the extent that a failure to remedy by any
such customer, supplier or financial service organization would not
have a Material Adverse Effect.
(rr) Since the date as of which information is given in the
Offering Memorandum, except as otherwise stated therein, (i) there has
been no material adverse change or any development involving a
prospective material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs, management or
business prospects of the Company, whether or not arising in the
ordinary course of business, (ii) the Company has not incurred any
material liability or obligation, direct or contingent, other than in
the ordinary course of business, (iii) the Company has not entered
into any material transaction other than in the ordinary course of
business and (iv) there has not been any change in the capital stock
or long-term debt of the Company, or any dividend or distribution of
any kind declared, paid or made by the Company on any class of its
capital stock.
(ss) Linsang Partners LLC ("Linsang") is (i) an "accredited
investor" within the meaning of Rule 501 under the Securities Act and
(ii) is controlled by, and 99.6% of the equity interests are owned by,
Kwok L. Li, the Chairman of the Board of Directors of the Company, in
a tenancy by the entireties with his wife, Felice Li.
2. Purchase and Resale of the Securities. (a) On the
basis of the representations, warranties and agreements contained herein, and
subject to the terms and conditions set forth herein, the Company agrees to
issue and sell to the Initial Purchaser, and the Initial Purchaser agrees to
purchase from the Company, 261,000 Units at an aggregate purchase price of
<PAGE> 11
11
$252,875,000. The Company shall not be obligated to deliver any of the Units
except upon payment for all of the Units to be purchased as provided herein.
(b) The Initial Purchaser has advised the Company that it
proposes to offer the Securities for resale upon the terms and subject to the
conditions set forth herein and in the Offering Memorandum. The Initial
Purchaser represents, warrants and agrees that (i) it is purchasing the
Securities pursuant to a private sale exempt from registration under the
Securities Act, (ii) it has not solicited offers for, or offered or sold, and
will not solicit offers for, or offer or sell, the Securities by means of any
form of general solicitation or general advertising within the meaning of Rule
502(c) of Regulation D under the Securities Act ("Regulation D") or in any
manner involving a public offering within the meaning of Section 4(2) of the
Securities Act and (iii) except in the case of the sale to Linsang of 11,000
Units (which will be sold pursuant to another exemption from registration under
the Securities Act), it has solicited and will solicit offers for the
Securities only from, and has offered or sold and will offer, sell or deliver
the Securities, as part of its initial offering, only to persons whom it
reasonably believes to be qualified institutional buyers ("Qualified
Institutional Buyers"), as defined in Rule 144A under the Securities Act ("Rule
144A"), or if any such person is buying for one or more institutional accounts
for which such person is acting as fiduciary or agent, only when such person
has represented to it that each such account is a Qualified Institutional Buyer
to whom notice has been given that such sale or delivery is being made in
reliance on Rule 144A and in each case, in transactions in accordance with Rule
144A.
(c) The Initial Purchaser agrees that, prior to or
simultaneously with the confirmation of sale by the Initial Purchaser to any
purchaser of any of the Securities purchased by the Initial Purchaser from the
Company pursuant hereto, the Initial Purchaser shall furnish to that purchaser
a copy of the Offering Memorandum (and any amendment or supplement thereto that
the Company shall have furnished to the Initial Purchaser prior to the date of
such confirmation of sale). In addition to the foregoing, the Initial
Purchaser acknowledges and agrees that the Company and, for purposes of the
opinions to be delivered to the Initial Purchaser pursuant to Sections 5(d) and
(e), counsel for the Company and for the Initial Purchaser, respectively, may
rely upon the accuracy of the representations and warranties of the Initial
Purchaser and its compliance with its agreements contained in this Section 2,
and the Initial Purchaser hereby consents to such reliance.
(d) The Company acknowledges and agrees that the Initial
Purchaser may sell Securities to any affiliate of the Initial Purchaser and
that any such affiliate may sell Securities purchased by it to the Initial
Purchaser.
3. Delivery of and Payment for the Securities. (a) Delivery
of and payment for the Units shall be made at the offices of Cravath, Swaine &
Moore, New York, New York, or at such other place as shall be agreed upon by
the Initial Purchaser and the Company, at 10:00 A.M., New York City time, on
July 24, 1998 or at such other time or date, not later than seven full business
days thereafter, as shall be agreed upon by the Initial Purchaser and the
Company (such date and time of payment and delivery being referred to herein as
the "Closing Date").
(b) On the Closing Date, payment of the purchase price for
the Units shall be made to the Company by wire or book-entry transfer of
same-day funds to such account or accounts as the Company shall specify prior
to the Closing Date or by such other means as the parties hereto shall agree
prior to the Closing Date against delivery to the Initial
<PAGE> 12
12
Purchaser of the certificates evidencing the Securities. Time shall be of the
essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligations of the Initial Purchaser
hereunder. Upon delivery, the Securities shall be in global form, registered
in such names and in such denominations as the Initial Purchaser shall have
requested in writing not less than two full business days prior to the Closing
Date. The Company agrees to make one or more global certificates evidencing
the Securities available for inspection by the Initial Purchaser in New York,
New York at least 24 hours prior to the Closing Date.
4. Further Agreements of the Company. The Company agrees
with the Initial Purchaser:
(a) to advise the Initial Purchaser promptly and, if
requested, confirm such advice in writing, of the happening of any
event which makes any statement of a material fact made in the
Offering Memorandum untrue or which requires the making of any
additions to or changes in the Offering Memorandum (as amended or
supplemented from time to time) in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; to advise the Initial Purchaser promptly of any order
preventing or suspending the use of the Preliminary Offering
Memorandum or the Offering Memorandum, of any suspension of the
qualification of the Securities for offering or sale in any
jurisdiction and of the initiation or threatening of any proceeding
for any such purpose; and to use its best efforts to prevent the
issuance of any such order preventing or suspending the use of the
Preliminary Offering Memorandum or the Offering Memorandum or
suspending any such qualification and, if any such suspension is
issued, to obtain the lifting thereof at the earliest possible time;
(b) to furnish promptly to the Initial Purchaser and counsel
for the Initial Purchaser, without charge, as many copies of the
Preliminary Offering Memorandum and the Offering Memorandum (and any
amendments or supplements thereto) as may be reasonably requested;
(c) prior to making any amendment or supplement to the
Offering Memorandum, to furnish a copy thereof to the Initial
Purchaser and counsel for the Initial Purchaser and not to effect any
such amendment or supplement to which the Initial Purchaser shall
reasonably object by notice to the Company after a reasonable period
to review;
(d) if, at any time prior to completion of the resale of the
Securities by the Initial Purchaser, any event shall occur or
condition exist as a result of which it is necessary, in the opinion
of counsel for the Initial Purchaser or counsel for the Company, to
amend or supplement the Offering Memorandum in order that the 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 purchaser, not misleading, or if it is
necessary to amend or supplement the Offering Memorandum to comply
with applicable law, to promptly prepare such amendment or supplement
as may be necessary to correct such untrue statement or omission or so
that the Offering Memorandum, as so amended or supplemented, will
comply with applicable law;
<PAGE> 13
13
(e) for so long as the Securities are outstanding and are
"restricted securities" within the meaning of Rule 144(a)(3) under the
Securities Act, to furnish to holders of the Securities and
prospective purchasers of the Securities designated by such holders,
upon request of such holders or such prospective purchasers, the
information required to be delivered pursuant to Rule 144A(d)(4) under
the Securities Act, unless the Company is then subject to and in
compliance with Section 13 or 15(d) of the Exchange Act (the foregoing
agreement being for the benefit of the holders from time to time of
the Securities and prospective purchasers of the Securities designated
by such holders);
(f) for so long as the Securities are outstanding, to furnish
to the Initial Purchaser copies of any annual reports, quarterly
reports and current reports filed by the Company with the Commission
on Forms 10-K, 10-Q and 8-K, or such other similar forms as may be
designated by the Commission, and such other documents, reports and
information as shall be furnished by the Company to the Trustee or to
the holders of the Securities pursuant to the Indenture or the
Exchange Act or any rule or regulation of the Commission thereunder;
(g) to promptly take from time to time such actions as the
Initial Purchaser may reasonably request to qualify the Securities for
offering and sale under the securities or Blue Sky laws of such
jurisdictions as the Initial Purchaser may designate and to continue
such qualifications in effect for so long as required for the resale
of the Securities; and to arrange for the determination of the
eligibility for investment of the Securities under the laws of such
jurisdictions as the Initial Purchaser may reasonably request;
provided that the Company shall not be obligated to qualify as a
foreign corporation in any jurisdiction in which it is not so
qualified or to file a general consent to service of process in any
jurisdiction;
(h) to assist the Initial Purchaser in arranging for the
Securities to be designated Private Offerings, Resales and Trading
through Automated Linkages ("PORTAL") Market securities in accordance
with the rules and regulations adopted by the National Association of
Securities Dealers, Inc. ("NASD") relating to trading in the PORTAL
Market and for the Securities to be eligible for clearance and
settlement through The Depository Trust Company ("DTC");
(i) not to, and to cause its affiliates not to, sell, offer
for sale or solicit offers to buy or otherwise negotiate in respect of
any security (as such term is defined in the Securities Act) which
could be integrated with the sale of the Securities in a manner which
would require registration of the Securities under the Securities Act;
(j) except following the effectiveness of (i) Exchange Offer
Registration Statement or the Shelf Registration Statement, as the
case may be, and (ii) the Warrant Shelf Registration Statement, not
to, and to cause its affiliates not to, and not to authorize or
knowingly permit any person acting on their behalf to, solicit any
offer to buy or offer to sell the Securities by means of any form of
general solicitation or general advertising within the meaning of
Regulation D or in any manner involving a public offering within the
meaning of Section 4(2) of the Securities Act; and not to offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, any
securities under circumstances where such offer, sale, contract or
disposition would cause the exemption afforded by Section 4(2) of the
Securities Act to cease
<PAGE> 14
14
to be applicable to the offering and sale of the Securities as
contemplated by this Agreement and the Offering Memorandum;
(k) for a period of 180 days from the date of the Offering
Memorandum, not to offer for sale, sell, contract to sell or otherwise
dispose of, directly or indirectly, or file a registration statement
for, or announce any offer, sale, contract for sale of or other
disposition of any debt or equity securities issued or guaranteed by
the Company (other than the Securities) without the prior written
consent of the Initial Purchaser, which consent shall not be
unreasonably withheld;
(l) during the period from the Closing Date until two years
after the Closing Date, without the prior written consent of the
Initial Purchaser, not to, and not permit any of its affiliates (as
defined in Rule 144 under the Securities Act) to, resell any of the
Securities that have been reacquired by them, except for Securities
purchased by the Company or any of its affiliates and resold in a
transaction registered under the Securities Act;
(m) not to, for so long as the Securities are outstanding, be
or become, or be or become owned by, an open-end investment company,
unit investment trust or face-amount certificate company that is or is
required to be registered under Section 8 of the Investment Company
Act, and to not be or become, or be or become owned by, a closed-end
investment company required to be registered, but not registered
thereunder;
(n) in connection with the offering of the Securities, until
the Initial Purchaser shall have notified the Company of the
completion of the resale of the Securities, not to, and to cause its
affiliated purchasers (as defined in Regulation M under the Exchange
Act) not to, either alone or with one or more other persons, bid for
or purchase, for any account in which it or any of its affiliated
purchasers has a beneficial interest, any Securities, or attempt to
induce any person to purchase any Securities; and not to, and to cause
its affiliated purchasers not to, make bids or purchase for the
purpose of creating actual, or apparent, active trading in or of
raising the price of the Securities;
(o) in connection with the offering of the Securities, to
make its officers, employees, independent accountants and legal
counsel reasonably available upon request by the Initial Purchaser;
(p) to furnish to the Initial Purchaser on the date hereof a
copy of the independent accountants' report included in the Offering
Memorandum signed by the accountants rendering such report;
(q) to do and perform all things required to be done and
performed by it under this Agreement that are within its control prior
to or after the Closing Date, and to use its best efforts to satisfy
all conditions precedent on its part to the delivery of the
Securities;
(r) to not take any action prior to the execution and
delivery of the Indenture or the Warrant Agreement which, if taken
after such execution and delivery, would have violated any of the
covenants contained in the Indenture or the Warrant Agreement;
<PAGE> 15
15
(s) to not take any action prior to the Closing Date which
would require the Offering Memorandum to be amended or supplemented
pursuant to Section 4(d);
(t) prior to the Closing Date, not to issue any press release
or other communication directly or indirectly or hold any press
conference with respect to the Company, its condition, financial or
otherwise, or earnings, business affairs or business prospects (except
for routine oral marketing communications in the ordinary course of
business and consistent with the past practices of the Company and of
which the Initial Purchaser is notified), without the prior written
consent of the Initial Purchaser, unless in the judgment of the
Company and its counsel, and after notification to the Initial
Purchaser, such press release or communication is required by law;
(u) to apply the net proceeds from the sale of the Securities
as set forth in the Offering Memorandum under the heading "Use of
Proceeds";
(v) to do or cause to be done all such acts and things as may
be necessary or proper, or as may be required by the provisions of the
Escrow Agreement, to assure and confirm to the Trustee the security
interest in the Escrow Collateral contemplated by the Escrow Agreement
or any part thereof, as from time to time constituted, so as to render
the Escrow Collateral available for the security and benefit of the
Holders; and to take any and all actions reasonably required to cause
the Escrow Agreement to create and maintain (to the extent possible
under applicable law), as security for the obligations of the Company
under the Indenture, a valid and perfected first priority security
interest in and on all the Escrow Collateral, in favor of the
Trustee, for the benefit of Holders.
5. Conditions of Initial Purchaser's Obligations. The
obligations of the Initial Purchaser hereunder are subject to the accuracy, on
and as of the date hereof and the Closing Date, of the representations and
warranties of the Company contained herein, to the accuracy of the statements
of the Company and its officers made in any certificates delivered pursuant
hereto, to the performance by the Company of its obligations hereunder, and to
each of the following additional terms and conditions:
(a) The Offering Memorandum (and any amendments or
supplements thereto) shall have been printed and copies distributed to
the Initial Purchaser as promptly as practicable on or following the
date of this Agreement or at such other date and time as to which the
Initial Purchaser may agree; and no stop order suspending the sale of
the Securities in any jurisdiction shall have been issued and no
proceeding for that purpose shall have been commenced or shall be
pending or threatened.
(b) The Initial Purchaser shall not have discovered and
disclosed to the Company on or prior to the Closing Date that the
Offering Memorandum or any amendment or supplement thereto contains an
untrue statement of a fact which, in the opinion of counsel for the
Initial Purchaser, is material or omits to state any fact which, in
the opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not misleading.
<PAGE> 16
16
(c) All corporate proceedings and other legal matters
incident to the authorization, form and validity of each of the
Transaction Documents and the Offering Memorandum, and all other legal
matters relating to the Transaction Documents and the transactions
contemplated thereby, shall be satisfactory in all material respects
to the Initial Purchaser, and the Company shall have furnished to the
Initial Purchaser all documents and information that it or its counsel
may reasonably request to enable them to pass upon such matters.
(d) Winstead Sechrest & Minick P.C. shall have furnished to
the Initial Purchaser their written opinion, as counsel to the
Company, addressed to the Initial Purchaser and dated the Closing
Date, in form and substance reasonably satisfactory to the Initial
Purchaser, substantially to the effect set forth in Annex B hereto.
(e) The Initial Purchaser shall have received from Cravath,
Swaine & Moore, counsel for the Initial Purchaser, such opinion or
opinions, dated the Closing Date, with respect to such matters as the
Initial Purchaser may reasonably require, and the Company shall have
furnished to such counsel such documents and information as they
request for the purpose of enabling them to pass upon such matters.
(f) The Company shall have furnished to the Initial Purchaser
a letter (the "Initial Letter") of PricewaterhouseCoopers LLP (the
successor entity to Price Waterhouse LLP), addressed to the Initial
Purchaser and dated the date hereof, in form and substance
satisfactory to each of the Initial Purchaser and
PricewaterhouseCoopers LLP.
(g) The Company shall have furnished to the Initial Purchaser
a letter (the "Bring-Down Letter") of PricewaterhouseCoopers LLP (the
successor entity to Price Waterhouse LLP), addressed to the Initial
Purchaser and dated the Closing Date (i) confirming that they are
independent public accountants with respect to the Company within the
meaning of Rule 101 of the Code of Professional Conduct of the AICPA
and its interpretations and rulings thereunder, (ii) stating, as of
the date of the Bring-Down Letter (or, with respect to matters
involving changes or developments since the respective dates as of
which specified financial information is given in the Offering
Memorandum, as of a date not more than three business days prior to
the date of the Bring-Down Letter), that the conclusions and findings
of such accountants with respect to the financial information and
other matters covered by the Initial Letter are accurate and (iii)
confirming in all material respects the conclusions and findings set
forth in the Initial Letter.
(h) The Company shall have furnished to the Initial Purchaser
a certificate, dated the Closing Date, of its chief executive officer
and its chief financial officer stating that (A) such officers have
carefully examined the Offering Memorandum, (B) in their opinion, the
Offering Memorandum, as of its date, did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading, and since the date of the Offering
Memorandum, no event has occurred which should have been set forth in
a supplement or amendment to the Offering Memorandum so that the
Offering Memorandum (as so amended or supplemented) would not include
any untrue statement of a material fact and would not omit to state a
material fact required to be stated therein or necessary in order to
make the statements therein, in
<PAGE> 17
17
the light of the circumstances under which they were made, not
misleading, (C) as of the Closing Date, the representations and
warranties of the Company in this Agreement are true and correct, the
Company has complied with all agreements and satisfied all conditions
on its part to be performed or satisfied hereunder on or prior to the
Closing Date, (D) subsequent to the date of the most recent financial
statements contained in the Offering Memorandum, there has been no
material adverse change in the financial position or results of
operations of the Company, or any change, or any development involving
a prospective change, in or affecting the condition (financial or
otherwise), results of operations, business or prospects of the
Company, taken as a whole, (E) they have read the covenants and
conditions (i) in the Indenture relating to the issuance of the Notes
by the Company and the authentication and delivery of the Notes by the
Trustee and (ii) in the Warrant Agreement relating to the issuance of
the Warrants by the Company and the countersignature and delivery of
the Warrants by the Warrant Agent, including in case of each of (i)
and (ii), the related definitions, (F) they are authorized to examine
and have access to the relevant records and accounts of the Company
and are conversant with the corporate proceedings and documents
relating to the authorization and issuance of the Units, Notes, and
Warrants, (G) in their opinion they have made such examination or
investigation as is necessary to enable them to express an informed
opinion as to whether or not the covenants and conditions referred to
in the Indenture and the Warrant Agreement referred to in clause (E)
above have been complied with, and (H) in their opinion all such
covenants and conditions have been complied with.
(i) The Initial Purchaser shall have received a counterpart
of the Registration Rights Agreement which shall have been executed
and delivered by a duly authorized officer of the Company.
(j) The Indenture shall have been duly executed and delivered
by the Company and the Trustee, and the Notes shall have been duly
executed and delivered by the Company and duly authenticated by the
Trustee.
(k) The Warrant Agreement shall have been duly executed and
delivered by the Company and the Warrant Agent, and the Warrants shall
have been duly executed and delivered by the Company and duly
countersigned by the Warrant Agent.
(l) The Escrow Agreement shall have been duly executed and
delivered by the Company and The Chase Manhattan Bank.
(m) The Securities shall have been approved by the NASD for
trading in the PORTAL Market.
(n) If any event shall have occurred that requires the
Company under Section 4(d) to prepare an amendment or supplement to
the Offering Memorandum, such amendment or supplement shall have been
prepared, the Initial Purchaser shall have been given a reasonable
opportunity to comment thereon, and copies thereof shall have been
delivered to the Initial Purchaser reasonably in advance of the
Closing Date.
<PAGE> 18
18
(o) There shall not have occurred any invalidation of Rule
144A under the Securities Act by any court or any withdrawal or
proposed withdrawal of any rule or regulation under the Securities Act
or the Exchange Act by the Commission or any amendment or proposed
amendment thereof by the Commission which in the judgment of the
Initial Purchaser would materially impair the ability of the Initial
Purchaser to purchase, hold or effect resales of the Securities as
contemplated hereby.
(p) Subsequent to the execution and delivery of this
Agreement or, if earlier, the dates as of which information is given
in the Offering Memorandum (exclusive of any amendment or supplement
thereto), there shall not have been any change in the capital stock or
long-term debt or any change, or any development involving a
prospective change, in or affecting the condition (financial or
otherwise), results of operations, business or prospects of the
Company taken as a whole, the effect of which, in any such case
described above, is, in the judgment of the Initial Purchaser, so
material and adverse as to make it impracticable or inadvisable to
proceed with the sale or delivery of the Securities on the terms and
in the manner contemplated by this Agreement and the Offering
Memorandum (exclusive of any amendment or supplement thereto).
(q) No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency or body which would, as of the Closing Date,
prevent the issuance or sale of the Securities; and no injunction,
restraining order or order of any other nature by any federal or state
court of competent jurisdiction shall have been issued as of the
Closing Date which would prevent the issuance or sale of the
Securities.
(r) Subsequent to the execution and delivery of this
Agreement (i) no downgrading shall have occurred in the rating
accorded the Securities or any of the Company's other debt securities
or preferred stock by any "nationally recognized statistical rating
organization", as such term is defined by the Commission for purposes
of Rule 436(g)(2) of the rules and regulations of the Commission under
the Securities Act and (ii) no such organization shall have publicly
announced that it has under surveillance or review (other than an
announcement with positive implications of a possible upgrading), its
rating of the Securities or any of the Company's other debt securities
or preferred stock.
(s) Subsequent to the execution and delivery of this
Agreement there shall not have occurred any of the following: (i)
trading in securities generally on the New York Stock Exchange, the
American Stock Exchange, the Chicago Board Options Exchange or the
over-the-counter market shall have been suspended or limited, or
minimum prices shall have been established on any such exchange or
market by the Commission, by any such exchange or by any other
regulatory body or governmental authority having jurisdiction, or
trading in any securities of the Company on any exchange or in the
over-the-counter market shall have been suspended or (ii) any
moratorium on commercial banking activities shall have been declared
by federal or New York state authorities or (iii) an outbreak or
escalation of hostilities or a declaration by the United States of a
national emergency or war or (iv) a material adverse change in general
economic, political or financial conditions (or the effect of
international conditions on the financial markets in the United States
shall be such) the effect of which, in the case of this clause (iv),
is, in the judgment of the Initial Purchaser, so material and adverse
as to make it impracticable or inadvisable to
<PAGE> 19
19
proceed with the sale or the delivery of the Securities on the terms
and in the manner contemplated by this Agreement and in the Offering
Memorandum (exclusive of any amendment or supplement thereto).
(t) A valid and perfected first priority security interest in
the Escrow Collateral shall have been created in favor of the Trustee
for the benefit of Holders.
All opinions, letters, evidence and certificates mentioned
above or elsewhere in this Agreement shall be deemed to be in
compliance with the provisions hereof only if they are in form and
substance reasonably satisfactory to counsel for the Initial
Purchaser.
6. Termination. The obligations of the Initial Purchaser
hereunder may be terminated by the Initial Purchaser, in its absolute
discretion, by notice given to and received by the Company prior to delivery of
and payment for the Securities if, prior to that time, any of the events
described in Section 5(n), (o), (p), (q) or (r) shall have occurred and be
continuing.
7. Reimbursement of Initial Purchaser's Expenses. If (a)
this Agreement shall have been terminated pursuant to Section 6, (b) the
Company shall fail to tender the Securities for delivery to the Initial
Purchaser for any reason permitted under this Agreement or (c) the Initial
Purchaser shall decline to purchase the Securities for any reason permitted
under this Agreement, the Company shall reimburse the Initial Purchaser for
such out-of-pocket expenses (including reasonable fees and disbursements of
counsel) as shall have been reasonably incurred by the Initial Purchaser in
connection with this Agreement and the proposed purchase and resale of the
Securities.
8. Indemnification. (a) The Company shall hold harmless the
Initial Purchaser, its affiliates, their respective officers, directors,
employees, representatives and agents, and each person, if any, who controls
any Initial Purchaser within the meaning of the Securities Act or the Exchange
Act (collectively referred to for purposes of this Section 8(a) and Section 9
as the Initial Purchaser), from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof (including,
without limitation, any loss, claim, damage, liability or action relating to
purchases and sales of the Securities), to which the Initial Purchaser may
become subject, whether commenced or threatened, under the Securities Act, the
Exchange Act, any other federal or state statutory law or regulation, at common
law or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in the Preliminary Offering Memorandum
or the Offering Memorandum or in any amendment or supplement thereto or in any
information provided by the Company pursuant to Section 4(e) or (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, and
shall reimburse each Initial Purchaser promptly upon demand for any legal or
other expenses reasonably incurred by that Initial Purchaser in connection with
investigating or defending or preparing to defend against or appearing as a
third party witness in connection with any such loss, claim, damage, liability
or action as such expenses are incurred; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in
<PAGE> 20
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conformity with any Initial Purchaser's Information; and provided, further,
that with respect to any such untrue statement in or omission from the
Preliminary Offering Memorandum, the indemnity agreement contained in this
Section 8(a) shall not inure to the benefit of any such Initial Purchaser to
the extent that the sale to the person asserting any such loss, claim, damage,
liability or action was an initial resale by the Initial Purchaser and any such
loss, claim, damage, liability or action of or with respect to the Initial
Purchaser results from the fact that both (A) to the extent required by
applicable law, a copy of the Offering Memorandum was not sent or given to such
person at or prior to the written confirmation of the sale of such Securities
to such person and (B) the untrue statement in or omission from the Preliminary
Offering Memorandum was corrected in the Offering Memorandum unless, in either
case, such failure to deliver the Offering Memorandum was a result of
non-compliance by the Company with Section 4(b).
(b) The Initial Purchaser shall indemnify and hold harmless
the Company, its affiliates, their respective officers, directors, employees,
representatives and agents, and each person, if any, who controls the Company
within the meaning of the Securities Act or the Exchange Act (collectively
referred to for purposes of this Section 8(b) and Section 9 as the Company),
from and against any loss, claim, damage or liability, joint or several, or any
action in respect thereof, to which the Company may become subject, whether
commenced or threatened, under the Securities Act, the Exchange Act, any other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained in the Preliminary Offering Memorandum or the Offering
Memorandum or in any amendment or supplement thereto or (ii) the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, but in each case only
to the extent that the untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with any
Initial Purchaser's Information, and shall reimburse the Company for any legal
or other expenses reasonably incurred by the Company in connection with
investigating or defending or preparing to defend against or appearing as a
third party witness in connection with any such loss, claim, damage, liability
or action as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party pursuant to Section 8(a) or 8(b), notify the
indemnifying party in writing of the claim or the commencement of that action;
provided, however, that the failure to notify the indemnifying party shall not
relieve it from any liability which it may have under this Section 8 except to
the extent that it has been materially prejudiced (through the forfeiture of
substantive rights or defenses) by such failure; and, provided, further, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party otherwise than under this
Section 8. If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
wishes, jointly with any other similarly notified indemnifying party, to assume
the defense thereof with counsel reasonably satisfactory to the indemnified
party. After notice from the indemnifying party to the indemnified party of
its election to assume the defense of such claim or action, the indemnifying
party shall not be liable to the indemnified party under this Section 8 for any
legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, that an indemnified party shall
<PAGE> 21
21
have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel for the indemnified party will be at
the expense of such indemnified party unless (1) the employment of counsel by
the indemnified party has been authorized in writing by the indemnifying party,
(2) the indemnified party has reasonably concluded (based upon advice of
counsel to the indemnified party) that there may be legal defenses available to
it or other indemnified parties that are different from or in addition to those
available to the indemnifying party, (3) a conflict or potential conflict
exists (based upon advice of counsel to the indemnified party) between the
indemnified party and the indemnifying party (in which case the indemnifying
party will not have the right to direct the defense of such action on behalf of
the indemnified party) or (4) the indemnifying party has not in fact employed
counsel reasonably satisfactory to the indemnified party to assume the defense
of such action within a reasonable time after receiving notice of the
commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm of attorneys (in addition to any
local counsel) at any one time for all such indemnified party or parties. Each
indemnified party, as a condition of the indemnity agreements contained in
Sections 8(a) and 8(b), shall use all reasonable efforts to cooperate with the
indemnifying party in the defense of any such action or claim. No indemnifying
party shall be liable for any settlement of any such action effected without
its written consent (which consent shall not be unreasonably withheld), but if
settled with its written consent or if there be a final judgment for the
plaintiff in any such action, the indemnifying party agrees to indemnify and
hold harmless any indemnified party from and against any loss or liability by
reason of such settlement or judgment. No indemnifying party shall, without
the prior written consent of the indemnified party (which consent shall not be
unreasonably withheld), effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
The obligations of the Company and the Initial Purchaser in
this Section 8 and in Section 9 are in addition to any other liability that the
Company or the Initial Purchaser, as the case may be, may otherwise have,
including in respect of any breaches of representations, warranties and
agreements made herein by any such party.
9. Contribution. If the indemnification provided for in
Section 8 is unavailable or insufficient to hold harmless an indemnified party
under Section 8(a) or 8(b), then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid or payable
by such indemnified party as a result of such loss, claim, damage or liability,
or action in respect thereof, (i) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company on the one hand and the
Initial Purchaser on the other from the offering of the Securities or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and the Initial Purchaser on the other with respect to the
statements or omissions that resulted in such loss, claim, damage or liability,
or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Initial Purchaser on the other with respect to such offering shall be
deemed to be in the same proportion as the total
<PAGE> 22
22
net proceeds from the offering of the Securities purchased under this Agreement
(before deducting expenses) received by or on behalf of the Company, on the one
hand, and the total discounts and commissions received by the Initial Purchaser
with respect to the Securities purchased under this Agreement, on the other,
bear to the total gross proceeds from the sale of the Securities under this
Agreement, in each case as set forth in the table on the cover page of the
Offering Memorandum. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to the Company or information supplied by the Company on the one hand
or to any Initial Purchaser's Information on the other, the intent of the
parties and their relative knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The Company and the
Initial Purchaser agree that it would not be just and equitable if
contributions pursuant to this Section 9 were to be determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 9 shall be deemed
to include, for purposes of this Section 9, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending or preparing to defend any such action or claim. Notwithstanding
the provisions of this Section 9, the Initial Purchaser shall not be required
to contribute any amount in excess of the amount by which the total discounts
and commissions received by the Initial Purchaser with respect to the
Securities purchased by it under this Agreement exceeds the amount of any
damages which such Initial Purchaser has otherwise paid or become liable to pay
by reason of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
10. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the Initial Purchaser and the
Company and their respective successors. This Agreement and the terms and
provisions hereof are for the sole benefit of only those persons, except as
provided in Sections 8 and 9 with respect to affiliates, officers, directors,
employees, representatives, agents and controlling persons of the Company and
the Initial Purchaser and in Section 4(e) with respect to holders and
prospective purchasers of the Securities. Nothing in this Agreement is
intended or shall be construed to give any person, other than the persons
referred to in this Section 10, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
11. Expenses. The Company agrees with the Initial Purchaser
to pay (a) the costs incident to the authorization, issuance, sale, preparation
and delivery of the Securities and any taxes payable in that connection; (b)
the costs incident to the preparation, printing and distribution of the
Preliminary Offering Memorandum, the Offering Memorandum and any amendments or
supplements thereto; (c) the costs of reproducing and distributing each of the
Transaction Documents; (d) the costs incident to the preparation, printing and
delivery of the certificates evidencing the Securities, including stamp duties
and transfer taxes, if any, payable upon issuance of the Securities; (e) the
fees and expenses of the Company's counsel and independent accountants; (f) the
fees and expenses of qualifying the Securities under the securities laws of the
several jurisdictions as provided in Section 4(g) and of preparing, printing
and distributing Blue Sky Memoranda (including related fees and expenses of
counsel for the Initial Purchaser); (g) the fees and expenses of the Trustee
and any paying agent (including related fees and expenses of any counsel to
such parties); (h) all expenses
<PAGE> 23
23
and application fees incurred in connection with the application for the
inclusion of the Securities on the PORTAL Market and the approval of the
Securities for book-entry transfer by DTC; and (i) all other costs and expenses
incident to the performance of the obligations of the Company under this
Agreement which are not otherwise specifically provided for in this Section 11;
provided, however, that except as provided in this Section 11 and Section 7,
the Initial Purchaser shall pay its own costs and expenses.
12. Survival. The respective indemnities, rights of
contribution, representations, warranties and agreements of the Company and the
Initial Purchaser contained in this Agreement or made by or on behalf of the
Company or the Initial Purchaser pursuant to this Agreement or any certificate
delivered pursuant hereto shall survive the delivery of and payment for the
Securities and shall remain in full force and effect, regardless of any
termination or cancelation of this Agreement or any investigation made by or on
behalf of any of them or any of their respective affiliates, officers,
directors, employees, representatives, agents or controlling persons. The
Company agrees to cause each subsidiary that becomes a Subsidiary Guarantor
under the Indenture to become jointly and severally liable for all of the
Company's obligations under this agreement.
13. Notices, etc.. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Initial Purchaser, shall be delivered or sent
by mail or telecopy transmission to Chase Securities Inc., 270 Park
Avenue, New York, New York 10017, Attention: Mr. Douglas Hurst
(telecopier no.: (212) 270-0994); or
(b) if to the Company, shall be delivered or sent by mail or
telecopy transmission to the address of the Company set forth in the
Offering Memorandum, Attention: Vice President and General Counsel
(telecopier no.:(281) 419-0860) with a copy (which shall not
constitute notice to the Company) by mail or telecopy transmission to
Winstead Sechrest & Minick P.C., 910 Travis, Suite 2400, Houston, TX
77002, Attention: Arthur S. Berner (telecopier no.: (713) 650-2400);
provided that any notice to the Initial Purchaser pursuant to Section 8(c)
shall also be delivered or sent by mail to the Initial Purchaser at its address
set forth on the signature page hereof. Any such statements, requests, notices
or agreements shall take effect at the time of receipt thereof. The Company
shall be entitled to act and rely upon any request, consent, notice or
agreement given or made on behalf of the Initial Purchaser by CSI.
14. Definition of Terms. For purposes of this Agreement, (a)
the term "business day" means any day on which the New York Stock Exchange,
Inc. is open for trading, (b) the term "subsidiary" has the meaning set forth
in Rule 405 under the Securities Act and (c) except where otherwise expressly
provided, the term "affiliate" has the meaning set forth in Rule 405 under the
Securities Act.
15. Initial Purchaser's Information. The parties hereto
acknowledge and agree that, for all purposes of this Agreement, the Initial
Purchaser's Information consists solely of the following information in the
Preliminary Offering Memorandum and the Offering Memorandum: (i) the last
paragraph on the front cover page concerning the terms of the offering by the
Initial Purchaser; (ii) the legend on the inside front cover page concerning
over-allotment and trading activities by the Initial Purchaser; and (iii) the
<PAGE> 24
24
statements concerning the Initial Purchaser contained in the third, ninth,
twelfth and thirteenth paragraphs under the heading "Plan of Distribution".
16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
17. Counterparts. This Agreement may be executed in one or
more counterparts (which may include counterparts delivered by telecopier) and,
if executed in more than one counterpart, the executed counterparts shall each
be deemed to be an original, but all such counterparts shall together
constitute one and the same instrument.
18. Amendments. No amendment or waiver of any provision of
this Agreement, nor any consent or approval to any departure therefrom, shall
in any event be effective unless the same shall be in writing and signed by the
parties hereto.
19. Headings. The headings herein are inserted for
convenience of reference only and are not intended to be part of, or to affect
the meaning or interpretation of, this Agreement.
<PAGE> 25
25
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us a counterpart hereof, whereupon
this instrument will become a binding agreement between the Company and the
Initial Purchaser in accordance with its terms.
Very truly yours,
SPLITROCK SERVICES, INC.,
by /s/
-----------------------------------
Name:
Title:
Accepted:
CHASE SECURITIES INC.
by /s/
-----------------------------------
Authorized Signatory
Address for notices pursuant to Section 8(c):
1 Chase Plaza, 25th floor
New York, New York 10081
Attention: Legal Department
<PAGE> 1
EXHIBIT 2.1
PLAN OF MERGER
by and between
SPLITROCK SERVICES, INC.
(a Texas corporation)
and
SPLITROCK SERVICES, INC.
(a Delaware corporation)
May 7, 1998
THIS PLAN OF MERGER was approved on April 6, 1998 by the Board of
Directors of Splitrock Services, Inc., a business corporation organized under
the laws of the State of Texas ("Splitrock"), and approved on April 27, 1998 by
the Board of Directors of Splitrock Services, Inc., a business corporation
organized under the laws of the State of Delaware ("Merger Sub" and together
with Splitrock the "Constituent Corporations").
WHEREAS, Splitrock wishes to reincorporate in the State of Delaware
and in order to accomplish said reincorporation, Splitrock will merge with and
into Merger Sub (the "Merger") upon the terms set forth herein; and
WHEREAS, the respective Boards of Directors of each of the Constituent
Corporations deem it advisable and in the best interests of each of such
corporations and their respective shareholders that Splitrock be merged with
and into Merger Sub, pursuant to the Texas Business Corporation Act ("TBCA")
and pursuant to the provisions of the Delaware General Corporation Law
("DGCL"), in the manner contemplated herein and have adopted resolutions
approving this Plan of Merger.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, and for the purpose of stating the
terms and conditions of the Merger, the mode of carrying the same into effect,
the manner and basis of causing the shares of each Constituent Corporation to
be converted into shares of Merger Sub or cancelled and such other details and
provisions as are deemed desirable, the parties hereto have agreed, and do
hereby agree, subject to the terms and conditions hereinafter set forth, as
follows:
ARTICLE I
In accordance with the provisions of the TBCA and the DGCL, Splitrock
shall be merged with and into Merger Sub, the latter of which shall be and is
herein sometimes referred to as the "Surviving Corporation," which shall
continue to exist as said Surviving Corporation under the name "Splitrock
Services, Inc." and shall continue to be governed by the DGCL. The separate
existence of Splitrock shall cease at the effective time and date of the Merger
in accordance with the provisions of the TBCA.
<PAGE> 2
ARTICLE II
The Merger shall become effective upon completion of the filing of an
executed original of this Plan of Merger and of Articles of Merger with the
Secretary of State of the State of Texas and the Certificate of Merger with the
Secretary of State of the State of Delaware. The date and time when the Merger
becomes effective shall be the "Effective Time" referred to in this Plan of
Merger.
ARTICLE III
A. The Merger. Subject to the terms and conditions of this Plan
of Merger, Splitrock shall be merged with and into Merger Sub at the Effective
Time. Following the Merger, the separate corporate existence of Splitrock
shall cease and Merger Sub shall be the Surviving Corporation and shall succeed
to and assume all the rights and obligations of Splitrock in accordance with
the DGCL.
B. Effects of the Merger; Certificate and Bylaws; Directors and
Officers.
1. The Certificate of Incorporation of Merger Sub as in
effect immediately prior to the Effective Time will be the Certificate
of Incorporation of the Surviving Corporation and said Certificate of
Incorporation shall continue in full force and effect until amended
and changed in the manner prescribed by the provisions of the DGCL.
PURSUANT TO ARTICLE 5.01 OF THE TBCA, A COPY OF THE CERTIFICATE OF
INCORPORATION IS ATTACHED HERETO.
2. The Bylaws of Merger Sub as in effect immediately
prior to the Effective Time shall be the Bylaws of the Surviving
Corporation thereafter unless and until changed, altered, or amended
in accordance with their terms, the terms of the Certificate of
Incorporation of the Surviving Corporation following the Effective
Time and as provided by law.
3. The directors and officers of Splitrock as in office
immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation thereafter, each to hold their
directorship or office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation until their
respective successors are duly elected and qualified or such
director's or officer's earlier resignation, termination, removal or
retirement.
ARTICLE IV
The mode of carrying the Merger into effect and the manner and basis
of converting, exchanging or cancelling the shares of the Constituent
Corporations, as applicable, into shares of Merger Sub (as hereinafter
defined), or other consideration shall be as follows:
2
<PAGE> 3
A. Merger Consideration.
1. At the Effective Time, each share of Common Stock of
Splitrock outstanding immediately prior to the Effective Time shall
automatically and without any action on the part of the holder thereof
cease to be outstanding and be converted into the right to receive one
share of Common Stock, par value $.001 per share, of Merger Sub.
2. No fractional shares shall be issued and each holder
of the Common Stock of Splitrock shall be entitled to the nearest
whole share of Merger Sub rounded upwards if such fractional share
exceeds .5 and otherwise rounded downwards.
3. Effective as of the Effective Time, each holder of
record of a certificate or certificates that immediately prior to the
Effective Time represented issued and outstanding shares of Common
Stock of Splitrock, whose shares were exchanged for shares of Merger
Sub, shall surrender such certificates for cancellation to Merger Sub,
duly endorsed.
4. Each share of Common Stock of Merger Sub issued and
outstanding immediately prior to the Effective Time shall continue to
be issued and outstanding as one share of Common Stock of the
Surviving Corporation.
B. No Further Rights in Common Stock of Splitrock. As of the
Effective Time, all shares of the Common Stock of Splitrock shall no longer be
outstanding and shall automatically be canceled and shall cease to exist, and
each holder of a certificate representing shares of Common Stock of Splitrock
as of the Effective Time shall cease to have any rights with respect thereto,
except the right to receive that number of shares of Merger Sub to which such
holder is entitled upon surrender of such certificates as provided above.
ARTICLE V
Expenses and Franchise Taxes. The Surviving Corporation shall bear
all expenses of the Surviving Corporation, Merger Sub, and Splitrock in
connection with this Plan of Merger and all the transactions contemplated
hereby. Additionally, pursuant to Article 5.04(c) of the TBCA, the Surviving
Corporation will be responsible for the payment of all fees and franchise taxes
required by law and will be obligated to pay same.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE> 4
IN WITNESS WHEREOF, each of the Constituent Corporations has caused
this Plan of Merger to be signed in its corporate name by its duly authorized
officer, all as of the date first above written.
SPLITROCK SERVICES, INC.,
a Delaware corporation
By: /s/ WILLIAM R. WILSON
------------------------------------
William R. Wilson, President
SPLITROCK SERVICES, INC.,
a Texas corporation
By: /s/ WILLIAM R. WILSON
------------------------------------
William R. Wilson, President
[SIGNATURE PAGE TO PLAN OF MERGER]
4
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
SPLITROCK SERVICES, INC.
The undersigned natural person, acting as an incorporator of Splitrock
Services, Inc. (the "Corporation") under the General Corporation Law of
Delaware, hereby adopts the following Certificate of Incorporation for such
corporation:
ARTICLE I
NAME
The name of the Corporation is Splitrock Services, Inc.
ARTICLE II
PURPOSE
The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of Delaware.
ARTICLE III
CAPITAL
Section 1. The aggregate number of shares which the Corporation will
have authority to issue is 175,000,000 shares, of which 150,000,000 will be
shares of common stock, $.001 par value per share ("Common Stock"), and
25,000,000 will be shares of preferred stock, $.001 par value per share
("Preferred Stock").
Section 2. Shares of Preferred Stock may be issued from time to time in
one or more series, each of which is to have a distinctive serial designation as
determined in the resolution or resolutions of the board of directors providing
for the issuance of such Preferred Stock from time to time.
<PAGE> 2
Section 3. Each series of Preferred Stock:
(a) may have such number of shares;
(b) may have such voting powers or may be without voting powers;
(c) may be subject to redemption at such time or times and at such
price;
(d) may be entitled to receive dividends (which may be cumulative
or noncumulative) at such rate or rates, or such conditions,
from such date or dates, and at such times,
and payable in preference to, or in such relation to, the
dividends payable on any other class or classes or series of
stock;
(e) may have such rights upon the dissolution of, or upon any
distribution of the assets of, the Corporation;
(f) may be made convertible into, or exchangeable for, shares of
any other class or classes, or of any other series of the same
class or of any other class or classes, of stock of the
Corporation at such price or prices or at such rates of
exchange, and with adjustments;
(g) may be entitled to the benefit of a sinking fund or purchase
fund to be applied to the purchase or redemption of shares of
such series in such amount or amounts;
(h) may be entitled to the benefit of conditions and restrictions
upon the creation of indebtedness of the Corporation or any
subsidiary, upon the issuance of any additional stock
(including additional shares of such series or of any other
series) and upon the payment of dividends or the making of
other distributions on, and the purchase, redemption or other
acquisition by the Corporation of stock of any class; and
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<PAGE> 3
(i) may have such other relative, participating, optional or other
special rights, and qualifications, limitations or
restrictions thereof;
as in such instance is stated in the resolution or resolutions of the board of
directors providing for the issuance of such Preferred Stock. Except where
otherwise set forth in such resolution or resolutions the number of shares
comprising such series may be increased or decreased (but not below the number
of shares then outstanding) from time to time by like action of the board of
directors.
Section 4. Shares of any series of Preferred Stock which have been
redeemed (whether through the operation of a sinking fund or otherwise) or
purchased by the Corporation, or which, if convertible or exchangeable, have
been converted into or exchanged for shares of stock of any other class or
classes will have the status of authorized but unissued shares of Preferred
Stock and may be reissued as a part of the series of which they were originally
a part or may be reclassified and reissued as part of a new series of Preferred
Stock created by resolution or resolutions of the board of directors or as part
of any other series of Preferred Stock, all subject to the conditions or
restrictions on issuance set forth in the resolution or resolutions adopted by
the board of directors providing for the issuance of any series of Preferred
Stock and to any filing required by law.
Section 5. (a) Except as otherwise provided by law or by
the resolutions of the board of directors providing for the
issuance of any series of Preferred Stock, Common Stock will
have the exclusive right to vote for the election of directors
and for all other purposes. Each holder of Common Stock will
be entitled to one vote for each share held.
-3-
<PAGE> 4
(b) Subject to all of the rights of Preferred Stock or any series
thereof, the holders of Common Stock will be entitled to
receive, when, as and if declared by the board of directors,
out of funds legally available therefor, dividends payable in
cash, in stock or otherwise.
(c) Upon any liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, and subject to
the rights of the holders of Preferred Stock, the remaining
net assets of the Corporation will be distributed pro rata to
the holders of Common Stock in accordance with their
respective rights and interests.
ARTICLE IV
DENIAL OF PREEMPTIVE RIGHTS
No stockholder of the Corporation or other person shall have any
preemptive right to purchase or subscribe to any shares of any class or any
notes, debentures, options, warrants or other securities, now or hereafter
authorized.
ARTICLE V
ELECTION OF DIRECTORS; NONCUMULATIVE VOTING
Directors shall be elected by plurality vote. Elections of directors
need not be by written ballot unless the Bylaws of the Corporation shall so
provide. No stockholder of this Corporation shall have the right to cumulate his
votes.
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<PAGE> 5
ARTICLE VI
REGISTERED OFFICE AND AGENT
The street address of the initial registered office of the Corporation
is 9 East Loockerman Street, Suite 214, Dover, Delaware 19901, and the name of
its initial registered agent at such address is Capitol Services, Inc.
ARTICLE VII
INITIAL DIRECTORS
The number of directors constituting the initial Board of Directors is
three (3) and the names and addresses of the persons who are to serve as
directors until the first annual meeting of the stockholders, or until their
successors are elected and qualified are:
William R. Wilson
33 Indian Clover
The Woodlands, Texas 77381
Kwok Li
12400 Ellen Court
Silver Springs, MD 20904
Roy Wilkens
6336 S. Harvard
Tulsa, Oklahoma 74136
ARTICLE VIII
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
No director (including any advisory director) of the Corporation shall
be liable to the Corporation or its stockholders 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 Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or
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<PAGE> 6
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 an
improper personal benefit.
ARTICLE IX
INDEMNITY
Section 1. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 2. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a
-6-
<PAGE> 7
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 3. To the extent that a director, officer, employee or agent of
the Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 1 and 2, or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Section 4. Any indemnification under Sections 1 and 2 (unless ordered
by a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Sections 1 and 2. Such determination
shall be made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding,
or (ii) if such a quorum is not obtainable, or, even
7
<PAGE> 8
if obtainable, if a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (iii) by the stockholders.
Notwithstanding the foregoing, a director, officer, employee or agent of the
Corporation shall be able to contest any determination that the director,
officer, employee or agent has not met the applicable standard of conduct set
forth in Sections 1 and 2 by petitioning a court of appropriate jurisdiction.
Section 5. Expenses (including attorneys' fees) incurred by an officer
or director in defending or settling any civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation 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 is not entitled to be
indemnified by the Corporation as authorized in this Article IX. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
Section 6. The indemnification and advancement of expenses provided by,
or granted pursuant to, the other sections of this Article IX shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
Section 7. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the
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<PAGE> 9
Corporation would have the power to indemnify him against such liability under
the provisions of this Article IX.
Section 8. For purposes of this Article IX, references to "the
Corporation" shall include, in addition to the Corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article IX with
respect to the Corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
Section 9. For purposes of this Article IX, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article IX.
Section 10. The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article IX shall, unless otherwise provided
when authorized or ratified, continue
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as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Section 11. The Corporation shall indemnify its directors, officers and
agents to the fullest extent permitted herein, by the Bylaws of the Corporation,
and by the Delaware General Corporation Law.
ARTICLE X
BYLAWS
The Bylaws of the Corporation may be amended or repealed, or new Bylaws
may be adopted, (i) by the Board of Directors of the Corporation at any duly
held meeting or pursuant to a written consent in lieu of such meeting, or (ii)
by the holders of a majority of the shares represented at any duly held meeting
of stockholders, provided that notice of such proposed action shall have been
contained in the notice of any such meeting, or pursuant to a written consent
signed by the holders of a majority of the outstanding shares entitled to vote
thereon.
ARTICLE XI
INCORPORATOR
The name and address of the incorporator is:
Arthur S. Berner, Esq.
Winstead Sechrest & Minick P.C.
910 Travis, Suite 2400
Houston, Texas 77002
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The undersigned, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, does make this certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly I have hereunto set my hand this the 8th day of April, 1998.
/s/ ARTHUR S. BERNER
----------------------------------------
Arthur S. Berner, Incorporator
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<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
SPLITROCK SERVICES, INC.
* * * * * * * * * * * * * * * * * * * *
TABLE OF CONTENTS
Page
ARTICLE I. OFFICES
Section 1. Principal Office................................ 1
Section 2. Registered office............................... 1
Section 3. Other Offices................................... 1
ARTICLE II. MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings............................... 1
Section 2. Annual Meeting.................................. 1
Section 3. List of Stockholders............................ 1
Section 4. Special Meetings................................ 1
Section 5. Notice.......................................... 2
Section 6. Quorum.......................................... 2
Section 7. Voting by Stockholders.......................... 2
Section 8. Voting Procedure................................ 3
Section 9. Record Date..................................... 3
Section 10. Action Without Meeting; Telephone Meetings...... 4
ARTICLE III. DIRECTORS
Section 1. Management...................................... 5
Section 2. Number, Qualifications and Term................. 5
Section 3. Change in Number................................ 5
Section 4. Removal and Vacancies........................... 5
Section 5. Election of Directors........................... 6
Section 6. Place of Meetings............................... 6
Section 7. First Meetings.................................. 6
Section 8. Regular Meetings................................ 6
Section 9. Special Meetings................................ 6
Section 10. Quorum.......................................... 6
Section 11. Action Without Meeting; Telephone Meetings...... 6
Section 12. Chairman of the Board........................... 7
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<PAGE> 2
TABLE OF CONTENTS
(Continued)
Page
Section 13. Compensation.................................... 7
Section 14. Committees...................................... 7
ARTICLE IV. NOTICES
Section 1. Method.......................................... 7
Section 2. Waiver.......................................... 7
ARTICLE V. OFFICERS
Section 1. Officers........................................ 8
Section 2. Election........................................ 8
Section 3. Removal and Vacancies........................... 8
Section 4. President....................................... 8
Section 5. Vice President.................................. 8
Section 6. Secretary....................................... 9
Section 7. Assistant Secretaries........................... 9
Section 8. Treasurer....................................... 9
Section 9. Assistant Treasurers............................ 9
ARTICLE VI. CERTIFICATES REPRESENTING SHARES
Section 1. Certificates.................................... 9
Section 2. Lost Certificates............................... 10
Section 3. Transfer of Shares.............................. 10
Section 4. Registered Stockholders......................... 10
ARTICLE VII. GENERAL PROVISIONS
Section 1. Distributions and Share Dividends............... 10
Section 2. Reserves........................................ 11
Section 3. Checks.......................................... 11
Section 4. Fiscal Year..................................... 11
Section 5. Seal............................................ 11
Section 6. Indemnification................................. 11
Section 7. Amendments...................................... 14
Section 8. Table of Contents; Headings..................... 14
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<PAGE> 3
BYLAWS
OF
SPLITROCK SERVICES, INC.
ARTICLE I.
OFFICES
Section 1. Principal Office. The principal business office of
Splitrock Services, Inc. (the "Corporation") is at 2170 Buckthorne Place, Suite
350, The Woodlands, Montgomery County, Texas 77380.
Section 2. Registered office. The registered office of the
Corporation shall be 9 East Lockerman Street, Suite 214, Dover, DE 19901.
Section 3. Other Offices. The Corporation may also have offices at
such other places, both within and without the State of Texas or the State of
Delaware, as the Board of Directors may from time to time determine or the
business of the Corporation may require.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders for all
purposes may be held at such time and place, within or without the State of
Texas, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual Meeting. The annual meeting of the stockholders
shall be held on the third Tuesday of April of each year. If this day falls on a
legal holiday, the annual meeting shall be held at the same time on the next
following business day thereafter, or on such other day as the Board of
Directors shall agree. At such meetings, the stockholders shall elect a Board of
Directors and transact such other business as may properly be brought before the
meeting.
Section 3. List of Stockholders. At least ten (10) days before
each meeting of the stockholders, a complete list of the stockholders entitled
to vote at said meeting or any adjournment thereof, arranged in alphabetical
order with the address of and the number of voting shares held by each, shall be
prepared by the officer or agent having charge of the stock transfer books. Such
list, for a period of ten (10) days prior to such meeting, shall be kept on file
at the registered office or principal place of business of the Corporation and
shall be subject to inspection by any stockholder at any time during usual
business hours. Such list shall be produced and kept open at the time and place
of the meeting during the whole time thereof, and shall be subject to the
inspection of any stockholder who may be present.
Section 4. Special Meetings. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute, the
Certificate of Incorporation, or these Bylaws,
<PAGE> 4
may be called by (a) the President or the Board of Directors, or (b) the holders
of at least ten percent (10%) of all shares entitled to vote at such meetings,
unless the Certificate of Incorporation provides for a number of shares greater
than or less than ten percent (10%), in which event special meetings may be
called by the holders of at least the percentage of shares specified in the
Certificate of Incorporation, provided, however, that in no event may the
Certificate of Incorporation require a percentage greater than fifty percent
(50%). Business transacted at a special meeting shall be confined to the
purposes stated in the notice of the meeting.
Section 5. Notice. Written or printed notice stating the place,
day and hour of a meeting of stockholders, and, in case of a special meeting,
the purpose or purposes for which the meeting is called, shall be delivered not
less than ten (10) or, in the event of a merger or consolidation, not less than
twenty (20), nor more than sixty (60) days before the date of the meeting,
either personally or by mail or other means of written communication, by or at
the direction of the President, the Secretary, or the officer or person calling
the meeting, to each stockholder of record entitled to vote at the meeting.
Notice need not be given to a stockholder if (1) notice of two consecutive
annual meetings and all notices of any meetings held during the period between
those annual meetings or (2) all (but in no event less than two) payments (if
sent by first class mail) of distributions or interest on securities during a
12-month period have been mailed to the stockholder, addressed at his address as
shown on the records of the Corporation, and have been returned undeliverable.
If such a stockholder delivers to the Corporation a written notice setting forth
his current address, the notice requirement of this Section shall be reinstated.
Section 6. Quorum. At each meeting the holders of a majority of
the shares issued and outstanding and entitled to vote thereat, present in
person or represented by proxy, shall be requisite and shall constitute a quorum
of the stockholders for the transaction of business except as otherwise provided
by statute, the Certificate of Incorporation or these Bylaws, but in no event
shall a quorum consist of the holders of less than one-third of the shares
entitled to vote at such a meeting. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified.
Section 7. Voting by Stockholders. (a) With respect to any matter
other than the election of directors or a matter for which the affirmative vote
of the holders of a specified portion of the shares entitled to vote is required
by the Delaware General Corporation Law, the affirmative vote of the holders of
a majority of the shares entitled to vote on that matter and represented in
person or by proxy at a meeting of stockholders at which a quorum is present
shall be the act of the stockholders, unless otherwise provided in the
Certificate of Incorporation or the Bylaws.
(b) Unless otherwise provided in the Certificate of Incorporation or
the Bylaws, directors shall be elected by a plurality of the votes cast by the
holders of shares entitled to vote in the election of directors at a meeting of
stockholders at which a quorum is present.
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<PAGE> 5
Section 8. Voting Procedure. Each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote at a
meeting of stockholders, except to the extent that the voting rights of the
shares of any class or classes are limited or denied or special voting rights
are provided by the Certificate of Incorporation. At any meeting of the
stockholders, every stockholder having the right to vote shall be entitled to
vote in person, by proxy appointed by an instrument in writing subscribed by
such stockholder, or by his duly authorized attorney-in-fact. No form of proxy
or power of attorney bearing a date more than eleven (11) months prior to said
meeting shall be valid, unless said instrument provides for a longer period.
Each proxy shall be revocable unless the proxy form conspicuously states that
the proxy is irrevocable and the proxy is coupled with an interest. Such proxy
shall be filed with the Secretary of the Corporation prior to or at the time of
the meeting.
Section 9. Record Date. (a) For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive a distribution by the
Corporation (other than a distribution involving a purchase or redemption by the
Corporation of any of its own shares) or a share dividend, or in order to make a
determination of stockholders for any other proper purpose (other than
determining stockholders entitled to consent to action by stockholders proposed
to be taken without a meeting of stockholders), the Board of Directors of the
Corporation may provide that the share transfer records shall be closed for a
stated period but not to exceed, in any case, sixty (60) days. If the share
transfer records shall be closed for the purpose of determining stockholders
entitled to notice of or to vote at a meeting of stockholders, such records
shall be closed for at least ten (10) days immediately preceding such meeting.
In lieu of closing the share transfer records, the Bylaws or, in the absence of
an applicable Bylaw, the Board of Directors, may fix in advance a date as the
record date for any such determination of stockholders, such date in any case to
be not more than sixty (60) days and, in the case of a meeting of stockholders,
not less than ten (10) days, prior to the date on which the particular action
requiring such determination of stockholders is to be taken. If the share
transfer records are not closed and no record date is fixed for the
determination of stockholders entitled to notice of or to vote at a meeting of
stockholders, or stockholders entitled to receive a distribution (other than a
distribution involving a purchase or redemption by the Corporation of any of its
own shares) or a share dividend, the date on which notice of the meeting is
mailed or the date on which the resolution of the Board of Directors declaring
such distribution or share dividend is adopted, as the case may be, shall be the
record date for such determination of stockholders. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this subsection, such determination shall apply to any adjournment
thereof, except where the determination has been made through the closing of the
share transfer records and the stated period of closing has expired.
(b) For the purpose of determining stockholders entitled to call a
special meeting of stockholders pursuant to Section 4 of this Article II, the
record date shall be the date the first stockholder signs the notice of the
meeting.
(c) Unless a record date shall have previously been fixed or
determined pursuant to this section, whenever action by stockholders is proposed
to be taken by consent in writing without a
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<PAGE> 6
meeting of stockholders, the Board of Directors may fix a record date for the
purpose of determining stockholders entitled to consent to that action, which
record date shall not precede, and shall not be more than ten (10) days after,
the date upon which the resolution fixing the record date is adopted by the
Board of Directors. If no record date has been fixed by the Board of Directors
and the prior action of the Board of Directors is not required by the Delaware
General Corporation Law, the record date for determining stockholders entitled
to consent to action in writing without a meeting shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the Corporation in the manner provided by Section 10(b) of
this Article II. If no record date shall have been fixed by the Board of
Directors and prior action of the Board of Directors is required by the Delaware
General Corporation Law, the record date for determining stockholders entitled
to consent to action in writing without a meeting shall be at the close of
business on the date on which the Board of Directors adopts a resolution taking
such prior action.
Section 10. Action Without Meeting; Telephone Meetings. (a) Any
action required or permitted to be taken at a meeting of the stockholders of the
Corporation may be taken without a meeting without prior notice, and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holder or holders of shares having not less than the
minimum number of votes that would be necessary to take such action at a meeting
at which the holders of all shares entitled to vote on the action were present
and voted.
(b) Every written consent signed by the holders of less than all the
shares entitled to vote with respect to the action that is the subject of the
consent shall bear the date of signature of each stockholder who signs the
consent. No written consent signed by the holders of less than all the shares
entitled to vote with respect to the action that is the subject of the consent
shall be effective to take the action that is the subject of the consent unless,
within sixty (60) days after the date of the earliest dated consent delivered to
the Corporation in the manner required by this subsection, a consent or consents
signed by the holder or holders of shares having not less than the minimum
number of votes that would be necessary to take the action that is the subject
of the consent are delivered to the Corporation by delivery to its registered
office, registered agent, principal place of business, transfer agent,
registrar, exchange agent or an officer or agent of the Corporation having
custody of the books in which proceedings of meetings of stockholders are
recorded. Delivery shall be by hand or certified or registered mail, return
receipt requested. Delivery to the Corporation's principal place of business
shall be addressed to the president or principal executive officer of the
Corporation.
(c) A telegram, telex, cablegram, or similar transmission by a
stockholder, or a photographic, photostatic, facsimile, or similar reproduction
of a writing signed by a stockholder, shall be regarded as signed by the
stockholder for purposes of this section.
(d) Prompt notice of the taking of any action by stockholders without
a meeting by less than unanimous written consent shall be given to those
stockholders who did not consent in writing to the action.
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<PAGE> 7
(e) Subject to applicable notice provisions and unless otherwise
restricted by the Certificate of Incorporation, stockholders may participate in
and hold a meeting by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in such meeting shall constitute presence in
person at such meeting, except where a person's participation is for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened.
ARTICLE III.
DIRECTORS
Section 1. Management. The business and affairs of the Corporation
shall be managed by its Board of Directors who may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by statute or
by the Certificate of Incorporation or by these Bylaws directed or required to
be exercised or done by the stockholders. The Board of Directors shall keep
regular minutes of its proceedings.
Section 2. Number, Qualifications and Term. The Board of Directors
shall consist of at least two (2) members but no more than seven (7) members
unless otherwise determined from time to time by resolution adopted by the
stockholders or by the Board of Directors. No decrease in the number of
directors shall shorten the term of any incumbent director. Directors need not
be stockholders of the Corporation or residents of Texas or Delaware. Effective
as of the 1998 annual meeting of stockholders, except as otherwise provided in
Article III, Section 4 of these Bylaws, the Board of Directors shall be divided
into three classes, each class to be as nearly equal in number as possible. The
terms of office of directors of the first class are to expire at the first
annual meeting of stockholders after their first election or appointment, that
of the second class is to expire at the second annual meeting of stockholders
after their first election or appointment, and that of the third class is to
expire at the third annual meeting of stockholders after their first election or
appointment. Thereafter, each director shall serve for a term ending on the date
of the third annual meeting of stockholders following the annual meeting at
which such director was elected. Each person elected a director shall hold
office until his successor is duly elected and qualified or until his earlier
resignation or removal.
Section 3. Change in Number. The number of Directors and the class
thereof may be increased or decreased from time to time by resolution adopted by
the affirmative vote of a majority of the Directors, but no decrease shall have
the effect of shortening the term of any incumbent Director.
Section 4. Removal and Vacancies. Any Director may be removed
either for or without cause at any annual or special meeting of stockholders by
the affirmative vote of a majority in number of shares of the stockholders
present in person or by proxy at such meeting and entitled to vote for the
election of such Director, if notice of the intention to act upon such matters
shall have
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<PAGE> 8
been given in the notice calling such meeting. Any vacancy occurring
in the Board of Directors may be filled by the vote of a majority of the
remaining Directors, even if such remaining Directors comprise less than a
quorum of the Board of Directors. A Director elected to fill a vacancy shall be
elected for the unexpired term of his predecessor in office. Any position on the
Board of Directors to be filled by reason of an increase in a number of
Directors shall be filled by the vote of a majority of Directors, election at an
annual meeting of the stockholders or at a special meeting of stockholders duly
called for such purpose.
Section 5. Election of Directors. At every election of Directors,
each stockholder entitled to vote with respect to such matter shall have the
right to vote in person or by proxy the number of voting shares owned by him for
as many persons as there are Directors to be elected and for whose election he
has a right to vote. Cumulative voting shall be prohibited.
Section 6. Place of Meetings. The Directors of the Corporation
may hold their meetings, both regular and special, either within or without the
State of Texas.
Section 7. First Meetings. The first meeting of each newly elected
Board of Directors shall be held without further notice immediately following
the annual meeting of stockholders, and at the same place, unless by unanimous
consent of the Directors then elected and serving, such time or place shall be
changed.
Section 8. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board of Directors.
Section 9. Special Meetings. Special meetings of the Board of
Directors may be called by the President on three (3) days' notice to each
Director, either personally, by mail, by telegram, or by facsimile. Special
meetings may be called in like manner and on like notice on the written request
of any two Directors. Except as may be otherwise expressly provided by statute,
the Certificate of Incorporation or these Bylaws, neither the business to be
transacted at, nor the purpose of, any special meeting need be specified in a
notice or waiver of notice.
Section 10. Quorum. At all meetings of the Board of Directors, the
presence of a majority of the Directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the act of a majority
of the Directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute, the Certificate of Incorporation or these Bylaws. If a quorum shall
not be present at any meeting of Directors, the Directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 11. Action Without Meeting; Telephone Meetings. Any action
required or permitted to be taken at a meeting of the Board of Directors or
members of any committee designated by the Board of Directors may be taken
without a meeting if a consent in writing, setting forth the action so taken, is
signed by all the members of the Board of Directors or committee, as the
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<PAGE> 9
case may be. Such consent shall have the same force and effect as a unanimous
vote at a meeting. Subject to applicable notice provisions and unless otherwise
restricted by the Certificate of Incorporation, members of the Board of
Directors, or members of any committee designated by the Board of Directors, may
participate in and hold a meeting by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in such meeting shall constitute
presence in person at such meeting, except where a person's participation is for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
Section 12. Chairman of the Board. The Board of Directors may elect
a Chairman of the Board to preside at their meetings and to perform such other
duties as the Board of Directors may from time to time assign to him.
Section 13. Compensation. Directors, as such, shall not receive any
stated salary for their services, but by resolution of the Board of Directors a
fixed sum, stock options, and other compensation including but not limited to
employee benefits along with expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the Board of Directors;
provided that nothing herein contained shall be construed to preclude any
Director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of any committee designated by the Board of
Directors may, by resolution of the Board of Directors, be allowed compensation
for attending committee meetings.
Section 14. Committees. The Board of Directors may, by resolution
adopted by a majority of the whole Board of Directors, designate from among its
members one or more committees, other than an Executive Committee, to the extent
provided in such resolution.
ARTICLE IV.
NOTICES
Section 1. Method. Whenever by statute, the Certificate of
Incorporation, or these Bylaws, notice is required to be given to any Director
or stockholder, and no provision is made as to how such notice shall be given,
it shall not be construed to mean personal notice, but any such notice may be
given in writing, by mail, postage prepaid, addressed to such Director or
stockholder at such address as appears on the books of the Corporation or in any
other method permitted by law. Any notice required or permitted to be given by
mail shall be deemed to be given at the time when the same shall be thus
deposited in the United States mail as aforesaid.
Section 2. Waiver. Whenever any notice is required to be given to
any stockholder or Director of the Corporation by statute, the Certificate of
Incorporation, or these Bylaws, a waiver thereof in writing signed by the person
or persons entitled to such notice, whether before or after the time stated in
such notice, shall be deemed equivalent to the giving of such notice. Attendance
of
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<PAGE> 10
a stockholder or Director at a meeting shall constitute a waiver of notice of
such meeting, except where a stockholder or Director attends for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened. Consent in writing by a stockholder
or Director to any action taken or resolution adopted by the stockholders or
Directors of the Corporation shall constitute a waiver of any and all notices
required to be given in connection with such action or resolution.
ARTICLE V.
OFFICERS
Section 1. Officers. The officers of the Corporation shall be
elected by the Directors and shall be a President and a Secretary. The Board of
Directors may also choose a Chairman of the Board, one or more Vice Presidents,
a Treasurer and one or more Assistant Secretaries and Assistant Treasurers. Any
two or more offices may be held by the same person.
Section 2. Election. The Board of Directors at its first meeting
after each annual meeting of stockholders shall choose a President and a
Secretary, neither of whom need be a member of the Board of Directors, a
stockholder, or a resident of the State of Texas. The Board of Directors may
appoint such other officers and agents as it shall deem necessary, who shall be
appointed for such terms and shall exercise such powers and perform such duties
as shall be determined from time to time by the Board of Directors.
Section 3. Removal and Vacancies. Each officer of the Corporation
shall hold office until his successor is chosen and qualified in his stead or
until his death or until his resignation or removal from office. Any officer or
agent or member of a committee elected or appointed by the Board of Directors
may be removed either for or without cause by a majority of the Board of
Directors present at a meeting of the Board of Directors at which a quorum is
represented, whenever in the judgment of the Board of Directors the best
interests of the Corporation will be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. If
the office of any officer becomes vacant for any reason, the vacancy may be
filled by the Board of Directors.
Section 4. President. The President shall be the chief executive
officer of the Corporation. The President shall preside at all meetings of the
stockholders and the Board of Directors unless the Board of Directors shall
choose to elect a Chairman of the Board, in which event the President shall
preside at meetings of the Board of Directors in the absence of the Chairman of
the Board. The President shall have general and active management of the
business and affairs of the Corporation, shall see that all orders and
resolutions of the Board of Directors are carried into effect, and shall perform
such other duties as the Board of Directors shall prescribe.
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Section 5. Vice President. Each Vice President, if any, shall have
only such powers and perform only such duties as the Board of Directors may from
time to time prescribe or as the President may from time to time delegate to
such Vice President.
Section 6. Secretary. The Secretary shall attend all sessions of
the Board of Directors and all meetings of the stockholders and record all votes
and the minutes of all proceedings in a book to be kept for that purpose and
shall perform like duties for the Executive Committee when required. The
Secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or President,
under whose supervision the Secretary shall be. The Secretary shall keep in safe
custody the seal of the Corporation and, when authorized by the Board of
Directors, affix the same to any instrument requiring it, and, when so affixed,
it shall be attested by the Secretary's signature or by the signature of the
Treasurer or an Assistant Secretary.
Section 7. Assistant Secretaries. Each Assistant Secretary, if
any, shall have only such powers and perform only such duties as the Board of
Directors may from time to time prescribe or as the President may from time to
time delegate.
Section 8. Treasurer. The Treasurer, if any, shall have the
custody of the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements of the Corporation and shall deposit all
monies and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and Directors, at the regular meetings of the Board of
Directors, or whenever they may require it, an account of all transactions as
Treasurer and of the financial condition of the Corporation, and shall perform
such other duties as the Board of Directors may prescribe. If required by the
Board of Directors, the Treasurer shall give the Corporation a bond in such
form, in such sum, and with surety or sureties as shall be satisfactory to the
Board of Directors for the faithful performance of the duties of such office and
for the restoration to the Corporation, in case of the Treasurer's death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money, and other property of whatever kind in the Treasurer's possession or
under the Treasurer's control belonging to the Corporation.
Section 9. Assistant Treasurers. Each Assistant Treasurer, if
any, shall have only such powers and perform only such duties as the Board of
Directors may from time to time prescribe.
-9-
<PAGE> 12
ARTICLE VI.
CERTIFICATES REPRESENTING SHARES
Section 1. Certificates. Certificates in such form as may be
determined by the Board of Directors shall be delivered representing all shares
to which stockholders are entitled. Such certificates shall be consecutively
numbered and shall be entered in the books of the Corporation as they are
issued. Each certificate shall state on the face thereof the holder's name, the
number and class of shares, and the par value of such shares or a statement that
such shares are without par value. They shall be signed by the President or a
Vice President and the Secretary or an Assistant Secretary and may be sealed
with the seal of the Corporation or a facsimile thereof. The signature of any
such officer may be facsimile.
Section 2. Lost Certificates. The Board of Directors may direct a
new certificate representing shares to be issued in place of any certificate
theretofore issued by the Corporation alleged to have been lost or destroyed,
upon the making of an affidavit of that fact by the person claiming the
certificate to be lost or destroyed. When authorizing such issue of a new
certificate, the Board of Directors, in its discretion and as a condition
precedent to the issuance thereof, may require the owner of such lost or
destroyed certificate, or the owner's legal representative, to advertise the
same in such manner as it shall require and/or give the Corporation a bond in
such form, in such sum, and with such surety or sureties as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost or destroyed.
Section 3. Transfer of Shares. Shares of stock shall be
transferable only on the books of the Corporation by the holder thereof in
person or by the holder's duly authorized attorney. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate
representing shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation or the transfer agent of the Corporation to issue a new certificate
to the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 4. Registered Stockholders. Unless otherwise provided in
the Delaware General Corporation Law, and subject to the provisions in the form
of the Uniform Commercial Code Commerce that has been adopted by the State of
Delaware: (a) the Corporation may regard the person in whose name any shares
issued by the Corporation are registered in the share transfer records of the
Corporation at any particular time (including, without limitation, as of a
record date fixed pursuant to these Bylaws) as the owner of those shares at that
time for purposes of voting those shares, receiving distributions thereon or
notices in respect thereof, transferring those shares, exercising rights of
dissent with respect to those shares, exercising or waiving any preemptive right
with respect to those shares, entering into agreements with respect to those
shares, or giving proxies with respect to those shares; and (b) neither the
Corporation nor any of its officers, directors, employees, or agents shall be
liable for regarding that person as the owner of those shares at that time for
those purposes, regardless of whether that person does not possess a certificate
for those shares.
-10-
<PAGE> 13
ARTICLE VII.
GENERAL PROVISIONS
Section 1. Distributions and Share Dividends. Distributions and
share dividends, subject to the provisions of the Certificate of Incorporation,
if any, may be authorized by the Board of Directors at any regular or special
meeting. Distributions may be paid in cash, in property, or in the issuance of
indebtedness, and may be in the form of a dividend on the outstanding shares of
the Corporation, a purchase or redemption by the Corporation of any of its own
shares, or a payment in liquidation of all or a portion of the assets of the
Corporation. Share dividends shall be paid in authorized but unissued shares of
the Corporation subject to the provisions of the Delaware General Corporation
Law and the Certificate of Incorporation. The Board of Directors may fix a
record date in the manner provided in Article II of these Bylaws for the purpose
of determining stockholders entitled to receive a distribution (other than a
distribution involving a purchase or redemption by the Corporation of any of its
own shares) or share dividend.
Section 2. Reserves. There may be created by resolution of the
Board of Directors out of the surplus of the Corporation such reserve or
reserves as the Directors from time to time, in their discretion, think proper
to provide for contingencies, or to equalize distributions, or to repair or
maintain any property of the Corporation, or for such other purposes as the
Directors shall think beneficial to the Corporation, and the Directors may
modify or abolish any such reserve in the manner in which it was created.
Section 3. Checks. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the Corporation shall
be fixed by resolution of the Board of Directors.
Section 5. Seal. The corporate seal shall have inscribed thereon
the name of the Corporation. Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 6. Indemnification. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
-11-
<PAGE> 14
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue, or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper.
To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in the first and second paragraphs of
this Section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Any indemnification under the first and second paragraphs of this
Section (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in the first and second
paragraphs of this Section. Such determination shall be made (i) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (ii) if such a quorum is not
obtainable, or, even if obtainable, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders. Notwithstanding the foregoing, a director, officer, employee or
agent of the Corporation shall be able to contest any determination that the
director, officer, employee or agent has not met the applicable standard of
conduct set forth in the first and second paragraphs of this Section, by
petitioning a court of appropriate jurisdiction.
Expenses (including attorneys' fees) incurred by an officer or director
in defending or settling any civil, criminal, administrative or investigative
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
-12-
<PAGE> 15
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Section. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the Board of Directors deems appropriate.
The indemnification and advancement of expenses provided by, or granted
pursuant to, the other paragraphs of this Section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
The Corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Section.
For purposes of this Section, references to "the Corporation" shall
include, in addition to the Corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Section with respect to the Corporation as he would have
with respect to such constituent corporation if its separate existence had
continued.
For purposes of this Section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Section.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
-13-
<PAGE> 16
The Corporation shall indemnify its directors, officers, and agents to
the fullest extent permitted herein, in the Certificate of Incorporation, and in
the Delaware General Corporation Law.
Section 7. Amendments. These Bylaws may be amended or repealed
or new Bylaws may be adopted by the stockholders of the Corporation or by the
Board of Directors.
Section 8. Table of Contents; Headings. The Table of Contents and
headings used in these Bylaws have been inserted for convenience only and do not
constitute matters to be construed in interpretation.
-14-
<PAGE> 17
CERTIFICATE BY SECRETARY
The undersigned, being the secretary of the Corporation, hereby
certifies that the foregoing code of Bylaws was duly adopted by the Directors of
the Corporation effective on April 27th, 1998.
IN WITNESS WHEREOF, I have signed this certification as of the 27th day
of April, 1998.
/s/ PATRICK J. MCGETTIGAN, JR.
----------------------------------------------
Patrick J. McGettigan, Jr., Secretary
-15-
<PAGE> 1
EXHIBIT 4.1
11 3/4% Senior Note due 2008
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, 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
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.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend]
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO
LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE
SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT
OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN
THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN "ACCREDITED
INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3), or (7) UNDER THE
SECURITIES ACT THAT
<PAGE> 2
2
IS AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THE SECURITY FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH
CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY
DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OF (E) PURSUANT TO ANY OTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), SUBJECT TO THE COMPANY'S AND THE
TRUSTEE'S RIGHT PRIOR TRANSFER PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE
DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION
SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF
THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
Each Definitive Security shall bear the following additional legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER
INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO
CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS."
<PAGE> 3
No. $ _________
11 3/4% Senior Note due 2008
CUSIP No. _____
SPLITROCK SERVICES, INC., a Delaware corporation, promises to pay to Cede &
Co., or registered assigns, the principal sum [of Dollars] [listed on
the Schedule of Increases or Decreases in Global Security attached hereto](1)
on July 15, 2008.
Interest Payment Dates: January 15 and July 15.
Record Dates: January 1 and July 1.
- --------
(1) Use the Schedule of Increases and Decreases language if Note is in
Global Form.
<PAGE> 4
2
Additional provisions of this Security are set forth on the other side
of this Security.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
SPLITROCK SERVICES, INC.,
by
-----------------------------------
Name:
Title:
Dated:
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
BANK OF MONTREAL TRUST COMPANY,
as Trustee, certifies
that this is one of
the Securities referred
to in the Indenture.
By:
-----------------------------
Authorized Signatory
<PAGE> 5
11 3/4% Senior Note due 2008
1. Interest
(a) SPLITROCK SERVICES, INC., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company"), promises to pay interest on
the principal amount of this Security at the rate per annum shown above. The
Company shall pay interest semiannually on January 15 and July 15 of each year,
commencing on [ ]. Interest on the Securities shall accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from [ ]. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
(b) Liquidated Damages. The holder of this Security is entitled to
the benefits of an Exchange and Registration Rights Agreement, dated as of July
24, 1998, between the Company and the Initial Purchaser named therein (the
"Registration Agreement"). Capitalized terms used in this paragraph (b) but not
defined herein have the meanings assigned to them in the Registration
Agreement. If (i) the Shelf Registration Statement or Exchange Offer
Registration Statement, as applicable under the Registration Agreement, is not
filed with the Commission on or prior to 45 days after the Issue Date, (ii) the
Exchange Offer Registration Statement or the Shelf Registration Statement, as
the case may be, is not declared effective within 105 days after the Issue Date
(or in the case of a Shelf Registration Statement required to be filed in
response to a change in law or the applicable interpretations of Commission's
staff, if later, within 45 days after publication of the change in law or
interpretation), (iii) the Registered Exchange Offer is not consummated on or
prior to 135 days after the Issue Date, or (iv) the Shelf Registration
Statement is filed and declared effective within 135 days after the Issue Date
(or in the case of a Shelf Registration Statement required to be filed in
response to a change in law or the applicable interpretations of Commission's
staff, if later, within 45 days after publication of the change in law or
interpretation) but shall thereafter cease to be effective (at any time that
the Company is obligated to maintain the effectiveness thereof) without being
succeeded within 30 days by an additional Registration Statement filed and
declared effective (each such event referred to in clauses (i) through (iv), a
"Registration Default"), the Company will be obligated to pay liquidated
damages to each Holder of Transfer Restricted Securities, during the period of
one or more such Registration Defaults, in an amount equal to $0.192 per week
per $1,000 principal amount of Transfer Restricted Securities held by such
Holder until (i) the applicable Registration Statement is filed, (ii) the
Exchange Offer Registration Statement is declared effective and the Registered
Exchange Offer is consummated, (iii) the Shelf Registration Statement is
declared effective or (iv) the Shelf Registration Statement again becomes
effective, as the case may be. All accrued liquidated damages shall be paid to
holders in the same manner as interest payments on the Securities on
semi-annual payment dates which correspond to interest payment dates for the
Securities. Following the cure of all Registration Defaults, the accrual of
liquidated damages shall cease. The Trustee shall have no responsibility with
respect to the determination of the amount of any such liquidated damages. For
purposes of the foregoing, "Transfer Restricted Securities" means (i) each
Initial Security until the date on which such Initial Security has been
exchanged for a freely transferable Exchange Security in the Registered
Exchange Offer, (ii) each Initial Security or Private Exchange Security until
the date on which such Initial Security or Private Exchange Security has been
effectively registered under the Securities Act and disposed of in
<PAGE> 6
2
accordance with a Shelf Registration Statement or (iii) each Initial Security
or Private Exchange Security until the date on which such Initial Security or
Private Exchange Security is distributed to the public pursuant to Rule 144
under the Securities Act or is saleable pursuant to Rule 144(k) under the
Securities Act.
2. Method of Payment
The Company shall pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the January 1 or July 1 next preceding the interest payment
date even if Securities are canceled after the record date and on or before
the interest payment date. Holder must surrender Securities to a Paying Agent
to collect principal payments. The Company shall pay principal and interest in
money of the United States of America that at the time of payment is legal
tender for payment of public and private debts. Payments in respect of the
Securities represented by a Global Security (including principal, premium and
interest) shall be made by wire transfer of immediately available funds to the
accounts specified by The Depository Trust Company. The Company shall make all
payments in respect of a certificated Security (including principal, premium,
and interest), by mailing a check to the registered address of each Holder
thereof; provided however, that payments on the Securities may also be made, in
the case of a Holder of at least $1,000,000 aggregate principal amount of
Securities, by wire transfer to a U.S. dollar account maintained by the payee
with a bank in the United States if such Holder elects payment by wire transfer
by giving written notice to the Trustee or the Paying agent to such effect
designating such account no later than 30 days immediately preceding the
relevant due date for payment (or such other date as the Trustee may accept in
its discretion).
3. Paying Agent and Registrar
Initially, BANK OF MONTREAL TRUST COMPANY, a New York banking
corporation (the "Trustee"), shall act as Paying Agent and Registrar. The
Company may appoint and change any Paying Agent, Registrar or co-registrar
without notice. The company or a domestically incorporated Wholly Owned
Subsidiary of the Company, if any, may act as Paying Agent, Registrar or
co-registrar.
4. Indenture
The Company issued the Securities under an Indenture dated as of
July 24, 1998 (the "Indenture"), between the Company and the Trustee. The terms
of the Securities 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.
Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the
"TIA"). Terms defined in the Indenture and not defined herein have the meanings
ascribed thereto in the Indenture. The Securities are subject to all terms and
provisions of the Indenture, and Securityholders are referred to the Indenture
and the TIA for a statement of such terms and provisions.
The Securities are senior unsecured obligations of the Company
limited to $311,000,000 aggregate principal amount at any one time outstanding
(subject to Sections 2.01 and 2.08 of the Indenture). This Security is one of
the [Initial Securities] [Private Exchange Securities] referred to in the
Indenture issued in an aggregate principal amount of $261,000,000. The
Securities include the Initial Securities and any Exchange Securities and
Private Exchange Securities issued in exchange for the Initial Securities
pursuant to the Indenture. The Initial Securities, the Exchange Securities and
the Private
<PAGE> 7
3
Exchange Securities are treated as a single class of securities under the
Indenture. The Indenture imposes certain limitations on the ability of the
Company and its Restricted Subsidiaries to, among other things, make certain
Investments and other Restricted Payments, pay dividends and other
distributions, incur Indebtedness, enter into consensual restrictions upon the
payment of certain dividends and distributions by such Restricted Subsidiaries,
issue or sell shares of capital stock of such Restricted Subsidiaries, enter
into or permit certain transactions with Affiliates, create or incur Liens, make
asset sales and enter into Sale/Leaseback Transactions. The Indenture also
imposes limitations on the ability of the Company to consolidate or merge with
or into any other Person or convey, transfer or lease all or substantially all
of the property of the Company. In addition, the Indenture provides that each
Restricted Subsidiary of the Company that Incurs Indebtedness shall jointly and
severally Guarantee all of the Company's obligations under the Securities and
the Indenture.
5. OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Securities shall
not be redeemable at the option of the Company prior to July 15, 2003. On or
after such date, the Securities shall be redeemable at the option of the
Company, in whole or in part, on not less than 30 nor more than 60 days prior
notice, at the following redemption prices (expressed as percentages of
principal amount), plus accrued and unpaid interest and liquidated damages (if
any) to the redemption date (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the 12-month period commencing on July 15 of the years
set forth below:
Redemption
Year Price
---- -----
2003 105.875%
2004 103.917%
2005 101.958%
2006 and thereafter 100.000%
In addition, at any time and from time to time prior to July 15, 2001,
the Company may redeem up to a maximum of 35% of the original aggregate
principal amount of the Securities (calculated giving effect to any issuance of
Additional Securities) with the Net Cash Proceeds of one or more Equity
Offerings by the Company, at a redemption price equal to 111.75% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to date of redemption (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); provided, however, that at least 65% of the original
aggregate principal amount of the Securities remains outstanding immediately
after each such redemption (calculated giving effect to any issuance of
Additional Securities). Any such redemption shall be made within 60 days of
such Equity Offering upon not less than 30 nor more than 60 days notice mailed
to each holder of Securities being redeemed and otherwise in accordance with
the procedures set forth in the Indenture.
6. SINKING FUND
The Securities are not subject to any sinking fund.
<PAGE> 8
4
7. Notice of Redemption
Notice of redemption will be mailed by first-class mail at least 30
days but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at his or her registered address. Securities in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000. If money sufficient to pay the redemption price of and
accrued and unpaid interest on all Securities (or portions thereof) to be
redeemed on the redemption date is deposited with the Paying Agent on or before
the redemption date and certain other conditions are satisfied, on and after
such date interest ceases to accrue on such Securities (or such portions
thereof) called for redemption.
8. Repurchase of Securities at the Option of Holders upon Change of Control
Upon a Change of Control, any Holder of Securities will have the
right, subject to certain conditions specified in the Indenture, to cause the
Company to repurchase all or any part of the Securities of such Holder at a
purchase price equal to 101% of the principal amount of the Securities to be
repurchased plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date that is on or prior
to the date of purchase) as provided in, and subject to the terms of, the
Indenture.
9. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in
denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or
exchange Securities in accordance with the Indenture. Upon any transfer or
exchange, the Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements or transfer documents and to pay
any taxes required by law or permitted by the Indenture. The Registrar need not
register the transfer of or exchange any Securities selected for redemption
(except, in the case of a Security to be redeemed in part, the portion of the
Security not to be redeemed) or to transfer or exchange any Securities for a
period of 15 days prior to a selection of Securities to be redeemed.
10. Persons Deemed Owners
The registered Holder of this Security may be treated as the owner of
it for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its written request unless an abandoned property law designates
another Person. After any such payment, Holders entitled to the money must look
only to the Company and not to the Trustee for payment.
<PAGE> 9
5
12. Discharge and Defeasance
Subject to certain conditions, the Company at any time may terminate some
of or all its obligations under the Securities and the Indenture if the Company
deposits with the Trustee money or U.S. Government Obligations for the payment
of principal and interest on the Securities to redemption or maturity, as the
case may be.
13. Amendment Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended without prior notice to any
Securityholder but with the written consent of the Holders of at least a
majority in aggregate principal amount of the outstanding Securities and (ii)
any default or noncompliance with any provision may be waived with the written
consent of the Holders of at least a majority in principal amount of the
outstanding Securities. Subject to certain exceptions set forth in the
Indenture, without the consent of any Holder of Securities, the Company and the
Trustee may amend the Indenture or the Securities (i) to cure any ambiguity,
omission, defect or inconsistency; (ii) to comply with Article 5 of the
Indenture; (iii) to provide for uncertificated Securities in addition to or in
place of certificated Securities; (iv) to add Guarantees with respect to the
Securities; (v) to secure the Securities or to create and maintain a valid first
priority security interest in the Escrow Collateral in favor of the Trustee for
the benefit of Holders; (vi) to add additional covenants or to surrender rights
and powers conferred on the Company; (vii) to comply with the requirements of
the SEC in order to effect or maintain the qualification of the Indenture under
the TIA; (viii) to make any change that does not adversely affect the rights of
any Securityholder; or (ix) to provide for the issuance of the Exchange
Securities, Private Exchange Securities, or Additional Securities.
14. Defaults and Remedies
If an Event of Default occurs (other than an Event of Default relating to
certain events of bankruptcy, insolvency or reorganization of the Company) and
is continuing, the Trustee or the Holders of at least 25% in principal amount of
the outstanding Securities may declare the principal of and accrued but unpaid
interest on all the Securities to be due and payable. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of the
Company occurs, the principal of and interest on all the Securities shall become
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holders. Under certain circumstances, the Holders of a
majority in principal amount of the outstanding Securities may rescind any such
acceleration with respect to the Securities and its consequences.
If an Event of Default occurs and is continuing, the Trustee shall be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the Holders unless such Holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Securities unless (i) such Holder
has previously given the Trustee notice that an Event of Default is continuing,
(ii) Holders of at least 25% in principal amount of the outstanding Securities
have requested the Trustee in writing to pursue the remedy, (iii) such Holders
have offered the Trustee reasonable security or indemnity against any loss,
liability or expense, (iv) the Trustee has not complied with such request within
60 days after the receipt of the request and the offer of security or
<PAGE> 10
6
indemnity and (v) the Holders of a majority in principal amount of the
outstanding Securities have not given the Trustee a direction inconsistent with
such request within such 60-day period. Subject to certain restrictions, the
Holders of a majority in principal amount of the outstanding Securities are
given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust
or power conferred on the Trustee. The Trustee, however, may refuse to follow
any direction that conflicts with law, the Indenture or the Escrow and
Disbursement Agreement or that the Trustee determines is unduly prejudicial to
the rights of any other Holder or that would involve the Trustee in personal
liability. Prior to taking any action under the Indenture, the Trustee shall
be entitled to indemnification satisfactory to it in its sole discretion
against all losses and expenses caused by taking or not taking such action.
15. Trustee Dealings with the Company
Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
16. 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 under the Securities or the Indenture or for any claim based on, in
respect of or by reason of such obligations or their creation. By accepting a
Security, each Securityholder waives and releases all such liability. The
waiver and release are part of the consideration for the issue of the
Securities.
17. Authentication
This Security shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder
or an assignee, such as TEN COM(=tenants in common), TEN ENT(=tenants by the
entireties), JT TEN(=joint tenants with rights of survivorship and not as
tenants in common), CUST(=custodian), and U/G/M/A(=Uniform Gift to Minors Act).
19. Governing Law
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
<PAGE> 11
7
20. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Securities or
as contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
THE COMPANY WILL FURNISH TO ANY HOLDER OF SECURITIES UPON WRITTEN
REQUEST AND WITHOUT CHARGE TO THE HOLDER A COPY OF THE INDENTURE WHICH HAS IN
IT THE TEXT OF THIS SECURITY.
<PAGE> 1
EXHIBIT 4.3
ESCROW AND DISBURSEMENT AGREEMENT
This ESCROW AND DISBURSEMENT AGREEMENT ("Agreement"),
dated as of July 24, 1998 is entered into by and among THE CHASE MANHATTAN
BANK, as escrow agent (together with any Subcustodian (as defined in Section
2(a) below), "Escrow Agent"), BANK OF MONTREAL TRUST COMPANY, as trustee for
the benefit of the holders of the Notes (as defined below) under the Indenture
(as defined below) (the "Trustee"), and SPLITROCK SERVICES, INC., a Delaware
corporation (the "Company").
RECITALS
A. Pursuant to that certain Indenture dated as
of July 24, 1998, by and among the Company and the Trustee
(the "Indenture"), the Company has issued $261,000,000
aggregate principal amount of its 11 3/4% Senior Notes due
2008 (together with any other Securities issued under the
Indenture, including in connection with a Registered Exchange
Offer, the "Notes").
B. The parties are entering into this Agreement
to set forth the conditions upon which, and the manner in
which, funds will be disbursed from the Escrow Account to be
established pursuant to this Agreement and released from the
security interest and lien described in Section 6(a) of this
Agreement.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Defined Terms. Capitalized terms used herein but not defined
herein shall have the meanings given in the Indenture. In addition to any
other defined terms used herein, the following terms shall constitute defined
terms for purposes of this Agreement and shall have the meanings set forth
below:
"Acceptable Replacement Escrow Agent" means a
corporation organized and doing business under the laws of the United States of
America or of any state thereof authorized under such laws to exercise
corporate trustee power, subject to supervision or examination by federal or
state authority and having a combined capital and surplus of at least $100
million as set forth in its most recent published annual report of condition.
"Available Funds" means (A) the sum of (i) the
Initial Escrow Amount and (ii) interest and other amounts earned, if any, or
dividends paid on the funds in the Escrow Account (including holdings of
Temporary Cash Investments), less (B) the aggregate disbursements previously
made pursuant to this Agreement.
"Escrow Account" means the escrow account established
pursuant to Section 2 hereof.
<PAGE> 2
"Escrow Account Statement" shall have the meaning
given in Section 2(g) hereof.
"Escrow Agent" has the meaning set forth in Section
2(a) hereof.
"Escrow Collateral" shall have the meaning given in
Section 6(a) hereof.
"Initial Escrow Amount" means $56,604,237.20.
"Payment Notice and Disbursement Request" means a
notice sent by the Trustee to Escrow Agent ordering a disbursement of funds
from the Escrow Account, in substantially the form of Exhibit A hereto. Each
Payment Notice and Disbursement Request shall be signed by an officer of the
Trustee whose signature appears on a Certificate of Incumbency, as defined in
Section 2(i), that has been provided to the Escrow Agent.
2. Escrow Account, Escrow Agent.
(a) Appointment of Escrow Agent. The Trustee and the Company
hereby appoint THE CHASE MANHATTAN BANK, and THE CHASE MANHATTAN BANK hereby
accepts appointment, as escrow agent ("Escrow Agent") under the terms and
conditions of this Agreement. The term "Escrow Agent" shall be deemed to
include any successor to, or subcustodian located in the State of New York
("Subcustodian") appointed by, Escrow Agent.
(b) Establishment of Escrow Account.
(i) Concurrently with the execution and delivery
hereof, Escrow Agent shall establish the Escrow Account at the office of Escrow
Agent or Subcustodian in New York. All funds and Temporary Cash Investments
accepted by Escrow Agent pursuant to this Agreement shall be held for the
exclusive benefit of the Trustee, for the ratable benefit of the holders of the
Notes. All such funds and Temporary Cash Investments shall be held in the
Escrow Account until disbursed in accordance with the terms hereof. The Escrow
Account, and the funds and any permitted Temporary Cash Investments and
proceeds held therein by Escrow Agent, shall be deemed to be under the sole
dominion and control of the Trustee for the ratable benefit of the holders of
the Notes and all such funds and Temporary Cash Investments shall be held by
Escrow Agent separate and apart from all other funds or investments of or held
by Escrow Agent, subject to Section 5 hereof. Concurrently with the execution
and delivery hereof, the Company shall deliver the Initial Escrow Amount in
cash or Temporary Cash Investments to Escrow Agent for deposit into the Escrow
Account against Escrow Agent's written acknowledgment and receipt of the
Initial Escrow Amount. Escrow Agent hereby acknowledges the security interest
in the Escrow Collateral in favor of the Trustee as a secured party for the
ratable benefit of the holders of the Notes. Escrow Agent does not have any
interest in the Escrow Collateral except as escrow holder for the benefit of
the Trustee for the ratable benefit of the holders of the Notes. The parties
acknowledge that this Agreement is intended to establish control of the Escrow
Account and the Escrow Collateral in favor of the Trustee for the ratable
benefit of the holders of the Notes in accordance and for purposes of Sections
8-106 and 9-115 of the Uniform Commercial Code (as defined in the Indenture).
The parties agree that no other person shall be granted such control.
(ii) The Company shall pay or reimburse Escrow
Agent upon request for any transfer taxes or other taxes, fees, charges or
expenses relating to the Escrow Collateral incurred
2
<PAGE> 3
in connection herewith and shall indemnify and hold harmless Escrow Agent from
any amounts that it is obligated to pay in the way of such taxes, fees, charges
or expenses. Any payments of income from the Escrow Account shall be subject
to withholding regulations then in force with respect to United States taxes.
The parties hereto will provide Escrow Agent with appropriate W-9 forms for tax
identification number certifications, or W-8 forms for non-resident alien
certifications. It is understood that the Company shall be responsible for
reporting and paying taxes on all income earned on investment of funds which
are part of the Escrow Collateral. This paragraph shall survive
notwithstanding any termination of this Agreement or the earlier resignation or
removal of Escrow Agent.
(iii) Escrow Agent hereby confirms that (i) it has
established the Escrow Account, (ii) it will hold (a) the Escrow Account and
any and all cash and Temporary Cash Investments (whether certificated or
uncertificated), now or hereafter held in or constituting part of or relating
to such Escrow Account, (b) all related stock and bond powers, certificates and
instruments held in the Escrow Account and all replacements, substitutions,
interest, cash and stock dividends, warrants, options, money, instruments,
documents, goods, chattel paper, accounts, general intangibles, deposit
accounts, partnership and limited liability company interests, and other
property and rights of any nature paid, accrued, received, receivable or
distributed with respect thereto from time to time, and (c) with respect to the
foregoing, all products and proceeds thereof, (iii) the Escrow Account is a
"securities account" as such term is defined in Section 8-501(a) of the Uniform
Commercial Code, (iv) each item of property (including securities) credited to
the Escrow Account shall be treated as a "financial asset" within the meaning
of Section 8-102 of the Uniform Commercial Code, (v) all property (including
securities) delivered to it will be promptly credited to the Escrow Account and
(vi) all property (including securities) underlying any financial assets
credited to the Escrow Account shall be registered in the name of the Trustee
or Escrow Agent, endorsed to the Trustee, Escrow Agent or in blank or credited
to another securities account maintained in the name of Escrow Agent and in no
case will any financial asset credited to the Escrow Account be registered in
the name of the Company, payable to the order of the Company or specially
endorsed to the Company. Escrow Agent shall receive and hold in the Escrow
Account all Escrow Collateral purchased from or through Escrow Agent with
assets in the Escrow Account and record or credit all such Escrow Collateral in
the name of "Bank of Montreal Trust Company, as Trustee under the Indenture
dated as of July 24, 1998" or in the name of Escrow Agent and Escrow Agent
shall collect all income and all proceeds of sales or other dispositions of
such Escrow Collateral and deposit the same in the Escrow Account.
(c) Escrow Agent Compensation.
(i) The Company shall pay to Escrow Agent from
time to time such compensation for its services as may be agreed upon by Escrow
Agent and the Company from time to time. The Company shall reimburse Escrow
Agent upon request for all reasonable out-of-pocket expenses incurred by it,
including costs of collections, in addition to the compensation for its
services. Such expenses shall include the compensation and expenses,
disbursements and advances of Escrow Agent's agents, counsel, accountants and
experts.
(ii) To the extent not paid by the Company when
due, Escrow Agent shall be entitled to disburse from the Escrow Account upon
written permission from the Trustee all amounts due to Escrow Agent as
compensation for services to be performed by Escrow Agent under this Agreement.
3
<PAGE> 1
EXHIBIT 4.4
================================================================================
SPLITROCK SERVICES, INC.
11 3/4% Senior Notes due 2008
---------------
INDENTURE
Dated as of July 24, 1998
---------------
BANK OF MONTREAL TRUST COMPANY,
Trustee
================================================================================
<PAGE> 2
TABLE OF CONTENTS
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ARTICLE 1
Definitions and Incorporation by Reference
SECTION 1.01. Definitions...............................................................................1
SECTION 1.02. Other Definitions........................................................................16
SECTION 1.03. Incorporation by Reference of Trust Indenture Act........................................17
SECTION 1.04. Rules of Construction....................................................................17
ARTICLE 2
The Securities
SECTION 2.01. Amount of Securities; Issuable in Series.................................................18
SECTION 2.02. Form and Dating..........................................................................19
SECTION 2.03. Execution and Authentication.............................................................19
SECTION 2.04. Registrar and Paying Agent...............................................................20
SECTION 2.05. Paying Agent To Hold Money in Trust......................................................20
SECTION 2.06. Securityholder Lists.....................................................................21
SECTION 2.07. Transfer and Exchange....................................................................21
SECTION 2.08. Replacement Securities...................................................................22
SECTION 2.09. Outstanding Securities...................................................................22
SECTION 2.10. Temporary Securities.....................................................................22
SECTION 2.11. Cancelation..............................................................................23
SECTION 2.12. Defaulted Interest.......................................................................23
SECTION 2.13. CUSIP Numbers............................................................................23
ARTICLE 3
Redemption
SECTION 3.01. Notices to Trustee.......................................................................23
SECTION 3.02. Selection of Securities To Be Redeemed...................................................24
SECTION 3.03. Notice of Redemption.....................................................................24
SECTION 3.04. Effect of Notice of Redemption...........................................................25
SECTION 3.05. Deposit of Redemption Price..............................................................25
SECTION 3.06. Securities Redeemed in Part..............................................................25
ARTICLE 4
Covenants
SECTION 4.01. Payment of Securities....................................................................25
SECTION 4.02. SEC Reports..............................................................................25
SECTION 4.03. Limitation on Indebtedness...............................................................26
</TABLE>
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<TABLE>
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SECTION 4.04. Limitation on Restricted Payments........................................................27
SECTION 4.05. Limitation on Restrictions on Distributions
from Restricted Subsidiaries.................................................29
SECTION 4.06. Limitation on Sales of Assets and Subsidiary Stock.......................................30
SECTION 4.07. Limitation on Transactions with Affiliates...............................................33
SECTION 4.08. Change of Control........................................................................33
SECTION 4.09. Compliance Certificate...................................................................34
SECTION 4.10. Further Instruments and Acts.............................................................34
SECTION 4.11. Future Subsidiary Guarantors.............................................................35
SECTION 4.12. Limitation on Lines of Business..........................................................35
SECTION 4.13. Limitation on the Sale or Issuance of Capital Stock
of Restricted Subsidiaries...................................................35
SECTION 4.14. Limitation on Liens......................................................................35
SECTION 4.15. Limitation on Sale/Leaseback Transactions................................................36
SECTION 4.16. Deposit of Funds with Escrow Agent.......................................................36
ARTICLE 5
Successor Company
SECTION 5.01. When Company May Merge or Transfer Assets................................................36
ARTICLE 6
Defaults and Remedies
SECTION 6.01. Events of Default........................................................................38
SECTION 6.02. Acceleration.............................................................................40
SECTION 6.03. Other Remedies...........................................................................40
SECTION 6.04. Waiver of Past Defaults..................................................................40
SECTION 6.05. Control by Majority......................................................................40
SECTION 6.06. Limitation on Suits......................................................................41
SECTION 6.07. Rights of Holders to Receive Payment.....................................................41
SECTION 6.08. Collection Suit by Trustee...............................................................41
SECTION 6.09. Trustee May File Proofs of Claim.........................................................41
SECTION 6.10. Priorities...............................................................................42
SECTION 6.11. Undertaking for Costs....................................................................42
SECTION 6.12. Waiver of Stay or Extension Laws.........................................................42
ARTICLE 7
Trustee
SECTION 7.01. Duties of Trustee........................................................................43
SECTION 7.02. Rights of Trustee........................................................................44
SECTION 7.03. Individual Rights of Trustee.............................................................44
SECTION 7.04. Trustee's Disclaimer.....................................................................44
SECTION 7.05. Notice of Defaults.......................................................................45
SECTION 7.06. Reports by Trustee to Holders............................................................45
SECTION 7.07. Compensation and Indemnity...............................................................45
SECTION 7.08. Replacement of Trustee...................................................................46
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 7.09. Successor Trustee by Merger..............................................................47
SECTION 7.10. Eligibility; Disqualification............................................................47
SECTION 7.11. Preferential Collection of Claims Against Company........................................47
ARTICLE 8
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities; Defeasance.........................................47
SECTION 8.02. Conditions to Defeasance.................................................................48
SECTION 8.03. Application of Trust Money...............................................................49
SECTION 8.04. Repayment to Company.....................................................................49
SECTION 8.05. Indemnity for Government Obligations.....................................................50
SECTION 8.06. Reinstatement............................................................................50
ARTICLE 9
Amendments
SECTION 9.01. Without Consent of Holders...............................................................50
SECTION 9.02. With Consent of Holders..................................................................51
SECTION 9.03. Compliance with Trust Indenture Act......................................................52
SECTION 9.04. Revocation and Effect of Consents and Waivers............................................52
SECTION 9.05. Notation on or Exchange of Securities....................................................52
SECTION 9.06. Trustee to Sign Amendments...............................................................52
SECTION 9.07. Payment for Consent......................................................................53
ARTICLE 10
Escrow Collateral and Security
SECTION 10.01. Escrow and Disbursement Agreement ......................................................53
SECTION 10.02. Recording and Opinions..................................................................54
SECTION 10.03. Release of Escrow Collateral ...........................................................54
SECTION 10.04. Authorization of Actions to Be Taken by the Trustee Under
the Escrow and Disbursement Agreement .......................................54
SECTION 10.05. Authorization of Receipt of Funds by the Trustee Under
the Escrow and Disbursement Agreement........................................55
SECTION 10.06. Termination of Security Interest .......................................................55
ARTICLE 11
Miscellaneous
SECTION 11.01. Trust Indenture Act Controls............................................................55
SECTION 11.02. Notices.................................................................................55
SECTION 11.03. Communication by Holders with Other Holders.............................................56
SECTION 11.04. Certificate and Opinion as to Conditions Precedent......................................56
SECTION 11.05. Statements Required in Certificate or Opinion...........................................56
SECTION 11.06. When Securities Disregarded.............................................................57
SECTION 11.07. Rules by Trustee, Paying Agent and Registrar............................................57
</TABLE>
(iii)
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SECTION 11.08. Legal Holidays..........................................................................57
SECTION 11.09. Governing Law...........................................................................57
SECTION 11.10. No Recourse Against Others..............................................................57
SECTION 11.11. Successors..............................................................................57
SECTION 11.12. Multiple Originals......................................................................57
SECTION 11.13. Table of Contents; Headings.............................................................57
Appendix A - Provisions Relating to Original Securities, Additional
Securities, Private Exchange Securities and Exchange
Securities
Exhibit A - Form of Initial Security
Exhibit B - Form of Exchange Security
Exhibit C - Form of Supplemental Indenture
Exhibit D - Form of Transferee Letter of Representation
</TABLE>
(iv)
<PAGE> 6
INDENTURE dated as of July 24, 1998, between
SPLITROCK SERVICES, INC., a Delaware corporation (the
"Company"), and BANK OF MONTREAL TRUST COMPANY, a New
York banking corporation, as trustee (the "Trustee").
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the Holders of (i) the Company's
11 3/4% Senior Notes due 2008 issued on the date hereof (the "Original
Securities"), (ii) any Additional Securities (as defined herein) that may be
issued on any Issue Date (all such Securities in clauses (i) and (ii) being
referred to collectively as the "Initial Securities"), (iii) if and when issued
as provided in a Registration Agreement (as defined in Appendix A hereto (the
"Appendix")), the Company's 11 3/4% Senior Notes due 2008 issued in a Registered
Exchange Offer (as defined in the Appendix) in exchange for any Initial
Securities (the "Exchange Securities") and (iv) if and when issued as provided
in a Registration Agreement, the Private Exchange Securities (as defined in the
Appendix, and together with the Initial Securities and any Exchange Securities
issued hereunder, the "Securities") issued in a Private Exchange (as defined in
the Appendix). Except as otherwise provided herein, the Securities shall be
limited to $311,000,000 in aggregate principal amount outstanding, of which
$261,000,000 in aggregate principal amount will be initially issued on the date
hereof. Subject to the conditions and in compliance with the covenants set forth
herein, the Company may issue up to $50,000,000 aggregate principal amount of
Additional Securities.
ARTICLE 1
Definitions and Incorporation by Reference
SECTION 1.01. Definitions.
"Additional Securities" means up to $50,000,000 aggregate principal
amount of 11 3/4% Senior Notes due 2008 issued under the terms of this Indenture
subsequent to the Closing Date.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. 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
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of Section 4.07 only, "Affiliate" shall also mean any beneficial owner
of shares representing 5% or more of the total voting power of the Voting Stock
(on a fully diluted basis) of the Company or of rights or warrants to purchase
such Voting Stock (whether or not currently exercisable) and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted
<PAGE> 7
2
Subsidiary, including any disposition by means of a merger, consolidation, or
similar transaction (each referred to for the purposes of this definition as a
"disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary
(other than directors' qualifying shares or shares required by applicable law to
be held by a Person other than the Company or a Restricted Subsidiary), (ii) all
or substantially all the assets of any division or line of business of the
Company or any Restricted Subsidiary or (iii) any other assets of the Company or
any Restricted Subsidiary other than inventory or obsolete assets sold in the
ordinary course of business of the Company or such Restricted Subsidiary (other
than, in the case of (i), (ii) and (iii) above, (x) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary, (y) for purposes of the provisions
described under Section 4.06 only, a disposition subject to Section 4.04 and (z)
a disposition of assets with a fair market value of less than $250,000).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means,
as at the time of determination, the present value (discounted at the interest
rate borne by the Securities, compounded annually) of the total obligations of
the lessee for rental payments during the remaining term of the lease included
in a Sale/Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any Indebtedness outstanding under any credit
or similar agreement with a financial institution which provides for revolving
credit loans, term loans or letters of credit or other credit facilities, as
amended, waived, restated, supplemented, extended, replaced, refinanced or
otherwise modified from time to time.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to
be classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be prepaid by the lessee without payment of a
penalty.
<PAGE> 8
3
"Cash Contribution Amount" means the aggregate amount of cash
contributions made to the capital of the Company described in the definition of
"Contribution Indebtedness".
"Change of Control" means the occurrence of any of the following
events:
(i) prior to the first public offering of common stock of the
Company, the Permitted Holders cease to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of a majority in the aggregate of the total voting power of
the Voting Stock of the Company, whether as a result of issuance of
securities of the Company, any merger, consolidation, liquidation or
dissolution of the Company, any direct or indirect transfer of
securities by any Permitted Holder or otherwise (for purposes of this
clause (i) and clause (ii) below, the Permitted Holders shall be deemed
to beneficially own any Voting Stock of an entity (the "specified
entity") held by any other entity (the "parent entity") so long as the
Permitted Holders beneficially own (as so defined), directly or
indirectly, in the aggregate a majority of the voting power of the
Voting Stock of the parent entity);
(ii) on the date of or after the first public offering of
common stock of the Company referred in clause (i), (A) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Exchange Act),
other than one or more Permitted Holders, is or becomes the beneficial
owner (as defined in clause (i) above, except that for purposes of this
clause (ii) such person shall be deemed to have "beneficial ownership"
of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% of the total voting
power of the Voting Stock of the Company and (B) the Permitted Holders
"beneficially own" (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the total voting
power of the Voting Stock of the Company than such other person and do
not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors
(for the purposes of this clause (ii), such other person shall be
deemed to beneficially own any Voting Stock of a specified entity held
by a parent entity, if such other person is the beneficial owner (as
defined in this clause (ii)), directly or indirectly, of more than 35%
of the voting power of the Voting Stock of such parent entity and the
Permitted Holders "beneficially own" (as defined in clause (i) above),
directly or indirectly, in the aggregate a lesser percentage of the
voting power of the Voting Stock of such parent entity and do not have
the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors of such
parent entity);
(iii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
(together with any new directors whose election by such Board of
Directors or whose nomination for election by the stockholders of the
Company was approved by a vote of 66 2/3% of the directors of the
Company 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 of Directors of the Company then in office;
<PAGE> 9
4
(iv) the adoption of a plan relating to the liquidation or
dissolution of the Company; or
(v) the merger or consolidation of the Company with or into
another Person or the merger of another Person with or into the
Company, or the sale of all or substantially all the assets of the
Company to another Person (other than a Person that is controlled by
the Permitted Holders), and, in the case of any such merger or
consolidation, the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed
into or exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving Person
or transferee that represent immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of
the surviving Person or transferee.
"Closing Date" means the date of this Indenture.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor and, for purposes of
any provision contained herein and required by the TIA, each other obligor on
the indenture securities.
"Consolidated Interest Expense" means, for any period, the total
interest expense of the Company and its Consolidated Restricted Subsidiaries,
plus, to the extent Incurred by the Company and its Subsidiaries in such period
but not included in such interest expense, (i) interest expense attributable to
Capitalized Lease Obligations and the interest expense relating to Attributable
Debt, (ii) amortization of debt discount and debt issuance costs, (iii)
capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts
and other fees and charges attributable to letters of credit and bankers'
acceptance financing, (vi) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary, (vii) net costs associated with Hedging Obligations
(including amortization of fees), (viii) dividends in respect of all
Disqualified Stock of the Company and all Preferred Stock of the Subsidiaries of
the Company to the extent held by Persons other than the Company or a Wholly
Owned Subsidiary, (ix) interest Incurred in connection with investments in
discontinued operations and (x) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries for such period; provided, however,
that there shall not be included in such Consolidated Net Income: (i) any net
income or loss of any Person (other than the Company) if such Person is not a
Restricted Subsidiary, except that (A) subject to the limitations contained in
clause (iv) below, the Company's equity in the net income of any such Person for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such period
to the Company or a Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution made to a Restricted
Subsidiary, to
<PAGE> 10
5
the limitations contained in clause (iii) below) and (B) the Company's equity in
a net loss of any such Person (including any Unrestricted Subsidiary) for such
period shall be included in determining such Consolidated Net Income; (ii) any
net income (or loss) of any Person acquired by the Company or a Subsidiary in a
pooling of interests transaction for any period prior to the date of such
acquisition; (iii) any net income (or loss) of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A) subject to
the limitations contained in clause (iv) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Restricted Subsidiary during such period to the Company or
another Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution made to another Restricted
Subsidiary, to the limitation contained in this clause) and (B) the Company's
equity in a net loss of any such Restricted Subsidiary for such period shall be
included in determining such Consolidated Net Income; (iv) any gain (but not
loss) realized upon the sale or other disposition of any asset of the Company or
its Consolidated Subsidiaries (including pursuant to any Sale/Leaseback
Transaction) that is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other disposition
of any Capital Stock of any Person; (v) any extraordinary gain or loss; and (vi)
the cumulative effect of a change in accounting principles. Notwithstanding the
foregoing, for the purpose of Section 4.04 only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets from Unrestricted Subsidiaries to the Company or a
Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under Section
4.04(a)(3)(D).
"Consolidated Operating Cash Flow" for any period means the
Consolidated Net Income for such period, plus the following to the extent
deducted in calculating such Consolidated Net Income: (i) income tax expense of
the Company and its Consolidated Restricted Subsidiaries, (ii) Consolidated
Interest Expense, (iii) depreciation expense of the Company and its Consolidated
Restricted Subsidiaries, (iv) amortization expense of the Company and its
Consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid cash item that was paid in a prior period) and (v) all
other non-cash charges of the Company and its Consolidated Restricted
Subsidiaries (excluding any such non-cash charge to the extent it represents an
accrual of or reserve for cash expenditures in any future period) in each case
for such period. Notwithstanding the foregoing, the provision for taxes based on
the income or profits of, and the depreciation and amortization and non-cash
charges of, a Restricted Subsidiary of the Company shall be added to
Consolidated Net Income to compute Consolidated Operating Cash Flow only to the
extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating Consolidated Net Income and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Restricted Subsidiary without prior approval
(that has not been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
stockholders.
"Consolidation" means the consolidation of the amounts of each
Restricted Subsidiary with those of the Company in accordance with GAAP
consistently applied; provided, however, that "Consolidation" shall not include
consolidation of the accounts
<PAGE> 11
6
of any Unrestricted Subsidiary, but the interest of the Company or any
Restricted Subsidiary in an Unrestricted Subsidiary shall be accounted for as an
investment. The term "Consolidated" has a correlative meaning.
"Contribution Indebtedness" means Indebtedness of the Company in an
aggregate principal amount not greater than twice the aggregate amount of the
Net Cash Proceeds received by the Company from contributions made to the capital
of the Company after the date hereof, provided, however, that such Contribution
Indebtedness (i) has a Stated Maturity later than the Stated Maturity of the
Securities, (ii) is Incurred substantially concurrently with such cash
contribution, and (iii) is so designated as Contribution Indebtedness, pursuant
to an Officers' Certificate, on the Incurrence date thereof.
"Currency Agreement" means with respect to any Person, any foreign
exchange contract, currency swap agreement or any similar agreement or
arrangement to which such Person is a party or of which it is a beneficiary.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a)
the Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) four times the Consolidated Operating Cash Flow for
the latest fiscal quarter for which financial information is available
immediately preceding such Determination Date (the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the Measurement
Period immediately prior to the relevant Determination Date, (i) any Person that
is a Restricted Subsidiary on the Determination Date (or would become a
Restricted Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated Operating Cash
Flow) shall be deemed to have been a Restricted Subsidiary at all times during
such Measurement Period, (ii) any Person that is not a Restricted Subsidiary on
such Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) shall be deemed not to
have been a Restricted Subsidiary at any time during such Measurement Period,
and (iii) if the Company or any Restricted Subsidiary shall have in any manner
(x) acquired (through an acquisition or the commencement of activities
constituting such operating business) or (y) disposed of (by an Asset
Disposition 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 such Determination Date, such
calculation shall be made on a pro forma basis in accordance with GAAP as if all
such transactions had been consummated prior to the first day of such
Measurement Period (it being understood that in calculating Consolidated
Operating Cash Flow, the exclusions set forth in clauses (i) through (vi) of the
definition of Consolidated Net Income shall apply to a Person which has been
acquired as if it were a Restricted Subsidiary).
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"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 exercisable) or upon the
happening of any event (i) matures or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise, (ii) is convertible or exchangeable for
Indebtedness or Disqualified Stock or (iii) is redeemable at the option of the
holder thereof, in whole or in part, in each case on or prior to the first
<PAGE> 12
7
anniversary of the Stated Maturity of the Securities; provided, however, 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 first anniversary of the Stated
Maturity of the Securities shall not constitute Disqualified Stock if the "asset
sale" or "change of control" provisions applicable to such Capital Stock are not
more favorable to the holders of such Capital Stock than the provisions of
Section 4.06 and Section 4.08.
"Equity Offering" means any public or private sale of common stock or
Preferred Stock of the Company (other than Disqualified Stock) other than any
sale to a Permitted Holder.
"Escrow Account" means an escrow account for the deposit of
approximately $54.9 million of the net proceeds from the sale of the Securities
under the Escrow and Disbursement Agreement.
"Escrow Agent" means The Chase Manhattan Bank as the Escrow Agent under
the Escrow and Disbursement Agreement, or any successor thereto appointed
pursuant to such agreement.
"Escrow Collateral" has the meaning provided in the Escrow and
Disbursement Agreement.
"Escrow and Disbursement Agreement" means the Escrow and Disbursement
Agreement, dated as of the Closing Date, by and among the Escrow Agent, the
Trustee and the Company, governing the disbursement of funds from the Escrow
Account.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the
price that could be negotiated in an arm's-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 this Indenture, Fair Market Value shall be determined by the Board of
Directors of the Company acting in good faith and shall be evidenced by a
resolution of the Board of Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Closing Date, including those set forth
in (i) the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entities as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC. All ratios and
computations based on GAAP contained in this Indenture shall be computed in
conformity with GAAP.
<PAGE> 13
8
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any other Person and any obligation, direct or indirect, contingent or
otherwise, of such Person (i) to purchase or pay (or advance or supply funds for
the purchase or payment of) such Indebtedness or other obligation of such other
Person (whether arising by virtue of partnership arrangements, or by agreement
to keep-well, to purchase assets, goods, securities or services, to take-or-pay,
or to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, 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. The term "Guarantor" shall mean any Person Guaranteeing
any obligation.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement or any Currency Agreement.
"Holder" or "Securityholder" means the Person in whose name a Security
is registered on the registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Person at the time it becomes a Subsidiary. The term "Incurrence" when used as a
noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money; (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments; (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto); (iv) all obligations
of such Person to pay the deferred and unpaid purchase price of property or
services (except Trade Payables), which purchase price is due more than six
months after the date of placing such property in service or taking delivery and
title thereto or the completion of such services; (v) Capitalized Lease
Obligations and all Attributable Debt of such Person; (vi) the amount of all
obligations of such Person with respect to the redemption, repayment or other
repurchase of any Disqualified Stock or, with respect to any Subsidiary of such
Person, any Preferred Stock (but excluding, in each case, any accrued
dividends); (vii) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided, however, that the amount of Indebtedness of such Person shall
be the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other Persons;
(viii) to the extent not otherwise included in this definition, Hedging
Obligations of such Person; and (ix) all obligations of the type referred to in
clauses (i) through (viii) of other Persons and all dividends of other Persons
for the payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such
<PAGE> 14
9
date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
"Indenture" means this Indenture as amended or supplemented from time
to time.
"Interest Payment Date" means January 15 and July 15 of each year
commencing on January 15, 1999.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Issue Date", with respect to any Initial Securities, means the date on
which such Initial Securities are originally issued.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extension of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and Section 4.04, (i) "Investment" shall include the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of any Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments
received (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to the properties or assets that are the subject of such
Asset Disposition or received in any other non-cash form) therefrom, in each
case net of (i) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, provincial, foreign
and local taxes required
<PAGE> 15
10
to be paid or accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such assets,
or which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law be repaid out of the proceeds from such
Asset Disposition, (iii) all distributions and other payments required to be
made to minority interest holders in Subsidiaries or joint ventures as a result
of such Asset Disposition and (iv) appropriate amounts to be provided by the
seller as a reserve, in accordance with GAAP, against any liabilities associated
with the property or other assets disposed of in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock or any equity contribution, means the cash proceeds of such issuance, sale
or contribution net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees actually incurred in connection with such issuance, sale or
contribution and net of taxes paid or payable as a result thereof.
"Officer" means the Chairman of the Board, the Chief Executive Officer,
the Chief Financial Officer, the President, any Vice President, the Treasurer or
the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Holders" means Kwok L. Li, William R. Wilson and Linsang
Partners, LLC and any Person acting in the capacity of an underwriter in
connection with a public or private offering of the Company's Capital Stock.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a Person
that will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted Subsidiary is a
Telecommunications Business; (ii) another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary; provided, however, that such Person's primary business is
a Telecommunications Business; (iii) Temporary Cash Investments; (iv)
receivables owing to the Company or any Restricted Subsidiary if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; provided, however, that such trade terms
may include such concessionary trade terms as the Company or any such Restricted
Subsidiary deems reasonable under the circumstances; (v) Investments in prepaid
expenses; (vi) loans or advances to employees made in the ordinary course of
business of the Company or such Restricted Subsidiary and not exceeding $2.0
million in the aggregate outstanding at any one time; (vii) stock, obligations
or securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments; (viii) any Person to the extent such Investment
represents
<PAGE> 16
11
the non-cash portion of the consideration received for an Asset Disposition that
was made pursuant to and in compliance with Section 4.06; (ix) Investments made
prior to the Closing Date; (x) Investments in Telecommunications Assets not to
exceed $30.0 million at any one time outstanding; and (xi) other Investments,
not to exceed the greater of (a) 10% of Total Assets of the Company at the time
of such Investment (with the fair market value of each Investment being measured
at the time made and without giving effect to subsequent changes in value) and
(b) $30.0 million.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker'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 of 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; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet due or payable or subject to
penalties for non-payment or which are being contested in good faith by
appropriate proceedings; (d) Liens in favor of issuers of surety bonds issued
pursuant to the request of and for the account of such Person in the ordinary
course of its business; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights-of-way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens to secure Indebtedness permitted pursuant to
clauses (b)(i) and (b)(vi) of Section 4.03; (g) Liens existing on the Closing
Date; (h) Liens on property or shares of stock of another Person at the time
such other Person becomes a Subsidiary of such Person; provided, however, that
such Liens are not created, Incurred or assumed in connection with, or in
contemplation of, such other Person becoming such a Subsidiary; provided
further, however, that such Liens do not extend to any other property owned by
such Person or any of its Subsidiaries; (i) Liens on property at the time such
Person or any of its Subsidiaries acquires the property, including any
acquisition by means of a merger or consolidation with or into such Person or
any Subsidiary of such Person; provided, however, that such Liens are not
created, Incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that the Liens do not extend to any
other property owned by such Person or any of its Subsidiaries; (j) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a wholly owned Subsidiary of such Person; (k) Liens securing
obligations under Interest Rate Agreements so long as such obligations under
Interest Rate Agreements relate to Indebtedness that is, and is permitted under
this Indenture to be, secured by a Lien on the same property securing such
obligations under Interest Rate Agreements; (l) Liens to secure any Refinancing
(or successive Refinancings) as a whole, or in part, of any Indebtedness secured
by any Lien referred to in the foregoing clauses (f), (g), (h) and (i);
provided, however, that (x) such new Lien shall be limited to all or part of the
same property that secured the original Lien (plus improvements to or on
<PAGE> 17
12
such property) and (y) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (A) the outstanding principal
amount or, if greater, committed amount of the Indebtedness secured by Liens
described under clauses (f), (g), (h) or (i) at the time the original Lien
became a Permitted Lien under this Indenture and (B) an amount necessary to pay
any fees and expenses, including premiums, related to such Refinancings; and (m)
Liens in favor of the Trustee arising under the provisions of the Escrow and
Disbursement Agreement and the provisions of this Indenture relating thereto.
Notwithstanding the foregoing, "Permitted Liens" shall not include any Lien
described in clauses (f), (h) or (i) above to the extent such Lien applies to
any Telecommunications Assets acquired directly or indirectly from Net Available
Cash pursuant to Section 4.06.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"principal" of a Security means the principal of the Security plus the
premium, if any, payable on the Security which is due or overdue or is to become
due at the relevant time.
"Prodigy Agreement" means the Splitrock Full Service Agreement dated as
of June 24, 1997 between the Company and Prodigy, Inc. as in effect on the date
hereof.
"Purchase Money Indebtedness" means Secured Indebtedness (including
Capitalized Lease Obligations, mortgage financings and purchase money
obligations) incurred for the purpose of financing all or any part of the cost
of construction, installation, acquisition, lease, development or improvement by
the Company or any Restricted Subsidiary of any Telecommunications Assets of the
Company or any Restricted Subsidiary and 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 provided, however, that (i) the security agreement or
conditional sales or other title retention contract pursuant to which a Lien on
such assets is created shall be entered into within 180 days after the purchase
or acquisition of such assets and shall at all times be confined solely to the
assets so purchased or acquired, any additions, replacements, modifications and
accessions thereto and any proceeds and products therefrom, (ii) at no time
shall the aggregate principal amount of the outstanding Indebtedness secured
thereby be increased, except in connection with the purchase of additions and
accessions thereto and except in respect of fees and other obligations in
respect of such Indebtedness and (iii) the Indebtedness secured thereby shall be
with recourse solely to the assets so purchased or acquired, any additions,
replacements, modifications and accessions thereto and any proceeds and products
therefrom.
<PAGE> 18
13
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness exchange or replacement for, such Indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that is Incurred to
refund, refinance, replace, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) any Indebtedness of the Company or any
Restricted Subsidiary existing on the date of this Indenture or Incurred in
compliance with this Indenture (including Indebtedness of the Company that
Refinances Refinancing Indebtedness); provided, however, that (i) the
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) the Refinancing Indebtedness
has an Average Life at the time such Refinancing Indebtedness is Incurred that
is equal to or greater than the Average Life of the Indebtedness being
refinanced, (iii) such Refinancing Indebtedness is Incurred in an aggregate
principal amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the aggregate principal amount (or if
issued with original issue discount, the aggregate accreted value) then
outstanding of the Indebtedness being Refinanced and (iv) if the Indebtedness
being Refinanced is subordinated in right of payment to the Securities, such
Refinancing Indebtedness is subordinated in right of payment to the Securities
at least to the same extent as the Indebtedness being Refinanced; provided
further, however, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of the
Company or (y) Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property
now owned or hereafter acquired by the Company or a Restricted Subsidiary
whereby the Company or a Restricted Subsidiary transfers such property to a
Person and the Company or such Restricted Subsidiary leases it from such Person,
other than leases between the Company and a Wholly Owned Subsidiary or between
Wholly Owned Subsidiaries.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by
a Lien.
"Securities" means the Securities issued under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Indebtedness" of the Company means the principal of, premium
(if any) and accrued and unpaid interest on (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization of the
Company, regardless of whether or not a claim for post-filing interest is
allowed in such proceedings), and fees and other amounts owing in respect of,
Bank Indebtedness and all other Indebtedness of the Company, whether outstanding
on the Closing Date or thereafter Incurred, unless in the instrument creating or
evidencing the same or pursuant to which the same is outstanding it is provided
that such obligations are subordinated in right of payment to the Securities;
<PAGE> 19
14
provided, however, that Senior Indebtedness shall not include (i) any obligation
of the Company to any Subsidiary, (ii) any liability for Federal, state, local
or other taxes owed or owing by the Company, (iii) any accounts payable or other
liability to trade creditors arising in the ordinary course of business
(including Guarantees thereof or instruments evidencing such liabilities), (iv)
any Indebtedness or obligation of the Company (and any accrued and unpaid
interest in respect thereof) that by its terms is subordinate or junior in any
respect to any other Indebtedness or obligation of the Company, including any
Subordinated Obligations, (v) any obligations with respect to any Capital Stock,
or (vi) any Indebtedness Incurred in violation of this Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency beyond the control of the issuer unless such
contingency has occurred).
"Subordinated Obligation" means, with respect to any Person, any
Indebtedness of such Person (whether outstanding on the Closing Date or
thereafter Incurred) that is subordinate or junior in right of payment to the
Securities or any other indebtedness of such Person pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Subsidiary Guarantee" means each Guarantee of the obligations with
respect to the Securities issued by a Person pursuant to the terms of this
Indenture.
"Subsidiary Guarantor" means any Person that has issued a Subsidiary
Guarantee.
"Telecommunications Assets" means all assets (including Capital Stock),
rights (contractual or otherwise) and properties, real or personal, whether
tangible or intangible, used or intended for use in connection with a
Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting,
or providing services relating to the transmission of, data, video or voice
through owned or leased transmission facilities, (ii) constructing, creating,
developing or marketing networks, related network transmission equipment,
software and other devices for use in a communication business or (iii)
evaluating, participating or pursuing any other activity or opportunity that is
primarily related to those identified in (i) or (ii) above; provided that the
determination of what constitutes a Telecommunications Business shall be made in
good faith by the Board of Directors of the Company.
<PAGE> 20
15
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any agency
thereof or obligations Guaranteed by the United States of America or any agency
thereof, (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company that is organized under the laws of
the United States of America, any state thereof or any foreign country
recognized by the United States of America having capital, surplus and undivided
profits aggregating in excess of $500.0 million (or the foreign currency
equivalent thereof) and whose long-term debt is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act), (iii)
repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clause (i) above entered into with a bank
meeting the qualifications described in clause (ii) above, (iv) investments in
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating at the time as
of which any investment therein is made of "P-1" (or higher) according to
Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard and
Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc. ("S&P"),
and (v) investments in securities with maturities of six months or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's
Investors Service, Inc.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections
77aaa-77bbbb) as in effect on the date of this Indenture.
"Total Assets" means, with respect to any Person, the total
Consolidated assets of such Person and its Restricted Subsidiaries, as shown on
the most recent balance sheet of such Person.
"Total Consolidated Indebtedness" means, as of any date of
determination, an amount equal to the aggregate amount of all Indebtedness of
the Company and its Restricted Subsidiaries, determined on a Consolidated basis
in accordance with GAAP, outstanding as of such date of determination, after
giving effect to any Incurrence of Indebtedness and the application of the
proceeds therefrom giving rise to such determination.
"Trade Payables" means, with respect to any Person, any accounts
payable or any indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person arising in the ordinary course of business
in connection with the acquisition of goods or services.
"Trustee" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any
other officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
<PAGE> 21
16
"Uniform Commercial Code" means the New York Uniform Commercial Code as
in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless (a) such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; (b) a Default or
Event of Default shall have occurred and be continuing; or (c) immediately after
giving effect to such designation, the Company would not be able to Incur $1.00
of Indebtedness pursuant to Section 4.03(a); provided, however, that either (A)
the Subsidiary to be so designated has total Consolidated assets of $1,000 or
less or (B) if such Subsidiary has Consolidated assets greater than $1,000, then
such designation would be permitted pursuant to Section 4.04. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness
pursuant to Section 4.03(a) and (y) no Default shall have occurred and be
continuing. Any such designation of a Subsidiary as a Restricted Subsidiary or
Unrestricted Subsidiary by the Board of Directors shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company
all the Capital Stock of which (other than directors' qualifying shares) is
owned by the Company or another Wholly Owned Subsidiary.
SECTION 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
---- -------------
<S> <C>
"Affiliate Transaction".......................................................... 4.07
"Bankruptcy Law"................................................................. 6.01
"Change of Control Offer......................................................... 4.08(b)
"covenant defeasance option"..................................................... 8.01(b)
</TABLE>
<PAGE> 22
17
<TABLE>
Defined in
Term Section
---- -------------
<S> <C>
"Custodian"...................................................................... 6.01
"Event of Default"............................................................... 6.01
"legal defeasance option"........................................................ 8.01(b)
"Legal Holiday".................................................................. 11.08
"Offer".......................................................................... 4.06(c)
"Offer Amount"................................................................... 4.06(d)(2)
"Offer Period"................................................................... 4.06(d)(2)
"Paying Agent"................................................................... 2.04
"protected purchaser"............................................................ 2.08
"Purchase Date".................................................................. 4.06(d)
"Registrar"...................................................................... 2.04
"Restricted Payment.............................................................. 4.04
"Successor Company".............................................................. 5.01
</TABLE>
SECTION 1.03. Incorporation by Reference of Trust Indenture
Act. This Indenture is subject to the mandatory provisions of the TIA, which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities and any Subsidiary
Guarantees.
"indenture security holder" means a Holder or Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the
Trustee.
"obligor" on the indenture securities means the Company, any
Subsidiary Guarantors and any other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by SEC rule have
the meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction. Unless the context
otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
<PAGE> 23
18
(5) words in the singular include the plural and words in the
plural include the singular;
(6) unsecured Indebtedness shall not be deemed to be
subordinate or junior to Secured Indebtedness merely by virtue of its
nature as unsecured Indebtedness;
(7) the principal amount of any noninterest bearing or other
discount security at any date shall be the principal amount thereof
that would be shown on a balance sheet of the issuer dated such date
prepared in accordance with GAAP;
(8) the principal amount of any Preferred Stock shall be (i)
the maximum liquidation value of such Preferred Stock or (ii) the
maximum mandatory redemption or mandatory repurchase price with respect
to such Preferred Stock, whichever is greater.
ARTICLE 2
The Securities
SECTION 2.01. Amount of Securities; Issuable in Series. The
aggregate principal amount of Securities which may be authenticated and
delivered under this Indenture is $311,000,000. The Securities may be issued in
one or more series. All Securities of any one series shall be substantially
identical except as to denomination.
With respect to any Additional Securities issued after the
Closing Date (except for Securities authenticated and delivered upon
registration of transfer of, or in exchange for, or in lieu of, other Securities
pursuant to Section 2.07, 2.08, 2.09, 2.10 or 3.06 or the Appendix), there shall
be (i) established in or pursuant to a resolution of the Board of Directors and
(ii) (A) set forth or determined in the manner provided in an Officers'
Certificate or (B) established in one or more indentures supplemental hereto,
prior to the issuance of such Additional Securities:
(1) whether such Additional Securities shall be issued as part
of a new or existing series of Securities and the title of such
Additional Securities (which shall distinguish the Additional
Securities of the series from Securities of any other series);
(2) the aggregate principal amount of such Additional
Securities which may be authenticated and delivered under this
Indenture, which shall be in an aggregate principal amount not to
exceed $50,000,000 (except for Securities authenticated and delivered
upon registration of transfer of, or in exchange for, or in lieu of,
other Securities of the same series pursuant to Section 2.07, 2.08,
2.09, 2.10 or 3.06 or the Appendix and except for Securities which,
pursuant to Section 2.03, are deemed never to have been authenticated
and delivered hereunder);
(3) the issue price and issuance date of such Additional
Securities, including the date from which interest on such Additional
Securities shall accrue; provided; however, that no Additional
Securities may be issued at a price that
<PAGE> 24
19
would cause such Additional Securities to have "original issue
discount" within the meaning of Section 1273 of the Code;
(4) if applicable, that such Additional Securities shall be
issuable in whole or in part in the form of one or more Global
Securities (as defined in the Appendix) and, in such case, the
respective depositaries for such Global Securities, the form of any
legend or legends which shall be borne by such Global Securities in
addition to or in lieu of those set forth in Exhibit A hereto and any
circumstances in addition to or in lieu of those set forth in Section
2.3 of the Appendix in which any such Global Security may be exchanged
in whole or in part for Additional Securities registered, or any
transfer of such Global Security in whole or in part may be registered,
in the name or names of Persons other than the depositary for such
Global Security or a nominee thereof; and
(5) if applicable, that such Additional Securities shall not
be issued in the form of Initial Securities as set forth in Exhibit A,
but shall be issued in the form of Exchange Securities as set forth in
Exhibit B.
If any of the terms of any Additional Securities are
established by action taken pursuant to a resolution of the Board of Directors,
a copy of an appropriate record of such action shall be certified by the
Secretary or any Assistant Secretary of the Company and delivered to the Trustee
at or prior to the delivery of the Officers' Certificate or the indenture
supplemental hereto setting forth the terms of the Additional Securities.
SECTION 2.02. Form and Dating. Provisions relating to the
Original Securities, the Additional Securities, the Private Exchange Securities
and the Exchange Securities are set forth in the Appendix, which is hereby
incorporated in and expressly made a part of this Indenture. The (i) Original
Securities and the Trustee's certificate of authentication, (ii) Private
Exchange Securities and the Trustee's certificate of authentication and (iii)
any Additional Securities (if issued as Transfer Restricted Securities (as
defined in the Appendix)) and the Trustee's certificate of authentication shall
each be substantially in the form of Exhibit A hereto, which is hereby
incorporated in and expressly made a part of this Indenture. The Exchange
Securities and any Additional Securities issued other than as Transfer
Restricted Securities and the Trustee's certificate of authentication shall each
be substantially in the form of Exhibit B hereto, which is hereby incorporated
in and expressly made a part of this Indenture. The Securities may have
notations, legends or endorsements required by law, stock exchange rule,
agreements to which the Company or any Subsidiary Guarantor is subject, if any,
or usage (provided that any such notation, legend or endorsement is in a form
acceptable to the Company). Each Security shall be dated the date of its
authentication. The Securities shall be issuable only in registered form without
coupons and only in denominations of $1,000 and integral multiples thereof.
SECTION 2.03. Execution and Authentication. One or more
Officers shall sign the Securities for the Company by manual or facsimile
signature.
If an Officer whose signature is on a Security no longer holds
that office at the time the Trustee authenticates the Security, the Security
shall be valid nevertheless.
<PAGE> 25
20
A Security shall not be valid until an authorized signatory of
the Trustee manually signs the certificate of authentication on the Security.
The signature shall be conclusive evidence that the Security has been
authenticated under this Indenture.
The Trustee shall authenticate and make available for delivery
Securities as set forth in the Appendix.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate the Securities. Any such appointment
shall be evidenced by an instrument signed by a Trust Officer, a copy of which
shall be furnished to the Company. Unless limited by the terms of such
appointment, an authenticating agent may authenticate Securities 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 any Registrar, Paying Agent or agent for service of notices and
demands.
SECTION 2.04. Registrar and Paying Agent. The Company shall
maintain an office or agency where Securities may be presented for registration
of transfer or for exchange (the "Registrar") and an office or agency where
Securities may be presented for payment (the "Paying Agent"). The Registrar
shall keep a register of the Securities 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" includes any additional paying agent, and the
term "Registrar" includes any co-registrars. The Company initially appoints the
Trustee as (i) Registrar and Paying Agent in connection with the Securities and
(ii) the Securities Custodian (as defined in the Appendix) with respect to the
Global Securities.
The Company shall enter into an appropriate agency agreement
with any Registrar or Paying Agent not a party to this Indenture, which shall
incorporate the terms of the TIA. 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, the Trustee shall act as such and shall be
entitled to appropriate compensation therefor pursuant to Section 7.07. The
Company or any of its domestically organized Wholly Owned Subsidiaries may act
as Paying Agent or Registrar.
The Company may remove any Registrar or Paying Agent upon
written notice to such Registrar or Paying Agent and to the Trustee; provided,
however, that no such removal shall become effective until (1) acceptance of an
appointment by a successor as evidenced by an appropriate agreement entered into
by the Company and such successor Registrar or Paying Agent, as the case may be,
and delivered to the Trustee or (2) notification to the Trustee that the Trustee
shall serve as Registrar or Paying Agent until the appointment of a successor in
accordance with clause (1) above. The Registrar or Paying Agent may resign at
any time upon written notice; provided, however, that the Trustee may resign as
Paying Agent or Registrar only if the Trustee also resigns as Trustee in
accordance with Section 7.08.
SECTION 2.05. Paying Agent To Hold Money in Trust. Prior to
each due date of the principal and interest on any Security, the Company shall
deposit with the Paying Agent (or if the Company or a Subsidiary is acting as
Paying Agent, segregate and hold in trust for the benefit of the Persons
entitled thereto) a sum sufficient to pay
<PAGE> 26
21
such principal and interest when so becoming due. The Company shall require each
Paying Agent (other than the Trustee) to agree in writing that the Paying Agent
shall hold in trust for the benefit of Securityholders or the Trustee all money
held by the Paying Agent for the payment of principal of or interest on the
Securities and shall notify the Trustee of any default by the Company in making
any such payment. If the Company or a Subsidiary of the Company acts as Paying
Agent, it shall segregate the money held by it as Paying Agent and hold it as a
separate trust fund. The Company at any time may require a Paying Agent to pay
all money held by it to the Trustee and to account for any funds disbursed by
the Paying Agent. Upon complying with this Section 2.05, the Paying Agent shall
have no further liability for the money delivered to the Trustee.
SECTION 2.06. Securityholder Lists. The Trustee shall preserve
in as current a form as is reasonably practicable the most recent list available
to it of the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall furnish, or cause the Registrar to furnish, to the
Trustee, in writing at least five Business Days before each interest payment
date and at such other times as the Trustee may 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 Securityholders.
SECTION 2.07. Transfer and Exchange. The Securities shall be
issued in registered form and shall be transferable only upon the surrender of a
Security for registration of transfer and in compliance with the Appendix. When
a Security is presented to the Registrar with a request to register a transfer,
the Registrar shall register the transfer as requested if the requirements of
Section 8-401(a) of the Uniform Commercial Code are met. When Securities are
presented to the Registrar with a request to exchange them for an equal
principal amount of Securities of other denominations, the Registrar shall make
the exchange as requested if the requirements of Section 8-401(a)(1) and (2) of
the Uniform Commercial Code are met. To permit registration of transfers and
exchanges, the Company shall execute and the Trustee shall authenticate
Securities at the Registrar's request. The Company may require payment of a sum
sufficient to pay all taxes, assessments or other governmental charges in
connection with any transfer or exchange pursuant to this Section 2.07. The
Company shall not be required to make and the Registrar need not register
transfers or exchanges of Securities selected for redemption (except, in the
case of Securities to be redeemed in part, the portion thereof not to be
redeemed) or any Securities for a period of 15 days before a selection of
Securities to be redeemed.
Prior to the due presentation for registration of transfer of
any Security, the Company, the Subsidiary Guarantors, if any, the Trustee, the
Paying Agent and the Registrar may deem and treat the Person in whose name a
Security is registered as the absolute owner of such Security for the purpose of
receiving payment of principal of and interest, if any, on such Security and for
all other purposes whatsoever, whether or not such Security is overdue, and none
of the Company, any Subsidiary Guarantor, the Trustee, the Paying Agent or the
Registrar shall be affected by notice to the contrary.
Any Holder of a Global Security shall, by acceptance of such
Global Security, agree that transfers of beneficial interest in such Global
Security may be effected only through a book-entry system maintained by (i) the
Holder of such Global Security (or its agent) or (ii) any Holder of a beneficial
interest in such Global Security, and that ownership of a beneficial interest in
such Global Security shall be required to be reflected in a book entry.
<PAGE> 27
22
All Securities issued upon any transfer or exchange pursuant
to the terms of this Indenture shall evidence the same debt and shall be
entitled to the same benefits under this Indenture as the Securities surrendered
upon such transfer or exchange.
SECTION 2.08. Replacement Securities. If a mutilated Security
is surrendered to the Registrar or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee shall authenticate a replacement Security if the requirements of
Section 8-405 of the Uniform Commercial Code are met, such that the Holder (i)
notifies the Company or the Trustee within a reasonable time after he has notice
of such loss, destruction or wrongful taking, and the Registrar does not
register a transfer prior to receiving such notification, (ii) makes such
request to the Company or the Trustee prior to the Security being acquired by a
protected purchaser as defined in Section 8-303 of the Uniform Commercial Code
(a "protected purchaser") and (iii) satisfies any other reasonable requirements
of the Trustee. If required by the Trustee or the Company, such Holder shall
furnish an indemnity bond sufficient in the judgment of the Trustee to protect
the Company, the Trustee, the Paying Agent and the Registrar from any loss that
any of them may suffer if a Security is replaced. The Company and the Trustee
may charge the Holder for their expenses in replacing a Security. In the event
any such mutilated, lost, destroyed or wrongfully taken Security has become or
is about to become due and payable, the Company in its discretion may pay such
Security instead of issuing a new Security in replacement thereof.
Every replacement Security is an additional obligation of the
Company.
The provisions of this Section 2.08 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, lost, destroyed or wrongfully taken
Securities.
SECTION 2.09. Outstanding Securities. Securities outstanding
at any time are all Securities authenticated by the Trustee except for those
canceled by it, those delivered to it for cancelation and those described in
this Section as not outstanding. Subject to Section 11.06, a Security does not
cease to be outstanding because the Company or an Affiliate of the Company holds
the Security.
If a Security is replaced pursuant to Section 2.08, it ceases
to be outstanding unless the Trustee and the Company receive proof satisfactory
to them that the replaced Security is held by a protected purchaser.
If the Paying Agent segregates and holds in trust, in
accordance with this Indenture, on a redemption date or maturity date money
sufficient to pay all principal and interest payable on that date with respect
to the Securities (or portions thereof) to be redeemed or maturing, as the case
may be, then on and after that date such Securities (or portions thereof) cease
to be outstanding and interest on them ceases to accrue.
SECTION 2.10. Temporary Securities. In the event that
Definitive Securities (as defined in the Appendix) are to be issued under the
terms of this Indenture, until such Definitive Securities are ready for
delivery, the Company may prepare and the Trustee shall authenticate temporary
Securities. Temporary Securities shall be substantially in the form of
Definitive Securities but may have variations that the Company considers
appropriate for temporary Securities. Without unreasonable delay, the
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Company shall prepare and the Trustee shall authenticate Definitive Securities
and deliver them in exchange for temporary Securities upon surrender of such
temporary Securities at the office or agency of the Company, without charge to
the Holder.
SECTION 2.11. Cancelation. The Company at any time may deliver
Securities to the Trustee for cancelation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them for registration
of transfer, exchange or payment. The Trustee and no one else shall cancel all
Securities surrendered for registration of transfer, exchange, payment or
cancelation and deliver canceled Securities to the Company pursuant to written
direction by an Officer. The Company may not issue new Securities to replace
Securities it has redeemed, paid or delivered to the Trustee for cancelation.
The Trustee shall not authenticate Securities in place of canceled Securities
other than pursuant to the terms of this Indenture.
SECTION 2.12. Defaulted Interest. If the Company defaults in a
payment of interest on the Securities, the Company shall pay the defaulted
interest (plus interest on such defaulted interest to the extent lawful) in any
lawful manner. The Company may pay the defaulted interest to the Persons who are
Securityholders on a subsequent special record date. The Company shall fix or
cause to be fixed any such special record date and payment date to the
reasonable satisfaction of the Trustee and shall promptly mail or cause to be
mailed to each Securityholder a notice that states the special record date, the
payment date and the amount of defaulted interest to be paid.
SECTION 2.13. CUSIP Numbers. The Company in issuing the
Securities may use "CUSIP" numbers (if then generally in use) and, if so, the
Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to
Holders; provided, however, that any such notice may state that no
representation is made as to the correctness of such numbers either as printed
on the Securities or as contained in any notice of a redemption and that
reliance may be placed only on the other identification numbers printed on the
Securities, and any such redemption shall not be affected by any defect in or
omission of such numbers.
ARTICLE 3
Redemption
SECTION 3.01. Notices to Trustee. If the Company elects to
redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the
Trustee in writing of the redemption date and the principal amount of Securities
to be redeemed.
The Company shall give each notice to the Trustee provided for
in this Section 3.01 at least 60 days before the redemption date unless the
Trustee consents to a shorter period. Such notice shall be accompanied by an
Officers' Certificate and an Opinion of Counsel from the Company to the effect
that such redemption will comply with the conditions herein. If fewer than all
the Securities are to be redeemed, the record date relating to such redemption
shall be selected by the Company and given to the Trustee, which record date
shall be not fewer than 15 days after the date of notice to the Trustee. Any
such notice may be canceled at any time prior to notice of such redemption being
mailed to any Holder and shall thereby be void and of no effect.
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SECTION 3.02. Selection of Securities To Be Redeemed. If fewer
than all the Securities are to be redeemed, the Trustee shall select the
Securities to be redeemed pro rata or by lot or by a method that complies with
applicable legal and securities exchange requirements, if any, and that the
Trustee in its sole discretion shall deem to be fair and appropriate and in
accordance with methods generally used at the time of selection by fiduciaries
in similar circumstances. The Trustee shall make the selection from outstanding
Securities not previously called for redemption. The Trustee may select for
redemption portions of the principal of Securities that have denominations
larger than $1,000. Securities and portions of them the Trustee selects shall be
in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture
that apply to Securities called for redemption also apply to portions of
Securities called for redemption. The Trustee shall notify the Company promptly
of the Securities or portions of Securities to be redeemed.
SECTION 3.03. Notice of Redemption. At least 30 days but not
more than 60 days before a date for redemption of Securities, the Company shall
mail a notice of redemption by first-class mail to each Holder of Securities to
be redeemed at such Holder's registered address.
The notice shall identify the Securities to be redeemed and
shall state:
(1) the redemption date;
(2) the redemption price and the amount of accrued interest to
the redemption date;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered
to the Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Securities are to be
redeemed, the certificate numbers and principal amounts of the
particular Securities to be redeemed;
(6) that, unless the Company defaults in making such
redemption payment or the Paying Agent is prohibited from making such
payment pursuant to the terms of this Indenture, interest on Securities
(or portion thereof) called for redemption ceases to accrue on and
after the redemption date;
(7) the CUSIP number, if any, printed on the Securities being
redeemed; and
(8) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed
on the Securities.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section.
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SECTION 3.04. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable on
the redemption date and at the redemption price stated in the notice. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price stated in the notice, plus accrued interest, if any, to the redemption
date; provided, however, that if the redemption date is after a regular record
date and on or prior to the interest payment date, the accrued interest shall be
payable to the Securityholder of the redeemed Securities registered on the
relevant record date. Failure to give notice or any defect in the notice to any
Holder shall not affect the validity of the notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. Prior to 10:00 a.m.
on the redemption date, the Company shall deposit with the Paying Agent (or, if
the Company or a Subsidiary is the Paying Agent, shall segregate and hold in
trust) money sufficient to pay the redemption price of and accrued interest on
all Securities to be redeemed on that date other than Securities or portions of
Securities called for redemption that have been delivered by the Company to the
Trustee for cancelation.
SECTION 3.06. Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate for the Holder (at the Company's expense) a new Security
equal in principal amount to the unredeemed portion of the Security surrendered.
ARTICLE 4
Covenants
SECTION 4.01. Payment of Securities. The Company shall
promptly pay the principal of and interest on the Securities on the dates and in
the manner provided in the Securities and in this Indenture. Principal and
interest shall be considered paid on the date due if on such date the Trustee or
the Paying Agent holds in accordance with this Indenture money sufficient to pay
all principal and interest then due and the Trustee or the Paying Agent, as the
case may be, is not prohibited from paying such money to the Securityholders on
that date pursuant to the terms of this Indenture.
The Company shall pay interest on overdue principal at the
rate specified therefor in the Securities, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
SECTION 4.02. SEC Reports. Notwithstanding that the Company
may not be subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act the Company shall file with the SEC and provide the Trustee and
Securityholders and prospective Securityholders (upon request) within 15 days
after it files them with the SEC, copies of its annual report and the
information, documents and other reports that are specified in Sections 13 and
15(d) of the Exchange Act. In addition, following a public offering of the
common stock of the Company, the Company shall furnish to the Trustee and the
Securityholders, promptly upon their becoming available, copies of the annual
report to stockholders and any other information provided by the Company to its
public stockholders generally. The Company also shall comply with the other
provisions of Section 314(a) of the TIA.
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SECTION 4.03. Limitation on Indebtedness. (a) The Company
shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or
indirectly, any Indebtedness; provided, however, that the Company may Incur
Indebtedness if on the date of such Incurrence and after giving effect thereto
the Debt to Annualized Operating Cash Flow Ratio would be less than or equal to
6.0:1.0 if such Indebtedness is Incurred prior to July 15, 2001 and less than or
equal to 5.5:1.0 if such Indebtedness is Incurred on or after such date.
(b) Notwithstanding Section 4.03(a), the Company and its Restricted
Subsidiaries may Incur the following Indebtedness:
(i) Bank Indebtedness in an aggregate principal amount not to
exceed $75.0 million less the aggregate amount of all repayments of
principal applied to permanently reduce any such Indebtedness;
(ii) Indebtedness of the Company owed to and held by any
Wholly Owned Subsidiary or Indebtedness of a Restricted Subsidiary owed
to and held by the Company or any Wholly Owned Subsidiary; provided,
however, that (i) any subsequent issuance or transfer of any Capital
Stock or any other event that results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of any such Indebtedness (except to the Company or a Wholly
Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the issuer thereof and (ii) if the
Company is the obligor on such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
obligations with respect to the Securities;
(iii) Indebtedness (A) represented by the Securities (not
including any Additional Securities), (B) outstanding on the Closing
Date (other than the Indebtedness described in clauses (i) and (ii)
above), (C) consisting of Refinancing Indebtedness Incurred in respect
of any Indebtedness described in this clause (iii) (including
Indebtedness Refinancing Refinancing Indebtedness) or Section 4.03(a),
(D) consisting of Guarantees of any Indebtedness permitted under
clauses (i) and (ii) of this paragraph (b) and (E) consisting of any
Guarantees of the Securities;
(iv) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such Restricted Subsidiary
was acquired by the Company (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary
became a Subsidiary of or was otherwise acquired by the Company);
provided, however, that on the date that such Restricted Subsidiary is
acquired by the Company, the Company would have been able to Incur
$1.00 of additional Indebtedness pursuant to Section 4.03(a) after
giving effect to the Incurrence of such Indebtedness pursuant to this
clause (iv) and (B) Refinancing Indebtedness Incurred by a Restricted
Subsidiary in respect of Indebtedness Incurred by such Restricted
Subsidiary pursuant to this clause (iv);
(v) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds provided by
the Company and the Restricted Subsidiaries in the ordinary course of
their business and
<PAGE> 32
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(B) under Hedging Obligations entered into for bona fide hedging
purposes of the Company in the ordinary course of business; provided,
however, that such Hedging Obligations do not increase the Indebtedness
of the Company outstanding at any time other than as a result of
fluctuations in interest rates or currency exchange rates or by reason
of fees, indemnities and compensation payable thereunder;
(vi) Purchase Money Indebtedness, provided that the amount of
such Purchase Money Indebtedness does not exceed the lesser of 80% of
(a) the Fair Market Value of or (b) the cost of the construction,
installation, acquisition, lease, development or improvement of, the
applicable Telecommunications Assets;
(vii) Contribution Indebtedness; or
(viii) Indebtedness (other than Indebtedness permitted to be
Incurred pursuant to Section 4.03(a) or any other clause of this
Section 4.03(b)) in an aggregate principal amount on the date of
Incurrence that, when added to all other Indebtedness Incurred pursuant
to this clause (viii) and then outstanding, shall not exceed $40.0
million.
(c) Notwithstanding the foregoing, the Company may not Incur any
Indebtedness pursuant to Section 4.03(b) if the proceeds thereof are used,
directly or indirectly, to repay, prepay, redeem, defease, retire, refund or
refinance any Subordinated Obligations unless such Indebtedness will be
subordinated to the Securities to at least the same extent as such Subordinated
Obligations.
(d) Notwithstanding any other provision of this Section 4.03, the
maximum amount of Indebtedness that the Company or any Restricted Subsidiary may
Incur pursuant to this Section 4.03 shall not be deemed to be exceeded solely as
a result of fluctuations in the exchange rates of currencies. For purposes of
determining the outstanding principal amount of any particular Indebtedness
Incurred pursuant to this Section 4.03, (i) Indebtedness permitted by this
Section 4.03 need not be permitted solely by reference to one provision
permitting such Indebtedness but may be permitted in part by one such provision
and in part by one or more other provisions of this Section 4.03 permitting such
Indebtedness and (ii) in the event that Indebtedness meets the criteria of more
than one of the types of Indebtedness described in Section 4.03(b), the Company,
in its sole discretion, shall classify such Indebtedness and only be required to
include the amount of such Indebtedness in one of such clauses. Once so
classified, such Indebtedness shall retain such classification until repaid.
SECTION 4.04. Limitation on Restricted Payments. (a) The
Company shall not, and shall not permit any Restricted Subsidiary, directly or
indirectly, to (i) declare or pay any dividend or make any distribution on or in
respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving the Company) or similar payment to the direct
or indirect holders of its Capital Stock except dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and except
dividends or distributions payable to the Company or another Restricted
Subsidiary (and, if such Restricted Subsidiary has stockholders other than the
Company or other Restricted Subsidiaries, to its other stockholders on a pro
rata basis), (ii) purchase, redeem, retire or otherwise acquire for value any
Capital Stock of the Company or any Restricted Subsidiary held by Persons other
than the Company or
<PAGE> 33
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another Restricted Subsidiary, (iii) purchase, repurchase, redeem, defease or
otherwise acquire or retire for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment any Subordinated Obligations (other
than the purchase, repurchase or other acquisition of Subordinated Obligations
purchased in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
acquisition) or (iv) make any Investment (other than a Permitted Investment) in
any Person (any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Investment being herein referred to
as a "Restricted Payment") if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would
result therefrom);
(2) the Company could not Incur at least $1.00 of additional
Indebtedness pursuant to Section 4.03(a); or
(3) the aggregate amount of such Restricted Payment and all
other Restricted Payments (the amount so expended, if other than in
cash, to be determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a resolution of the
Board of Directors) declared or made subsequent to the Closing Date
would exceed the sum of: (A) (i) 100% of Consolidated Operating Cash
Flow accrued during the period (treated as one accounting period) from
the beginning of the fiscal quarter immediately following the fiscal
quarter during which the Closing Date occurs to the end of the most
recent fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Operating Cash Flow
during such period is a deficit, minus 100% of such deficit), minus
(ii) 150% of Consolidated Interest Expense accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter immediately following the fiscal quarter during which the
Closing Date occurs to the end of the most recent fiscal quarter ending
at least 45 days prior to the date of such Restricted Payment; plus,
(B) the aggregate Net Cash Proceeds received by the Company from the
issue or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Closing Date (other than an issuance or sale to (x) a
Subsidiary of the Company or (y) an employee stock ownership plan or
other trust established by the Company or any of its Subsidiaries);
plus, (C) the amount by which Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's balance sheet upon
the conversion or exchange (other than by a Subsidiary of the Company)
subsequent to the Closing Date of any Indebtedness of the Company or
its Restricted Subsidiaries issued after the Closing Date which is
convertible or exchangeable for Capital Stock (other than Disqualified
Stock) of the Company (less the amount of any cash or the fair market
value of other property distributed by the Company or any Restricted
Subsidiary upon such conversion or exchange); plus, (D) the amount
equal to the net reduction in Investments in Unrestricted Subsidiaries
resulting from (i) payments of dividends, repayments of the principal
of loans or advances or other transfers of assets to the Company or any
Restricted Subsidiary from Unrestricted Subsidiaries or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investment") not
to exceed, in the case of any Unrestricted Subsidiary, the amount of
Investments previously made by the Company or any
<PAGE> 34
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Restricted Subsidiary in such Unrestricted Subsidiary, which amount was
included in the calculation of the amount of Restricted Payments; and
less, (E) the aggregate principal amount of any outstanding
Contribution Indebtedness or, if less, the Cash Contribution Amount.
(b) The provisions of Section 4.04(a) shall not prohibit: (i) any
purchase, repurchase, retirement or other acquisition or retirement for value of
Capital Stock of the Company made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of the Company (other than
Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary
of the Company or an employee stock ownership plan or other trust established by
the Company or any of its Subsidiaries); provided, however, that such purchase,
repurchase, retirement or other acquisition or retirement for value shall be
excluded in the calculation of the amount of Restricted Payments; (ii) any
purchase, repurchase, redemption, defeasance or other acquisition or retirement
for value of Subordinated Obligations of the Company made by exchange for, or
out of the proceeds of the substantially concurrent sale of, Indebtedness of the
Company that is permitted to be Incurred pursuant to Section 4.03(b) or Capital
Stock of the Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of the Company or an employee stock ownership
plan or other trust established by the Company or any of its Subsidiaries);
provided, however, that such purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value shall be excluded in the calculation
of the amount of Restricted Payments; (iii) any purchase or redemption of
Subordinated Obligations from Net Available Cash to the extent permitted by
Section 4.06; provided, however, that such purchase or redemption shall be
included in the calculation of the amount of Restricted Payments; (iv) dividends
paid within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with this Section 4.04; provided,
however, that such dividend shall be included in the calculation of the amount
of Restricted Payments; or (v) the repurchase or other acquisition of shares of,
or options to purchase shares of, common stock of the Company or any of its
Subsidiaries from employees, former employees, directors or former directors of
the Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to the
terms of agreements (including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors under which such individuals
purchase or sell or are granted the option to purchase or sell, shares of such
common stock; provided, however, that the aggregate amount of such repurchases
shall not exceed $1.0 million in any calendar year and $3.0 million in the
aggregate; provided further, that such repurchases and other acquisitions shall
be included in the calculation of the amount of Restricted Payments.
SECTION 4.05. Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distributions on
its Capital Stock or pay any Indebtedness or other obligations owed to the
Company, (ii) make any loans or advances to the Company or (iii) transfer any of
its property or assets to the Company, except:
(1) any encumbrance or restriction pursuant to (A) an
agreement in effect at or entered into on the Closing Date or (B) an
agreement entered into in connection with the Incurrence of
Indebtedness permitted under clause (b)(i) or
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(b)(vi) of Section 4.03, provided that the chief financial officer of
the Company has determined in good faith that any restriction incurred
pursuant to this clause (B) is customary for similar Incurrences of
Indebtedness;
(2) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary prior to the date
on which such Restricted Subsidiary was acquired by the Company (other
than Indebtedness Incurred as consideration in, in contemplation of,
or to provide all or any portion of the funds or credit support
utilized to consummate the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was otherwise acquired by the Company) and
outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (1) or (2) of this Section 4.05 or this
clause (3) or contained in any amendment to an agreement referred to in
clause (1) or (2) of this Section 4.05 or this clause (3); provided,
however, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are no less favorable to the
Securityholders than the encumbrances and restrictions contained in
such predecessor agreements;
(4) in the case of clause (iii), any encumbrance or
restriction (A) that restricts in a customary manner the subletting,
assignment or transfer of any property or asset that is subject to a
lease, license or similar contract, or (B) contained in security
agreements securing Indebtedness of a Restricted Subsidiary to the
extent such encumbrance or restriction restricts the transfer of the
property subject to such security agreements; and
(5) with respect to a Restricted Subsidiary, any restriction
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or
disposition.
SECTION 4.06. Limitation on Sales of Assets and Subsidiary
Stock. (a) The Company shall not, and shall not permit any Restricted Subsidiary
to, make any Asset Disposition unless (i) the Company or such Restricted
Subsidiary receives consideration (including by way of relief from, or by any
other Person assuming sole responsibility for, any liabilities, contingent or
otherwise) at the time of such Asset Disposition at least equal to the Fair
Market Value of the shares and assets subject to such Asset Disposition, (ii) at
least 75% of the consideration thereof received by the Company or such
Restricted Subsidiary is in the form of cash or cash equivalents and (iii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by the Company (or such Restricted Subsidiary, as the case may be) (A)
first, to the extent the Company elects (or is required by the terms of any Bank
Indebtedness) to (x) reinvest in Telecommunications Assets (including by means
of an Investment in Telecommunications Assets by a Restricted Subsidiary with
Net Available Cash received by the Company or another Restricted Subsidiary) or
(y) prepay, repay, redeem or purchase Bank Indebtedness of the Company Incurred
pursuant to Section 4.03(b)(i), in each case within 180 days after the later of
the date of such Asset Disposition or the receipt of such Net Available Cash;
(B) second, to the extent of the balance of such Net
<PAGE> 36
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Available Cash after application in accordance with clause (A), to make an Offer
(as defined below) to purchase Securities pursuant to and subject to the
conditions set forth in Section 4.06(c) within 365 days after the later of such
Asset Disposition or the receipt of such Net Available Cash; provided, however,
that if the Company elects (or is required by the terms of any other Senior
Indebtedness), such Offer may be made ratably to purchase the Securities and
other Senior Indebtedness of the Company, and (C) third, to fund (to the extent
consistent with any other applicable provision in this Indenture) any corporate
purpose. Notwithstanding the foregoing provisions of this Section 4.06, the
Company and the Restricted Subsidiaries shall not be required to apply any Net
Available Cash in accordance with this Section 4.06 except to the extent that
the aggregate Net Available Cash from all Asset Dispositions that is not applied
in accordance with this Section 4.06 exceeds $5.0 million.
(b) For the purposes of this Section 4.06, the following are deemed to
be cash: (x) the assumption of Indebtedness of the Company (other than
Disqualified Stock of the Company) or any Restricted Subsidiary and the release
of the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary from the transferee that
are converted by the Company or such Restricted Subsidiary into cash within 60
days of such receipt.
(c) In the event of an Asset Disposition that requires the purchase of
Securities (and other Senior Indebtedness) pursuant to Section 4.06(a)(iii)(B),
the Company shall be required to purchase Securities (and other Senior
Indebtedness) tendered pursuant to an offer by the Company for the Securities
(and other Senior Indebtedness) (the "Offer") at a purchase price of 100% of
their principal amount plus accrued and unpaid interest and liquidated damages,
if any, to the date of purchase in accordance with the procedures (including
prorating in the event of oversubscription) set forth in Section 4.06(d). If the
aggregate purchase price of Securities (and other Senior Indebtedness) tendered
pursuant to the Offer is less than the Net Available Cash allotted to the
purchase of the Securities (and other Senior Indebtedness), the Company may
apply the remaining Net Available Cash in accordance with Section
4.06(a)(iii)(C). The Company shall not be required to make an Offer for
Securities (and other Senior Indebtedness) pursuant to this Section 4.06 if the
Net Available Cash available therefor (after application of the proceeds as
provided in Section 4.06(a)(iii)(A)) is less than $5.0 million for any
particular Asset Disposition (which lesser amount shall be carried forward for
purposes of determining whether an Offer is required with respect to the Net
Available Cash from any subsequent Asset Disposition).
(d) (1) Promptly, and in any event within 10 days after the Company
becomes obligated to make an Offer, the Company shall be obligated to deliver to
the Trustee and send, by first-class mail to each Holder, a written notice
stating that the Holder may elect to have his Securities purchased by the
Company either in whole or in part (subject to prorationing as hereinafter
described in the event the Offer is oversubscribed) in integral multiples of
$1,000 of principal amount, at the applicable purchase price. The notice shall
specify a purchase date not less than 30 days nor more than 60 days after the
date of such notice (the "Purchase Date") and shall contain such information
concerning the business of the Company which the Company in good faith believes
will enable such Holders to make an informed decision (which at a minimum shall
include (i) the most recently filed Annual Report on Form 10-K (including
audited consolidated financial statements) of the Company, the most recent
subsequently filed Quarterly Report on
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Form 10-Q and any Current Report on Form 8-K of the Company filed subsequent to
such Quarterly Report, other than Current Reports describing Asset Dispositions
otherwise described in the offering materials (or corresponding successor
reports), (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such reports, and (iii) if material,
appropriate pro forma financial information) and all instructions and materials
necessary to tender Securities pursuant to the Offer, together with the address
referred to in clause (3) below.
(2) Not later than the date upon which written notice of an
Offer is delivered to the Trustee as provided above, the Company shall deliver
to the Trustee an Officers' Certificate as to (i) the amount of the Offer (the
"Offer Amount"), (ii) the allocation of the Net Available Cash from the Asset
Dispositions pursuant to which such Offer is being made and (iii) the compliance
of such allocation with the provisions of Section 4.06(a). On such date, the
Company shall also irrevocably deposit with the Trustee or with a Paying Agent
(or, if the Company is acting as its own Paying Agent, segregate and hold in
trust) an amount equal to the Offer Amount to be invested in Temporary Cash
Investments and to be held for payment in accordance with the provisions of
this Section. Upon the expiration of the period for which the Offer remains open
(the "Offer Period"), the Company shall deliver to the Trustee for cancelation
the Securities or portions thereof that have been properly tendered to and are
to be accepted by the Company. The Trustee (or the Paying Agent, if not the
Trustee) shall, on the date of purchase, mail or deliver payment to each
tendering Holder in the amount of the purchase price. In the event that the
aggregate purchase price of the Securities delivered by the Company to the
Trustee is less than the Offer Amount applicable to the Securities, the Trustee
shall deliver the excess to the Company immediately after the expiration of the
Offer Period for application in accordance with this Section 4.06.
(3) Holders electing to have a Security purchased shall be
required to surrender the Security, with an appropriate form duly completed, to
the Company at the address specified in the notice at least three Business Days
prior to the Purchase Date. Holders shall be entitled to withdraw their election
if the Trustee or the Company receives not later than one Business Day prior to
the Purchase Date, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of the Security which was
delivered by the Holder for purchase and a statement that such Holder is
withdrawing his election to have such Security purchased. If at the expiration
of the Offer Period the aggregate principal amount of Securities included in the
Offer surrendered by holders thereof exceeds the Offer Amount, the Company shall
select the Securities to be purchased on a pro rata basis (with such adjustments
as may be deemed appropriate by the Company so that only Securities in
denominations of $1,000, or integral multiples thereof, shall be purchased).
Holders whose Securities are purchased only in part will be issued new
Securities equal in principal amount to the unpurchased portion of the
Securities surrendered.
(4) At the time the Company delivers Securities to the Trustee
which are to be accepted for purchase, the Company shall also deliver an
Officers' Certificate stating that such Securities are to be accepted by the
Company pursuant to and in accordance with the terms of this Section. A Security
shall be deemed to have been accepted for purchase at the time the Trustee,
directly or through an agent, mails or delivers payment therefor to the
surrendering Holder.
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33
(d) The Company shall comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Securities pursuant to
this Section 4.06. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.07. Limitation on Transactions with Affiliates. (a)
The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, enter into or conduct any transaction (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
such transaction is on terms (i) that are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with a Person
who is not such an Affiliate, (ii) that, in the event such Affiliate Transaction
involves an aggregate amount in excess of $1.0 million, (1) are set forth in
writing and (2) have been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction and (iii) that,
in the event such Affiliate Transaction involves an amount in excess of $20.0
million, have been determined by a nationally recognized appraisal or investment
banking firm to be fair, from a financial standpoint, to the Company and its
Restricted Subsidiaries.
(b) The provisions of Section 4.07(a) shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant Section 4.04, (ii) any issuance
of securities, or other payments, awards or grants in cash, securities or
otherwise pursuant to, or the funding of, employment arrangements, stock options
and stock ownership plans approved by the Board of Directors, (iii) the grant of
stock options or similar rights to employees and directors of the Company
pursuant to plans approved by the Board of Directors, (iv) loans or advances to
employees in the ordinary course of business in accordance with past practices
of the Company, but in any event not to exceed $2.0 million in the aggregate
outstanding at any one time, (v) the payment of reasonable fees to directors of
the Company and its Subsidiaries, if any, who are not employees of the Company
or its Subsidiaries, if any, (vi) any transaction between the Company and a
Wholly Owned Subsidiary or between Wholly Owned Subsidiaries or (vii) any
transaction pursuant to, and on the terms set forth in, the Prodigy Agreement.
SECTION 4.08. Change of Control. (a) Upon the occurrence of a
Change of Control, each Holder shall have the right to require the Company to
repurchase all or any part of such Holder's Securities at a purchase price in
cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest and liquidated damages, if any, to the date of repurchase (subject to
the right of Holders of record on the relevant record date to receive interest
due on the relevant interest payment date); provided, however, that
notwithstanding the occurrence of a Change of Control, the Company shall not be
obligated to repurchase the Securities pursuant to this Section 4.08 in the
event that it has exercised its right to redeem all the Securities under
paragraph 5 of the Securities.
(b) Within 30 days following any Change of Control, the
Company shall mail a notice to each Holder with a copy to the Trustee (the
"Change of Control Offer") stating: (1) that a Change of Control has occurred
and that such Holder has the right to require the Company to purchase such
Holder's Securities at a purchase price in cash
<PAGE> 39
34
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
and liquidated damages, if any, to the date of repurchase (subject to the right
of Holders of record on the relevant record date to receive interest on the
relevant interest payment date); (2) the circumstances and relevant facts and
financial information regarding such Change of Control; (3) the repurchase date
(which shall be no earlier than 30 days nor later than 60 days from the date
such notice is mailed); and (4) the instructions determined by the Company,
consistent with this Section 4.08, that a Holder must follow in order to have
its Securities purchased.
(c) Holders electing to have a Security purchased shall be
required to surrender the Security, with an appropriate form duly completed, to
the Company at the address specified in the notice at least three Business Days
prior to the purchase date. Holders shall be entitled to withdraw their election
if the Trustee or the Company receives not later than one Business Day prior to
the purchase date a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of the Security which was
delivered for purchase by the Holder and a statement that such Holder is
withdrawing his election to have such Security purchased.
(d) On the purchase date, all Securities purchased by the
Company under this Section 4.08 shall be delivered to the Trustee for
cancelation, and the Company shall pay the purchase price plus accrued and
unpaid interest, if any, to the Holders entitled thereto.
(e) Notwithstanding the forgoing provisions of this Section
4.08, the Company shall not be required to make a Change of Control Offer upon 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 set forth
in this Indenture applicable to a Change of Control Offer made by the Company
and purchases all Securities validly tendered and not withdrawn under such
Change of Control Offer.
(f) The Company shall comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Securities pursuant to
this Section 4.08. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section 4.08, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this Section 4.08 by virtue
thereof.
SECTION 4.09. Compliance Certificate. The Company shall
deliver to the Trustee within 120 days after the end of each fiscal year of the
Company an Officers' Certificate stating that in the course of the performance
by the signers of their duties as Officers of the Company they would normally
have knowledge of any Default and whether or not the signers know of any Default
that occurred during such period. If they do, the certificate shall describe the
Default, its status and what action the Company is taking or proposes to take
with respect thereto. The Company also shall comply with Section 314(a)(4) of
the TIA.
SECTION 4.10. Further Instruments and Acts. Upon request of
the Trustee, the Company shall execute and deliver such further instruments and
do such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
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35
SECTION 4.11. Future Subsidiary Guarantors. The Company shall
cause each Restricted Subsidiary that Incurs Indebtedness to become a Subsidiary
Guarantor by executing and delivering to the Trustee a supplemental indenture
substantially in the form of Exhibit C hereto pursuant to which such Restricted
Subsidiary shall Guarantee payment of the Securities. Each Subsidiary Guarantee
shall be limited to an amount not to exceed the maximum amount that can be
Guaranteed by that Restricted Subsidiary without rendering the Subsidiary
Guarantee, as it relates to such Restricted Subsidiary, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
SECTION 4.12. Limitation on Lines of Business. The Company
shall not, and shall not permit any Restricted Subsidiary to, engage in any
business other than a Telecommunications Business.
SECTION 4.13. Limitation on the Sale or Issuance of Capital
Stock of Restricted Subsidiaries. The Company shall not permit (a) any
Restricted Subsidiary of the Company to issue any Capital Stock except for (i)
Capital Stock issued or sold to, held by or transferred to the Company or a
Wholly Owned Subsidiary, (ii) Capital Stock issued by a Person prior to the time
(A) such Person becomes a Restricted Subsidiary of the Company, (B) such Person
merges with or into a Restricted Subsidiary of the Company or (C) a Restricted
Subsidiary of the Company merges with or into such Person; provided that such
Capital Stock was not issued or Incurred by such Person in anticipation of the
type of transaction contemplated by subclause (A), (B) or (C) (excluding for
purposes of this proviso, shares of Capital Stock issued in connection with
customary accelerated vesting provisions contained in option or similar plans or
agreements which are accelerated as a result of a change of control of such
Person and which option or similar plans or agreements were not adopted or
implemented solely in anticipation of or in connection with such transaction) or
(b) any person (other than the Company or a Wholly Owned Subsidiary) to acquire
Capital Stock of any Restricted Subsidiary of the Company from the Company or
any Restricted Subsidiary of the Company, except, in the case of each of clause
(a) or (b), (1) upon the acquisition of all the outstanding Capital Stock of
such Restricted Subsidiary in accordance with Section 4.06, (2) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary, and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made pursuant to Section 4.04 if made on the date of such issuance or
sale, and (3) if required, the issuance, transfer, conveyance, sale or other
disposition of directors' qualifying shares.
SECTION 4.14. Limitation on Liens. The Company shall not, and
shall not permit any Restricted Subsidiary to, directly or indirectly, Incur or
permit to exist any Lien of any nature whatsoever on any of its property or
assets (including Capital Stock of a Restricted Subsidiary), whether owned at
the Closing Date or thereafter acquired, other than Permitted Liens, without
effectively providing that the Securities shall be secured equally and ratably
with (or prior to) the obligations so secured for so long as such obligations
are so secured; provided, that if such obligations are expressly subordinated to
the Securities or the Subsidiary Guarantees the Lien securing such obligations
shall be subordinated and junior to the Lien securing the Securities with the
same relative priority as such obligations have with respect to the Securities
or the Subsidiary Guarantees.
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36
SECTION 4.15. Limitation on Sale/Leaseback Transactions. The
Company shall not, and shall not permit any Restricted Subsidiary to, enter into
any Sale/Leaseback Transaction with respect to any property unless (a) the
Company or such Restricted Subsidiary would be entitled to (i) Incur
Indebtedness in an amount equal to the Attributable Debt with respect to such
Sale/Leaseback Transaction pursuant to Section 4.03 and (ii) create a Lien on
such property securing such Attributable Debt without equally and ratably
securing the Securities pursuant to Section 4.14, (b) the net proceeds received
by the Company or such Restricted Subsidiary in connection with such
Sale/Leaseback Transaction are at least equal to the fair market value (as
determined in good faith by the Board of Directors) of such property and (c) the
transfer of such property is permitted by, and the Company applies the proceeds
of such transaction in compliance with Section 4.06.
SECTION 4.16. Deposit of Funds with the Escrow Agent. (a) On
the Closing Date, the Company shall deposit with the Escrow Agent $54.9 million
in cash or Temporary Cash Investments that, together with the interest received
thereon, will be sufficient to pay the first four semi-annual interest payments
on the Securities. All Escrow Collateral shall be held in the Escrow Account
until permitted to be disbursed pursuant to the Escrow and Disbursement
Agreement and Section 10.03 of this Indenture and then shall be disbursed
strictly in accordance with the terms thereof.
(b) Pending release of such funds, such funds shall be
invested in Temporary Cash Investments as specifically directed in writing by
the Company. Any interest or other profit resulting from such investment shall
be deposited in the Escrow Account.
ARTICLE 5
Successor Company
SECTION 5.01. When Company May Merge or Transfer Assets. (a)
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the
"Successor Company") will be a corporation organized and existing under
the laws of the United States of America, any State thereof or the
District of Columbia and the Successor Company (if not the Company)
will expressly assume, by a supplemental indenture and other
appropriate documents, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under
the Securities, this Indenture and the Escrow and Disbursement
Agreement;
(ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Restricted Subsidiary as a result of such transaction as
having been Incurred by the Successor Company or such Restricted
Subsidiary at the time of such transaction), no Default shall have
occurred and be continuing;
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37
(iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to Section 4.03(a);
(iv) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture and
other appropriate documents (if any) comply with this Indenture and the
Escrow and Disbursement Agreement;
(v) the Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that the Holders will not recognize
income, gain or loss for Federal income tax purposes as a result of
such transaction 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 transaction had not occurred; and
(vi) the Company shall have delivered to the Trustee an
Opinion of Counsel (subject to customary exceptions) to the effect that
any Subsidiary Guarantee shall remain in full force and effect after
such transaction.
The Successor Company shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture and the
Escrow and Disbursement Agreement, but the predecessor Company in the case of a
conveyance, transfer or lease of all or substantially all its assets shall not
be released from the obligation to pay the principal of and interest on the
Securities.
(b) The Company shall not permit any Subsidiary Guarantor to
consolidate with or merge with or into, or convey, transfer or lease, all or
substantially all of its assets to any Person unless:
(i) the resulting, surviving or transferee Person will be a
corporation organized and existing under the laws of the United States
of America, any State thereof or the District of Columbia, and such
Person (if not a Subsidiary Guarantor) will expressly assume, by a
supplemental indenture and other appropriate documents, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of such Subsidiary Guarantor under its Subsidiary
Guarantee;
(ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the resulting,
surviving or transferee Person as a result of such transaction as
having been incurred by such Person at the time of such transaction),
no Default shall have occurred and be continuing; and
(iii) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture and
other appropriate documents (if any) comply with this Indenture.
Notwithstanding the foregoing, (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and
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38
(b) the Company may merge with an Affiliate incorporated solely for the purpose
of reincorporating the Company in another jurisdiction to realize tax or other
benefits.
ARTICLE 6
Defaults and Remedies
SECTION 6.01. Events of Default. An "Event of Default" occurs
if:
(1) the Company defaults in any payment of interest on any
Security when the same becomes due and payable and such default
continues for a period of 30 days;
(2) the Company (i) defaults in the payment of the principal
of any Security when the same becomes due and payable at its Stated
Maturity, upon redemption, upon declaration or otherwise or (ii) fails
to redeem or purchase Securities when required pursuant to this
Indenture or the Securities;
(3) the Company fails to comply with Section 5.01;
(4) the Company fails to comply with Section 4.02, 4.03, 4.04,
4.05, 4.06, 4.07, 4.08, 4.11, 4.12, 4.13, 4.14, 4.15 (other than a
failure to purchase Securities when required under Section 4.06 or
4.08) or any of its agreements contained in the Escrow and Disbursement
Agreement and such failure continues for 30 days after the notice
specified below;
(5) the Company fails to comply with any of its agreements in
the Securities or this Indenture (other than those referred to in (1),
(2), (3) or (4) above) and such failure continues for 60 days after the
notice specified below;
(6) Indebtedness of the Company or any Subsidiary is not paid
within any applicable grace period after final maturity or the
acceleration by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $5.0 million
or its foreign currency equivalent at the time and such failure
continues for 10 days after the notice specified below;
(7) the Company or any Significant Subsidiary pursuant to or
within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief
against it in an involuntary case;
(C) consents to the appointment of a Custodian of it
or for any substantial part of its property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
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(8) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company or any
Significant Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any
Significant Subsidiary or for any substantial part of its
property; or
(C) orders the winding up or liquidation of the
Company or any Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order
or decree remains unstayed and in effect for 60 days;
(9) any judgment or decree for the payment of money in excess
of $5.0 million or its foreign currency equivalent at the time is
entered against the Company or any Significant Subsidiary and is not
discharged, waived or stayed and either (A) an enforcement proceeding
has been commenced by any creditor upon such judgment or decree or (B)
there is a period of 60 days following the entry of such judgment or
decree during which such judgment or decree is not discharged, waived
or the execution thereof stayed;
(10) any Subsidiary Guarantee shall cease to be in full force
and effect (except as contemplated by the terms thereof) or any
Subsidiary Guarantor or Person acting by or on behalf of such
Subsidiary Guarantor shall deny or disaffirm its obligations under this
Indenture or any Subsidiary Guarantee and such Default continues for 10
days after the notice specified below; or
(11) the Company challenges the Lien on the Escrow Collateral
under the Escrow and Disbursement Agreement prior to the time that the
Escrow Collateral is to be released to the Company, the Escrow
Collateral becomes subject to any Lien other than Liens under the
Escrow Agreement or the Escrow and Disbursement Agreement becomes, or
the Company asserts that the Escrow and Disbursement Agreement is,
invalid and unenforceable, other than in accordance with its terms.
The foregoing shall constitute Events of Default whatever the
reason for any such Event of Default and whether it is voluntary or involuntary
or is 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.
The term "Bankruptcy Law" means Title 11, United States Code,
or any similar Federal or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, custodian or
similar official under any Bankruptcy Law.
A Default under clause (4), (5), (6) or (10) above is not an
Event of Default until the Trustee or the Holders of at least 25% in principal
amount of the outstanding Securities notify the Company of the Default and the
Company does not cure such Default within the time specified after receipt of
such notice. Such notice must
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40
specify the Default, demand that it be remedied and state that such notice is a
"Notice of Default".
The Company shall deliver to the Trustee, within 30 days after
the occurrence thereof, written notice in the form of an Officers' Certificate
of any Event of Default under clause (6), (10) and (11) and any event which with
the giving of notice or the lapse of time would become an Event of Default under
clause (4), (5) or (9), its status and what action the Company is taking or
proposes to take with respect thereto.
SECTION 6.02. Acceleration. If an Event of Default (other than
an Event of Default specified in Section 6.01(7) or (8) with respect to the
Company) occurs and is continuing, the Trustee by notice to the Company, or the
Holders of at least 25% in principal amount of the outstanding Securities by
notice to the Company, may declare the principal of and accrued but unpaid
interest on all the Securities to be due and payable. Upon such a declaration,
such principal and interest shall be due and payable immediately. If an Event of
Default specified in Section 6.01(7) or (8) with respect to the Company occurs,
the principal of and interest on all the Securities shall ipso facto become and
be immediately due and payable without any declaration or other act on the part
of the Trustee or any Securityholders. The Holders of a majority in principal
amount of the Securities by notice to the Trustee may rescind an acceleration
and its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
acceleration. No such rescission shall affect any subsequent Default or impair
any right consequent thereto.
SECTION 6.03. Other Remedies. If an Event of Default occurs
and is continuing, the Trustee may pursue any available remedy to collect the
payment of principal of or interest on the Securities or to enforce the
performance of any provision of the Securities, this Indenture or the Escrow and
Disbursement Agreement.
The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the proceeding.
A delay or omission by the Trustee or any Securityholder in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a
majority in principal amount of the Securities by notice to the Trustee may
waive an existing Default and its consequences except (i) a Default in the
payment of the principal of or interest on a Security, (ii) a Default arising
from the failure to redeem or purchase any Security when required pursuant to
the terms of this Indenture or (iii) a Default in respect of a provision that
under Section 9.02 cannot be amended without the consent of each Securityholder
affected. When a Default is waived, it is deemed cured, but no such waiver shall
extend to any subsequent or other Default or impair any consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority
in principal amount of the Securities may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. However, the Trustee may
refuse to follow any direction that conflicts with law, this Indenture or the
Escrow and Disbursement Agreement or,
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41
subject to Section 7.01, that the Trustee determines is unduly prejudicial to
the rights of other Securityholders or would involve the Trustee in personal
liability; provided, however, that the Trustee may take any other action deemed
proper by the Trustee that is not inconsistent with such direction. Prior to
taking any action hereunder, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
SECTION 6.06. Limitation on Suits. Except to enforce the right
to receive payment of principal, premium (if any) or interest when due, no
Securityholder may pursue any remedy with respect to this Indenture or the
Securities unless:
(1) the Holder gives to the Trustee written notice stating
that an Event of Default is continuing;
(2) the Holders of at least 25% in principal amount of the
Securities make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of security or
indemnity; and
(5) the Holders of a majority in principal amount of the
Securities do not give the Trustee a direction inconsistent with the
request during such 60-day period.
A Securityholder may not use this Indenture to prejudice the
rights of another Securityholder or to obtain a preference or priority over
another Securityholder.
SECTION 6.07. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder
to receive payment of principal of and liquidated damages and interest on the
Securities held by such Holder, on or after the respective due dates expressed
in the Securities, or to bring suit for the enforcement of any such payment on
or after such respective dates, shall not be impaired or affected without the
consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of
Default specified in Section 6.01(1) or (2) occurs and is continuing, the
Trustee may recover judgment in its own name and as trustee of an express trust
against the Company for the whole amount then due and owing (together with
interest on any unpaid interest to the extent lawful) and the amounts provided
for in Section 7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee
may file such proofs of claim and other papers or documents as may be necessary
or advisable in order to have the claims of the Trustee and the Securityholders
allowed in any judicial proceedings relative to the Company, any Subsidiary or
Subsidiary Guarantor, their creditors or their property and, unless prohibited
by law or applicable regulations, may vote on behalf of the Holders in any
election of a trustee in bankruptcy or other Person performing similar
functions, and any Custodian in any such judicial proceeding is hereby
authorized by each Holder to make payments to the Trustee and, in the event that
<PAGE> 47
42
the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and its counsel, and any other amounts due the Trustee under Section 7.07.
SECTION 6.10. Priorities. If the Trustee collects any money or
property pursuant to this Article 6 or the Escrow and Disbursement Agreement, it
shall pay out the money or property in the following order:
FIRST: to the Trustee for amounts due under Section 7.07 and
to the Escrow Agent pursuant to the Escrow and Disbursement Agreement;
SECOND: to Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, and any liquidated
damages without preference or priority of any kind, according to the
amounts due and payable on the Securities for principal, any liquidated
damages and interest, respectively; and
THIRD: to the Company provided that all sums due and owing to
the Holders, the Trustee and the Escrow Agent have been paid in full as
required by this Indenture.
The Trustee may fix a record date and payment date for any
payment to Securityholders pursuant to this Section 6.10. At least 15 days
before such record date, the Trustee shall mail to each Securityholder and the
Company a notice that states the record date, the payment date and amount to be
paid.
SECTION 6.11. Undertaking for Costs. In any suit for the
enforcement of any right or remedy under this Indenture or in any suit against
the Trustee for any action taken or omitted by it as Trustee, a court in its
discretion may require the filing by any party litigant in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses made by the party litigant. This Section 6.11 does not apply
to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit
by Holders of more than 10% in principal amount of the Securities.
SECTION 6.12. Waiver of Stay or Extension Laws. Neither the
Company nor any Subsidiary Guarantor which becomes a party to this Indenture (to
the extent it may lawfully do so) shall 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 wherever enacted, now or at any time hereafter in force, 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, and each
Subsidiary Guarantor which becomes a party to this Indenture (to the extent that
it may lawfully do so) will agree to waive, all benefit or advantage of any such
law, and shall not hinder, delay or impede the execution of any power herein
granted to the Trustee, but shall suffer and permit the execution of every such
power as though no such law had been enacted.
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43
ARTICLE 7
Trustee
SECTION 7.01. Duties of Trustee. (a) If an Event of Default
has occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in
their exercise as a prudent Person would exercise or use under the circumstances
in the conduct of such Person's own affairs.
(b) 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
Escrow and Disbursement Agreement and no implied covenants or
obligations shall be read into this Indenture or the Escrow and
Disbursement Agreement 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 or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture or the Escrow and Disbursement Agreement. However, the
Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture or
the Escrow and Disbursement Agreement.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful misconduct,
except that:
(1) this paragraph does not limit the effect of paragraph (b)
of this Section 7.01;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates
to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 7.01.
(e) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.
(g) No provision of this Indenture or the Escrow and
Disbursement Agreement shall require the Trustee to expend or risk its own funds
or otherwise incur financial liability in the performance of any of its duties
hereunder or in the exercise of
<PAGE> 49
44
any of its rights or powers, if it shall have reasonable grounds to believe that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(h) 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 7.01 and to the provisions of the TIA.
SECTION 7.02. Rights of Trustee. Subject to Section 7.01: (a)
The Trustee may rely on any document believed by it to be genuine and to have
been signed or presented by the proper person. The Trustee need not investigate
any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
the Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers; provided, however, that the Trustee's conduct does not
constitute wilful misconduct or negligence.
(e) The Trustee may consult with counsel, and the advice or
opinion of counsel with respect to legal matters relating to this Indenture, the
Securities and the Escrow and Disbursement Agreement shall be full and complete
authorization and protection from liability in respect to any action taken,
omitted or suffered by it here under in good faith and in accordance with the
advice or opinion of such counsel.
(f) The Trustee shall have no duty to inquire as to the
performance of the covenants in Article 4 hereof, except pursuant to Sections
4.01, 4.09, 4.10 and 4.16. In addition, the Trustee shall not be deemed to have
knowledge of any Default or Event of Default except (i) any Event of Default
occurring pursuant to Sections 6.01(1), 6.01(2), 4.01, 4.09, 4.10 or 4.16 or
(ii) any Default or Event of Default of which the Trustee shall have received
written notification or obtained actual knowledge.
(g) 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, consent, order, approval, bond,
debenture, note or other paper or document unless requested in writing to do so
by the Holders of not less than a majority in principal amount of the Securities
at the time outstanding, but the Trustee, in its discretion, may make such
further inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney.
SECTION 7.03. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not Trustee. Any Paying Agent, Registrar, co-paying
agent or the Escrow Agent
<PAGE> 50
45
may do the same with like rights. However, the Trustee must comply with Sections
7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture, or the Securities or the Escrow and Disbursement Agreement, it
shall not be accountable for the Company's use of the proceeds from the
Securities, and it shall not be responsible for any statement of the Company in
this Indenture or in any document issued in connection with the sale of the
Securities, in the Securities or the Escrow and Disbursement Agreement other
than the Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Securityholder notice of the Default within the earlier of 90 days after it
occurs or 30 days after it is known to a trust officer. Except in the case of a
Default in payment of principal of or interest on any Security (including
payments pursuant to the mandatory redemption provisions of such Security, if
any), or a Default in complying with any provisions of the Escrow and
Disbursement Agreement, the Trustee may withhold the notice if and so long as a
committee of its Trust Officers in good faith determines that withholding the
notice is in the interests of Securityholders.
SECTION 7.06. Reports by Trustee to Holders. As promptly as
practicable after each December 31 beginning with the December 31 following the
date of this Indenture, and in any event prior to February 15 in each year, the
Trustee shall mail to each Securityholder a brief report dated as of February 15
that complies with Section 313(a) of the TIA. The Trustee shall also comply with
Section 313(b) of the TIA.
A copy of each report at the time of its mailing to
Securityholders shall be filed with the SEC and each stock exchange (if any) on
which the Securities are listed. The Company agrees to notify promptly the
Trustee whenever the Securities become listed on any stock exchange and of any
delisting thereof.
SECTION 7.07. Compensation and Indemnity. The Company shall
pay to the Trustee from time to time reasonable compensation for its services.
The Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred or made by it,
including costs of collection, in addition to the compensation for its services.
Such expenses shall include the reasonable compensation and expenses,
disbursements and advances of the Trustee's agents, counsel, accountants and
experts. The Company and each Subsidiary Guarantor that becomes a party to this
Indenture pursuant to Section 4.11, jointly and severally shall indemnify the
Trustee against any and all loss, liability or expense (including reasonable
attorneys' fees) incurred by or in connection with the administration of this
trust and the performance of its their duties hereunder. The Trustee shall
notify the Company of any claim for which it may seek indemnity promptly upon
obtaining actual knowledge thereof; provided, however, that any failure so to
notify the Company shall not relieve the Company or any Subsidiary Guarantor of
its indemnity obligations hereunder. The Company shall defend the claim and the
indemnified party shall provide reasonable cooperation at the Company's expense
in the defense. Such indemnified parties may have separate counsel and the
Company and the Subsidiary Guarantors, as applicable, shall pay the fees and
expenses of such counsel; provided, however, that the Company shall not be
required to
<PAGE> 51
46
pay such fees and expenses if it assumes such indemnified parties' defense and,
in such indemnified parties' reasonable judgment, there is no conflict of
interest between the Company and the Subsidiary Guarantors, as applicable, and
such parties in connection with such defense. The Company need not reimburse any
expense or indemnify against any loss, liability or expense incurred by an
indemnified party through such party's own wilful misconduct, negligence or bad
faith.
To secure the Company's payment obligations pursuant to this
Section 7.07, the Trustee shall have a lien prior to the Securities on all money
or property held or collected by the Trustee other than money or property held
in trust to pay principal of and interest and any liquidated damages on
particular Securities.
The Company's payment obligations pursuant to this Section
shall survive the satisfaction or discharge of this Indenture, any rejection or
termination of this Indenture under any bankruptcy law or the resignation or
removal of the Trustee. When the Trustee incurs expenses after the occurrence of
a Default specified in Section 6.01(7) or (8) with respect to the Company, the
expenses are intended to constitute expenses of administration under the
Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The Trustee may resign
at any time by so notifying the Company. The Holders of a majority in principal
amount of the Securities may remove the Trustee by so notifying the Trustee and
may appoint a successor Trustee. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the
Trustee or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the
Holders of a majority in principal amount of the Securities and such Holders do
not reasonably promptly appoint a successor Trustee, or if a vacancy exists in
the office of Trustee for any reason (the Trustee in such event being referred
to herein as the retiring Trustee), the Company shall promptly appoint a
successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Securityholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.07.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee or the
Holders of 10% in principal amount of the Securities may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
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If the Trustee fails to comply with Section 7.10, any
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to
this Section 7.07, the Company's obligations under Section 7.07 shall continue
for the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Securities 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 Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of the
successor to the Trustee; and in all such cases such certificates shall have the
full force which it is anywhere in the Securities or in this Indenture provided
that the certificate of the Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The Trustee shall
at all times satisfy the requirements of TIA Section 310(a). The Trustee or the
bank holding company of which the Trustee is a wholly-owned subsidiary shall
have a combined capital and surplus of at least $100,000,000 as set forth in its
most recent published annual report of condition. The Trustee shall comply with
TIA Section 310(b); provided, however, that there shall be excluded from the
operation of TIA Section 310(b)(1) any indenture or indentures under which other
securities or certificates of interest or participation in other securities of
the Company are outstanding if the requirements for such exclusion set forth in
TIA Section 310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against
Company. The Trustee shall comply with TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has resigned
or been removed shall be subject to TIA Section 311(a) to the extent indicated.
ARTICLE 8
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities;
Defeasance. (a) When (i) the Company delivers to the Trustee all outstanding
Securities (other than Securities replaced pursuant to Section 2.08) for
cancelation or (ii) all outstanding Securities have become due and payable,
whether at maturity or as a result of the mailing of a notice of redemption
pursuant to Article 3 hereof, and the Company irrevocably deposits with the
Trustee funds or U.S. Government Obligations on which payment of principal and
interest when due will be sufficient to pay at maturity or upon redemption
<PAGE> 53
48
all outstanding Securities, including interest thereon to maturity or such
redemption date (other than Securities replaced pursuant to Section 2.08), and
if in either case the Company pays all other sums payable hereunder by the
Company, then this Indenture shall, subject to Section 8.01(c), cease to be of
further effect. The Trustee shall acknowledge satisfaction and discharge of this
Indenture on demand of the Company accompanied by an Officers' Certificate and
an Opinion of Counsel and at the cost and expense of the Company.
(b) Subject to Sections 8.01(c) and 8.02, the Company at any
time may terminate (i) all of its obligations under the Securities and this
Indenture ("legal defeasance option") or (ii) its obligations under Sections
4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14 and
4.15 and the operation of Section 5.01(a)(iii), 6.01(4), 6.01(6), 6.01(7) (with
respect to Significant Subsidiaries of the Company only), 6.01(8) (with respect
to Significant Subsidiaries of the Company only) and 6.01(9) ("covenant
defeasance option"). The Company may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance option. In the
event that the Company terminates all of its obligations under the Securities
and this Indenture by exercising its legal defeasance option, the obligations
under the Subsidiary Guarantees, if any, shall each be terminated simultaneously
with the termination of such obligations.
If the Company exercises its legal defeasance option, payment
of the Securities may not be accelerated because of an Event of Default. If the
Company exercises its covenant defeasance option, payment of the Securities may
not be accelerated because of an Event of Default specified in Sections 6.01(4),
6.01(6), 6.01(7) (with respect to Significant Subsidiaries of the Company only),
6.01(8) (with respect to Significant Subsidiaries of the Company only) or
6.01(9) or because of the failure of the Company to comply with Section
5.01(a)(iii).
Upon satisfaction of the conditions set forth herein and upon
request of the Company, the Trustee shall acknowledge in writing the discharge
of those obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 7.07, 7.08 and in
this Article 8 shall survive until the Securities have been paid in full.
Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 shall
survive.
SECTION 8.02. Conditions to Defeasance. The Company may
exercise its legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee
money or U.S. Government Obligations for the payment of principal,
premium (if any) and interest on the Securities to maturity or
redemption, as the case may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and
without reinvestment on the deposited U.S. Government Obligations plus
any deposited money without investment will provide cash at such times
and in such amounts as will be
<PAGE> 54
49
sufficient to pay principal and interest when due on all the Securities
to maturity or redemption, as the case may be;
(3) 123 days pass after the deposit is made and during the
123-day period no Default specified in Section 6.01(7) or (8) with
respect to the Company occurs which is continuing at the end of the
period;
(4) the deposit does not constitute a default under any other
agreement binding on the Company;
(5) the Company delivers to the Trustee an Opinion of Counsel
to the effect that the trust resulting from the deposit does not
constitute, or is qualified as, a regulated investment company under
the Investment Company Act of 1940;
(6) in the case of the legal defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that
(i) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or (ii) since the date of this
Indenture there has been a change in the applicable Federal income tax
law, in either case to the effect that, and based thereon such Opinion
of Counsel shall confirm that, the Securityholders 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 the covenant defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Security holders 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; and
(8) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent to the defeasance and discharge of the Securities as
contemplated by this Article 8 have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Securities at a future date in
accordance with Article 3.
SECTION 8.03. Application of Trust Money. The Trustee shall
hold in trust money or U.S. Government Obligations deposited with it pursuant to
this Article 8. It shall apply the deposited money and the money from U.S.
Government Obligations through the Paying Agent and in accordance with this
Indenture to the payment of principal of and interest on the Securities.
SECTION 8.04. Repayment to Company. The Trustee and the Paying
Agent shall promptly turn over to the Company upon request any excess money or
securities held by them at any time.
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Subject to any applicable abandoned property law, the Trustee
and the Paying Agent shall pay to the Company upon written request any money
held by them for the payment of principal or interest that remains unclaimed for
two years, and, thereafter, Securityholders entitled to the money must look to
the Company for payment as general creditors.
SECTION 8.05. Indemnity for Government Obligations. The
Company shall pay and shall indemnify the Trustee against any tax, fee or other
charge imposed on or assessed against deposited U.S. Government Obligations or
the principal and interest received on such U.S. Government Obligations.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with this
Article 8 by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under this
Indenture and the Securities shall be revived and reinstated as though no
deposit had occurred pursuant to this Article 8 until such time as the Trustee
or Paying Agent is permitted to apply all such money or U.S. Government
Obligations in accordance with this Article 8; provided, however, that, if the
Company has made any payment of interest on or principal of any Securities
because of the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of such Securities to receive such payment from the
money or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE 9
Amendments
SECTION 9.01. Without Consent of Holders. The Company, the
Subsidiary Guarantors, if any, and the Trustee may amend this Indenture or the
Securities without notice to or consent of any Securityholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or
in place of certificated Securities; provided, however, that the
uncertificated Securities are issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Securities are described in Section 163(f)(2)(B) of the Code;
(4) to add additional Guarantees with respect to the
Securities or to secure the Securities or to create and maintain a
valid first priority security interest in and on the Escrow Collateral
in favor of the Trustee for the benefit of Holders;
(5) 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;
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51
(6) to comply with any requirements of the SEC in connection
with qualifying, or maintaining the qualification of, this Indenture
under the TIA;
(7) to make any change that does not adversely affect the
rights of any Securityholder; or
(8) to provide for the issuance of the Exchange Securities,
Private Exchange Securities or Additional Securities, which shall have
terms substantially identical in all material respects to the Original
Securities (except that the transfer restrictions contained in the
Original Securities shall be modified or eliminated, as appropriate),
and which shall be treated, together with any outstanding Original
Securities, as a single issue of securities.
After an amendment under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing such
amendment. The failure to give such notice to all Securityholders, or any defect
therein, shall not impair or affect the validity of an amendment under this
Section.
SECTION 9.02. With Consent of Holders. The Company, the
Subsidiary Guarantors, if any, and the Trustee may amend this Indenture or the
Securities without notice to any Securityholder but with the written consent of
the Holders of at least a majority in principal amount of the Securities then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for the Securities). However, without the consent of each
Securityholder affected, an amendment may not:
(1) reduce the amount of Securities whose Holders must consent
to an amendment;
(2) reduce the rate of or extend the time for payment of
interest or any liquidated damages on any Security;
(3) reduce the principal of or extend the Stated Maturity of
any Security;
(4) reduce the premium payable upon the redemption of any
Security or change the time at which any Security may be redeemed in
accordance with Article 3 or paragraph 5 of the Securities;
(5) make any Security payable in money other than that stated
in the Security;
(6) make any change in Section 6.04 or 6.07 or the second
sentence of this Section 9.02;
(7) modify or affect in any manner adverse to the Holders the
terms and conditions of the obligation of any Subsidiary Guarantor for
the due and punctual payment of the principal of or any liquidated
damages or interest on the Securities;
(8) impair the right of any Holder to receive payment of
principal of and interest or any liquidated damages on such Holder's
Securities on or after the due
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dates therefor or to institute suit for the enforcement of any payment
on or with respect to such Holder's Securities; or
(9) modify the provisions of the Escrow and Disbursement
Agreement or this Indenture relating to the Escrow Collateral in any
manner adverse to the Holders or release any of the Escrow Collateral
from the Lien under the Escrow and Disbursement Agreement or permit any
other obligation to be secured by the Escrow Collateral.
It shall not be necessary for the consent of the Holders under
this Section 9.02 to approve the particular form of any proposed amendment, but
it shall be sufficient if such consent approves the substance thereof.
After an amendment under this Section 9.02 becomes effective,
the Company shall mail to Securityholders a notice briefly describing such
amendment. The failure to give such notice to all Securityholders, or any defect
therein, shall not impair or affect the validity of an amendment under this
Section 9.02.
SECTION 9.03. Compliance with Trust Indenture Act. Every
amendment to this Indenture or the Securities shall comply with the TIA as then
in effect.
SECTION 9.04. Revocation and Effect of Consents and Waivers. A
consent to an amendment or a waiver by a Holder of a Security shall bind the
Holder and every subsequent Holder of that Security or portion of the Security
that evidences the same debt as the consenting Holder's Security, even if
notation of the consent or waiver is not made on the Security. However, any such
Holder or subsequent Holder may revoke the consent or waiver as to such Holder's
Security or portion of the Security if the Trustee receives the notice of
revocation before the date the amendment or waiver becomes effective. After an
amendment or waiver becomes effective, it shall bind every Securityholder. An
amendment or waiver becomes effective once both (i) the requisite number of
consents have been received by the Company or the Trustee and (ii) such
amendment or waiver has been executed by the Company and the Trustee.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Securityholders entitled to give their
consent or take any other action described above or required or permitted to be
taken pursuant to this Indenture. If a record date is fixed, then
notwithstanding the immediately preceding paragraph, those Persons who were
Securityholders at such record date (or their duly designated proxies), and only
those Persons, shall be entitled to give such consent or to revoke any consent
previously given or to take any such action, whether or not such Persons
continue to be Holders after such record date. No such consent shall be valid or
effective for more than 120 days after such record date.
SECTION 9.05. Notation on or Exchange of Securities. If an
amendment changes the terms of a Security, the Trustee may require the Holder of
the Security to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Security regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines, the Company
in exchange for the Security shall issue and the Trustee shall authenticate a
new Security that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Security shall not affect the validity of such
amendment.
<PAGE> 58
53
SECTION 9.06. Trustee to Sign Amendments. The Trustee shall
sign any amendment authorized pursuant to this Article 9 if the amendment does
not adversely affect the rights, duties, liabilities or immunities of the
Trustee. If it does, the Trustee may but need not sign it. In signing such
amendment the Trustee shall be entitled to receive indemnity reasonably
satisfactory to it and to receive, and (subject to Section 7.01) shall be fully
protected in relying upon, an Officers' Certificate and an Opinion of Counsel
stating that such amendment is authorized or permitted by this Indenture and
that such amendment is the legal, valid and binding obligation of the Company
and the Subsidiary Guarantors, if any, enforceable against them in accordance
with its terms, subject to customary exceptions, and complies with the
provisions hereof (including Section 9.03).
SECTION 9.07. Payment for Consent. Neither the Company nor any
Affiliate of the Company shall, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of this Indenture or the Securities unless such consideration is
offered to be paid to all Holders that so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
ARTICLE 10
Escrow Collateral and Security
SECTION 10.01. Escrow and Disbursement Agreement. The due and
punctual payment of the first four semi-annual interest payments on the
Securities, when and as the same shall be due and payable on an Interest Payment
Date or by acceleration, shall be secured as provided in the Escrow and
Disbursement Agreement which the Company, the Escrow Agent and the Trustee have
entered into simultaneously with the execution of this Indenture. Upon
acceleration of the Securities prior to the payment in full of the first four
semi-annual interest payments on the Securities, the Escrow Agent shall, upon
the receipt of written notice from the Trustee, as agent for the Trustee,
foreclose upon the Escrow Collateral. Each Holder of Securities, by its
acceptance thereof, consents and agrees to the terms of the Escrow and
Disbursement Agreement (including, without limitation, the provisions providing
for foreclosure and disbursement of the Escrow Collateral) as the same may be in
effect or may be amended from time to time in accordance with its terms and the
terms hereof and authorizes and directs the Escrow Agent and the Trustee to
enter into the Escrow and Disbursement Agreement and to perform its obligations
and exercise its rights thereunder in accordance therewith. The Company shall
deliver to the Trustee copies of the Escrow and Disbursement Agreement, and
shall do or cause to be done all such acts and things as may be necessary or
proper, or as may be required by the provisions of the Escrow and Disbursement
Agreement, to assure and confirm to the Trustee the security interest in the
Escrow Collateral contemplated by the Escrow and Disbursement Agreement or any
part thereof, as from time to time constituted, so as to render the Escrow
Collateral available for the security and benefit of this Indenture with respect
to the Securities, according to the intent and purposes expressed in the Escrow
and Disbursement Agreement. The Company shall take any and all actions
reasonably required to cause the Escrow and Disbursement Agreement to create and
maintain (to the extent possible under applicable law), as security for the
obligations of the Company hereunder, a security interest in and on all
<PAGE> 59
54
the Escrow Collateral, in favor of the Trustee, for the benefit of Holders.
Neither the Escrow Agent nor the Trustee shall have any responsibility for
perfecting or maintaining the perfection of the Trustee's security interest in
the Escrow Collateral or for filing any instrument, document or notice in any
public office at any time or times.
SECTION 10.02. Recording and Opinions. (a) The Company shall
furnish to the Trustee simultaneously with the execution and delivery of this
Indenture an Opinion of Counsel stating that (i) either (A) in the opinion of
such counsel all action has been taken with respect to the recording,
registering and filing of this Indenture, financing statements or other
instruments necessary to create a valid and perfected first priority security
interest in favor of the Trustee for the benefit of Holders, subject to no equal
or prior security interest of any creditor or (B) in the opinion of such counsel
no such action is necessary to make such security interest effective and (ii) a
valid and perfected security interest has been created in the Escrow Collateral
in favor of the Trustee for the benefit of Holders.
(b) To the extent, if any, Section 314(b) of the Trust
Indenture Act is applicable, the Company shall furnish to the Trustee on each
anniversary of the Closing Date (upon receipt of written notice from the Escrow
Agent) until the date upon which the balance of funds in the Escrow Account
shall have been reduced to zero, an Opinion of Counsel, dated as of such date,
complying in all respects with Section 314(b) of the TIA.
SECTION 10.03. Release of Escrow Collateral. (a) Subject to
subsections (b), (c) and (d) of this Section 10.03, the Escrow Collateral may be
released from the security interest created by the Escrow and Disbursement
Agreement only in accordance with the provisions of the Escrow and Disbursement
Agreement.
(b) No Escrow Collateral shall be released from the security
interest created by the Escrow and Disbursement Agreement pursuant to the
provisions of the Escrow and Disbursement Agreement, other than as provided in
the Escrow and Disbursement Agreement.
(c) Upon acceleration of the Securities (whether by
declaration or otherwise), no Escrow Collateral shall be released pursuant to
the provisions of the Escrow and Disbursement Agreement, and no release of
Escrow Collateral in contravention of this Section 10.03(c) shall be effective
as against Holders, except for the disbursement of all funds and other Escrow
Collateral to the Trustee pursuant to Section 6(b) of the Escrow and
Disbursement Agreement.
(d) To the extent applicable, the Company shall cause Section
314(d) of the TIA, relating to the release of property or securities from the
security interest of the Escrow and Disbursement Agreement, to be complied with.
SECTION 10.04. Authorization of Actions to Be Taken by the
Trustee Under the Escrow and Disbursement Agreement. Subject to the provisions
of Section 7.01 and Section 7.02, the Trustee may, without the consent of
Holders, on behalf of such Holders, take all actions it deems necessary or
appropriate in order to (a) enforce any of the terms of the Escrow and
Disbursement Agreement and (b) collect and receive any and all amounts payable
in respect of the obligations of the Company thereunder and hereunder. The
Trustee shall have power to institute and maintain such suits and
<PAGE> 60
55
proceedings as it may deem expedient to prevent any impairment of the Escrow
Collateral by any acts that may be unlawful or in violation of the Escrow and
Disbursement Agreement or this Indenture, and such suits and proceedings as the
Trustee may deem expedient to preserve or protect its interests and the
interests of Holders and the Escrow Agent in the Escrow Collateral (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).
SECTION 10.05. Authorization of Receipt of Funds by the
Trustee Under the Escrow and Disbursement Agreement. The Trustee is authorized
to receive any funds for the benefit of Holders disbursed under the Escrow and
Disbursement Agreement, and to make further distributions of such funds to
Holders according to the provisions of this Indenture.
SECTION 10.06. Termination of Security Interest. Upon the
earliest to occur of (i) the date upon which the balance of funds in the Escrow
Account and other Escrow Collateral shall have been reduced to zero, (ii) the
payment of the first four semi-annual interest payments on the Notes and (iii)
defeasance of the Company's obligations under the Securities and this Indenture
in accordance with Article 8, the Trustee shall, at the written request of the
Company, release the security interest in the Escrow Collateral pursuant to this
Indenture and the Escrow and Disbursement Agreement upon the Company's
compliance with the provisions of the TIA pertaining to release of collateral.
ARTICLE 11
Miscellaneous
SECTION 11.01. Trust Indenture Act Controls. If any provision
of this Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.
SECTION 11.02. Notices. Any notice or communication shall be
in writing and delivered in person or mailed by first-class mail addressed as
follows:
if to the Company:
Splitrock Services, Inc.
8665 New Trails Drive, Suite 200
The Woodlands, TX 77381
Attention of: Vice President and General
Counsel
<PAGE> 61
56
if to the Trustee:
Bank of Montreal Trust Company
88 Pine Street
New York, NY 10005
Attention of: Corporate Trust Department
The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Securityholder shall
be mailed to the Securityholder at the Securityholder's address as it appears on
the registration books of the Registrar and shall be sufficiently given if so
mailed within the time prescribed.
Failure to mail a notice or communication to a Securityholder
or any defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
SECTION 11.03. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA Section 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA Section 312(c).
SECTION 11.04. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Company to the Trustee to take
or refrain from taking any action under this Indenture, the Company shall
furnish to the Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
SECTION 11.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a covenant or
condition provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or
opinion has read such covenant or condition;
(2) 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;
(3) a statement that, in the opinion of such individual, he
has made such examination or investigation as is necessary to enable
him to express an informed
<PAGE> 62
57
opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
SECTION 11.06. When Securities Disregarded. In determining
whether the Holders of the required principal amount of Securities have
concurred in any direction, waiver or consent, Securities owned by the Company,
any Subsidiary Guarantor or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company or any
Subsidiary Guarantor shall be disregarded and deemed not to be outstanding,
except that, for the purpose of determining whether the Trustee shall be
protected in relying on any such direction, waiver or consent, only Securities
which the Trustee knows are so owned shall be so disregarded. Subject to the
foregoing, only Securities outstanding at the time shall be considered in any
such determination.
SECTION 11.07. Rules by Trustee, Paying Agent and Registrar.
The Trustee may make reasonable rules for action by or a meeting of
Securityholders. The Registrar and the Paying Agent may make reasonable rules
for their functions.
SECTION 11.08. Legal Holidays. A "Legal Holiday" is a
Saturday, a Sunday or a day on which banking institutions are not required to be
open in the State of New York. If a payment date is a Legal Holiday, payment
shall be made on the next succeeding day that is not a Legal Holiday, and no
interest shall accrue for the intervening period. If a regular record date is a
Legal Holiday, the record date shall not be affected.
SECTION 11.09. GOVERNING LAW. THIS INDENTURE AND
THE SECURITIES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF
CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION WOULD BE REQUIRED THEREBY.
SECTION 11.10. No Recourse Against Others. A director,
officer, employee or stockholder, as such, of the Company shall not have any
liability for any obligations of the Company under the Securities or this
Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Security, each Securityholder
shall waive and release all such liability. The waiver and release shall be part
of the consideration for the issue of the Securities.
SECTION 11.11. Successors. All agreements of the Company and
each Subsidiary Guarantor, if any, in this Indenture and the Securities shall
bind its successors. All agreements of the Trustee in this Indenture shall bind
its successors.
SECTION 11.12. Multiple 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. One signed copy is enough to
prove this Indenture.
SECTION 11.13. Table of Contents; Headings. The table of
contents, cross-reference sheet and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not
intended to be considered a part hereof and shall not modify or restrict any of
the terms or provisions hereof.
<PAGE> 63
58
IN WITNESS WHEREOF, the parties have caused this Indenture to
be duly executed as of the date first written above.
SPLITROCK SERVICES, INC.,
by /s/
----------------------------------------
Name:
Title:
BANK OF MONTREAL TRUST
COMPANY, as Trustee,
by /s/
----------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 4.5
SPLITROCK SERVICES, INC.
$261,000,000
11 3/4% Senior Notes due 2008
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
July 24, 1998
CHASE SECURITIES INC.
270 Park Avenue, 4th floor
New York, New York 10017
Ladies and Gentlemen:
Splitrock Services, Inc., a Delaware corporation (the
"Company"),proposes to issue and sell to Chase Securities Inc. ("CSI" or the
"Initial Purchaser"), upon the terms and subject to the conditions set forth in
a purchase agreement dated July 21, 1998 (the "Purchase Agreement"), 261,000
units (the "Units"), each Unit consisting of $1,000 principal amount of the
Company's 11 3/4% Senior Notes due 2008 (the "Notes") and one warrant to
purchase 10.124954 shares of common stock, par value $.001 per share, of the
Company. Capitalized terms used but not defined herein shall have the meanings
given to such terms in the Purchase Agreement.
As an inducement to the Initial Purchaser to enter into the
Purchase Agreement and in satisfaction of a condition to the obligations of the
Initial Purchaser thereunder, the Company agrees with the Initial Purchaser, for
the benefit of the holders (including the Initial Purchaser) of the Notes, the
Exchange Notes (as defined herein) and the Private Exchange Notes (as defined
herein) (collectively, the "Holders"), as follows:
1. Registered Exchange Offer. The Company shall (i) prepare
and, not later than 45 days following the date of original issuance of the Notes
(the "Issue Date"), file with the Commission a registration statement (the
"Exchange Offer Registration Statement") on an appropriate form under the
Securities Act with respect to a proposed offer to the Holders of the Notes (the
"Registered Exchange Offer") to issue and deliver to such Holders, in exchange
for the Notes, a like aggregate principal amount of debt securities of the
Company (the "Exchange Notes") that are identical in all material respects to
the Notes, except for the transfer restrictions relating to the Notes, (ii) use
their reasonable best efforts to cause the Exchange Offer Registration Statement
to become effective under the Securities Act no later than 105 days after the
Issue Date and the Registered Exchange Offer to be consummated no later than 135
days after the Issue Date and (iii) keep the Exchange Offer Registration
Statement effective for not less than 30 days (or longer, if required by
applicable law) after the date on which notice of the Registered Exchange Offer
is mailed to the Holders (such period being called the "Exchange Offer
Registration Period"). The Exchange Notes will be issued under the Indenture or
an indenture (the "Exchange Notes Indenture") between the Company, the
Subsidiary Guarantors, if any, and the Trustee or such other bank or trust
company that is
<PAGE> 2
2
reasonably satisfactory to the Initial Purchaser, as trustee (the "Exchange
Notes Trustee"), such indenture to be identical in all material respects to the
Indenture, except for the transfer restrictions relating to the Notes (as
described above).
Upon the effectiveness of the Exchange Offer Registration
Statement, the Company shall promptly commence the Registered Exchange Offer, it
being the objective of such Registered Exchange Offer to enable each Holder
electing to exchange Notes for Exchange Notes (assuming that such Holder (a) is
not an affiliate of the Company or an Exchanging Dealer (as defined herein) not
complying with the requirements of the next sentence, (b) is not the Initial
Purchaser holding Notes that have, or that are reasonably likely to have, the
status of an unsold allotment in an initial distribution, (c) acquires the
Exchange Notes in the ordinary course of such Holder's business and (d) has no
arrangements or understandings with any person to participate in the
distribution of the Exchange Notes) and to trade such Exchange Notes from and
after their receipt without any limitations or restrictions under the Securities
Act and without material restrictions under the securities laws of the several
states of the United States. The Company, the Initial Purchaser and each
Exchanging Dealer acknowledge that, pursuant to current interpretations by the
Commission's staff of Section 5 of the Securities Act, each Holder that is a
broker-dealer electing to exchange Notes, acquired for its own account as a
result of market-making activities or other trading activities, for Exchange
Notes (an "Exchanging Dealer"), is required to deliver a prospectus containing
substantially the information set forth in Annex A hereto on the cover, in Annex
B hereto in the "Exchange Offer Procedures" section and the "Purpose of the
Exchange Offer" section and in Annex C hereto in the "Plan of Distribution"
section of such prospectus in connection with a sale of any such Exchange Notes
received by such Exchanging Dealer pursuant to the Registered Exchange Offer.
If, prior to the consummation of the Registered Exchange
Offer, any Holder holds any Notes acquired by it that have, or that are
reasonably likely to be determined to have, the status of an unsold allotment in
an initial distribution, or any Holder is not entitled to participate in the
Registered Exchange Offer, the Company shall, upon the request of any such
Holder, simultaneously with the delivery of the Exchange Notes in the Registered
Exchange Offer, issue and deliver to any such Holder, in exchange for the Notes
held by such Holder (the "Private Exchange"), a like aggregate principal amount
of debt securities of the Company (the "Private Exchange Notes") that are
identical in all material respects to the Exchange Notes, except for the
transfer restrictions relating to such Private Exchange Notes. The Private
Exchange Notes will be issued under the same indenture as the Exchange Notes,
and the Company shall use its reasonable best efforts to cause the Private
Exchange Notes to bear the same CUSIP number as the Exchange Notes.
In connection with the Registered Exchange Offer, the Company
shall:
(a) 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;
(b) keep the Registered Exchange Offer open for not less than
30 days (or longer, if required by applicable law) after the date on
which notice of the Registered Exchange Offer is mailed to the Holders;
<PAGE> 3
3
(c) utilize the services of a depositary for the Registered
Exchange Offer with an address in the Borough of Manhattan, The City of
New York;
(d) permit Holders to withdraw tendered Notes at any time
prior to the close of business, New York City time, on the last
business day on which the Registered Exchange Offer shall remain open;
and
(e) otherwise comply in all respects with all laws that are
applicable to the Registered Exchange Offer.
As soon as practicable after the close of the Registered
Exchange Offer and any Private Exchange, as the case may be, the Company shall:
(a) accept for exchange all Notes tendered and not validly
withdrawn pursuant to the Registered Exchange Offer and the Private
Exchange;
(b) deliver to the Trustee for cancelation all Notes so
accepted for exchange; and
(c) cause the Trustee or the Exchange Notes Trustee, as the
case may be, promptly to authenticate and deliver to each Holder,
Exchange Notes or Private Exchange Notes, as the case may be, equal in
principal amount to the Notes of such Holder so accepted for exchange.
The Company shall use its reasonable best efforts to keep the
Exchange Offer Registration Statement effective and to amend and supplement the
prospectus contained therein in order to permit such prospectus to be used by
all persons subject to the prospectus delivery requirements of the Securities
Act for such period of time as such persons must comply with such requirements
in order to resell the Exchange Notes; provided that (i) in the case where such
prospectus and any amendment or supplement thereto must be delivered by an
Exchanging Dealer, such period shall be the lesser of 180 days and the date on
which all Exchanging Dealers have sold all Exchange Notes held by them and (ii)
the Company shall make such prospectus and any amendment or supplement thereto
available to any broker-dealer for use in connection with any resale of any
Exchange Notes for a period of not less than 180 days after the consummation of
the Registered Exchange Offer.
The Indenture or the Exchange Notes Indenture, as the case may
be, shall provide that the Notes, the Exchange Notes and the Private Exchange
Notes shall vote and consent together on all matters as one class and that none
of the Notes, the Exchange Notes or the Private Exchange Notes will have the
right to vote or consent as a separate class on any matter.
Interest on each Exchange Note and Private Exchange Note
issued pursuant to the Registered Exchange Offer and in the Private Exchange
will accrue from the last interest payment date on which interest was paid on
the Notes surrendered in exchange therefor or, if no interest has been paid on
the Notes, from the Issue Date.
Each Holder participating in the Registered Exchange Offer
shall be required to represent to the Company that at the time of the
consummation of the Registered Exchange Offer (i) any Exchange Notes received by
such Holder will be
<PAGE> 4
4
acquired in the ordinary course of business, (ii) such Holder will have no
arrangements or understanding with any person to participate in the distribution
of the Notes or the Exchange Notes within the meaning of the Securities Act and
(iii) such Holder is not an affiliate of the Company or, if it is such an
affiliate, such Holder will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
Notwithstanding any other provisions hereof, the Company will
ensure that (i) any Exchange Offer Registration Statement and any amendment
thereto and any prospectus forming part thereof and any supplement thereto
complies in all material respects with the Securities Act and the rules and
regulations of the Commission thereunder, (ii) any Exchange Offer 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 make the statements therein not misleading
and (iii) any prospectus forming part of any Exchange Offer Registration
Statement, and any supplement to such prospectus, does not, as of the
consummation of the Registered Exchange Offer, 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.
2. Shelf Registration. If (i) because of any change in law or
applicable interpretations thereof by the Commission's staff the Company is not
permitted to effect the Registered Exchange Offer as contemplated by Section 1
hereof, or (ii) any Notes validly tendered pursuant to the Registered Exchange
Offer are not exchanged for Exchange Notes within 135 days after the Issue Date,
or (iii) the Initial Purchaser so requests with respect to Notes or Private
Exchange Notes not eligible to be exchanged for Exchange Notes in the Registered
Exchange Offer and held by it following the consummation of the Registered
Exchange Offer, or (iv) any applicable law or interpretations do not permit any
Holder to participate in the Registered Exchange Offer, or (v) any Holder that
participates in the Registered Exchange Offer does not receive freely
transferable Exchange Notes in exchange for tendered Notes, or (vi) the Company
so elects, or (vii) any affiliate of the Company so requests with respect to
Transfer Restricted Notes (as defined) held by it, then the following provisions
shall apply:
(a) The Company shall use its reasonable best efforts to file
as promptly as practicable (but in no event more than 30 days after so
required or requested pursuant to this Section 2) with the Commission,
and thereafter shall use its reasonable best efforts to cause to be
declared effective, a shelf registration statement on an appropriate
form under the Securities Act relating to the offer and sale of the
Transfer Restricted Notes (as defined below) by the Holders thereof
from time to time in accordance with the methods of distribution set
forth in such registration statement (hereafter, a "Shelf Registration
Statement" and, together with any Exchange Offer Registration
Statement, a "Registration Statement").
(b) The Company shall use its reasonable best efforts to keep
the Shelf Registration Statement continuously effective in order to
permit the prospectus forming part thereof to be used by Holders of
Transfer Restricted Notes for a period ending on the earlier of (i) two
years from the Issue Date or such shorter period that will terminate
when all the Transfer Restricted Notes covered by the Shelf
Registration Statement have been sold pursuant thereto and (ii) the
date on which the Notes become eligible for resale without volume
restrictions pursuant
<PAGE> 5
5
to Rule 144 under the Securities Act (in any such case, such period
being called the "Shelf Registration Period"). The Company shall be
deemed not to have used its reasonable best efforts to keep the Shelf
Registration Statement effective during the requisite period if it
voluntarily takes any action that would result in Holders of Transfer
Restricted Notes covered thereby not being able to offer and sell such
Transfer Restricted Notes during that period, unless such action is
required by applicable law.
(c) Notwithstanding any other provisions hereof, the Company
will ensure that (i) any Shelf Registration Statement and any amendment
thereto and any prospectus forming part thereof and any supplement
thereto complies in all material respects with the Securities Act and
the rules and regulations of the Commission thereunder, (ii) any Shelf
Registration Statement and any amendment thereto (in either case, other
than with respect to information included therein in reliance upon or
in conformity with written information furnished to the Company by or
on behalf of any Holder specifically for use therein (the "Holders'
Information")) does not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) any
prospectus forming part of any Shelf Registration Statement, and any
supplement to such prospectus (in either case, other than with respect
to Holders' Information), 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 the light of the circumstances under
which they were made, not misleading.
3. Liquidated Damages. (a) The parties hereto agree that the
Holders of Transfer Restricted Notes will suffer damages if the Company fails to
fulfill its obligations under Section 1 or Section 2, as applicable, and that it
would not be feasible to ascertain the extent of such damages. Accordingly, if
(i) the applicable Registration Statement is not filed with the Commission on or
prior to 45 days after the Issue Date, (ii) the Exchange Offer Registration
Statement or the Shelf Registration Statement, as the case may be, is not
declared effective within 105 days after the Issue Date (or in the case of a
Shelf Registration Statement required to be filed in response to a change in law
or the applicable interpretations of Commission's staff, if later, within 45
days after publication of the change in law or interpretation), (iii) the
Registered Exchange Offer is not consummated on or prior to 135 days after the
Issue Date, or (iv) the Shelf Registration Statement is filed and declared
effective within 135 days after the Issue Date (or in the case of a Shelf
Registration Statement required to be filed in response to a change in law or
the applicable interpretations of Commission's staff, if later, within 45 days
after publication of the change in law or interpretation) but shall thereafter
cease to be effective (at any time that the Company is obligated to maintain the
effectiveness thereof) without being succeeded within 30 days by an additional
Registration Statement filed and declared effective (each such event referred to
in clauses (i) through (iv), a "Registration Default"), the Company will be
obligated to pay liquidated damages to each Holder of Transfer Restricted Notes,
during the period of one or more such Registration Defaults, in an amount equal
to $ 0.192 per week per $1,000 principal amount of Transfer Restricted Notes
held by such Holder until (i) the applicable Registration Statement is filed,
(ii) the Exchange Offer Registration Statement is declared effective and the
Registered Exchange Offer is consummated, (iii) the Shelf Registration Statement
is declared effective or (iv) the Shelf Registration Statement again becomes
effective, as the case may be. Following the cure of all Registration Defaults,
the accrual of liquidated damages will cease. As
<PAGE> 6
6
used herein, the term "Transfer Restricted Notes" means (i) each Note until the
date on which such Note has been exchanged for a freely transferable Exchange
Note in the Registered Exchange Offer, (ii) each Note or Private Exchange Note
until the date on which it has been effectively registered under the Securities
Act and disposed of in accordance with the Shelf Registration Statement or (iii)
each Note or Private Exchange Note until the date on which it is distributed to
the public pursuant to Rule 144 under the Securities Act or is saleable pursuant
to Rule 144(k) under the Securities Act. Notwithstanding anything to the
contrary in this Section 3(a), the Company shall not be required to pay
liquidated damages to a Holder of Transfer Restricted Notes if such Holder
failed to comply with its obligations to make the representations set forth in
the second to last paragraph of Section 1 or failed to provide the information
required to be provided by it, if any, pursuant to Section 4(n).
(b) The Company shall notify the Trustee and the Paying Agent
under the Indenture immediately upon the happening of each and every
Registration Default. The Company shall pay the liquidated damages due on the
Transfer Restricted Notes by depositing with the Paying Agent (which may not be
the Company for these purposes), in trust, for the benefit of the Holders
thereof, prior to 10:00 a.m., New York City time, on the next interest payment
date specified by the Indenture and the Notes, sums sufficient to pay the
liquidated damages then due. The liquidated damages due shall be payable on each
interest payment date specified by the Indenture and the Notes to the record
holder entitled to receive the interest payment to be made on such date. Each
obligation to pay liquidated damages shall be deemed to accrue from and
including the date of the applicable Registration Default.
(c) The parties hereto agree that the liquidated damages
provided for in this Section 3 constitute a reasonable estimate of and are
intended to constitute the sole damages that will be suffered by Holders of
Transfer Restricted Notes by reason of the failure of (i) the Shelf Registration
Statement or the Exchange Offer Registration Statement to be filed, (ii) the
Shelf Registration Statement to remain effective or (iii) the Exchange Offer
Registration Statement to be declared effective and the Registered Exchange
Offer to be consummated, in each case to the extent required by this Agreement.
4. Registration Procedures. In connection with any
Registration Statement, the following provisions shall apply:
(a) The Company shall (i) furnish to the Initial Purchaser,
prior to the filing thereof with the Commission, a copy of the
Registration Statement and each amendment thereof and each supplement,
if any, to the prospectus included therein and shall use its reasonable
best efforts to reflect in each such document, when so filed with the
Commission, such comments as the Initial Purchaser may reasonably
propose; (ii) include the information set forth in Annex A hereto on
the cover, in Annex B hereto in the "Exchange Offer Procedures" section
and the "Purpose of the Exchange Offer" section and in Annex C hereto
in the "Plan of Distribution" section of the prospectus forming a part
of the Exchange Offer Registration Statement, and include the
information set forth in Annex D hereto in the Letter of Transmittal
delivered pursuant to the Registered Exchange Offer; and (iii) if
requested by any Initial Purchaser, include the information required by
Items 507 or 508 of Regulation S-K, as applicable, in the prospectus
forming a part of the Exchange Offer Registration Statement.
<PAGE> 7
7
(b) The Company shall advise the Initial Purchaser, each
Exchanging Dealer and the Holders (if applicable) and, if requested by
any such person, confirm such advice in writing (which advice pursuant
to clauses (ii)-(v) hereof shall be accompanied by an instruction to
suspend the use of the prospectus until the requisite changes have been
made):
(i) when any Registration Statement and any
amendment thereto has been filed with the Commission and when
such Registration Statement or any post-effective amendment
thereto has become effective;
(ii) of any request by the Commission for amendments
or supplements to any Registration Statement or the prospectus
included therein or for additional information;
(iii) of the issuance by the Commission of any stop
order suspending the effectiveness of any Registration
Statement or the initiation of any proceedings for that
purpose;
(iv) of the receipt by the Company of any
notification with respect to the suspension of the
qualification of the Notes, the Exchange Notes or the Private
Exchange Notes for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose; and
(v) of the happening of any event that requires the
making of any changes in any Registration Statement or the
prospectus included therein in order that the statements
therein are not misleading and do not omit to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading.
(c) The Company will make every reasonable effort to obtain the
withdrawal at the earliest possible time of any order suspending the
effectiveness of any Registration Statement.
(d) The Company will furnish to each Holder of Transfer
Restricted Notes included within the coverage of any Shelf Registration
Statement, without charge, at least one conformed copy of such Shelf
Registration Statement and any post-effective amendment thereto,
including financial statements and schedules and, if any such Holder so
requests in writing, all exhibits thereto (including those, if any,
incorporated by reference).
(e) The Company will, during the Shelf Registration Period,
promptly deliver to each Holder of Transfer Restricted Notes included
within the coverage of any Shelf Registration Statement, without
charge, as many copies of the prospectus (including each preliminary
prospectus) included in such Shelf Registration Statement and any
amendment or supplement thereto as such Holder may reasonably request;
and the Company consents to the use of such prospectus or any amendment
or supplement thereto by each of the selling Holders of Transfer
Restricted Notes in connection with the offer and sale of the Transfer
Restricted Notes covered by such prospectus or any amendment or
supplement thereto.
<PAGE> 8
8
(f) The Company will furnish to the Initial Purchaser and each
Exchanging Dealer, and to any other Holder who so requests, without
charge, at least one conformed copy of the Exchange Offer Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules and, if the Initial Purchaser or Exchanging
Dealer or any such Holder so requests in writing, all exhibits thereto
(including those, if any, incorporated by reference).
(g) The Company will, during the Exchange Offer Registration
Period or the Shelf Registration Period, as applicable, promptly
deliver to the Initial Purchaser, each Exchanging Dealer and such other
persons that are required to deliver a prospectus following the
Registered Exchange Offer, without charge, as many copies of the final
prospectus included in the Exchange Offer Registration Statement or the
Shelf Registration Statement and any amendment or supplement thereto as
the Initial Purchaser, such Exchanging Dealer or other persons may
reasonably request; and the Company consents to the use of such
prospectus or any amendment or supplement thereto by the Initial
Purchaser, such Exchanging Dealer or other persons, as applicable, as
aforesaid.
(h) Prior to the effective date of any Registration Statement,
the Company will use its reasonable best efforts to register or
qualify, or cooperate with the Holders of Notes, Exchange Notes or
Private Exchange Notes included therein and their respective counsel in
connection with the registration or qualification of, such Notes,
Exchange Notes or Private Exchange Notes for offer and sale under the
securities or blue sky laws of such jurisdictions as any such Holder
reasonably requests in writing and do any and all other acts or things
necessary or advisable to enable the offer and sale in such
jurisdictions of the Notes, Exchange Notes or Private Exchange Notes
covered by such Registration Statement; provided that the Company will
not be required to qualify generally to do business in any jurisdiction
where it is not then so qualified or to take any action which would
subject it to general service of process or to taxation in any such
jurisdiction where it is not then so subject.
(i) The Company will cooperate with the Holders of Notes,
Exchange Notes or Private Exchange Notes to facilitate the timely
preparation and delivery of certificates representing Notes, Exchange
Notes or Private Exchange Notes to be sold pursuant to any Registration
Statement free of any restrictive legends and in such denominations and
registered in such names as the Holders thereof may request in writing
prior to sales of Notes, Exchange Notes or Private Exchange Notes
pursuant to such Registration Statement.
(j) If any event contemplated by Section 4(b)(ii) through (v)
occurs during the period for which the Company is required to maintain
an effective Registration Statement, the Company will promptly prepare
and file with the Commission a post-effective amendment to the
Registration Statement or a supplement to the related prospectus or
file any other required document so that, as thereafter delivered to
purchasers of the Notes, Exchange Notes or Private Exchange Notes from
a Holder, the prospectus 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.
<PAGE> 9
9
(k) Not later than the effective date of the applicable
Registration Statement, the Company will provide a CUSIP number for the
Notes, the Exchange Notes and the Private Exchange Notes, as the case
may be, and provide the applicable trustee with printed certificates
for the Notes, the Exchange Notes or the Private Exchange Notes, as the
case may be, in a form eligible for deposit with The Depository Trust
Company.
(l) The Company will comply with all applicable rules and
regulations of the Commission and the Company will make generally
available to its security holders as soon as practicable after the
effective date of the applicable Registration Statement an earning
statement satisfying the provisions of Section 11(a) of the Securities
Act; provided that in no event shall such earning statement be
delivered later than 45 days after the end of a 12-month period (or 90
days, if such period is a fiscal year) beginning with the first month
of the Company's first fiscal quarter commencing after the effective
date of the applicable Registration Statement, which statement shall
cover such 12-month period.
(m) The Company will cause the Indenture or the Exchange Notes
Indenture, as the case may be, to be qualified under the Trust
Indenture Act as required by applicable law in a timely manner.
(n) The Company may require each Holder of Transfer Restricted
Notes to be registered pursuant to any Shelf Registration Statement to
furnish to the Company such information concerning the Holder and the
distribution of such Transfer Restricted Notes as the Company may from
time to time reasonably require for inclusion in such Shelf
Registration Statement, and the Company may exclude from such
registration the Transfer Restricted Notes of any Holder that fails to
furnish such information within a reasonable time after receiving such
request.
(o) In the case of a Shelf Registration Statement, each Holder
of Transfer Restricted Notes to be registered pursuant thereto agrees
by acquisition of such Transfer Restricted Notes that, upon receipt of
any notice from the Company pursuant to Section 4(b)(ii) through (v),
such Holder will discontinue disposition of such Transfer Restricted
Notes until such Holder's receipt of copies of the supplemental or
amended prospectus contemplated by Section 4(j) or until advised in
writing (the "Advice") by the Company that the use of the applicable
prospectus may be resumed. If the Company shall give any notice under
Section 4(b)(ii) through (v) during the period that the Company is
required to maintain an effective Registration Statement (the
"Effectiveness Period"), such Effectiveness Period shall be extended by
the number of days during such period from and including the date of
the giving of such notice to and including the date when each seller of
Transfer Restricted Notes covered by such Registration Statement shall
have received (x) the copies of the supplemental or amended prospectus
contemplated by Section 4(j) (if an amended or supplemental prospectus
is required) or (y) the Advice (if no amended or supplemental
prospectus is required).
(p) In the case of a Shelf Registration Statement, the Company
shall enter into such customary agreements (including, if requested, an
underwriting agreement in customary form) and take all such other
action, if any, as Holders of
<PAGE> 10
10
a majority in aggregate principal amount of the Notes, Exchange Notes
and Private Exchange Notes being sold or the managing underwriters (if
any) shall reasonably request in order to facilitate any disposition of
Notes, Exchange Notes or Private Exchange Notes pursuant to such Shelf
Registration Statement.
(q) In the case of a Shelf Registration Statement, the Company
shall (i) make reasonably available for inspection by a representative
of, and Special Counsel (as defined below) acting for, Holders of a
majority in aggregate principal amount of the Notes, Exchange Notes and
Private Exchange Notes being sold and any underwriter participating in
any disposition of Notes, Exchange Notes or Private Exchange Notes
pursuant to such Shelf Registration Statement, all relevant financial
and other records, pertinent corporate documents and properties of the
Company and (ii) use its reasonable best efforts to have its officers,
directors, employees, accountants and counsel supply all relevant
information reasonably requested by such representative, Special
Counsel or any such underwriter (an "Inspector") in connection with
such Shelf Registration Statement.
(r) In the case of a Shelf Registration Statement, the Company
shall, if requested by Holders of a majority in aggregate principal
amount of the Notes, Exchange Notes and Private Exchange Notes being
sold, their Special Counsel or the managing underwriters (if any) in
connection with such Shelf Registration Statement, use its reasonable
best efforts to cause (i) its counsel to deliver an opinion relating to
the Shelf Registration Statement and the Notes, Exchange Notes or
Private Exchange Notes, as applicable, in customary form, (ii) its
officers to execute and deliver all customary documents and
certificates requested by Holders of a majority in aggregate principal
amount of the Notes, Exchange Notes and Private Exchange Notes being
sold, their Special Counsel or the managing underwriters (if any) and
(iii) its independent public accountants to provide a comfort letter or
letters in customary form, subject to receipt of appropriate
documentation as contemplated, and only if permitted, by Statement of
Auditing Standards No. 72.
5. Registration Expenses. The Company will bear all expenses
incurred in connection with the performance of its obligations under Sections 1,
2, 3 and 4 and the Company will reimburse the Initial Purchaser and the Holders
for the reasonable fees and disbursements of one firm of attorneys (in addition
to any local counsel) chosen by the Holders of a majority in aggregate principal
amount of the Notes, the Exchange Notes and the Private Exchange Notes to be
sold pursuant to each Registration Statement (the "Special Counsel") acting for
the Initial Purchaser or Holders in connection therewith.
6. Indemnification. (a) In the event of a Shelf Registration
Statement or in connection with any prospectus delivery pursuant to an Exchange
Offer Registration Statement by the Initial Purchaser or Exchanging Dealer, as
applicable, the Company shall indemnify and hold harmless each Holder
(including, without limitation, the Initial Purchaser or such Exchanging
Dealer), its affiliates, their respective officers, directors, employees,
representatives and agents, and each person, if any, who controls such Holder
within the meaning of the Securities Act or the Exchange Act (collectively
referred to for purposes of this Section 6 and Section 7 as a Holder) from and
against any loss, claim, damage or liability, joint or several, or any action in
respect thereof (including, without limitation, any loss, claim, damage,
liability or action relating to purchases and sales of
<PAGE> 11
11
Notes, Exchange Notes or Private Exchange Notes), to which that Holder may
become subject, whether commenced or threatened, under the Securities Act, the
Exchange Act, any other federal or state statutory law or regulation, at common
law or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in any such Registration Statement or any
prospectus forming part thereof or in any amendment or supplement thereto or
(ii) the omission or alleged omission to state therein a material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading, and
shall reimburse each Holder promptly upon demand for any legal or other expenses
reasonably incurred by that Holder in connection with investigating or defending
or preparing to defend against or appearing as a third party witness in
connection with any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with any Holders' Information; and provided,
further, that with respect to any such untrue statement in or omission from any
related preliminary prospectus, the indemnity agreement contained in this
Section 6(a) shall not inure to the benefit of any Holder from whom the person
asserting any such loss, claim, damage, liability or action received Notes,
Exchange Notes or Private Exchange Notes to the extent that such loss, claim,
damage, liability or action of or with respect to such Holder results from the
fact that both (A) a copy of the final prospectus was not sent or given to such
person at or prior to the written confirmation of the sale of such Notes,
Exchange Notes or Private Exchange Notes to such person and (B) the untrue
statement in or omission from the related preliminary prospectus was corrected
in the final prospectus unless, in either case, such failure to deliver the
final prospectus was a result of non-compliance by the Company with Section
4(d), 4(e), 4(f) or 4(g).
(b) In the event of a Shelf Registration Statement, each Holder
shall indemnify and hold harmless the Company, its affiliates, their respective
officers, directors, employees, representatives and agents, and each person, if
any, who controls the Company within the meaning of the Securities Act or the
Exchange Act (collectively referred to for purposes of this Section 6(b) and
Section 7 as the Company), from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which the
Company may become subject, whether commenced or threatened, under the
Securities Act, the Exchange Act, any other federal or state statutory law or
regulation, at common law or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained in any such Registration
Statement or any prospectus forming part thereof or in any amendment or
supplement thereto or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with any Holders' Information furnished to
the Company by such Holder, and shall reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending or preparing to defend against or appearing as a
third party witness in connection with any such loss, claim, damage, liability
or action as such expenses are incurred; provided, however, that no such Holder
shall be liable for any indemnity claims hereunder in excess of the amount of
net
<PAGE> 12
12
proceeds received by such Holder from the sale of Notes, Exchange Notes or
Private Exchange Notes pursuant to such Shelf Registration Statement.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party pursuant to Section 6(a) or 6(b), notify the indemnifying
party in writing of the claim or the commencement of that action; provided,
however, that the failure to notify the indemnifying party shall not relieve it
from any liability which it may have under this Section 6 except to the extent
that it has been materially prejudiced (through the forfeiture of substantive
rights or defenses) by such failure; and provided, further, that the failure to
notify the indemnifying party shall not relieve it from any liability which it
may have to an indemnified party otherwise than under this Section 6. If any
such claim or action shall be brought against an indemnified party, and it shall
notify the indemnifying party thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than the reasonable costs of investigation; provided, however,
that an indemnified party shall have the right to employ its own counsel in any
such action, but the fees, expenses and other charges of such counsel for the
indemnified party will be at the expense of such indemnified party unless (1)
the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based upon advice of counsel to the indemnified party) that there may
be legal defenses available to it or other indemnified parties that are
different from or in addition to those available to the indemnifying party, (3)
a conflict or potential conflict exists (based upon advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (4) the indemnifying party
has not in fact employed counsel reasonably satisfactory to the indemnified
party to assume the defense of such action within a reasonable time after
receiving notice of the commencement of the action, in each of which cases the
reasonable fees, disbursements and other charges of counsel will be at the
expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm of attorneys (in
addition to any local counsel) at any one time for all such indemnified party or
parties. Each indemnified party, as a condition of the indemnity agreements
contained in Sections 6(a) and 6(b), shall use all reasonable efforts to
cooperate with the indemnifying party in the defense of any such action or
claim. No indemnifying party shall be liable for any settlement of any such
action effected without its written consent (which consent shall not be
unreasonably withheld), but if settled with its written consent or if there be a
final judgment for the plaintiff in any such action, the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against any
loss or liability by reason of such settlement or judgment. No indemnifying
party shall, without the prior written consent of the indemnified party (which
consent shall not be unreasonably withheld), effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been
<PAGE> 13
13
a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such proceeding.
7. Contribution. If the indemnification provided for in
Section 6 is unavailable or insufficient to hold harmless an indemnified party
under Section 6(a) or 6(b), then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid or payable by
such indemnified party as a result of such loss, claim, damage or liability, or
action in respect thereof, (i) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company from the offering and sale
of the Notes, on the one hand, and a Holder with respect to the sale by such
Holder of Notes, Exchange Notes or Private Exchange Notes, on the other, or (ii)
if the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company, on the one hand, and such Holder, on the other, with respect to the
statements or omissions that resulted in such loss, claim, damage or liability,
or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand,
and a Holder, on the other, with respect to such offering and such sale shall be
deemed to be in the same proportion as the total net proceeds from the offering
of the Notes (before deducting expenses) received by or on behalf of the Company
as set forth in the table on the cover of the Offering Memorandum, on the one
hand, bear to the total proceeds received by such Holder with respect to its
sale of Notes, Exchange Notes or Private Exchange Notes, on the other. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to the Company or information
supplied by the Company, on the one hand, or to any Holders' Information
supplied by such Holder, on the other, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The parties hereto agree that it would not be
just and equitable if contributions pursuant to this Section 7 were to be
determined by pro rata allocation or by any other method of allocation that does
not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the loss, claim,
damage or liability, or action in respect thereof, referred to above in this
Section 7 shall be deemed to include, for purposes of this Section 7, any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending or preparing to defend any such action or claim.
Notwithstanding the provisions of this Section 7, an indemnifying party that is
a Holder of Notes, Exchange Notes or Private Exchange Notes shall not be
required to contribute any amount in excess of the amount by which the total
price at which the Notes, Exchange Notes or Private Exchange Notes sold by such
indemnifying party to any purchaser exceeds the amount of any damages which such
indemnifying party has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
8. Rules 144 and 144A. The Company shall use its reasonable
best efforts to file the reports required to be filed by it under the Securities
Act and the Exchange Act in a timely manner and, if at any time the Company is
not required to file
<PAGE> 14
14
such reports, it will, upon the written request of any Holder of Transfer
Restricted Notes, make publicly available other information so long as necessary
to permit sales of such Holder's securities pursuant to Rules 144 and 144A. The
Company covenants that it will take such further action as any Holder of
Transfer Restricted Notes may reasonably request, all to the extent required
from time to time to enable such Holder to sell Transfer Restricted Notes
without registration under the Securities Act within the limitation of the
exemptions provided by Rules 144 and 144A (including, without limitation, the
requirements of Rule 144A(d)(4)). Upon the written request of any Holder of
Transfer Restricted Notes, the Company shall deliver to such Holder a written
statement as to whether it has complied with such requirements. Notwithstanding
the foregoing, nothing in this Section 8 shall be deemed to require the Company
to register any of its securities pursuant to the Exchange Act.
9. Underwritten Registrations. If any of the Transfer
Restricted Notes covered by any Shelf Registration Statement are to be sold in
an underwritten offering, the investment banker or investment bankers and
manager or managers that will administer the offering will be selected by the
Holders of a majority in aggregate principal amount of such Transfer Restricted
Notes included in such offering, subject to the consent of the Company (which
shall not be unreasonably withheld or delayed), and such Holders shall be
responsible for all underwriting commissions and discounts in connection
therewith.
No person may participate in any underwritten registration
hereunder unless such person (i) agrees to sell such person's Transfer
Restricted Notes on the basis reasonably provided in any underwriting
arrangements approved by the persons entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
10. Miscellaneous. (a) Amendments and Waivers. The provisions
of this Agreement 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 a majority in aggregate
principal amount of the Notes, the Exchange Notes and the Private Exchange
Notes, taken as a single class. Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter that
relates exclusively to the rights of Holders whose Notes, Exchange Notes or
Private Exchange Notes are being sold pursuant to a Registration Statement and
that does not directly or indirectly affect the rights of other Holders may be
given by Holders of a majority in aggregate principal amount of the Notes, the
Exchange Notes and the Private Exchange Notes being sold by such Holders
pursuant to such Registration Statement.
(b) Notices. All notices and other communications provided
for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail, telecopier or air courier guaranteeing next-day delivery:
(1) if to a Holder, at the most current address given by
such Holder to the Company in accordance with the provisions of this
Section 10(b), which address initially is, with respect to each Holder,
the address of such Holder maintained by the Registrar under the
Indenture, with a copy in like manner to Chase Securities Inc.;
<PAGE> 15
15
(2) if to the Initial Purchaser, initially at its address
set forth in the Purchase Agreement; and
(3) if to the Company, initially at the address of the
Company set forth in the Purchase Agreement.
All such notices and communications shall be deemed to have
been duly given: when delivered by hand, if personally delivered; one business
day after being delivered to a next-day air courier; five business days after
being deposited in the mail; and when receipt is acknowledged by the recipient's
telecopier machine, if sent by telecopier.
(c) Successors And Assigns. This Agreement shall be binding
upon the Company and its successors and assigns.
(d) Counterparts. This Agreement may be executed in any number
of counterparts (which may be delivered in original form or by telecopier) 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.
(e) Definition of Terms. For purposes of this Agreement, (a)
the term "business day" means any day on which the New York Stock Exchange, Inc.
is open for trading, (b) the term "subsidiary" has the meaning set forth in Rule
405 under the Securities Act and (c) except where otherwise expressly provided,
the term "affiliate" has the meaning set forth in Rule 405 under the Securities
Act.
(f) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(h) Remedies. In the event of a breach by the Company or by any
Holder of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law, including recovery of damages (other than the recovery of
damages for a breach by the Company of its obligations under Sections 1 or 2
hereof for which liquidated damages have been paid pursuant to Section 3
hereof), will be entitled to specific performance of its rights under this
Agreement. The Company and each Holder agree that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by each such
person of any of the provisions of this Agreement and hereby further agree that,
in the event of any action for specific performance in respect of such breach,
each such person shall waive the defense that a remedy at law would be adequate.
(i) No Inconsistent Agreements. The Company represents,
warrants and agrees that (i) it has not entered into, shall not, on or after the
date of this Agreement, enter into any agreement that is inconsistent with the
rights granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof, (ii) it has not previously entered into any agreement which
remains in effect granting any registration rights with respect to any of its
debt securities to any person and (iii) (with respect to the Company)
<PAGE> 16
16
without limiting the generality of the foregoing, without the written consent of
the Holders of a majority in aggregate principal amount of the then outstanding
Transfer Restricted Notes, it shall not grant to any person the right to request
the Company to register any debt securities of the Company under the Securities
Act unless the rights so granted are not in conflict or inconsistent with the
provisions of this Agreement.
(j) No Piggyback on Registrations. Neither the Company nor any
of its security holders (other than the Holders of Transfer Restricted Notes in
such capacity) shall have the right to include any securities of the Company in
any Shelf Registration or Registered Exchange Offer other than Transfer
Restricted Notes.
(k) Severability. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law. If any term, provision,
covenant or restriction of this Agreement is held by a court of competent
jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions set forth herein shall remain in
full force and effect and shall in no way be affected, impaired or invalidated,
and the parties hereto shall use their reasonable best efforts to find and
employ an alternative means to achieve the same or substantially the same result
as that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
(l) Future Subsidiary Guarantors. The Company agrees to cause
each subsidiary that becomes a Subsidiary Guarantor under the Indenture to
become jointly and severally liable for the performance of the Company's
obligations under this Agreement.
<PAGE> 17
17
Please confirm that the foregoing correctly sets forth the
agreement among the Company and the Initial Purchaser.
Very truly yours,
SPLITROCK SERVICES, INC.,
By /s/
------------------------
Name:
Title:
Accepted:
CHASE SECURITIES INC.
By /s/
-------------------------------------
Authorized Signatory
<PAGE> 1
EXHIBIT 5
[WINSTEAD SECHREST & MINICK LETTERHEAD]
August 11, 1998
Board of Directors
Splitrock Services, Inc.
8665 New Trails Drive, Suite 200
The Woodlands, Texas 76381
Gentlemen:
We have acted as counsel to Splitrock Services, Inc. (the "Company") in
connection with the Registration Statement on Form S-4 (the "Registration
Statement") to be filed with the Securities and Exchange Commission in
connection with the registration under the Securities Act of 1933, as amended,
of $250 million aggregate principal amount of 11-3/4% Series B Senior Notes due
2008 of the Company (the "Exchange Notes") to be offered and issued by the
Company under an Indenture dated as of July 24, 1998 by and among the Company
and Bank of Montreal Trust Company, as Trustee.
We have examined the Indenture, the global note issued under the
Indenture and such statutes, corporate records and documents, certificates of
corporate and public officials and such other instruments and documents as we
have deemed necessary or appropriate for the purposes of the opinions expressed
herein.
Based upon the foregoing and subject to the qualifications, assumptions
and other statements set forth herein, we are of the opinion that, upon issuance
thereof in the manner described in the Registration Statement, the Exchange
Notes will be valid and binding obligations of the Company, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization
or other similar laws affecting the enforcement of creditors' rights generally
and by general equitable principles (regardless of whether the issue of
enforceability is considered in a proceeding in equity or at law).
The opinion expressed above assumes that the Exchange Notes issued
under the Indenture have been duly executed, authenticated, issued and delivered
in accordance with the provisions of the Indenture upon exchange for the 11-3/4%
Senior Notes due 2008 as provided for therein.
Except as otherwise stated below, the opinions expressed herein are
based upon, and limited to, the laws of the State of Texas and the United States
and the Delaware General Corporation Law, and to case decisions reported as of
this date under such laws, and to facts known to us on this date,
<PAGE> 2
Board of Directors
Splitrock Services, Inc.
August 11, 1998
Page 2
and we do not undertake to provide any opinion as to any matter or to advise any
person with respect to any events or changes occurring subsequent to the date of
this letter.
The opinions expressed in this letter are provided as legal opinions
only and not as any guaranties or warranties of the matters discussed herein,
and such opinions are strictly limited to the matters stated herein, and no
other opinions may be implied. This opinion letter is intended solely for your
benefit. Without our prior written consent, the opinions expressed herein may
not be published or relied upon by you other than in connection with the
Registration Statement or the transactions contemplated therein, or published or
relied upon by any other person in connection with any matter or in any manner
whatsoever.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this Firm under the heading
"Legal Matters" in the Prospectus which is part of the Registration Statement.
Very truly yours,
WINSTEAD SECHREST & MINICK P.C.
By: /s/ ARTHUR S. BERNER
----------------------------------
For the Firm
<PAGE> 1
EXHIBIT 10.1
SPLITROCK FULL SERVICE AGREEMENT
CONFIDENTIAL
ATTORNEY-CLIENT PRIVILEGE
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SPLITROCK FULL SERVICE AGREEMENT
PREAMBLE
This Agreement is entered into as of June 24, 1997 by and between
Prodigy Services Corporation, a Delaware corporation ("Prodigy"), and SPLITROCK
SERVICES, INC. ("SplitRock"), a Texas corporation (this "Agreement").
References throughout this Agreement to "you" and "your" mean Prodigy; and
references to "we", "us" and "our" mean SplitRock and its assignees. References
throughout this Agreement to "party" or "parties" mean either Prodigy or
SplitRock, as the context requires and unless otherwise defined except that
"third party" means anyone other than a "party". Reference is made to that
certain Definitive Agreement, dated as of June 24, 1997, and that certain
Transition Services Agreement between the Parties dated June 24, 1997
("Transition Services Agreement") and that certain Sublease Agreement dated as
of June 24, 1997 ("Sublease Agreement") each by and between Prodigy and
SplitRock.
AGREEMENT
The parties hereto agree that the following provisions of this Agreement shall
be effective at 12:01 a.m. (New York time) July 1, 1997: Part 1, Part 2, Part 5,
and Sections 6.5, 6.10, 6.11 and 6.12 and all other rights and obligations of
the Company and Provider herein shall only become effective as of the end of the
Transition Period (as hereinafter defined).
Part I - General
1.1 Definitions
"Equipment" is a machine, including its features, conversions,
upgrades, elements, or accessories, or any combination of them. The
term "Equipment" includes SplitRock Equipment and any non-SplitRock
Equipment we provide to you, but excludes Programs.
"Materials" are work products (such as programs, program listings,
programming tools, documentation, reports, and drawings) that we may
deliver to you during a project. The term "Materials" does not include
Programs.
"Product" Is a Program or Equipment.
"Program" is the following, including features and any whole or partial
copies:
1. machine-readable instructions;
2. a collection of machine-readable data, such as a data
base; and
3. related licensed materials, including documentation
and listings, in any form.
The term "Program" includes a SplitRock Program and any non-
SplitRock Program that we my provide to you. The term does not
include licensed internal code or Materials.
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"Services" as used herein describes the network services (not to
include satellite) we will provide, as more particularly described in
Section 6.1. In addition, any new service you request or additional
service you request, not already contemplated by this Agreement, and
that we agree to provide is not the subject of this Agreement until the
terms conditions and prices of such service shall be confirmed in
Transaction Documents. In addition, Services provided to you hereunder
shall include reports, surveys and analysis reasonably required to
fulfill the purposes of this Agreement, and shall not be subject to any
additional charge.
"Subscriber" is any user authorized to access basic Prodigy Classic or
basic Prodigy Internet (as they currently exist), regardless of whether
such user actually uses your services in any month or regardless of
whether or not you receive payment from that user.
"Subscriber Count" shall mean the total number of Subscribers, subject
to the limitations in this definitional paragraph. For Prodigy
Classic, multiple User Identifications associated with one Subscriber
will count as one Subscriber in the Subscriber Count. For Prodigy
Internet, multiple User Identifications associated with one Subscriber
will count as one Subscriber in the Subscriber Count, provided only one
such User Identification per Subscriber can access the Service at any
one time. A Subscriber to both Prodigy Classic and Prodigy Internet
under the "Prodigy Combo Plan" will count as one Subscriber in the
Subscriber Count. Any Subscriber who is not capable of accessing the
Service shall not be counted in the Subscriber Count.
"System" is the Services and Products we provide together under this
Agreement that we identify to you as a System, which identification is
in writing.
"Transition Period" is the period from July 1, 1997 until the earlier
of (i) December 31, 1997 or (ii) on the effective date of a notice from
Provider stating that it intends to terminate the Transition Services
Agreement which effective date may only be the last day of a calendar
month.
"User Identification" is a code or codes which enable authorization or
access to programs, data or equipment through a Service.
1.2 Agreement Structure
ATTACHMENTS
Some Services and Products have terms in addition to those we specify
in this Agreement. We will provide the additional terms in documents
called "Attachments," which are also part of this Agreement.
TRANSACTION DOCUMENTS
For each business transaction, we will provide to you the appropriate
"Transaction Documents" before the transaction occurs that confirm the
details of the transaction, which Transaction Documents shall not be
effective against or in favor of either party, unless and until each
party agrees to each appropriate set of Transition Documents in
writing.
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CONFLICTING TERMS
If there is a conflict among the terms in the various documents, those
of an Attachment prevail over those of this Agreement. The terms of a
Transaction Document prevail over those of both the Attachments and
this Agreement.
YOUR ORDER
You may order a Service or Product in writing, including a request
written on paper and delivered to us and a request sent via facsimile
to us.
OUR ACCEPTANCE OF YOUR ORDER
A Service or Product becomes subject to this Agreement when we
accept your order by sending you a Transaction Document which accepts
expressly and precisely the terms of the order.
YOUR ACCEPTANCE OF ADDITIONAL TERMS
You accept the additional terms in an Attachment or Transaction
Document by signing it.
1.3 Electronic Communications
You and we may communicate with the other by electronic means for
information purposes only, such as through electronic or Prodigy Mail.
Any electronic communication must be followed by written confirmation
or telecopied in order to be binding on either party. Documents which
include handwritten signatures may be transmitted by telecopier, and
shall be deemed binding without the need for original signatures.
Nevertheless, original signature copies are preferred.
1.4 Prices
The following are the bases on which we may require the amount payable
for a Service or Product to be paid, with an example of each:
1. one-time (Service installation changes);
2. recurring (a periodic charge for Services);
3. a combination of both (an initial charge and a monthly license
charge for a Program); or
4. usage (network traffic charges).
We will specify the amount and basis for the particular Service or
Product. If additional Products or Services are added, the prices will
be set forth in a Transaction Document. Except as herein provided
specifically, no additional charges shall be imposed or incurred for
Services which we are obligated to provide under this Agreement.
1.5 Payment and Taxes
You shall pay:
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1. usage and recurring charges according to Section 6.5.
2. all other charges when or after you incur them.
Amounts due are payable as we specify in the invoice which invoice
shall be consistent with the conflict hierarchy set forth in Section
1.2, Conflicting Terms, or, with respect to dial up network services,
as provided in Section 6.5. You agree to pay accordingly. You agree to
pay any tax on the Services we provide to you. You are responsible for
personal property taxes for each Product that you purchase and each
Program that you license from the date we ship it to you or otherwise
make it available to you. "Taxes" as used in this Agreement shall not
include any FCC charges or other charges payable to any government
organization other than a taxing authority, all of which we shall pay.
1.6 Patents and Copyrights
For purposes of this Section only, the term "Product" includes
Materials alone or in combination with Products we provide to you as a
System.
If a third party claims that a Product we provide to you infringes that
party's patent or copyright, we will defend you against that claim at
our expense and pay all costs, damages, and attorney's fees that a
court finally awards, provided that you:
1. promptly notify us in writing of the claim; and
2. allow us to control, and cooperate with us in, the defense and
any related settlement negotiations. At your option and at
your cost you may retain counsel to advise you as you work
with us.
If such a claim is made or appears likely to be made, we will take
reasonable steps, and you agree to permit us to do so, to enable you to
continue to use the Product, or to modify it, or replace it with one
that is at least functionally equivalent. If we determine that none of
these alternatives is reasonably available, you agree to return the
Product to us on our written request and we may terminate the affected
Service at no further charge to you, in which case we will refund to
you the unused prorata portion of any advance payments for the Service
and/or the Product.
YOU AGREE THAT YOUR RIGHTS, AS PROVIDED BY THIS SECTION 1.6, REGARDING
ANY CLAIM OF INFRINGEMENT ARE LIMITED AND THE REMEDIES IN THIS SECTION
WILL BE YOUR SOLE AND EXCLUSIVE, REMEDY FOR ANY SUCH CLAIM.
NOTICE OF INFRINGEMENT
All notices of patent or copyright infringement permitted or required
by this Agreement will be in writing and will take effect upon receipt.
CONFIDENTIAL
ATTORNEY-CLIENT PRIVILEGE
<PAGE> 6
CLAIMS FOR WHICH WE ARE NOT RESPONSIBLE
We have no obligation regarding any claim to the extent it is based on
any of the following:
1. your modification of a Product, or a Program's use with
equipment and programs other than the Equipment and Programs
with which the Program is designed to operate:
2. the combination, operation, or use of a Product with any
product, data, or apparatus that we did not provide unless we
had written notice and acknowledged in writing receipt of
notice that the intended use of the Product was for a use with
a product, data, or apparatus we did not provide; or
3. infringement by a non-SplitRock Product alone, as opposed to
its combination with Products we provide to you as a System.
1.7 LIMITATION OF LIABILITY
Circumstances may arise where, because of a default on our part or
other liability, you are entitled to recover damages from us. In each
such instance, regardless of the basis on which such party is entitled
to claim damages, we are liable only for:
1. payments referred to in our patent and copyright terms
described above,
2. bodily injury (including death), and damage to real property
and tangible personal property; and
3. the amount of any other actual loss or damage, in excess of
$100,000 or the charges (if recurring or usage, 12 months'
charges apply) for the Service or Product that is the subject
of the claim.
This limit also applies to any of our subcontractors, agents
and Program developers. It is the maximum for which we, our
subcontractors, agents and program developers are collectively
responsible.
ITEMS FOR WHICH NEITHER PARTY IS LIABLE
Under no circumstances are either party or its subcontractors, agents
or Program developers liable for any of the following:
1. third-party claims against the other party for losses or
damages (other than those under the first two items listed in
1.7 above) except for willful acts or acts of gross
negligence;
2. loss of, or damage to, records or data except for any actual
loss or damage willfully and intentionally caused by the other
party or caused by gross negligence, subject to the limitation
contained in Section 1.7(3) above; or
3. economic consequential damages (including lost profits or
savings) or incidental damages, even if either party is
informed of their possibility.
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<PAGE> 7
EACH PARTY AGREES THAT ITS RIGHTS ARE LIMITED BY THIS SECTION 1.7, THAT
THE LIMITATIONS PROVIDED HEREIN ARE FAIR AND EQUITABLE, AND EACH PARTY
HEREBY WAIVES ANY RIGHT OR REMEDY IT MAY HAVE FOR THE RECOVERY OF ANY
OTHER DAMAGES.
1.8 Your Additional Rights
You may have additional rights under certain laws (such as consumer
laws) which do not allow the exclusion of implied warranties, or the
exclusion or limitation of certain damages. If these laws apply, our
exclusions or limitations may not apply to you.
1.9 Changes to and Termination of Services
If a third party claims that a Product we provide as part of a Service
infringes a patent or copyright, we reserve the right to first
substitute a different Product, or alternatively to terminate the
Service effective immediately.
1.10 Geographic Scope
All of your rights, all our obligations, and all licenses are valid
only in the United States, including Hawaii and Alaska.
1.11 Governing Law
This Agreement shall be governed by and interpreted under the laws of,
any action shall be brought in the state or federal courts located in,
and any arbitration proceeding shall be located in, the domicile of the
party who is an initial defendant or the party upon whom an initial
demand for arbitration is served.
1.12 Notice
All notices permitted or required by this Agreement will be sent to the
following address and will take effect upon receipt:
Prodigy
445 Hamilton Avenue
White Plains, New York 10601
Attention: President
SplitRock
2170 Buckthorne Place, Suite 350
The Woodlands, Texas 77380
Attention: President
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1.13 Term
The initial term of this Agreement shall be for a period of 48 months
("Initial Term") commencing on July 1, 1997 and continuing through
June 30, 2001.
After the Initial Term, either party may terminate this Agreement
without cause by giving the other party not less than 12 months prior
written notice, otherwise this Agreement shall be considered as having
been automatically renewed for successive 12-month terms.
1.14 Financial Covenants.
From the date hereof until June 30, 1999, we covenant and agree
that we will:
1. Financial and Other Information
(a) Annual Financial Reports. Furnish you not later than 90
days after the close of each 1997 and 1998 calendar year a balance
sheet as of December 31, 1997 and December 31, 1998, statements of
operations and statements of cash flows for the period from inception
through each applicable period, and such other comments and financial
details as are usually included in similar financial statements. Such
financial statements shall be prepared in accordance with generally
accepted accounting principles and shall be audited by independent
certified public accountants of recognized standing selected by us and
shall contain unqualified opinions as to the fairness of the statements
therein contained, shall be unqualified in all other respects, and
shall not contain any explanatory language which makes reference to
uncertainties such as: (i) going concern, (ii) litigation or (iii) any
other potential liabilities or impairment of our assets.
(b) Quarterly Financial Statements. Furnish you not later than
45 days after the close of each calendar quarter through June 30, 1999,
beginning with the quarter commencing July 1, 1997, financial
statements containing our balance sheet as of the end of such period
and statements of operations and cash flows up to the end of such
period. These statements shall be prepared an a basis consistent with
our normal accounting practices and the accuracy of the statements
shall be certified as true by our chief executive or financial officer.
(c) Payables. Furnish you not later than 45 days after the
close of each calendar quarter through June 30, 1999, beginning with
the quarter commencing July 1, 1997, a total of amounts which are due
and payable and have not been paid by their contractual due date, and a
list of each creditor to which payments over $25,000 are due.
(d) Taxes. Pay promptly and within the time that they can be
paid without interest or penalty, all taxes, assessments and similar
imposts and charges of every kind and nature lawfully levied, assessed
or imposed upon us, except to the extent being contested in good faith
and furnish you evidence of such payment on a quarterly basis within 45
days after the close of each calendar quarter through June 30, 1999.
(e) Liens and Litigation. Through June 30, 1999, furnish you
within ten days of receipt of notice of any lien or lawsuit which is
threatened or pending against us and which involves a claim in excess
of $100,000.
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(f) Projections. Thirty days after we have received your
forecasts referenced in Section 6.6 hereof for each applicable quarter,
we will provide you with plans and projections for income, expenses,
capital receipt and expenditure, for the immediately succeeding fifteen
(15) month period. Included with the statements to be provided
quarterly pursuant to Section 1.14 (a)-(e) hereof, we shall also
provide you with evidence of our results as compared to past
projections, which shall also be certified as true by our chief
executive or financial officer.
2. Insurance. Maintain valid and effective insurance policies
that cover our properties and risks of the business in such types and
amounts as are consistent with customary practices and standards of
companies engaged in businesses and operations similar to ours and
furnish you not later than 45 days after the close of each calendar
quarter through June 30, 1999, beginning with the quarter commencing
July 1, 1997, certificates evidencing such insurance. After you receive
such certificate, you may request that we obtain additional coverage,
consistent with reasonable business practices, which we shall obtain.
3. Maintain Tangible Net Worth. Maintain a tangible net worth
of not less than $5,000,000, which excludes organizational costs and
intangible assets such as patents, trademarks, goodwill and going
concern value.
4. Continuing Annual and Quarterly Reporting. The financial
reporting requirements of subsection 1.(a) and (b) hereof shall
continue after June 30, 1999 if, at that time, our cash plus past due
accounts receivable from you less past due accounts payable less debt
other than capital leases is an amount less than $5,000,000.
1.15 Headings. The headings contained herein are inserted for convenience of
reference only and are not intended to be part of or to affect the
meaning or interpretation of this Agreement.
Part 2 - Responsibilities of the Parties
2.1 Mutual Responsibilities
You and we agree that under this Agreement:
1. neither party grants the other the right to use its
trademarks, trade names, or other designation in any promotion
or publication;
2. all information exchanged by both parties is nonconfidential
unless such information is conspicuously marked as
confidential. Part 5 of this Agreement describes
confidentiality and our responsibilities for handling data
and information you transmit using the Services;
3. each party grants the other only the licenses specified. No
other licenses (including licenses under patents) are granted;
4. each party will promptly notify the other if it becomes aware
of any unsafe conditions or hazardous materials to which the
other's personnel would be exposed at any of its facilities;
5. NEITHER PARTY WILL BRING A LEGAL ACTION MORE THAN TWO YEARS
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AFTER THE CAUSE OF ACTION AROSE UNLESS SUCH CLAIM IS AS A
RESULT OF A THIRD PARTY CLAIM, IN WHICH EVENT THE TWO YEAR
PROVISION SHALL NOT APPLY; and
6. neither party is responsible for failure to fulfill its
obligations (other than payment obligations) due to causes
beyond its reasonable control, including without limitation,
acts of God, war, riots, blockades, insurrections, labor
disputes, lockouts, earthquakes, fires, storms, lightning,
power failures, floods, natural disasters, accidents, new or
changed governmental regulations or laws, or other similar
events beyond the reasonable control of the party relying on
this provision of the Agreement ("Force Majeure").
2.2 Our Other Responsibilities
We will:
1. comply with all applicable laws regulations or conventions
including those related to data privacy, international
communications, and exportation of technical or personal data.
You are responsible for obtaining all necessary governmental
regulatory or statutory approvals for the offering of your
services;
2. not assign, or otherwise transfer, this Agreement, or our
rights or obligation's under it, or delegate our rights or
your obligations, other than to an affiliate, without your
prior written consent which consent will not be unreasonably
withheld. Any attempt to do so is void;
3. obtain install and maintain suitable equipment as necessary to
provide the Services to you;
4. fulfill all regular activity and performance reporting and
analysis, including service disruption analysis, periodic
audits, and attend and participate actively in monthly status
meetings which shall be held no less frequently than monthly
between the parties; and
5. be responsible for data, programs or other material that we
provide for use with the Service.
2.3 Your Other Responsibilities
You agree:
1. not to resell any Service, without our prior written consent,
and any attempt to do so is void. We expressly consent to your
selling other versions of your service at the retail level,
but you may not wholesale or resell our Service.
2. not to assign, or otherwise transfer, this Agreement or your
rights under it, or delegate your rights without our prior
written consent, which consent will not be unreasonably
withheld. Any attempt to do so is void.
3. to allow us to install mandatory engineering changes (such as
those required for safety) on Equipment.
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4. that you are responsible for the results obtained from the use
of the Services and Products.
5. to provide us with sufficient, and safe access to your
facilities for us to fulfill our obligations during reasonable
hours and under such conditions as you may reasonably impose.
6. to control and be responsible for issuance of User
Identifications and their distribution to Subscribers.
7. to comply with all applicable laws, regulations or conventions
including those related to data privacy, international
communications, and exportation of technical or personal data.
You are responsible for obtaining all necessary governmental,
regulatory, or statutory approvals for your use of the
Services.
8. to provide us terminal access to your network management
system so that we can determine the operating status of each
modem and component.
9. to be responsible for data, programs, or other material that
you provide for use with a Service.
10. that we have no liability to those whom you authorize to
access a Service.
11. that we are not responsible for any data, or text, including
the content, and including its accuracy, which is received,
routed or sent as a result of the Services we provide
hereunder.
12. that we are free to enter into any agreements with third
parties that are similar or dissimilar to this Agreement
without your consent or approval.
13. to take reasonably necessary actions to reduce network demand,
including without limitation, ensuring that all timed-out
features are fully effective and operating, performing routine
and aggressive audits of network services to eliminate
"fraud", and encouraging Subscribers to read and compose
e-mail offline.
14. to terminate all Services related to Prodigy Classic no later
than December 31, 1998. Upon the termination of all such
Services, any and all provisions contained herein relating
specifically to Prodigy Classic, including but not limited to
the definition of a Prodigy Classic Subscriber and the
operation and maintenance of Prodigy Classic related
equipment, shall terminate.
Part 3 - Warranties
3.1 Warranty for Services
For each Service, we warrant that we will perform it:
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1. in a workmanlike manner consistent with industry standards,
2. according to its current description contained in this
Agreement, an Attachment, or a Transaction Document, and
3. in a manner so that the Service and the network shall be
compatible with your equipment.
OTHER THAN AS EXPRESSLY PROVIDED HEREIN, WE DISCLAIM ALL WARRANTIES,
INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, AND NON-INFRINGEMENT.
3.2 Items Not Covered by Warranty
We do not warrant uninterrupted or error-free operation of a Service or
Product.
We will specifically identify our Services and Products that have a
warranty, other than as described in this Part 3, and the terms of
that warranty.
Unless we specify otherwise, as set forth in this Agreement, including
Section 3.1, we provide Materials, non-SplitRock Services and
non-SplitRock Products on an "AS IS" basis without any warranty from
us. However, non-SplitRock manufacturers, suppliers, or publishers may
provide their own warranties to you.
Part 4 - Equipment Provided by SplitRock
We may provide Equipment to be installed on your premises for the
purpose of providing a Service. The Equipment is and will remain our
asset or that of our lessor, and will not become a fixture or realty.
Certain Equipment may contain licensed internal code. We will identify
this Equipment to you.
No right, title, or interest in or to the Equipment, or licensed
internal code associated with it, or any related planning information,
is conveyed to you. However, We will use such Equipment to provide
Services to you.
Part 5 - Confidentiality
We agree not to disclose your confidential information, including
programs and data transmitted using the Services and usage forecasts as
described in section 6.6, nor shall we disclose your customer's private
information, such as name, address, credit card or other information
which may be transmitted using the Service. However, we have no
obligation of confidentiality relating to your information which is not
confidential or which you do not conspicuously mark as confidential. We
acknowledge that all of your customer information, and information
about your individual customers is confidential. Information that is
not confidential includes information which is:
1. either currently publicly available or becomes publicly
available in the future without
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our breach of any obligation or responsibility described in
this Agreement;
2. rightfully received by either you or us from a third party,
where the information was received without any obligation of
confidentiality associated with it;
3. already in our possession without an obligation of
confidentiality;
4. independently developed by us;
5. approved for disclosure by you; or
6. treated by you as nonconfidential.
We also have no liability for any disclosure of information that occurs
as the result of our delivery of your information, at your direction
and to a recipient you designate, when the delivery is made in the
normal course of Service provision (for example, to an incorrect
delivery address provided by you to us). We may disclose information to
the extent required by law, but will give you as much advance notice of
such potential disclosure as reasonably possible.
HANDLING OF YOUR INFORMATION
We will handle your information marked confidential in a confidential
manner, and you will not permit our confidentially marked information
to be disclosed.
You are responsible to develop and maintain procedures (apart from the
Services) to protect your information.
We will allow you to audit our security procedures to insure that they
are reasonable and customary, and will notify you of any material
security breach that affects the Services. You agree that any
information regarding our security systems will be our confidential
information.
For the purposes of operation and maintenance, we may use, copy, store,
and distribute internally your information but only to the extent
necessary for such operation and maintenance. We shall have no such
rights with respect to your customer information, or with respect to
information about your customers. We agree not to reverse assemble or
reverse compile your information. We will use reasonable procedures,
but we do not guarantee that these procedures will prevent the loss of,
alteration of, or improper access to, your information. You agree that
access to your information will not prohibit or prevent us from
developing or marketing any Service or Product.
For transmission carried over interexchange carriers' and local
exchange carriers' facilities, we are not responsible for transmission
errors, or corruption or security of data.
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Part 6 - SplitRock Services
6.1 Description
We will provide you network services consisting of the following
components:
o Dial access network as described in Section 6.1.1
o ATM backbone network as described in Section 6.1.2
o Regional Servers connectivity as described in 6.1.3
o Network Management and Proxy Servers as described in
Section 6.1.4
6.1.1 Dial Access Network
We will provide to you dial access for data transport for your
Subscribers as described in this Agreement as a "Service". We will
provide this Service to you in all locations in which, on the effective
date of this Agreement, such dial access service already exists. You
agree to provide to us a list of current dial access locations, which
list shall be Appendix "A" to this Agreement. We may substitute a new
site for an existing location upon 30 days prior notice of change, with
60 days simultaneous usage. You may request new sites to exceed an 80%
coverage, by population, for local dial access; but we will not be
obligated to provide dial access Service in any new dial access
location with usage in any month of less than 5,000 dial hours unless
we review the location for the new site and approve the creation of a
new site at such location, in our sole discretion. We can modify the
site coverage only with your permission, unless the modification is for
a substitution of existing coverage, in which case we do not need your
permission. Any new sites added by us for Services will be available to
you if you choose to use them.
The data traffic dial access Service shall include the receipt of
inbound data dial traffic from your Subscribers and the routing of such
traffic to another Subscriber, to a proxy server, to a regional server,
to your data center at Yorktown or to the selected Internet Network
Access Points ("NAP"). We will not support initiating a call to another
Subscriber's telephone.
We shall, in our sole discretion, decide the number of dial ports we
provide to serve each site, as well as the method we use to provide
Service to each site provided the grades and standards of service as
set forth in this Agreement are met. Examples of methods we may use to
provide this Service include:
o a physical site presence with modem ports; or
o a virtual presence using call forwarding or a foreign
exchange.
All new access equipment provided by us will have speed capacity with
respect to backbone access, and with respect to Subscriber access,
consistent with the service that can and will be provided from that
site. For example, we will not install equipment with a speed higher
than the existing line infrastructure can support, except we
acknowledge that we shall install 56K capable bps modems, although
current FCC regulations prohibit transmission at speeds in excess of
53K bps, and, other conditions beyond our control may decrease the
actual connection speed.
Specifically identified protocols to be supported include Serial Line
Internet protocol (SLIP), Prodigy Link Level Protocol (PLLP), and
Point-to-point Protocol (PPP).
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We shall be responsible for:
o inbound communication facilities (such as hunt groups,
measured business lines or DID trunks);
o modem hardware including ports and chassis; and
o network equipment and communications facilities to transport
traffic from our dial site to other sites, to your data center
at Yorktown and the seven NAPs.
We shall transport the dial data traffic to you via TCP/IP over ATM. We
will not change the term or conditions of a Service without your
approval, which you agree will not be unreasonably withheld.
6.1.2 ATM Backbone Network
The SplitRock ATM backbone network will be operational on or before
December 31, 1997 and will be based on the Yurie LDR200/50 ATM switches
or similar ATM switches. This network is based on ATM switches,
supporting TCP/IP protocol for Prodigy Classic and Prodigy Internet
services. Prodigy Classic transmission which requires SNA will be
encapsulated as TCP/IP.
Each dial access site will be upgraded with a LDR200, LDR50 or similar
ATM switch. A backbone transmission facility based on ATM protocol will
interconnect the dial access sites to Yorktown, New York. Since the
Yurie ATM switches use standard ATM protocol, the interconnections can
be a mixture of FT1, T1, T3 and OC-3 or publicly available switched ATM
services.
Effective July 1, 1997 but subject to the Transition Services
Agreement, we shall also provide, maintain and manage sufficient
bandwith connections to Yorktown, New York to support the Service
Level Objectives in Section 6.2. The transmission facilities may be
DS-3, OC-3 or other appropriate transmission services available at the
time. The transmission facilities will be terminated by a LDR200 and
Centillion C100 combination or equivalent provided by us at your
Yorktown facility. The transmission facilities will be diversely routed
and fully separated and connect to you via selected routers. The two
SplitRock C100s will connect to existing Prodigy 6611 or equivalent
routers, which support the Prodigy internal LAN at Yorktown.
The Equipment we provide at Yorktown will be installed on your premises
solely for our use in providing our Services. This Equipment is
provided under the terms specified In the Section "Equipment We
Provide."
In addition, at locations selected by us agreed, we will provide
interconnection of the network to the Internet via DS3 to suitable
NAPs. This will provide bandwith between the NAP and Yorktown as well
as between the NAP and the dial up user. We will have the sole right to
select the choice of the NAP provider at each location. You will be
responsible for complying with all protocol requirements for layer 3
and above as set forth by the NAP providers that we select.
6.1.3 Regional Servers
You may provide, maintain and manage regional servers at sites
determined by you which are to be geographically dispersed and
co-located at our network hub sites; such equipment is limited to
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that which may only be installed in one standard 19" rack per site
("Regional Servers"). You shall provide, maintain and manage diagnostic
equipment, connection equipment that you my use to connect to us and
associated analog phone lines which you may use to manage your Regional
Servers. In addition, you shall provide the electric power cables and
the equipment connection cables for the equipment you provide,
including those cables, required to connect your equipment to our
network equipment. You also agree to comply with all safety
requirements at each site. Each Regional Server will be EtherNet
connected to our network. Neither we nor any other customer of ours
shall use your Regional Servers for any purpose except to support
Prodigy Classic and Prodigy Internet. We shall provide you with access
to our sites for purposes of maintaining, upgrading and servicing these
Regional Servers at no additional cost to you.
You are responsible for separately procuring from us the upstream
connection from the Regional Server. The upstream connection is defined
as the network facilities used to transport traffic from the Regional
Server to locations other than the source dial node (such as Yorktown
or the Internet). Cost for such services will be as provided in
Section 6.5.2 section 2 of this Agreement.
The Regional Servers will not be included in the service level
objectives, as provided in Section 6.2.
6.1.4 Network Management and Proxy Servers
Network Management
We will maintain TINA until we replace it with a new network
management system which encompasses all TINA functions. You
will make available to us the mainframe computer resources
necessary to run TINA for the purpose of managing the network
at no cost to us. We will provide you read only terminal
access to TINA and any other network management system used by
us so that you can determine the operational status of any
modem or network component.
Proxy Servers
We will assume your existing Unix servers and all hardware and
software maintenance costs as they directly relate to proxy
functions. These servers will be placed at our hub and peering
sites. We will also provide for a fee additional new Unix
based servers at hub sites when needed and requested by you.
Unix based servers will not be supported at all POP sites.
We intend to use Windows NT based servers for the POP sites
and for future hub sites for the proxy server functions.
6.2 Service Level Objectives
We will have four service level objectives for both Prodigy Internet
and Prodigy Classic:
1. Site Dial Grade of Service (SDGS) objective of P.01 during the
peak or busiest hours of the day (We will use your algorithms
in effect as of June 23, 1997 for purposes of measuring the
SDGS and Grade of Service);
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2. Site System, Availability (SSA) objective of 99.5%;
3. Overall System Availability (OSA) objective of 99.5%; and
4. Transit Delay (TD) objective average of 100 milliseconds or
less 95% of the time and 150 milliseconds or less 99% of the
time, however, TD objective average for Alaska and Hawaii is
300 milliseconds. (We will use your algorithms in effect as of
June 23, 1997 for purposes of measuring the TD and Grade of
Service)
NOTE: A P.01 Grade of Service means that no more than 1% of calls are
denied access during the peak busy hour of the weekly measured period.
A P.03 Grade of Service means that no more than 3% of calls are denied
access during the peak busy hour of the weekly measured period.
We shall measure each of the objectives, other than SDGS, on a monthly
basis and shall provide you with a report of such measured objectives
by the 10th business day of the following month, unless otherwise
agreed between the parties.
6.2.1 Site Dial Grade of Service (SDGS) Objective
We shall measure and report the weekly Site Dial Grade of
Service for each site. If the SDGS, measured weekly, falls
below P.03 for a site in two consecutive weeks, we shall have
four additional weeks to improve the performance. If during
this four week period, the measured SDGS is not improved above
P.03 with the intent to meet the P.01 objective, then we shall
provide you a credit of $1,500.00 for each four week period
thereafter for that site until such time as the measured SDGS
is improved above P.03. Except for your right of termination
as provided for in Section 6.7.1., this is your sole remedy
for our failure to meet the SDGS objective.
Grade of Service reductions which are caused by, related to or
extended as a result of your actions, or Force Majeure shall
not be considered in the estimation of the monthly SDGS.
Should you supply an invalid forecast (see Section
"Forecasts"), then the SDGS objective will not be applicable
for that period.
6.2.2 Availability Objectives
The components of the availability objective calculations
shall include the components provided by us. The OSA rate and
the SSA rate shall be represented as a percentage of the time
the components are actually available, as compared to the
scheduled time of availability.
The SSA shall be defined as the monthly availability of the
Service components for a single site including the modem and
server components at the site, and network connections from
the site to Yorktown. We shall measure and report the monthly
site availability, and deliver such report to you no later
than the 10th business day after the month of testing.
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We will measure and report site availability by sending a 56
byte message, called a sample ping, to the modem chassis and
to the servers from a SplitRock network monitor in Yorktown on
a periodic basis, but no less than every 10 minutes. The ping
sampling interval is subject to change over time but in no
event shall it be more than 30 minute intervals. If a positive
response is received to the ping, then the site is considered
available for that ping period. We will issue one retry (or
effectively do the retry using another function) if an initial
negative response is received. If a positive response is
received on the retry then the site is considered available
for that ping period. If a negative response is received from
the initial ping and the retry, then the site is considered
unavailable for that ping period.
The SSA rate calculation shall be:
o the Total Scheduled Minutes of Availability for the
site;
o minus the Total Unscheduled Outage Minutes for the
site;
o divided by the Total Scheduled Minutes of
Availability for the site.
(Total Scheduled Minutes of Availability) - (Total Unscheduled Outage Minutes)
------------------------------------------------------------------------------
(Total Scheduled Minutes of Availability)
The Total Scheduled Minutes of Availability for a site is
defined as the total minutes in the measurement time period minus the
total minutes of outages which are not due to unscheduled outages
during the measurement time period.
Total Unscheduled Outage Minutes include outages due to
telecommunication facilities (carrier outages), loss of electrical
power, hardware, operations, software and design problems except for:
1. scheduled network maintenance and scheduled outages;
2. outages caused by, related to, or extended as a
result of your actions; and
3. outages due a Force Majeure event.
If the SSA rate for a specific site, measured monthly, falls
below 98.5%, we shall take immediate and necessary action to improve the
performance. If the measured SSA rate for the site is not improved above 98.5%
with the intent to meet the 99.5% objective within the next two months, we shall
provide you a credit of $1,500.00 for each month thereafter for that site until
such time as the measured SSA rate is improved above 99.5%. Except for your
right of termination provided for in Section 6.7.1. this is your sole remedy for
our failure to meet the SSA objective.
The OSA objective is defined as the combined availability of
the Service components, including the modem and server components, and network
connections to Yorktown. The OSA rate shall be an average of all the SSA rates.
We shall measure and report the monthly OSA.
If the OSA rate, measured monthly, falls below 98.7%, we shall
take immediate and necessary action to improve the performance. If the measured
OSA rate is not improved above 98.7% with the intent to meet the 99.5% objective
within the next two months, we shall provide you a credit of $25,000.00 for each
month thereafter until such time as the measured OSA rate is improved above
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98.7%. Except for your right of termination provided for in Section 6.7.1. this
is your sole remedy for our failure to meet the OSA objective.
We shall be allowed a system-wide weekly maintenance window. The
weekly maintenance window shall occur initially Sunday mornings from 3:15 to
4:45 Eastern time. This initial period may be changed upon your prior written
consent. Additionally, there shall be an allowance for scheduled outages at each
site for us to perform maintenance/upgrade work: allowing each site two outages
annually each up to three hours in duration. We shall provide you with advance
notice of sites scheduled for upgrade/maintenance activity, and we shall use
reasonable efforts to schedule such upgrade/maintenance activity for a time
other than 5 pm to midnight, local site time.
We shall review anticipated changes in the network maintenance
window with you. You and we shall cooperate to accommodate a necessary change in
the network maintenance window and the business impact on you.
We shall not be precluded from performing unscheduled maintenance
as we may deem necessary. In such instances we will use reasonable efforts to
notify you at least 48 hours in advance. For purposes of the SSA and OSA rate
calculations, these will be considered unscheduled outages.
6.2.3 Transit Delay
The TD is represented as the actual time for a 56 byte message,
called a sample ping, to travel round trip between two specific routers in the
network under normal prime time conditions.
Using the sample ping referred to in Section 6.2.2, we will
measure the TD on a periodic basis, but no less than every 10 minutes. The ping
sampling interval is subject to change over time but in no event shall exceed 30
minutes. We will average all the samples in a given month to determine the
overall average TD, and will report that to you.
If we fail to meet the monthly TD objectives, you will notify us
in writing. If we continue to fail to meet the TD objectives for two months,
then we shall provide you a credit of $25,000.00 for each month thereafter until
such time as the measured TD meets the objectives. Except for your right of
termination provided for in Section 6.7.1, this is your sole remedy for our
failure to meet the TD objectives.
In an instance where the monthly forecast for 20% of the sites is
invalid, then the TD objective shall not be applicable for that period.
6.3 Our Other Responsibilities
We will:
1. provide you with a number for your operations group or customer
service group to contact our help desk support, which shall be available 24
hours a day, 7 days a week, and staffed adequately to handle all inquiries
within 60 seconds of receipt;
2. provide you with standard monthly, or in the case of SDGS weekly,
reports that we produce that are related to the Services provided under this
Agreement, including reports describing the results of the tests for each of
SDGS, SSA, OSA and TD, and reports relative to availability and traffic
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statistics within ten days of the end of the immediately preceding month. which
reports will show by site, the total connect hours, time of peak busy hour per
site, average peak busy hour percentage and distribution of traffic by hour of
day;
3. provide you with a monthly report detailing the status of network
upgrades and expansions within ten day of the end of the immediately preceding
month;
4. maintain the components, programs, equipment and materials we
provide under this Agreement; and
5. provide you with read only terminal access to our network management
system so you can verify operational status of all network modems and
components.
6.4 Your Other Responsibilities
You agree:
1. to be responsible for supporting your Subscribers directly through
your help desk. Your operations group or customer service group will contact our
help desk in regard to any reported problems with the Service being provided by
us;
2. to be responsible for ensuring that your software can and will
log-off each Subscriber after no activity by each Subscriber for 30 minutes
("Time Out Function");
3. to be responsible for ensuring that for Prodigy Internet Services
your software will not allow multiple User Identifications associated with any
Prodigy Internet Subscriber to gain simultaneous access to the Services
("Simultaneous Prohibition Function"); and
4. upon written request by us audit each of the Time Out Function and
Simultaneous Prohibition Function up to five audits per each 12 month period.
Within 15 days of receiving a written audit request you will deliver a written
audit report to us. If the audit shows noncompliance with the Time Out Function
or Simultaneous Prohibition Function, as the case may be, the Maximum Monthly
Usage Charge (as provided in Section 6.5.1) shall not be applicable to any time
period from the date of the last audit showing compliance until the date you
cure such noncompliance.
6.5 Charges
6.5.1 Monthly Usage Charges
With respect to usage, you agree to pay us for the Services based on
the total number of monthly connect hours of your Subscribers times the
applicable rate per hour in the following schedule (the "Hourly Usage Charge"),
subject to the Maximum Monthly Usage Charge (upper limit) and Minimum Monthly
Usage Charge (lower limit) described below:
Hourly Usage Charge Rate Schedule:
July 1, 1997 through December 31, 1997 [Confidential material
omitted and filed separately with the Commission]
January 1, 1998 through December 31, 1998 [Confidential
material omitted and filed separately with the Commission]
All subsequent years [Confidential material omitted and filed
separately with the Commission]
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Maximum Monthly Usage Charge: You agree to provide to us each month
the Subscriber Count for such month (by price plan) as of the last day of each
month, by the fifth day of the next month. We will use the Subscriber Count as
the basis for calculating the Maximum Monthly Usage Charge for such month. For
any month in which the average monthly connect hours per Subscriber (total
connect hours divided by the Subscriber Count) does not exceed 30 hours, the
Maximum Monthly Usage Charge you will pay is equal to [confidential material
omitted and filed separately with the Commission] times the Subscriber Count
for such month. If the average monthly connect hours per Subscriber in any
month exceeds 30 hours, then, in addition to the Maximum Monthly Usage Charge,
we shall invoice you, and you agree to pay us an additional amount equal to (a)
[confidential material omitted and filed separately with the Commission] per
hour times (b) the number of average hours (or any portion thereof) in excess
of 30 hours times (c) the Subscriber Count for such month. In the event that
the Maximum Monthly Usage Charge does not apply, as described in Section 6.4 or
in the previous sentence, you will pay us the greater of the applicable Hourly
Usage Charge or the Minimum Monthly Usage Charge for such time period of
noncompliance.
Minimum Monthly Usage Charge:
$3,000,000 per calendar month for the period from July 1, 1997 through
June 30, 1998;
$3,500,00 per calendar month for the period from July 1, 1998 through
June 30, 1999;
$4,000,000 per calendar month for the period from July 1, 1999 through
June 30, 2000;
$4,500,000 per calendar month for the period from July 1, 2000 through
June 30, 2001.
In any month, if the Hourly Usage Charge is not equal to or greater
than the applicable Minimum Monthly Usage Charge, you agree to pay us the
applicable Minimum Monthly Usage Charge as set forth above.
For example (assumption: average monthly connect hours per Subscriber
is not in excess of 30 hours and no other amounts were due)
[confidential material omitted and filed separately with the Commission]
Minimum Monthly Usage Charge:
The Minimum Monthly Usage Charge you will be required to
pay for Subscriber connect services is set forth in the
paragraph above. July 1997: = $3,000,000.
For purposes of determining connect hours, the sequence of a call is as
follows: The dial port
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goes off hook, modem synchronization, protocol management, call routed, Prodigy
authentication, session live while user performing tasks, user initiates end of
session or the session otherwise ends, eventually resulting in modem off-line
and session termination (carrier dropped). We will aggregate the total time of
all calls, rounded up by city to the nearest hour. The length of each individual
call will be calculated from the time the port goes off hook to session end
(modem off-line), rounded up to the nearest second.
6.5.2 Other Monthly Charges
In addition to the charges provided in Section 6.5.1 above, you agree
to pay us each month for the following, which is dedicated for your exclusive
use and provided you approve of such use in writing:
1. for each NAP connection at a rate of [confidential material
omitted and filed separately with the Commission] per month
for each DS3 connection, at our choice of location, as are
necessary for supporting your Subscribers,
2. for all remote and proxy server connections at a rate of
[confidential material omitted and filed separately with the
Commission] per month for each EtherNet connection at each
remote and proxy server location,
3. for servers which you require in addition to those installed
as of the data hereof, an amount for the acquisition,
installation, operation and maintenance of hardware and
software for such server, at our total cost plus 10%
(including applicable sales tax).
4. If you ask usor no later than August 31, 1997 to assume or
provide any network related service obligations, not
specifically disclosed in this Agreement, including its
Exhibit and Schedules ("Supplemental Obligations"), we will
assume such Supplemental Obligations in consideration for
payment to us of our total cost plus 10% (including applicable
sale tax); provided that, such cost plus 10% pricing shall not
be applicable to any increase or variations in Supplemental
Obligations, and the parties shall mutually agree on pricing
for any such increase or variation.
6.5.3 Payment Terms
Except as provided in the Transition Services Agreement while it is in
effect, you agree to pay us the applicable Minimum Monthly Usage Charge (plus
any other fixed charges) by the end of the calendar month that we provide the
Service, whether or not you receive an invoice for such charges, and to make
payments to us by wire funds transfer or other mutually agreed to electronic
means to an account specified by us. For all other charges, we shall make
reasonable efforts to provide invoices on or before the tenth day of the month
following the monthly period being invoiced and you agree to pay such invoices
within 30 days of the invoice date. If you do not make payments to us by their
applicable due dates, you agree to pay us a service charge equal to the lesser
of 1.5% per month or the maximum allowable rate under applicable law on each
unpaid amount. You agree to pay charges for all Service usage you or
Subscribers incur by any means, including providing a User Identification to
access a Service. You are responsible for charges and damages resulting from
misuse of User Identifications.
Applicable taxes, such as sales, use or excise taxes are not included
in the above charges, and you will be invoiced for taxes payable by you but
required by law to be collected by us, but taxes shall not include line access
or similar telecommunications based charges.
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We shall be responsible for payment of sales, use, property and other
taxes on machines, software, or goods and services used or furnished by us for
our own use in providing the Services to you. All taxes incurred in connection
with our upgrading of the network to ATM switching, or any other upgrade,
whether mandatory or voluntary, shall be our sole responsibility.
You shall be responsible for sales, use, property and other taxes on
machines, software, or goods and services provided by you.
All pricing for dial access covers speeds up to 56K bps. All pricing of
higher speed Service is subject to negotiation and agreement between the
parties.
6.6 Forecasts
At the beginning of each quarter, you shall supply us with a rolling
15-month forecast consistent with your business model:
1. hours of traffic for each site for each month of the forecast,
2. time of peak busy hour for each site,
3. average peak busy hour percentage for each site for each month
of the forecast,
4. distribution of traffic by hour of day across all sites, and
5. average session length across all sites.
We shall use this information to perform capacity planning for the
Services provided under this Agreement.
For purposes of determining if a forecast is valid or invalid, the
fourth, fifth and sixth month of a forecast shall be recorded and saved and then
compared against the actual. The forecast for the specified month compared
against the actual is valid if the actual peak hours are no more than 15%
greater than the forecasted peak hours. If the actual peak hours are more than
15% greater than the forecasted peak hours, then the forecast for the month is
invalid and the SDGS objective does not apply for that month. For any month in
which a forecast is invalid, we shall not be responsible for SDGS or TD
objectives for the subject forecast period.
6.7 Changes and Default
6.7.1 Undesirable Conditions.
If any of the following undesirable events occurs for two consecutive
months or four months out of a twelve-month period, you may terminate this
Agreement upon 45 days written notice to us ("Notice of Termination"):
SDGS below P.05 for 30% or more of the sites
SSA below 95% for 30% or more of the sites
OSA below 95%
TD above 250 millisecond monthly average, and 500 milliseconds monthly
average for
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Alaska and Hawaii.
For SDGS and SSA undesirable condition calculations, a site is deemed
to be meeting its service level objective during any period of time when the
corresponding service level objective is not applicable. For OSA and TD, an
undesirable condition shall not apply during any period of time when the
corresponding service levels, objective is not applicable.
If you desire to terminate this Agreement because of any of the
foregoing undesirable conditions, you must give us a Notice of Termination
within 30 days of receiving the monthly report that gives rise to your right of
termination. If you do not exercise your right of termination within such 30 day
period and in the next month the applicable undesirable condition no longer
exists, then you waive any right of termination for the applicable time period
and this Agreement shall remain in full force and effect.
Upon Notification of Termination, we shall provide reasonable
transition assistance to you, for a period of up to six months, and no
termination adjustment charge or service level credits shall apply, nor shall
any Minimum Monthly Usage Charges apply after the effective date of termination.
6.7.2 System Wide Failure.
If 50% of the point of presence sites are failing to provide access or
Services for forty eight consecutive hours, then you have the right to
enter our premises to operate our network assets and direct our
employees, as is necessary to cure such failure, and we shall reimburse
you for any reasonable expense you incur in doing so. We will cooperate
with your efforts in restoring service to the network. You shall also
have the right to terminate in accordance with the termination
provisions within Section 6.7.1.
6.7.3 Financial Related Defaults.
The occurrence of any of the following events shall constitute an Event of
Default (herein so called) hereunder.
1. If we shall fail to perform any of our obligations and covenants under
Section 1.14; or
2. If you, in good faith, after reviewing any document or report
required to be delivered under Section 1.14, believe that there has been a
material and adverse change in our business operations and conditions, financial
or otherwise, which in your reasonable opinion will have a materially adverse
effect upon the operations, business, property, assets, financial condition or
credit of us or you.
Remedies
Upon the occurrence of an Event of Default in this Section 6.7.3, you shall have
the right, at your option, to initiate an alternative dispute resolution by the
procedures set forth in Section 6.12. If the dispute is not resolved by
mediation, the arbitrators will be instructed to determine whether or not we, in
their judgment, are capable of performing our obligations under this Agreement.
A decision shall be rendered within three days of the conclusion of mediation or
arbitration, as appropriate.
We will respond within three business days to any reasonable request for
information made by the arbitrators.
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If the arbitrators' judgement is that we are not capable of performing our
obligations under this Agreement for the twelve month period after the
arbitrators render their decision, then you shall have the right, in your sole
discretion, to elect either (i) to terminate this Agreement, without penalty,
and be relieved of the Minimum Monthly Usage Charges, or (ii) to enter our
premises to operate our network assets and direct our employees to the extent
necessary to operate the network until the end of the Initial Term of this
Agreement, and we shall reimburse you for any reasonable expenses you incur in
doing so.
6.7.4 Default (other than for Sections 6.7.1, 6.7.2 or 6.7.3)
This Section 6.7.4 applies to defaults, other than for the events
described in Sections 6.7.1, 6.7.2 or 6.7.3.
In the event that either party materially defaults in the performance
of any of its duties or obligations under this Agreement (other than your
failure to make timely payments due to us) and does not substantially cure such
default within 60 days after being given written notice specifying the default,
then the party not in default may, by giving written notice to the defaulting
party, terminate this Agreement (herein termination "for cause").
In the event you do not make any payment of the Minimum Monthly Usage
Charge or Hourly Usage Charge due to us on the due date, then we may terminate
this Agreement 45 days after we give you written notice of such default and
provided that we did not receive good funds for such overdue payment within the
45 day time period. In the event that you do not make any other payment due to
us within 30 days of your receipt of an invoice, and such failure is not
remedied within 60 days after we give you written notice of nonpayment (the
"Cure Period") then we may terminate this Agreement upon the expiration of the
Cure Period.
In the event that you are in default (for reasons other than failure to
make timely payments due to us) and we elect to terminate this Agreement, then
you may request an extension of this Agreement of up to six months as a
transition period, provided that we, in our discretion, agree to provide such an
extension.
In the event that you terminate this Agreement because we are in
material default for reasons other than as described in Section 6.7.1 then we
will provide reasonable transition assistance to you, for a period of up to six
months and no termination adjustment charges or service level credits shall
apply.
You may terminate this Agreement during the Initial Term without cause
by providing 12 months' prior written notice to us. If you terminate this
Agreement without cause, or if we terminate this Agreement for cause, you shall
pay us a termination adjustment charge as follows: $7,000,000 if terminated in
the first year of the Agreement; $5,000,000 if terminated in the second year of
the Agreement; and $3,000,000 if terminated in the third year of the Agreement.
Payment is due and payable upon the date termination notice is given and all
other terms and conditions of this Agreement shall remain in place.
6.8 Other Terms
You will not be allowed to test or repair our dial, network, except as
provided in Section 6.7.2., and except to send your own sample pings similar to
that described in section 6.2.3.
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6.9 Auditing Procedures
We shall maintain true and accurate accounting records, in accordance
with sound accounting practices, to support the dial connect charges payable to
us by you. We shall, upon 30 days' prior written request, during normal business
hours, but not more frequently than once each calendar quarter, provide access
to the connect hour accounting records associated only with the provision of the
Service for the immediately preceding one-year period to an independent
accounting firm chosen and compensated by you for the purposes of auditing the
accuracy of the calculation of the dial connect charges. The accounting firm
selected shall: be required to sign an agreement with us protecting our
confidential information, perform such audit on our premises, and such other
locations reasonably necessary to conduct a proper audit, comply with our
security procedures, and be authorized by us to report only the results of such
audit and provide us with a copy of the report.
In the event that the audit shows you owe an amount to us, we will
invoice you for such amount within the next two monthly billing cycles.
In the event that the audit shows a credit due to you, we will process
such credit including the cost of the audit (but such costs shall not exceed the
credit), excluding travel and per diem charges, plus interest at the prime rate
on the entire amount until paid in full within the next two monthly billing
cycles, provided that we do not disagree with the audit report. If we disagree
with the audit report, we may select an independent accounting firm, compensated
by us, to perform an audit on the same information provided to the firm selected
by you. We shall provide you a copy of the report commissioned by us. In the
event that the audit reports disagree an the credit due to you, the credit due
to you will be determined by averaging the results of the two audit reports.
6.10 Primary Provider
We shall be your Primary Provider of Services. You shall be free to
make agreements with third parties for Services, provided you shall not seek or
accept any bids for Services to replace our Services in their totality or to any
substantial extent. In addition, you shall not seek to bundle our Services with
other features which will have the effect of diverting traffic away from our
network in an amount which causes our traffic from you not to follow generally
the overall amount of your dial up access service needs, measured quarterly.
You shall negotiate with us in good faith for any new service which we
have the ability, capacity and interest to provide. You shall be free to offer
new, experimental and other access including without limitation, ADSL, cable
access, modified cable access including dial up, satellite access, roaming
(e.g. Aimquest), Web TV, access bundled with content of other applications,
agreements with regional bell operating companies or long distance companies as
marketing partners ("Other Business"); provided that, at least thirty days prior
to your entering into any agreement of arrangement for Other Business, you will
deliver to us on a confidential basis any business plan changes, projections,
draft agreements and other documents describing such Other Business and meet
with us to discuss such Other Business.
You shall not offer Other Business that would result in a material
increase in our costs unless we both agree on the amount of increased revenues
which will bear a reasonable relationship to such increase in our costs;
provided that, if we cannot agree on the amount of such increased revenues, we
shall have no obligation to provide our Services required for such Other
Business.
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6.11 Additional Services and Products
You may request us to provide you services, products or enhancements
which are not the subject of this Agreement, which include services, products or
enhancements which we provide to other customers. If we provide such services,
products or enhancements, we agree that we will offer you a price for such
services or products which is no higher than the price we charge any other party
for the same services, products or enhancements; provided, however, that you
will not be entitled to receive this price treatment with respect to any
product, service or enhancement which we have developed for another party, or
which we consider to be proprietary.
If you request us to develop a new product, service or enhancement for
your use and we agree to develop such product or service, then we will charge
you a price which will include a profit to us.
6.12 Alternative Dispute Resolution
In the event of a dispute between you and us arising out of or relating
to this Agreement, or the breach thereof, you and we shall submit the dispute to
nonbinding mediation and shall make a good-faith effort to resolve the dispute
through the mediation process. In the event the dispute is not resolved through
mediation within 30 days following written notice by one party that it desires
to enter into mediation, then such dispute shall be resolved exclusively and
finally by binding arbitration by three arbitrators who will be appointed and
will act as follows:
The party requesting arbitration shall, simultaneously with such
request, appoint one arbitrator and shall notify the other of such appointment
together with such arbitrator's acceptance. Within 30 days from the receipt of
such notice, the other party shall appoint another arbitrator and shall notify
the requesting party of such appointment together with the second arbitrator's
acceptance. The third arbitrator, who shall act as chairman of the arbitration
panel, shall be appointed by the other two arbitrators within the following 30
days. In the event either party fails to appoint an arbitrator or in the event
no agreement is reached between the two arbitrators as to the appointment of the
chairman of the arbitration panel in accordance with the foregoing provisions,
such arbitrator or arbitrators shall be appointed, upon application by the
interested party, by the American Arbitration Association (AAA).
The arbitrators shall apply the arbitration rules of the AAA.
The award of the arbitrators shall be final and shall not be subject to
any appeal or challenge whatsoever. The arbitrators will not be required to file
their award with any body of authority whatsoever. In the event arbitration
proceedings are initiated under this section, pending such proceedings and until
a final award is rendered pursuant thereto, any subsequent controversy arising
between the parties shall be exclusively submitted for final decision by the
arbitrators in the arbitration
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proceedings already pending. The arbitrators shall be instructed by the parties
to include an award for reasonable attorneys' fees, arbitrators' fees, expert
witnesses, travel and other costs incurred.
If a dispute arises out of an alleged breach of this Agreement (other
than your failure to make timely payments due to us), then you and we agree to
continue to perform our respective obligations under this Agreement until an
agreement is reached through mediation or the arbitrators render a decision,
whichever is applicable.
PRODIGY SERVICES CORPORATION SPLITROCK SERVICES, INC.
By: /s/ PAUL W. DELALEY By: /s/ WILLIAM R. WILSON
-------------------------- --------------------------
Name: Paul W. Delaley Name: William R. Wilson
Title: PRESIDENT Title: PRESIDENT
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EXHIBIT 10.2
DEFINITIVE AGREEMENT
by and between
PRODIGY SERVICES CORPORATION
as the "Company,"
and
SPLITROCK SERVICES, INC.
as "Provider"
Dated: June 24, 1997
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
[TABLE OF CONTENTS PAGE NUMBERING TO BE UPDATED]
<S> <C>
ARTICLE I DEFINITIONS ........................................................................................-1-
1.1 Defined Terms ....................................................................................-1-
ARTICLE II TRANSFER OF ASSETS.................................................................................-2-
ARTICLE III CLOSING...........................................................................................-3-
3.1 Closing...........................................................................................-3-
3.2 Documents to be Delivered.........................................................................-3-
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF
COMPANY.......................................................................................................-3-
4.1 Organization of Company and Authority.............................................................-3-
4.2 Absence of Certain Changes or Events .............................................................-3-
4.3 Title to Assets and Value of Assets...............................................................-4-
4.4 No Conflict or Violation .........................................................................-4-
4.5 Financial Statements .............................................................................-4-
4.6 Litigation........................................................................................-5-
4.7 Liabilities ......................................................................................-5-
4.8 Compliance with Law ..............................................................................-5-
4.9 Proprietary Rights ...............................................................................-5-
4.10 Employee Matters..................................................................................-5-
4.11 Employee Benefit Plans............................................................................-7-
4.12 Consents and Approvals............................................................................-7-
4.13 No Brokers .......................................................................................-7-
4.14 No Other Agreements to Sell the Assets Of Company.................................................-7-
4.15 Environmental and Safety Matters..................................................................-7-
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PROVIDER..........................................................-7-
5.1 Organization of Provider .........................................................................-8-
5.2 Authorization ....................................................................................-8-
5.3 Consents and Approvals ...........................................................................-8-
5.4 No Brokers .......................................................................................-8-
5.5 No Conflict or Violation..........................................................................-8-
5.6 Litigation .......................................................................................-8-
ARTICLE VI ACTIONS BY COMPANY AND PROVIDER PRIOR TO THE CLOSING...............................................-8-
6.1 Investigation by Provider.........................................................................-8-
6.2 Consents and Reasonable Commercial Efforts........................................................-9-
6.3 Notification of Certain Matters...................................................................-9-
6.4 No Mergers, Consolidations, Sale of Assets, Etc...................................................-9-
6.5 Hiring Employees .................................................................................-9-
6.6 Employee Matters .................................................................................-9-
6.7 Business Operations .............................................................................-10-
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
ARTICLE VII CONDITIONS TO COMPANY'S OBLIGATIONS..............................................................-10-
7.1 Representations, Warranties and Covenants........................................................-10-
7.2 Consents.........................................................................................-10-
7.3 No Governmental Proceedings or Litigation .......................................................-10-
7.4 Due Diligence Review ............................................................................-11-
7.5 Certificates ....................................................................................-11-
7.6 Full Service Agreement and Transition Services Agreement.........................................-11-
ARTICLE VIII CONDITIONS TO PROVIDER'S OBLIGATIONS............................................................-11-
8.1 Representations, Warranties and Covenants .......................................................-11-
8.2 Consents ........................................................................................-11-
8.3 Opinion .........................................................................................-11-
8.4 No Material Adverse Change.......................................................................-11-
8.5 Due Diligence Review ............................................................................-11-
8.6 No Governmental Proceeding or Litigation ........................................................-11-
8.7 Employee Compensation and Benefits ..............................................................-12-
8.8 System Verification .............................................................................-12-
8.9 Supplier Verification ...........................................................................-12-
8.10 Full Service Agreement and Transition Services Agreement.........................................-12-
8.11 Certificates.....................................................................................-12-
8.12 Bill of Sale.....................................................................................-12-
ARTICLE IX ACTIONS BY COMPANY AND PROVIDER AFTER THE CLOSING.................................................-12-
9.1 Books and Records ...............................................................................-12-
9.2 Further Assurances ..............................................................................-12-
9.3 Solicitation of Employees .......................................................................-12-
ARTICLE X INDEMNIFICATION....................................................................................-13-
10.1 Survival of Representations, Etc.................................................................-13-
10.2 Indemnification .................................................................................-13-
10.3 Indemnification Procedures ......................................................................-13-
ARTICLE XI MISCELLANEOUS.....................................................................................-14-
11.1 Termination .....................................................................................-14-
11.2 Assignment ......................................................................................-14-
11.3 Notices .........................................................................................-14-
11.4 Choice of Law ...................................................................................-15-
11.5 Entire Agreement: Amendments and Waivers.........................................................-15-
11.6 Counterparts.....................................................................................-15-
11.7 Invalidity.......................................................................................-15-
11.8 Headings.........................................................................................-15-
11.9 Expenses ........................................................................................-16-
11.10 LIMITATION OF REMEDIES...........................................................................-16-
11.11 Publicity........................................................................................-16-
11.12 Confidential Information.........................................................................-16-
</TABLE>
Exhibit A Form of Full Service Agreement
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Exhibit B Form of Transition Services Agreement
Exhibit C Form of Sublease
Exhibit D Form of Conveyance and Assignment Agreement
Schedules
1.1(a) Fixtures, Equipment and Facilities
1.1(b) Network Assets
2 Leases
3 Transfer of Possession of Assets
4.2(a) Absence of Certain Changes or Events
4.3 Title to Assets
4.4 No Conflict or Violation
4.5 Financial Statement
4.6 Litigation
4.7 Liabilities
4.10 (a)Cash Compensation
4.10 (b)Compensation Plans
4.10 (c)Employment and Independent Contractor Agreements
4.10 (d)Employee Policies and Procedures
4.10 (e)Unwritten Amendments
4.10 (f)Labor Compliance
4.11 (a)Employee Benefit Plans
4.11 (c)Retirees
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DEFINITIVE AGREEMENT
This Definitive Agreement ("Agreement"), effective as of June 24, 1997, is
by and between PRODIGY SERVICES CORPORATION, a Delaware corporation (the
"Company"), and SPLITROCK SERVICES, INC., a Texas corporation ("Provider").
RECITALS
WHEREAS, Company wishes to enter into arrangements with providers of
network services, and Provider can provide the services required by Company;
WHEREAS, Company and Provider intend to enter into a full services
agreement pursuant to which Provider will provide certain network services to
Company ("Full Service Agreement");
WHEREAS, Company owns certain assets which are necessary to the
implementation and operation of the services to be provided by Provider under
the Full Service Agreement and which will no longer be required by Company upon
its execution of the Full Service Agreement;
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used herein, the term below shall have the
following meanings:
"Assets" shall mean the Network Assets and the Fixtures,
Equipment and Facilities (as hereinafter defined).
"Closing" and "Closing Date" shall mean July 1, 1997.
"Effective Date" shall mean June 24, 1997.
"Encumbrances" shall mean any claim, lien, pledge, option,
charge, easement, security interest, right-of-way, encumbrance or other rights
of third parties.
"Financial Statements" shall mean the draft of audited
consolidated balance sheet as of December 31, 1996 and the audited consolidated
statements of income, cash flows and stockholders' (deficit) equity for the year
ended December 31, 1996 of Prodigy, Inc. together with the notes thereto
prepared by Coopers & Lybrand L.L.P. attached hereto as Schedule 4.5.
"Fixtures, Equipment and Facilities" shall mean all of the
furniture, fixtures, furnishings, accessories, computer hardware and software,
machinery and equipment owned by Company (regardless
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of location) which is being used by the Personnel (as hereinafter defined) to
perform their duties, which assets are listed on Schedule 1.1(a) attached
hereto. Specifically excluded from this transaction are desktop and laptop
personal computers, furniture, fixtures and leasehold improvements, which
otherwise may be used by the Personnel to perform their duties.
"Full Service Agreement" shall mean that Full Service Agreement
referenced in the recitals herein, a form of which is attached hereto as Exhibit
A.
"Network Assets" shall mean those certain tangible assets owned
or leased by the Company that are used by Company in providing network services
to its current United States subscribers and all communications equipment which
is directly linked to providing such network services, which assets include
without limitation, related warranty information, maintenance information, and
operating manuals, and which could be used by Provider to perform the Full
Service Agreement and which are set forth in Schedule 1.1(b) hereof, but shall
exclude: any owned, leased or licensed real property interests; all leased or
licensed personal property interests other than as set forth in Schedule 1.1(b);
all assets relating to the directory machines; all assets relating to the
ISP referral servers; and all assets relating to Company's wide area access
(800# call option) plans.
"Network Business" shall mean that portion of Company's business
that relates to providing network services to the Company's subscribers, which
services Provider will perform pursuant to the terms and conditions of the Full
Service Agreement.
"Permitted Encumbrances" shall mean the encumbrances to title set
forth on Schedule 4.3 hereof.
"Personnel" shall mean those certain employees and contractors of
Company who work in Company's network operations division and listed on Schedule
4.10(a) attached hereto, and any reference herein to "Direct Employees" shall
mean only the Company employees on Schedule 4.10(a) without any reference to the
independent contractors.
"Sublease Agreement" shall mean that agreement of sublease
between Company and Provider, a form of which is attached hereto as Exhibit C,
which provides for Provider to sublease certain space from Company in Company's
Yorktown Heights, New York facility.
"Transition Services Agreement" shall mean that certain
transition services agreement between Company and Provider, a form of which is
attached hereto as Exhibit B, which will, among other things, require Company to
provide certain support efforts and administrative assistance to Provider and to
continue to manage some or all of the Network Assets, from July 1, 1997 through
or prior to December 31, 1997.
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ARTICLE II
TRANSFER OF ASSETS
(a) Upon the terms and subject to the conditions contained herein, the
Company will sell, convey, transfer, assign and deliver the Assets to Provider,
free and clear of all Encumbrances, except the Permitted Encumbrances, in a
Conveyance and Assignment Agreement dated as of July 1, 1997 in the form of
Exhibit D hereto. With respect to those assets transferred in the form of leases
described in Schedule 2, Provider shall acquire such assets subject to such
leases, and shall also assume all liability related to such leases. Company and
Provider agree that the consideration for the Assets will be the execution by
Provider of the Full Service Agreement.
(b) Provider shall not buy any Assets other than those contemplated by this
Agreement, and Provider shall not assume or agree to pay, perform or discharge
any Encumbrance, liabilities or obligations of Company, whether accrued,
absolute, contingent or otherwise, except as specifically provided for in this
Agreement.
(c) Notwithstanding any provision herein to the contrary Provider will
assume leases for five (5) 3745/46s as referenced in the Memorandum dated June
17, 1997 from Company to Kwok Li, which 3745/46s connect Proteon 600 to TPF
specifically for SNA traffic designated for Prodigy Classic subscribers' direct
access, subject to Provider's review of the respective leases encumbering such
3745/46s. In addition, Provider will assume NCP licenses and maintenance
contracts associated with such 3745/46s, subject to Provider's review of the
respective licenses and maintenance contracts. Any other 37XX network-related
equipment which is located at Yorktown as of June 24, 1997 and which has related
leases, licenses or maintenance contracts shall be identified on Schedule 2(c)
by Company no later than June 30, 1997. Company shall transfer such Assets, and
Provider shall assume the obligations associated with such Assets, and Company
will reimburse Provider for Provider's costs associated with Provider's
assumption of leases, licenses or maintenance contracts related to such
obligations, plus 10%, subject to Provider's review of the respective leases,
licenses and maintenance contracts.
(d) Provider does not agree to assume and will not assume any obligations
of Company which relate to any Asset which obligations are not disclosed on
Schedule 2.(c), as amended, or Schedule 4.3, as amended.
(e) Schedule 3 contains a list of new network related assets which are in
Company's possession but are not included in the definition of Assets, and for
which Company has not yet executed contracts for purchase or lease with the
respective vendors. Company will transfer right of possession of such assets on
the Closing Date and Provider will assume the payment obligations for such
assets upon receipt.
ARTICLE III
CLOSING
To effect the transfer referred to in Article II, Company shall, on or
before the Closing Date, deliver the following:
(a) Company shall deliver all documents required to be
delivered pursuant to Article VIII.
(b) Prior to Closing, Company shall deliver all Schedules
referenced herein which
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are not attached hereto and, on the Closing Date.
(c) All instruments and documents executed and delivered to
Provider pursuant hereto shall be in form and
substance, and shall be executed in a manner,
reasonably satisfactory to Provider. All instruments
and documents executed and delivered to Company
pursuant hereto shall be in form and substance, and
shall be executed in a manner, reasonably satisfactory
to Company.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents and warrants to Provider as follows:
4.1 Organization of Company and Authority Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to conduct its
business as it is presently being conducted and to own and lease its properties
and assets. Company is duly qualified to do business and is in good standing in
the State of New York and each other foreign jurisdiction in which such
qualification is necessary under the applicable law as a result of the conduct
of its business or the ownership of its properties and where the failure to be
so qualified would have a material adverse effect on the business or financial
condition of Company. Company has all necessary corporate authority to enter
into this Agreement, the Full Service Agreement, the Transition Services
Agreement and the Sublease Agreement, and has taken all necessary corporate
action to execute each such agreement and to consummate all the transactions
contemplated hereby and to perform its obligations thereunder. This Agreement,
the Full Service Agreement, the Transition Services Agreement and the Sublease
Agreement, are each duly executed and delivered by Company and each is the valid
and binding obligation of Company, enforceable against it in accordance with its
terms.
4.2 Absence of Certain Changes or Events. Since December 31. 1996,
solely with respect to the Assets, and except as disclosed in Schedule 4.2(a),
there has not been any:
(a) change in Company's condition (financial or otherwise), assets,
liabilities, working capital, reserves, earnings or operations, or change which
has, individually or in the aggregate, had a material adverse effect on the
Company's Network Business, other than matters disclosed on Schedule 4.2(a) and
those relating to (i) changes previously disclosed to Provider, (ii) matters of
public knowledge relating to Company, and (iii) to Company's industry in
general;
(b) sale, assignment or transfer of any of the Network Assets of
Company, individually or in the aggregate, other than in the ordinary course of
business;
(c) cancellation of any indebtedness or waiver of any rights of
significant value to the network division of Company;
(d) damage, destruction or loss not covered by insurance materially
adversely affecting the properties, business or prospects of Company;
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(e) declaration or payment of distributions or dividends with respect
to any stockholder of Company, except a repayment of a loan to Mr. Greg Carr in
the approximate amount of six million dollars ($6,000,000.00);
(f) payment, discharge or satisfaction of any liabilities other than
the payment, discharge or satisfaction, in the ordinary course of business and
consistent with past practice, of liabilities reflected or reserved against in
the Financial Statements, or incurred in the ordinary course of business and
consistent with past practice;
(g) indebtedness incurred by Company for borrowed money or any
commitment to borrow money entered into by Company, or any loans made or agreed
to be made by Company except in connection with certain loans made or to be made
by the Company by Banco Inbursa and others; and
(h) agreement by Company to do any of the foregoing.
4.3 Title to Assets and Value of Assets. Except for the Encumbrances as
disclosed in Schedule 4.3, Company has good and marketable title to the Network
Assets and the Fixtures, Equipment and Facilities free and clear of any
Encumbrances. Company has in all respects performed all the obligations required
to be performed by it with respect to all assets leased by it through the
Closing Date, except where the failure to perform would not have a material
adverse effect on the business or financial condition of Company. The book value
of the Network Assets is not greater than $14,000,000 as of May 31, 1997.
4.4 No Conflict or Violation. Except as disclosed in Schedule 4.4,
neither the execution nor delivery of this Agreement, the Full Service
Agreement, the Transition Services Agreement, the Sublease Agreement nor the
consummation of the transactions contemplated hereby will result in (a) a
violation of or a conflict with any provision of the Company's Certificate of
Incorporation or Bylaws, as amended, (b) a breach of, or a default under, any
term or provision of any contract, agreement, indebtedness, lease, Encumbrance,
commitment, license, franchise, permit, authorization or concession to which
Company is a party or by which the Assets are bound, which breach or default
would have a material adverse effect on the business or financial condition of
Company, (c) a violation by Company of any statute, rule, regulation, ordinance,
code, order, judgment, writ, injunction, decree or award, which violation would
have a material adverse effect on the business or financial condition of Company
or the ability of Company to consummate the transactions contemplated hereby,
or (d) an imposition of any Encumbrance, restriction or charge on the business
of Company or any of the Assets.
4.5. Financial Statements. Except as otherwise set forth therein, the
Financial Statements present fairly, in all material respects, Prodigy, Inc.'s
assets, liabilities and financial condition as of the dates indicated and
results of operations for the periods indicated in accordance with generally
accepted accounting principles consistently applied.
4.6 Litigation. Except as disclosed in Schedule 4.6, there is no action,
order, writ, injunction, judgment or decree outstanding or claim, suit,
litigation, proceeding, labor dispute (other than routine grievance procedures,
or routine uncontested claims for benefits under any employee benefit plan),
arbitral action or investigation (collectively, "Actions") pending, threatened,
anticipated against or relating to (i) any Employee Benefit Plan (as hereinafter
defined) or any fiduciary or administrator thereof, (ii) the transactions
contemplated by this Agreement, or (iii) the Company in general. Company is not
in default with respect to any judgment, order, writ, injunction or decree of
any court or
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governmental agency, and there are no unsatisfied judgments against Company or
the business or activities of Company. There is not a reasonable likelihood of
an adverse determination of any pending Actions which would, individually or in
the aggregate, have a material adverse effect on the business or financial
condition of Company, this Agreement, the Full Services Agreement or the
Transition Services Agreement.
4.7 Liabilities. Except as disclosed on Schedule 4.7, Company has no
liabilities or obligations (absolute, accrued, contingent or otherwise) except
(i) liabilities which are reflected and reserved against in the Financial
Statements, (ii) liabilities incurred in the ordinary course of business and
consistent with past practice since December 31, 1996, (iii) liabilities arising
under contracts, letters of credit, purchase orders, licenses, permits, purchase
agreements and other agreements, business arrangements and commitments arising
in the ordinary course of business which because of the dollar amount or other
qualifications (including rights of termination) are not material to Company,
and (iv) the Permitted Encumbrances.
4.8 Compliance with Law. The Company is in compliance with all
applicable laws, statutes, ordinances and regulations, whether federal, state or
local, except where the failure to comply would not have a material adverse
effect on the business or financial condition of Company or the transactions
contemplated by this Agreement. The Company has not received any written notice
to the effect that, or otherwise been advised that, it is not in compliance with
any of such laws, statutes, ordinances or regulations, where the failure to
comply would have a material adverse effect on the business or financial
condition of Company or the transactions contemplated by this Agreement, and
Company has no reason to anticipate that any presently existing circumstances
are likely to result in any such violation which would, individually or in the
aggregate, have a material adverse effect on the business or financial condition
of Company, or the transactions contemplated by this Agreement.
4.9 Proprietary Rights. No proceedings have been instituted against or
notices received by Company alleging that Company's use of any of its
registrations of trademarks and of other marks, trade names or other trade
rights, pending applications for any such registrations, and its patents and
copyrights and all pending applications therefor, and all other trade secrets,
designs, plans, specifications and other proprietary rights owned by Company
that are material to the business of Company (collectively, "Proprietary
Rights") infringes upon or otherwise violates any rights of a third party in or
to such Proprietary Rights.
4.10 Employee and Independent Contract Matters.
(a) Cash Compensation. Schedule 4.10(a) contains a complete and
accurate list, as of the Effective Date, of the names, titles and current rate
of compensation, including without limitation wages, salaries, bonuses
(discretionary and formula), hourly or monthly rates and other cash compensation
(the "Cash Compensation") of the Personnel. In addition, Schedule 4.10(a)
contains a complete and accurate description of any promised increases, in Cash
Compensation of Personnel that have not yet been effected.
(b) Compensation Plans. Schedule 4.10(b) contains a complete and
accurate list of all compensation plans, arrangements or practices (the
"Compensation Plans") sponsored by Company or to which Company contributes on
behalf of the Direct Employees (other than Employee Benefit Plans (as defined in
Section 4.11(a)), including those that provide for severance pay, deferred
compensation, incentive, bonus or performance awards, and stock ownership or
stock options.
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(c) Employment and Independent Contractor Agreements. Schedule 4.10(c)
contains a complete and accurate list of all employment and independent
contractor agreements (the "Employment and Independent Contractor Agreements")
to which Company is a party with respect to Personnel, including without
limitation employee leasing agreements, employee services agreements and
non-competition agreements.
(d) Employee Policies and Procedures. Schedule 4.10(d) contains a
complete and accurate list of all employee manuals, policies, procedures and
work-related rules (the "Employee Policies and Procedures") that apply to the
Direct Employees. Prior to the Effective Date, Company will provide Provider a
copy of all written Employee Policies and Procedures and a written description
of all unwritten Employee Policies and Procedures. Subject to applicable law,
each of the Employee Policies and Procedures can be amended or terminated at
will by Company.
(e) Unwritten Amendments. Except as disclosed in Schedule 4.10(e), no
unwritten amendments have been made, whether by oral communication, pattern of
conduct or otherwise, with respect to any, Cash Compensation, Compensation
Plans, Employment and Independent Contractor Agreements or Employee Policies and
Procedures.
(f) Labor Compliance. Except as disclosed in Schedule 4.10(f),
Company (i) has been and is in compliance with all applicable laws, rules,
regulations and ordinances respecting employment and employment practices, terms
and conditions of employment and wages and hours relating to the Personnel, and
(ii) is not liable for any arrears of wages or penalties for failure to comply
with any of the foregoing relating to the Personnel. Company has not to its
knowledge engaged in any unfair labor practice or discriminated on the basis of
race, color, religion, sex, national origin, age or disability in its employment
conditions or practices relating to the Personnel. With respect to the
Personnel, there are no (i) unfair labor practice charges or complaints or
racial, color, religious, sex, national origin, age or disability discrimination
charges or complaints pending, or to the knowledge of Company threatened,
against Company before any federal, state or local court, board, department,
commission or agency nor does any basis therefor exist or (ii) existing or, to
the knowledge of Company, threatened labor strikes, disputes, grievances,
controversies or other labor troubles affecting Company, nor does Company know
of any basis therefor.
(g) Unions. Company has never been a party to any agreement with any
union, labor organization or collective bargaining unit. None of the Personnel
are represented by any union, labor organization or collective bargaining unit.
To the knowledge of Company, the Personnel have no intention to and have not
threatened to organize or join a union, labor organization or collective
bargaining unit.
(h) Aliens. All of the Personnel are citizens of, or are authorized to
be employed in, the United States.
4.11 Employee Benefit Plans.
(a) Identification. Schedule 4.11(a) contains a complete and accurate
list of all employee benefit plans (within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) sponsored
by Company or to which Company contributes on behalf of the Direct Employees and
all Employee Benefit Plans previously sponsored or contributed to on behalf of
the Direct Employees within the three years preceding the date hereof (the
"Employee Benefit Plans"). Company will provide Provider with copies of all
summary plan descriptions and
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summaries of material modifications. Each of the Employee Benefit Plans can be
terminated or amended at will by Company. No unwritten amendment exists with
respect to any Employee Benefit Plan.
(b) Retirees. Schedule 4.11(b) contains a complete and accurate list of
any obligation or commitment of Company to provide medical, dental or life
insurance benefits to or on behalf of any Direct Employee who may retire.
(c) Claims and Litigation. No pending, or to the knowledge of Company
threatened, claims, suits or other proceedings exist with respect to any
Employee Benefit Plan other than normal uncontested benefit claims filed by
participants or beneficiaries.
4.12 Consents and Approvals. No consent, approval or authorization
of, or declaration, filing or registration with, any governmental or regulatory
authority is required to be made or obtained by Company in connection with the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby.
4.13 No Brokers. Neither Company nor any affiliate of Company has
entered into or will enter into any contract, agreement, arrangement or
understanding with any person or firm which will result in the obligation of
Provider to pay any finder's fee, brokerage commission or similar payment in
connection with the transactions contemplated hereby.
4.14 No Other Agreements or Negotiations to Sell the Assets of Company.
Company has no legal obligation, absolute or contingent to, and is not in
negotiations with, any other person or business entity to sell any of the
Assets.
4.15 Environmental and Safety Matters. None of the Assets are currently
in violation of, or subject to, any existing, pending or threatened
investigation or inquiry by any governmental authority or to any remedial
obligations under any laws or regulations pertaining to health, safety or the
environment (collectively, "Health and Safety Laws"). To the knowledge of
Company, the Assets have never been used in a manner that would be in violation
of any Health and Safety Laws.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PROVIDER
Provider hereby represents and warrants to Company as follows:
5.1 Organization of Provider. Provider is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas and has all requisite corporate power and authority to conduct its
business as it is presently being conducted, and to own and lease its
properties. On or before December 31, 1997, Provider will be duly qualified to
do business and be in good standing in each jurisdiction in which such
qualification is necessary under the applicable law as a result of the conduct
of its business or the ownership of its properties and where the failure to be
so qualified would have a material adverse effect on the business or financial
condition of Provider.
5.2 Authorization. Provider has all necessary corporate authority
to enter into this Agreement, the Full Service Agreement, the Transition
Services Agreement and the Sublease Agreement and has taken all necessary
corporate action to enter into each such agreement and to consummate the
transactions contemplated hereby and to perform its obligations hereunder. This
Agreement, the Full
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Service Agreement, the Transition Services Agreement and the Sublease Agreement
each have been duly executed and delivered by Provider and each is the valid and
binding obligation of Provider, enforceable against it in accordance with its
terms.
5.3 Consents and Approvals. No consent, approval or authorization of, or
declaration, filing or registration with, any United States federal or state
governmental or regulatory authority is required to be made or obtained by
Provider in connection with the execution, delivery and performance of this
Agreement, the Full Service Agreement, the Transition Services Agreement and the
Sublease Agreement and the consummation of the transactions contemplated hereby.
Based on the good faith determination by the Board of Directors of Provider with
respect to the value of the Assets transferred hereby, and representations from
Company regarding the Network Assets, no filing or notice pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act, as amended, shall be necessary in
connection with the transactions contemplated hereby.
5.4 No Brokers. Neither Provider, nor any affiliate of Provider has
entered into or will enter into any agreement, arrangement or understanding with
any person or firm which will result in the obligation of Company to pay any
finder's fee, brokerage commission or similar payment in connection with the
transactions contemplated hereby.
5.5 No Conflict or Violation. Neither the execution and delivery of
this Agreement, the Full Service Agreement, the Transition Services Agreement,
the Sublease Agreement nor the consummation of the transactions contemplated
hereby will result in (a) a violation of or a conflict with any provision of the
Articles of Incorporation or Bylaws of Provider, (b) a breach of, or a default
under, any term or provision of any contract, agreement, indebtedness, lease,
commitment, license, franchise, permit, authorization or concession to which
Provider is a party which breach or default would have a material adverse effect
on the business or financial condition of Provider or its ability to consummate
the transactions contemplated hereby or (c) a violation by Provider of any
statute, rule, regulation, ordinance, code, order, judgment, writ, injunction,
decree or award, which violation would have a material adverse effect on the
business or financial condition of Provider or its ability to consummate the
transactions contemplated hereby.
5.6 Litigation. "Provider has received no notice of any Actions,
or, to the knowledge of Provider, threatened or anticipated Actions, relating to
the transactions contemplated by this Agreement or the operations of Provider.
Provider is not in default with respect to any judgment, order, writ, injunction
or decree of any court or governmental agency, and there are no unsatisfied
judgments against Provider, its business or activities.
5.7 Due Diligence. The due diligence material, ("Material")
provided by Provider to Company under cover dated June 17, 1997, and letter
dated June 23, 1997 addressed to Company from Provider, and the Subscription
Agreements dated June 24, 1997 from Kwok Li and Jeong Kim, L.L.C. to Provider
are true and accurate in all material respects except as revised and provided to
Company thereafter. However, Provider makes no representation with respect to
the financial statements and projections included in the Material, except that
it was prepared in good faith and do in fact represent Provider's intended
business plan. Company shall not have any claim against Provider arising out of
the furnishing of the Material.
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ARTICLE VI
ACTIONS BY COMPANY AND PROVIDER PRIOR TO THE CLOSING DATE
Company and Provider covenant as follows from the Effective Date through
the Closing Date:
6.1 Consents and Reasonable Commercial Efforts. Company will, as soon as
possible, commence to take all action required to obtain all consents, approvals
and agreements of, and to give all notices and make all other filings with, any
third parties, including governmental authorities, necessary on Company's part
to authorize, approve or permit the sale, conveyance, assignment or transfer of
the Assets and Provider shall cooperate with Company with respect thereto. In
addition, subject to the terms and conditions herein provided, each of the
parties hereto covenants and agrees to use its reasonable commercial efforts to
take, or cause to be taken, all action or do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and the transactions contemplated hereby and to cause the fulfillment
of the parties' obligations hereunder.
6.2 Notification of Certain Matters. Company shall give prompt notice to
Provider, and Provider shall give prompt notice to Company, of the occurrence,
or failure to occur, of any event which occurrence or failure would be likely to
cause any representation or warranty of such Company or Provider, respectively,
contained in this Agreement to be untrue or inaccurate in any material respect
any time from the date hereof through July 1, 1997. Company or Provider, as the
case may be, shall give prompt notice to the other party hereto of the failure
of such party to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it hereunder, and each party shall use all
reasonable commercial efforts to remedy same. Provider hereby acknowledges
receipt of notice that shortly after the execution of this Agreement, Company
will terminate its various agreements with Advantis.
6.3 Employee Matters. Company shall not, without the prior written
approval of Provider, except as required by law:
(a) increase the Cash Compensation of any Personnel;
(b) enter into, adopt, amend or terminate any Compensation
Plan, Employment Agreement, Employee Policies and
Procedures or Employee Benefit Plan;
(c) institute any employment-related litigation;
(d) enter into any agreement with any union, labor
organization or collective bargaining unit; or
(e) take any action that could deplete the assets of any
Employee Benefit Plan, other than routine payment of
benefits in the ordinary course to participants and
beneficiaries.
6.4 Business Operations. Company shall operate its business in the
ordinary course and will not introduce any new method of management or
operation. Company shall use its reasonable commercial efforts to retain its
present suppliers and customers so that they will continue their relationship
with Provider after Closing. Company shall not take any action that could
materially adversely affect the condition (financial or otherwise) of the
Company without the prior written consent of Provider.
6.5 Risk of Loss. The Company shall have the risk of loss with respect
to the Assets until the transfer of the Assets to Provider on the Closing Date.
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ARTICLE VII
CONDITIONS TO COMPANY'S OBLIGATIONS
The obligations of Company herein to transfer the Assets to Provider on the
Closing Date are subject, in the discretion of Company, to the satisfaction, on
or prior to the Closing Date, of each of the following conditions:
7.1 Representations, Warranties and Covenants. All representations and
warranties contained in Article V of Provider contained in this Agreement shall
be true and correct in all respects at and as of the Effective Date as if such
representations and warranties were made at and as of the Effective Date, and
Provider shall have performed in all respects all agreements and covenants
required hereby to be performed by it prior to or at the Effective Date. There
shall be delivered to Company a certificate to the foregoing effect.
7.2 Consents. To the best of Company's ability, all consents, approvals
and waivers from governmental authorities and other parties necessary to permit
Company to transfer the Assets to Provider as contemplated hereby shall have
been obtained.
7.3 No Governmental Proceedings or Litigation. No suit, action,
investigation, inquiry or other proceeding by any governmental authority or
other person shall have been instituted or threatened which questions the
validity or legality of the transactions contemplated hereby and which could
reasonably be expected to have a material adverse effect upon Company if the
transactions contemplated hereunder are consummated.
7.4 Certificates. Provider will furnish Company with such certificates
of its officers to evidence compliance with the conditions set forth in this
Article VII as may be reasonably requested by Company.
7.5 Full Service Agreement and Transition Services Agreement. Company
shall have received a Full Service Agreement, Transition Services Agreement and
Sublease Agreement executed by Provider.
7.6 No Material Adverse Change. No material adverse change in the
condition (financial or otherwise), operations, assets, liabilities, business or
prospects of Provider shall have occurred.
ARTICLE VIII
CONDITIONS TO PROVIDER'S OBLIGATIONS
The obligations of Provider to purchase the Assets as provided hereby
are subject in the discretion of Provider, to the satisfaction, on or prior to
the Closing Date, of each of the following conditions:
8.1 Representations, Warranties and Covenants. All representations and
warranties contained in Article IV of Company contained in this Agreement shall
be true and correct in all respects at and as of the Effective Date as if such
representations and warranties were made at and as of the Effective Date, and
Company shall have performed in all respects all agreements and covenants
required
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hereby to be performed by it prior to or at the Effective Date. There shall be
delivered to Provider certificates to the foregoing effect.
8.2 Consents. To the best of Provider's ability, All consents, approvals
and waivers from governmental authorities and other parties necessary to permit
Company to transfer the Assets to Provider as contemplated hereby shall have
been obtained.
8.3 Opinion. Counsel to Company shall have delivered to Provider its
legal opinion, dated as of the Closing Date, in form and substance satisfactory
to counsel for Provider.
8.4 No Material Adverse Change. Except as disclosed on the schedules
attached hereto, no material adverse change in the condition (financial or
otherwise), operations, assets, liabilities, business or prospects of Company
shall have occurred since the date of the most recent audited balance sheet
included in the Financial Statements, whether or not such change shall have been
caused by the deliberate act or omission of Company.
8.5 Due Diligence Review. Provider and its accounting, financial and
legal advisors, shall have been furnished timely all Schedules and other
documents required to be provided by Company under this Agreement. Provider and
its accounting, financial and legal advisors shall have completed a review of
such information, and the results of such review shall be satisfactory to
Provider in its sole discretion.
8.6 No Governmental Proceeding or Litigation. No suit, action,
investigation, inquiry or other proceeding by any governmental authority or
other person shall have been instituted or threatened which questions the
validity or legality of the transactions contemplated hereby and which could
reasonably be expected to have a materially adverse effect upon the value of the
Assets, the Company or Provider if the transactions contemplated hereunder are
consummated.
8.7 Employee Compensation and Benefits. Proof that, as of the Effective
Date Company is current on all obligations to Personnel for any and all amounts
then accrued relating to all Cash Compensation, Compensation Plans, Employment
and Independent Contractor Agreements and Employee Benefit Plans as
applicable.
8.8 Supplier Verification. Verification by Provider that Company's
vendors, suppliers, licensors, lessors and other like entities that Company does
business with, as chosen or selected by Provider, will continue to supply or
provide Provider with the same or similar terms as those currently available to
Company.
8.9 Full Service Agreement, Transition Services Agreement and Sublease
Agreement. Provider shall have received a Full Service Agreement, Transition
Services Agreement and Sublease Agreement executed by Company.
8.10 Certificates and Schedules. Company shall furnish Provider (i) such
certificates of the respective officers of Company to evidence compliance with
the conditions set forth in this Article VIII as may be reasonably requested by
Provider, (ii) bringdown certificates of the respective officers of Company that
all Schedules and all representations and warranties of Company as of Closing
are accurate and complete, and (iii) updated Schedules, if necessary, including
but not limited to Financial Statements with a signed report from Coopers &
Lybrand L.L.P.
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8.11 Conveyance and Assignment Agreement. Provider shall have received
Conveyance and Assignment Agreement dated as of July 1, 1997 executed by
Company, in the form of Exhibit D.
ARTICLE IX
ACTIONS BY COMPANY AND PROVIDER AFTER THE EFFECTIVE DATE
9.1 Books and Records. Company and Provider agree that any books,
records and files relating to the Assets which are in existence prior to
Effective and within the possession of Company or available to it, shall be
available to either party (at its expense) for inspection and to make copies of
the same at any time upon at least ten (10) days written notice during business
hours for any proper purpose.
9.2 Further Assurances. On and after the Effective Date, Company and
Provider will take all appropriate action and execute all documents, instruments
or conveyances of any kind which may be reasonably necessary or advisable to
carry out any of the provisions hereof, including without limitation, vesting in
Provider ownership, possession and use of the Assets.
9.3 Updated Network Assets Schedule. Prior to or on the Closing Date,
Company will furnish Provider with an updated Schedule 1.1(b) Network Assets and
Schedule 4.3 Permitted Encumbrances. Company agrees that the updated Schedule
1.1(b) will not materially increase the book value of the assets listed on
Schedule 1.1(b) furnished to Provider as of the Effective Date. Company further
agrees that the updated Schedule 4.3 shall not include material Encumbrances
which were not listed on Schedule 4.3 furnished to Provider on the Effective
Date, other than maintenance contracts and software licenses.
9.4 Solicitation of Employees. From and after the date of this Agreement
for a period of one year after the Effective Date, (i) Company shall not, and
shall cause any affiliate not to, actively solicit the employment of any current
employee or independent contractor of Provider, and (ii) Provider shall not, and
shall cause any affiliate not to, actively solicit the employment of any current
employee or independent contractor of Company, other than the Personnel.
ARTICLE X
INDEMNIFICATION
10.1 Survival of Representations, Etc. The representations and warranties
of Company and Provider contained herein shall survive the Effective Date until
December 31, 1998.
10.2 Indemnification Company shall indemnify Provider against, and hold
Provider harmless from, any damage, claim, liability or expense, including
without limitation, interest, penalties and reasonable attorneys' fees
(collectively "Damages"), arising out of the breach of any warranty or
representation of Company contained in this Agreement. Provider shall indemnify
and hold Company harmless from any Damages arising out of the breach of any
warranty or representation of Provider contained in this Agreement. There shall
be a $100,000 per claim deductible for any Damages sustained by Company or
Provider and covered by this indemnity. Limitations upon scope Of
Indemnification herein contained are not intended to affect any other rights or
remedies that may be available to the parties.
10.3 Indemnification Procedures. (a) Upon Provider becoming aware of a
fact, condition or
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event which constitutes a breach of any of the representations or warranties of
Company contained herein, if a claim for Damages in respect thereof is to be
made against Company under this Article X, Provider will with reasonable
promptness notify Company in writing of such fact, condition or event. If such
fact, condition or event is the assertion of a claim by a third party, Company
will be entitled to participate in the defense against such claim, provided that
Company and its counsel shall proceed with diligence and in good faith with
respect thereto and shall in no way interfere with Provider's defense. If
Company acknowledges its obligation to indemnify Provider hereunder, then it
shall have the right to assume and control the defense of this action.
(b) Upon Company becoming aware of a fact, condition or event which
constitutes a breach of any of the representations or warranties of Provider
contained herein, if a claim for Damages in respect thereof is to be made
against Provider under this Article X, Company will with reasonable promptness
notify Provider in writing of such fact, condition or event. If such fact,
condition or event is the assertion of a claim by a third party, Provider will
be entitled to participate in or take charge of the defense against such claim,
provided that Provider and its counsel shall proceed with diligence and in good
faith with respect thereto. If Provider acknowledges its obligation to indemnify
Company hereunder, then it shall have the right to assume and control the
defense of this action.
(c) The indemnitor shall not settle or resolve any action without the
indemnitee's prior written consent, which shall not be unreasonably withheld.
The overall liability of Company and Provider pursuant to this paragraph 10.3
shall in no event exceed two million five hundred thousand dollars
($2,500,000.00) each.
ARTICLE XI
MISCELLANEOUS
11.1 Assignment. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by Company without the prior written
consent of Provider, or by Provider without the prior written consent of
Company, except that Provider shall have the right to assign its rights and
obligations hereunder to any affiliate of Provider, provided that such assignee
assumes all of Provider's obligations hereunder. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns, and no other person shall have any right, benefit or
obligation hereunder.
11.2 Notices. Unless otherwise provided herein, any notice, request,
instruction or other document to be given hereunder by either party to the other
shall be in writing and delivered in person or by courier, telegraphed, telexed
or by facsimile transmission or mailed by certified mail, postage prepaid,
return receipt requested (such mailed notice to be effective on the date of such
receipt is acknowledged), as follows:
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If to Company:
Prodigy Services Corporation
445 Hamilton Avenue
White Plains, NY 10601
Attn: President
with a Copy to:
Prodigy Services Corporation
445 Hamilton Avenue
White Plains, New York 10601
Attn: General Counsel
(email: [email protected])
If to Provider:
SplitRock Services, Inc.
2170 Buckthorne, Suite 350
The Woodlands, Texas 77380
Attn: William R. Wilson
with a copy to:
Carole R. Riggs
Campbell & Riggs, P. C.
1980 Post Oak Boulevard, Suite 2300
Houston, Texas 77056-3810
or to such other place and with such other copies as any party may designate as
to itself by written notice to the others.
11.3 Choice of Law and Forum Selection. This Agreement shall be
construed, interpreted and the rights of the parties determined in accordance
with the internal laws of the State of Texas without regard to conflict of law
rules, except with respect to matters of law concerning the internal corporate
affairs of any party, and as to those matters the law of the jurisdiction under
which the respective entity derives its powers shall govern. Any action or
proceeding brought under this agreement shall be brought in the federal and
state courts located in Harris County, Texas.
11.4 Entire Agreement; Amendments and Waivers. This Agreement, together
with all exhibits and schedules hereto, constitutes the entire agreement among
the parties pertaining to the subject matter hereof and supersedes all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. No supplement, modification or waiver of this Agreement
shall be binding unless executed in writing by the party to be bound thereby. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision hereof (whether or not similar), nor
shall such waiver constitute a continuing waiver unless otherwise expressly
provided.
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11.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.6 Invalidity. In the event that any one or more of the provisions
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement or any other such instrument.
11.7 Headings. The headings of the Articles and Sections herein are
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement.
11.8 Expenses. Except as specifically provided herein, Company and
Provider will each be liable for its own costs and expenses incurred in
connection with the negotiation, preparation, execution and performance of this
Agreement.
11.9 Limitation of Remedies. In the event of a breach of contract claim
of the Full Service Agreement, Company hereby waives any claim it may have for
failure of consideration, insufficient consideration, lack of consideration or
similar claim which could result in the transfer of the assets, as herein
contemplated, becoming void or nullified, or result in title to the assets
vesting in Company, and Company hereby covenants not to sue Provider for any
such claim.
11.10 Publicity. Neither party shall issue any press release or make any
public statement, either prior to or after the Effective Date, regarding the
transactions contemplated hereby prior to the Effective Date, without the prior
approval of the other party, and the parties hereto shall issue a mutually
acceptable press release as soon as practicable after Effective Date.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
have caused this Agreement to be duly executed on their respective behalf by
their respective officers thereunto duly authorized, as of the day and year
first above written.
PRODIGY SERVICES CORPORATION SPLITROCK SERVICES, INC.
("Company") ("Provider")
By: /s/ PAUL W. DELALEY By: /s/ WILLIAM R. WILSON
------------------------- -------------------------
Name : Paul W. Delaley Name : William R. Wilson
Title: President Title: President
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EXHIBIT 10.3
TRANSITION SERVICES AGREEMENT
THIS TRANSITION SERVICES AGREEMENT (this "Agreement"), dated as of
June 24,1997, is by and between PRODIGY SERVICES CORPORATION, a Delaware
corporation ("Company"), and SPLITROCK SERVICES, INC., a Texas corporation
("Provider"). This Agreement shall be effective on July 1, 1997 (the "Effective
Date").
RECITALS
WHEREAS, pursuant to that certain Full Service Agreement dated
June 24, 1997 ("Full Service Agreement") and that certain Definitive Agreement
dated June 24, 1997 ("Definitive Agreement") each by and between Company and
Provider, Provider will perform certain network related services for Company
and Provider has acquired certain network related assets from Company as of
July 1, 1997 necessary to provide such services;
WHEREAS, in order to provide for the orderly transfer and
conversion of the network related services from Company to Provider, and for a
period of time following July 1, 1997, Company shall provide the network
related services and other transition-related services as set forth herein;
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
TRANSITION SERVICES
Agreements Relating to the Network During the Transition
Period. Company and Provider agree as follows:
(A) End Date. This Agreement shall terminate on the
earlier of December 31, 1997 or on the effective date
of a notice from Provider stating that it intends to
terminate this Agreement, which effective date may
only be the last day of a calendar month ("End
Date"). The "Transition Period" is the period from
the Effective Date to the End Date. Notwithstanding
the termination of this Agreement, Provider's
obligations under leases it assumed pursuant to the
Definitive Agreement and under leases for Acceptable
POP Sites (defined below) shall continue pursuant to
such leases.
(B) Termination of Services Prior to End Date. Each
service performed hereunder by Company for the
benefit of Provider may be terminated. upon at least
15 days
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advance written notice by Provider, and such notice
shall state the date of termination which may only be
the last day of a calendar month. Upon termination of
any service, Provider shall no longer be required to
reimburse Company for such service.
(C) Direct Employees. Until the sooner of the End Date.
or such time as each network related employee of
Company ("Direct Employee") or independent contractor
of Company as listed on Schedule I.C., (1) becomes an
employee or independent contractor of Provider or (2)
is otherwise requested by Provider to cease
performing services relating to the Network Assets
(as defined in the Definitive Agreement), Company
shall cause each independent contractor who provides
services to Company or each Direct Employee who
continues in the employment of Company to continue
performing services, under the direction and
supervision of Provider's management, relating to the
operation of the Network Assets. Provider shall, each
month, reimburse Company for the monthly base salary
of each independent contractor and each Direct
Employee as set forth in Schedule I.C. attached
hereto plus an amount equal to 30% of each
independent contractor's monthly compensation or
Direct Employee's monthly base salary. All offers by
Provider to Direct Employees and contractors shall be
made on the same date and shall be made no later than
July 31, 1997. No person listed on Schedule I.C.
shall become an employee or contractor, as
appropriate, of Provider until Provider offers such
persons listed on Schedule I.C. employment or
contractor position, as appropriate, and such person
accepts that position and commences employment, or,
working under contract, with Provider. Provider shall
offer all of the persons listed on Schedule I.C.
employment or independent contractor contracts, as
appropriate, commencing no later than the End Date on
terms and conditions no less favorable than such
terms and conditions currently enjoyed by each
individual Direct Employee or independent contractor.
With respect to those former IBM employees who are
now Company employees (specifically Tom Isaacson, Jim
Moore, Anthony Matera and Daniel Cain), the parties
shall cooperate to eliminate the potential for
reduction in their pension benefits, by, for example,
delaying the commencement date of such employment by
Provider or Company continuing to lease each such
employee to Provider even after the termination of
this Agreement.
With respect to those Company employees whose
matching contribution to their 401 (k) plan offered
by Company has not yet vested, and whose right to
otherwise receive such funds shall lapse, if such
employees resign from Company to work at Provider,
Company shall act to vest such Employees' unvested
portion of their 401(k).
Company hereby indemnifies and shall hold Provider
harmless from any and all costs, demands, claims,
liabilities including reasonable attorney's fees and
costs, arising out of the employment with Company of
any Direct Employee, including
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<PAGE> 3
any claim under any and all applicable plant closing
or other similar laws, or ERISA, or other applicable
law.
Provider hereby indemnifies and shall hold Company
harmless from any and all costs, demands, claims,
liabilities including reasonable attorney's fees and
costs, arising out of the employment with Provider of
any Direct Employee, including any claim under any
and all applicable plant closing or other similar
laws, or ERISA, or other applicable law.
(D) Network Support Functions. Company further agrees to
provide network support functions to Provider such as
accounting and analysis (but excluding financial
projections), human resources, and purchasing
functions (except that purchase advice shall be
provided by Company, but purchase orders shall be
issued on Provider's account), at the monthly costs
to Provider included in Schedule I.D. Company will
provide each such service monthly but only upon
request and until such time as Provider terminates
the service. If Provider terminates any service under
this Paragraph I.D., it may not have such service
reinstated.
(E) Network-Related Costs. Company agrees to incur only
reasonable and customary amounts in operating the
network assets during the Transition Period,
consistent with past practices, which amounts will
include routine monthly payments for network
contracts, in effect as of the Effective Date, with
payment amounts and terms previously disclosed to
Provider. Provider will reimburse Company for such
amounts on a monthly basis and within 15 days of
receipt of a detailed invoice for such
network-related expenses incurred during such month,
which expenses shall not include any amount for
non-cash expenses (including without limitation
depreciation, amortization and any expense increase
attributable to events occurring prior to July 1,
1997). Further, in no event shall Provider be liable
for reimbursing Company for any payments incurred by
reason of Company's breach or termination of
network-related agreements. Company will not incur
any new reimbursable network related costs for the
purchase of network equipment or for new services in
excess of $10,000, without Provider's prior written
consent. For example, Provider will pay reasonable
and customary costs associated with the classes of
expenses listed on Schedule I.
(F) POP Leases. During the Transition Period, (i) Company
will maintain all of its Point of Presence ("POP")
real estate leases in full force and effect at all of
the locations listed on Schedule I.F. attached hereto
entitled "Prodigy POP Site Remaining Lease Liability
Analysis," and (ii) Provider shall reimburse Company
for such lease payments based on the rental rates
listed in Schedule I.F. attached hereto. From and
after the Effective Date of this Agreement Provider
will furnish Company a list of POP site leases as it
determines it desires to keep ("Acceptable POP
Sites") and on or prior to October 1, 1997 Provider
will furnish a complete list of all Acceptable POP
Sites. After
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providing Company with the list of the Acceptable POP
Sites, Provider will commence negotiations with such
POP site lessors to assume, assign or execute new
leases for such sites. Provider's notice to Company
of the list of Acceptable POP Sites shall not relieve
Company of its obligations described in first
sentence of this section F(i), except with respect to
any POP site that Provider has notified Company shall
be terminated. Further, unless Provider notifies
Company that, as to any POP lease which expires
between July 1, 1997 and the December 31, 1997,
Provider does not designate such lease as an
Acceptable POP Site, Company shall use reasonable
efforts to renew such lease through the End Date.
From and after December 31, 1997 the Company shall be
responsible for every lease which Provider did not
designate as an Acceptable POP Site. In selecting
those POP site leases which are not Acceptable POP
Sites, Provider shall provide notice to Company of
the access numbers if any to be discontinued, and the
new access numbers to replace such POP sites which
are not Acceptable POP Sites, at least sixty (60)
days before the termination of such access numbers,
so that continuity of service may be provided to
Company's customers. Provider acknowledges that as
of approximately June 1, 1997 Company has not sought
to renew any POP leases. Nothing in this Transition
Services Agreement shall cause any reduction in local
access telephone numbers to be made available to
Company's customers.
Provider shall use reasonable efforts to create its
new POPs in areas where Company's POPs may be
expiring, and replacements are needed. Upon the
expiration of all leases for those sites which are not
acceptable POP sites, Provider shall deliver the
premises back to each applicable landlord in
accordance with the terms of each applicable lease.
Provider shall have the right to dispose of any
furniture, fixtures or equipment not otherwise
transferred in its sole discretion.
(G) Assignment and Assumption of Ameritech Modem Leases.
During the Transition Period, Company will make all
commercially reasonable efforts to assign the
Ameritech modem lease to Provider, upon the same or
similar terms and conditions as are currently in the
draft Ameritech modem lease attached hereto as
Exhibit I.G. Company agrees that during the
Transition Period it will not enter into any lease
for modem or other equipment, other the Ameritech
modem lease.
(H) Review of Books and Records. During the Transition
Period, and during regular working hours, upon
reasonable notice, Provider may review Company's
books and records (make any copies at Provider's
expense) for purposes of verifying the accuracy of
any fees, costs or charges allocable, reimbursable or
chargeable to Provider as herein contemplated.
(I) Full Service Agreement Status. In addition to the
obligations of the parties hereunder, the parties
hereto agree that the following provisions of the
Full Service
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Agreement shall be effective at 12:01 am (New York
time) on July 1, 1997: Part 1, Part 2, Part 5, and
Sections 6.5, 6.10, 6.11 and 6.12 thereof and all
other rights and obligations of the Company and
Provider therein shall only become effective as of
the end of the Transition Period. 7 and all other
rights and obligations of the Company and Provider
thereunder shall become effective as of the End Date.
(J) Real Estate Sublease. Company shall provide those
services described in the Sublease Agreement attached
hereto as Exhibit "I.J." and shall be compensated for
such services as set forth in such Sublease
Agreement.
(K) Indemnification. Except as to employment related
indemnity issues covered in Section I.C. hereof,
Company agrees to indemnify and hold Provider and
Provider's officers, directors, and agents harmless
from any and all damages, losses (which shall include
any diminution in value), liabilities, payments,
obligations, penalties, claims, litigation, demands,
defenses, judgments, suits, proceedings, costs,
disbursements or expenses, (including without
limitation, fees, disbursements and expenses of
attorneys) of any kind or nature whatsoever
(collectively "Damages"), directly or indirectly
resulting from, relating to or arising out of any
breach or nonperformance, partial or total by Company
of any covenant or agreement of Company contained in
this Agreement; the negligence of Company in
providing any services under this Agreement, or its
failure to comply with applicable laws in connection
with this Agreement; and all contracts, agreements,
obligations, commitments and liabilities of Company
of every kind and character relating in any way to
the Network Assets or the business of Company.
Provider shall have the right to offset any amounts
for which it is entitled to indemnification under
this Section against any amounts payable by Provider
pursuant to this Agreement or the Full Service
Agreement.
(L) Payments. Payment from either party to the other of
amounts accrued as of month end shall be due on the
15th of the next month.
ARTICLE II
MISCELLANEOUS
(A) Assignment. Neither this Agreement nor any of the
rights or obligations hereunder may be assigned by
Company without the prior written consent of
Provider, or by Provider without the prior written
consent of Company, except that Provider shall have
the right to assign its rights and obligations
hereunder to any affiliate of Provider, provided that
such assignee assumes all of Provider's
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obligations hereunder, and that Provider shall remain
liable hereunder. This Agreement shall be binding
upon and inure to the benefit of the parties hereto
and their respective permitted successors and
assigns, and no other person shall have any right,
benefit or obligation hereunder.
(B) Notices. Unless otherwise provided herein, any
notice, request, instruction or other document to be
given hereunder by either party to the other shall be
in writing and delivered in person or by courier, or
telegraphed or mailed by certified mail, postage
prepaid, return receipt requested (such mailed notice
to be effective on the date of such receipt is
acknowledged), as follows:
(C) If to Company:
Prodigy Services Corporation
445 Hamilton Avenue
White Plains, NY 10601
Attn: President
with a Copy to:
Prodigy Services Corporation
445 Hamilton Avenue
White Plains, NY 10601
Attn: General Counsel
If to Provider:
SplitRock Services, Inc.
2170 Buckthorne Place, Suite 350
The Woodlands, Texas 77380
Attn: President
with a copy to:
Carole R. Riggs
Campbell & Riggs, P.C.
1980 Post Oak Boulevard, Suite 2300
Houston, Texas 77056-3810
or to such other place and with such other copies as
any party may designate as to itself by written
notice to the others.
(D) Choice of Law. This Agreement shall be construed,
interpreted and the rights of the parties determined
in accordance with the internal laws of the State of
New York.
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(E) Entire Agreement, Amendments and Waivers. This
Agreement, together with all schedules hereto,
constitutes the entire agreement among the parties
pertaining to the subject matter hereof and
supersedes all prior agreements, understandings,
negotiations and discussions, whether oral or
written, of the parties. No supplement, modification
or waiver of this Agreement shall be binding unless
executed in writing by the party to be bound thereby.
No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any
other provision hereof (whether or not similar), nor
shall such waiver constitute a continuing waiver
unless otherwise expressly provided.
(F) Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed
an original, but all of which together shall
constitute one and the same instrument.
(G) Invalidity. In the event that any one or more of the
provisions contained in this Agreement or in any
other instrument referred to herein, shall, for any
reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any
other provision of this Agreement or any other such
instrument.
(H) Alternative Dispute Resolution. In the event of a
dispute between the parties arising out of or
relating to this Agreement, or the breach thereof,
the parties shall submit the dispute to nonbinding
mediation and shall make a good-faith effort to
resolve the dispute through the mediation process. In
the event the dispute is not resolved through
mediation within 30 days following written notice by
one party that it desires to enter into mediation,
then such dispute shall be resolved exclusively and
finally by binding arbitration by three arbitrators
who will be appointed and will act as follows:
The party requesting arbitration shall,
simultaneously with such request, appoint one
arbitrator and shall notify the other of such
appointment together with such arbitrator's
acceptance. Within 30 days from the receipt of such
notice, the other party shall appoint another
arbitrator and shall notify the requesting party of
such appointment together with the second
arbitrator's acceptance. The third arbitrator, who
shall act as chairman of the arbitration panel, shall
be appointed by the other two arbitrators within the
following 30 days. Each party agrees to respond
within three business days to any reasonable request
for information made by the arbitrators. In the event
either party fails to appoint an arbitrator or in the
event no agreement is reached between the two
arbitrators as to the appointment of the chairman of
the arbitration panel in accordance with the
foregoing provisions, such
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arbitrator or arbitrators shall be appointed, upon
application by the interested party, by the American
Association of Arbitration (AAA).
The arbitrators shall apply the arbitration rules of
the AAA, and the arbitration proceedings shall take
place in Westchester County, New York.
The award of the arbitrators shall be final and shall
not be subject to any appeal or challenge whatsoever.
The arbitrators will not be required to file their
award with any body or authority whatsoever. In the
event arbitration proceedings are initiated under this
section, pending such proceedings and until a final
award is rendered pursuant thereto, any subsequent
controversy arising between the parties shall be
exclusively submitted for final decision by the
arbitrators in the arbitration proceedings already
pending. The arbitrators shall be instructed by the
parties to include an award for reasonable attorneys'
fees, arbitrators' fees, expert witnesses, travel and
other costs incurred.
If a dispute arises out of an alleged breach of this
Agreement (other than Provider's failure to make
timely payments due to Company), then the parties
agree to continue to perform their respective
obligations under this Agreement until an agreement
is reached through mediation or the arbitrators
render a decision, whichever is applicable.
(I) No Third Party Rights. Nothing in this Agreement,
shall confer on any person or business entity, other
than the parties hereto, and their respective
successors and assigns, any rights, obligations,
remedies or liabilities.
(J) Headings. The headings of the Articles and Sections
herein are inserted for convenience of reference only
and are not intended to be a part of or to affect the
meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
or have caused this Agreement to be duly executed on their respective behalf by
their respective officers thereunto duly authorized, as of the day and year
first above written.
PRODIGY SERVICES CORPORATION SPLITROCK SERVICES, INC.
("Company") ("Provider")
By: /s/ PAUL W. DELALEY By: /s/ WILLIAM R. WILSON
------------------------- ---------------------------
Name: Paul W. Delaley Name: William R. Wilson
Title: President Title: President
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EXHIBIT 10.4
NETWORK IMPLEMENTATION AGREEMENT
THIS NETWORK IMPLEMENTATION AGREEMENT (this "Agreement"), effective as of April
23, 1998 (the "Effective Date"), is entered into by and between Ericsson Inc., a
Delaware corporation ("Ericsson"), and Splitrock Services, Inc., a Texas
corporation ("Splitrock").
WHEREAS, Splitrock desires to obtain from Ericsson, and Ericsson is willing to
provide to Splitrock, the products and services relating to Splitrock's national
network deployment of 99 ISP Points of Presence, in accordance with and subject
to the terms and conditions of this Agreement.
NOW, THEREFORE, Ericsson and Splitrock hereby agree as follows:
1. Agreement. During the term of this Agreement, Splitrock will purchase
from Ericsson, and Ericsson will provide to Splitrock, the products and
services as set forth in the statement of work attached hereto as Exhibit
A (the "Statement of Work") and such additional products and services as
Splitrock may reasonably request and as the parties may mutually agree
in writing from time to time, all in accordance with and subject to the
terms and conditions of this Agreement.
2. Term. The term of this Agreement will commence on the Effective Date and
will continue unless earlier terminated in accordance with the provisions
hereof.
3. Prices and Fees. With respect to the products and services to be provided
by Ericsson to Splitrock as set forth in the Statement of Work, Splitrock
will pay to Ericsson the prices and fees set forth in the Statement of
Work.
4. Out-of-pocket Expense. Except as otherwise expressly provided herein,
Splitrock will pay or reimburse Ericsson for any reasonable out-of-pocket
expenses reasonably incurred by Ericsson, with Splitrock's prior written
approval, in connection with the performance of this Agreement.
5. Taxes. Splitrock will be responsible for, and will pay or reimburse
Ericsson for, any sales, use excise or other taxes, however designated or
levied (excluding any taxes paid by Ericsson based on its profits), based
upon this Agreement, any amounts payable to Ericsson hereunder, or any
services, systems, materials or goods provided to Splitrock hereunder or
their use.
6. Invoicing and Payment. From time to time as contemplated hereby, Ericsson
will submit to Splitrock an invoice for the amounts then due and payable
to Ericsson hereunder. Each such invoice will be due and payable to
Ericsson within thirty days from the date of the invoice. Any sum due to
Ericsson hereunder that is not
<PAGE> 2
paid when due will bear interest thereafter until paid at a rate equal to
the lesser of 1.5% per month or the maximum rate allowed by applicable
law.
7. Delivery. Unless otherwise mutually agreed in writing by the parties, the
products provided by Ericsson to Splitrock hereunder will be shipped by
Ericsson to the applicable designated sites. Risk of loss of such
products will pass to Splitrock upon Ericsson's placement of the shelter
in which such products are housed on the ground at the designated site.
Title to such products will pass to Splitrock when such products have
been paid for in full by Splitrock to Ericsson.
8. Warranty. Ericsson warrants and agrees that it will perform the services
hereunder in a good and workmanlike manner. The foregoing warranty is for
a warranty period of six (6) months following the date of acceptance. In
addition, Ericsson warrants that:
(a) Ericsson has all right, title and ownership interests and/or
licenses necessary to perform its obligations under this
Agreement, and the products sold by Ericsson hereunder will be
free and clear of any and all liens, encumbrances or security
interests of any third party.
(b) Ericsson will assign any and all warranties with respect to each
product sold by Ericsson to Splitrock hereunder if and to the
extent allowed by the supplier of such product.
EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, THERE ARE NO, AND ERICSSON
HEREBY DISCLAIMS ALL, OTHER WARRANTIES, WHETHER IMPLIED, EXPRESS OR
STATUTORY, WITH RESPECT TO THE PRODUCTS AND SERVICES PROVIDED TO
SPLITROCK HEREUNDER, INCLUDING WITHOUT LIMITATION WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE.
9. Rights in Software. With respect to all and all software components of
the products provided by Ericsson hereunder and related documentation
(collectively, the "Software"), Ericsson hereby grants to Splitrock, and
Splitrock hereby accepts from Ericsson, a perpetual, non-exclusive and
non-transferable license to use and possess the Software in strict
accordance with the following use provisions:
(a) Splitrock will use the Software solely as an integral part of the
products in which the Software is originally installed or embedded
and for the operation of such products.
(b) Splitrock may make only one copy of the Software for backup or
archival purpose; provided that any such copy will contain all
proprietary notices, including the copyright notices of Ericsson
or its licensor, which appear on or are encoded within the
Software.
<PAGE> 3
(c) The Software (including any and all copies thereof) shall remain
the exclusive property of Ericsson or its licensor.
(d) Splitrock may not merge the Software with other software to form a
derivative work or otherwise modify or alter the Software in any
manner.
(e) Splitrock may not reverse engineer, decompile or otherwise derive
the source code from the Software.
10. Confidentiality. Each party agrees that all confidential documents, work
product and information (including all computer code and related
materials) received or otherwise obtained from the other party pursuant
to this Agreement, whether before or after the Effective Date, will be,
and will be deemed to have been, received in confidence and will be used
only for the purpose of carrying out the obligations of, or as otherwise
contemplated by, this Agreement. Without the other party's prior written
consent, neither party may disclose any such information to any third
party, and each party will disclose such information only to such of its
officers, employees and agents that have a need to know such information
for the purposes contemplated hereby. However, the provisions of this
Section 10 will not apply to any such information that (i) is or becomes
generally available to the public without the fault or negligence of
either party, (ii) is already in the possession of the receiving party
without being subject to another confidentiality obligation, (iii) is or
becomes available to the receiving party on a non-confidential basis from
a source other than the disclosing party; provided that such source is
not bound by a confidentiality obligation of the disclosing party, (iv)
is required to be disclosed pursuant to an arbitration proceeding
conducted in accordance with this Agreement, or (v) is required to be
disclosed pursuant to a requirement of any governmental authority or any
statute, rule or regulation; provided that the party required to disclose
such information of the other party provide to the other party notice of
such requirement of any such disclosure and cooperates with the other
party to prevent or restrict any such disclosure to the extent allowed by
applicable law.
11. Infringement Indemnification, Ericsson will, at its expense, indemnify,
defend and hold Splitrock harmless from and against any claim or action
asserted or brought against Splitrock alleging that the products provided
by Ericsson hereunder directly infringes any United States patent,
copyright, trademark or trade secret of any third party; provided that
Splitrock (i) promptly notifies Ericsson of any such claim or action,
(ii) provides to Ericsson all reasonably necessary assistance in
defending any such claim or action, (iii) permits Ericsson to direct the
defense or any such claim or action, including all settlement discussions
or decisions.
In the event the use of the Products by Splitrock as contemplated hereby
is enjoined, or in the event that Ericsson desires to minimize its
potential liability
<PAGE> 4
hereunder, Ericsson may fulfill its obligations hereunder by (i)
substituting non-infringing equivalent products, (ii) modifying the
infringing products or portion thereof, so that such products no longer
infringe but remain functionally equivalent, (iii) obtain for Splitrock,
at Ericsson's expense, the right to continue the use of such Products, or
(iv) if none of the preceding is commercially feasible, refund to
Splitrock the purchase price for the infringing products, less the
accumulated depreciation or amortization of such products as reflected in
Splitrock's books. This Section 11 states Ericsson's entire liability for
infringement of patent, copyright, trademark or trade secret.
Ericsson's indemnification obligations set forth in this Section 11 will
not apply to any infringement arising from (i) modification of the
products by anyone other than Ericsson, (ii) any combination of the
products with products or services provided by Splitrock or any third
party, or (iii) any products developed by Ericsson for Splitrock in
strict compliance with Splitrock's written instructions. Splitrock agrees
to indemnify, defend and hold Ericsson harmless from and against any and
all claims or actions asserted or brought against Ericsson based upon any
of the foregoing infringement circumstances caused by Splitrock.
12. Mutual Indemnity. Each party will indemnify, defend and hold the other
party harmless from any and all actions or claims to the extent such
actions or claims arise out of or result from any negligent act or
omission or willful misconduct of the indemnifying party or its
employees, agents or contractors.
13. Termination for Cause. In the event that either party materially or
repeatedly defaults in the performance of any of its duties or
obligations hereunder (except for a default in payments to Ericsson) and
does not substantially cure such default within thirty (30) days after
being given written notice specifying such default, then the party not in
default may, by giving written notice thereof to the defaulting party at
any time thereafter and before such default is substantially cured,
terminate this Agreement as of the date specified in the notice of
termination. In addition to other available remedies, in the event that
Splitrock defaults in the performance of any of its duties or obligations
hereunder (including without limitation default in payments to Ericsson),
Ericsson may suspend the performance of any of its duties or obligations
hereunder until such default is cured by Splitrock to Ericsson's
reasonable satisfaction, and Splitrock will pay to Ericsson an addition
amount equal to the charges, costs and expenses reasonably incurred by
Ericsson as a result of any such default by Splitrock.
14. Termination for Non-Payment. In the event that Splitrock defaults in the
payment when due of any amount due to Ericsson hereunder and does not
cure such default within ten (10) days after being given written notice
specifying such default, then Ericsson may, by giving written notice
thereof to Splitrock at any time thereafter and before such default is
cured, terminate this Agreement as of the date specified in the notice of
termination.
<PAGE> 5
15. Limitation of Liability. In no event shall either party be liable for any
special, incidental, indirect or consequential damages in connection with
this Agreement, whether based on action or claim in contract, equity,
negligence, intended conduct, tort or otherwise, even if such damages are
foreseeable.
16. Dispute Resolution. The parties agree to resolve any dispute relating to
this Agreement as set forth below:
(a) Negotiation. In the event of any dispute between the parties of
any kind or nature arising out of or relating to this Agreement,
upon the written request of either party, each party will appoint
a designated representative whose task will be to meet with the
other party's designated representative to resolve such dispute.
Such representatives will discuss the dispute and negotiate in
good faith to resolve the dispute or renegotiate the applicable
section or provision without the necessity of any formal
proceeding relating thereto.
(b) Arbitration. If one of the designated representatives concludes
in good faith that amicable resolution through such continued
negotiation of the matter in issue is not likely to occur, then,
upon the request of either party, the dispute will be submitted to
arbitration in accordance with the Commercial Arbitration Rules of
the America Arbitration Association then in effect (the "Rules")
or such other procedures as may be agreed upon by the parties.
Three independent arbitrators will be selected in accordance with
the Rules and the arbitrators will allow such discovery as is
appropriate, consistent with the purposes of arbitration in
accomplishing fair, speedy and cost effective resolution of
disputes. Unless otherwise mutually agreed in writing by the
parties, the arbitration proceedings will be conducted in the City
of Dallas, Texas. The arbitrators will reference the rules of
evidence of the Federal Rules of Civil Procedure then in effect in
setting the scope of discovery. Judgment on the award rendered by
the arbitrators may be entered in any court of competent
jurisdiction; provided that any such award rendered by the
arbitrators shall be strictly in conformance to and in accordance
with the terms and conditions of this Agreement.
(c) Exclusive Remedy. Other than those matters involving injunctive
relief as a remedy or any action necessary to enforce the award of
the arbitrators, the parties agree that the provisions of this
Section are a complete defense to any suit, action or other
proceeding instituted in any court or before any administrative
tribunal with respect to any dispute, controversy or claim
arising under or in connection with this Agreement. Nothing in
this Section prevents the parties from exercising their rights to
terminate this Agreement in accordance with this Agreement.
<PAGE> 6
17. Legal Compliance. This Agreement and each party's obligations hereunder
will be subject to, and each party will comply with, all applicable laws,
rules, regulations, ordinances, codes, orders and judgments.
18. Assignment. This Agreement will be binding on the parties and their
respective successors and assigns, but neither party may assign this
Agreement without the other party's prior written consent.
19. Notices. Wherever under this Agreement one party is required or permitted
to give notice to the other party, such notice will be deemed given when
delivered in hand to an appropriate representative of the other party or
three days after being mailed by United States mail, registered or
certified mail, return receipt requested, postage prepaid, and addressed
as follows:
If to Ericsson: If to Splitrock:
Ericsson Inc. Splitrock Services, Inc.
730 International Parkway 2170 Buckthorne Place, Suite 350
Richardson, Texas 75083-3875 The Woodlands, Texas 77380
Attention: Vice President-Bus. Dev. Attention: Bill Wilson, President
Fax No.: (972) 583-1864 Fax No.: (281) 364-6668
With a copy to: With a copy to:
Ericsson Inc. Splitrock Services, Inc.
1010 East Arapaho Road 2170 Buckthorne Place, Suite 350
Richardson, Texas 75081 The Woodlands, Texas 77380
Attention: General Counsel Attention: General Counsel
Fax No.: (972) 583-7864 Fax No.: (281) 364-6668
Any writing which may be mailed pursuant to the foregoing may also be
delivered by express mail, telegraph, telex or facsimile and will be
effective when received by the addressee. Either party may from time to
time change its address for notification purposes by giving the other
party prior written notice of the new address and the date upon which it
will become effective.
20. Relationship of Parties. Ericsson, in providing products and services to
Splitrock hereunder, is acting only as an independent contractor and does
not undertake by this Agreement or otherwise to perform an obligation of
Splitrock, whether regulatory or contractual, or to assume any
responsibility for Splitrock's business or operations. Ericsson has the
sole right and obligation to supervise, manage, contract, direct,
procure, perform or cause to be perform, all work to be performed by
Ericsson hereunder unless otherwise provided herein.
21. Restriction on Hiring. Each party agrees that, during the term of this
Agreement and for two years thereafter, it will not, except with the
other party's prior written
<PAGE> 7
consent, solicit for its employment, employ, engage as an independent
contractor, otherwise obtain the services of any person employed then or
within the preceding twelve months by the other party if that person was
involved in the performance of this Agreement.
22. Force Majeure. Each party will be excused from performance hereunder for
any period and to the extent that it is prevented from such performance,
in whole or in part, as a result of delays caused by the other party or
an act of God, natural disaster, war, civil disturbance, court order,
labor dispute, third party non-performance, or other cause beyond its
reasonable control and which it could not have prevented by reasonable
precautions, including failures or fluctuations in electrical power,
heat, light, air conditioning or telecommunications equipment, and such
non-performance will not be a default hereunder or a ground for
termination hereof.
23. Attorneys' Fees. If any legal action or other proceeding is brought for
the enforcement of this Agreement of any arbitration award, or because of
an alleged dispute, breach, default, or misrepresentation in connection
with any of the provisions of this Agreement, the prevailing party will
be entitled to recover reasonable attorneys' fees and other costs
incurred in that action or proceeding, in addition to any other relief to
which it may be entitled.
24. Third Party Beneficiaries. This Agreement is for the benefit of the
parties hereto and is not intended to confer any rights or benefits on
any third party, including any employees, creditor or affiliate of either
party.
25. Severability. If any provision of this Agreement is illegal,
unenforceable or void, then both parties will be relieved of all
obligations arising under that provision, but only to the extent the
provision is illegal, unenforceable or void. If the illegal,
unenforceable or void provision does not relate to the payments to be
made to Ericsson hereunder and if the remainder of this Agreement is
capable of substantial performance, then each provision not so affected
will be enforced to the extent permitted by law.
26. Waiver. No delay or omission by either party to exercise any right or
power hereunder will impair that right or power or be construed to be a
waiver thereof. A waiver by either party of any of the covenants to be
performed by the other party or any breach thereof will not be construed
to be a waiver of any succeeding breach thereof or of any other covenant
herein contained.
27. Press Releases. All media releases, public announcements and public
disclosures by either party relating to this Agreement or its subject
matter, including promotional or marketing materials, will be
coordinated with and approved in writing by the other party prior to
release. This restriction does not apply to (i) any announcement intended
solely for internal distribution by the
<PAGE> 8
disclosing party, or (ii) any announcement required by legal, accounting
or regulatory requirements beyond the reasonable control of the
disclosing party.
28. Counterparts. This Agreement may be executed in several counterparts, all
of which taken together will constitute one single agreement between the
parties.
29. Amendments. No amendment, change, waiver or discharge hereof will be
valid unless in writing and signed by an authorized representative of
each party.
30. Governing Law. This Agreement will be governed by and construed in
accordance with the laws, other than the choice of law rules, of the
State of Texas.
31. Entire Agreement. This Agreement, including each schedule and exhibit
referred to herein and attached hereto, each of which is incorporated
herein for all purposes, constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all
prior and contemporaneous representations, understandings or agreements
relating to the subject matter hereof.
IN WITNESS WHEREOR, Ericsson and Splitrock have each caused this Agreement to be
signed and delivered by its duly authorized representative, as of the Effective
Date.
ERICSSON INC. SPLITROCK SERVICES, INC.
By: /s/ GARY PINKHAM By: /s/ WILLIAM WILSON
---------------------------- ------------------------------
Printed Name: Gary Pinkham Printed Name: William Wilson
------------------ --------------------
Title: Vice President Title: President
------------------------- ---------------------------
<PAGE> 1
EXHIBIT 10.5
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement"), dated as of April 30, 1998,
is made between SplitRock Services, Inc., a Texas corporation ("Debtor"), and
Ericsson Inc., a Delaware corporation ("Secured Party").
Debtor and Secured Party hereby agree as follows:
SECTION 1 Definitions; Interpretation.
(a) As used in this Agreement, the following terms shall have the
following meanings:
"Collateral" has the meaning set forth in Section 2.
"Documents" means this Agreement, the Note, the Network Agreement and all
other certificates, documents, agreements and instruments delivered to Secured
Party under the Note or in connection with the Obligations.
"Event of Default" has the meaning set forth in Section 8.
"Lien" means any mortgage, deed of trust, pledge, security interest,
assignment, deposit arrangement, charge or encumbrance, lien, or other type of
preferential arrangement.
"Network Agreement" means that certain Network Implementation Agreement
dated as of April 23, 1998, by and between Debtor and Secured Party (as the
same may be amended, restated, supplemented or otherwise modified in accordance
with the terms thereof).
"Note" means that certain Secured Promissory Note and Agreement of even
date herewith made by Debtor in favor of Secured Party, as amended, modified,
renewed, extended or replaced from time to time.
"Obligations" means the indebtedness, liabilities and other obligations of
Debtor to Secured Party under or in connection with this Agreement and the
Note, including, without limitation, all unpaid principal of the Note, all
interest accrued thereon, all fees and all other amounts payable by Debtor to
Secured Party thereunder or in connection therewith, whether now existing or
hereafter arising, and whether due or to become due, absolute or contingent,
liquidated or unliquidated, determined or undetermined.
"Permitted Lien" means (i) any Lien in favor of Secured Party and (ii)
nonconsensual Liens which arise in the ordinary course of business and do not
materially impair Debtor's ownership or use of the Collateral or the value
thereof.
"Person" means an individual, corporation, partnership, joint venture,
trust, unincorporated organization, governmental agency or authority, or any
other entity of whatever nature.
1.
<PAGE> 2
"Prodigy Agreement" means the SplitRock Full Service Agreement dated June
24, 1997, between Borrower and Prodigy Services Corporation, a Delaware
corporation (as the same may be amended, restated, modified or otherwise
supplemented from time to time in accordance with the terms thereof).
"UCC" means the Uniform Commercial Code as the same may, from time to
time, be in effect in the State of New York, provided, however, in the event
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of the security interest in any Collateral is governed
by the Uniform Commercial Code as in effect in a jurisdiction other than the
State of New York, the term "UCC" shall mean the Uniform Commercial Code as in
effect in such other jurisdiction for purposes of the provisions hereof
relating to such attachment, perfection or priority and for purposes of
definitions related to such provisions.
(b) Where applicable and except as otherwise defined herein, terms used in
this Agreement shall have the meanings assigned to them in the UCC.
(c) In this Agreement, (i) the meaning of defined terms shall be equally
applicable to both the singular and plural forms of the terms defined; and (ii)
the captions and headings are for convenience of reference only and shall not
affect the construction of this Agreement.
SECTION 2 Security Interest.
(a) As security for the payment and performance of the Obligations, Debtor
hereby pledges, assigns, transfers, hypothecates and sets over to Secured
Party, and hereby grants to Secured Party a security interest in, all of
Debtor's right, title and interest in, to and under the following property,
wherever located and whether now existing or owned or hereafter acquired or
arising (collectively, the "Collateral"):
(i) all of the following equipment: all (i) Yurie ATM access concentrators
(including, but limited to, the types and items of equipment and parts of
equipment listed on Schedule 2 hereto under the heading "Yurie Equipment"), but
excluding any Yurie ATM access concentrators constructed and deployed prior to
the date hereof in approximately 70 locations pursuant to phase 1 of Debtor's
national network deployment of ISP points of presence, (ii) Ericsson power
equipment (including, but not limited to, the types and items of equipment and
parts of equipment listed on Schedule 2 hereto under the heading "Ericsson
Power Equipment") and (iii) GFRC shelters (including, but not limited to, the
types and items of equipment and parts of equipment listed on Schedule 2 hereto
under the heading "GFRC Shelters"), and any and all additions, substitutions,
replacements, parts, accessories, and accessions to and for any of the
foregoing;
(ii) all indemnity agreements, guaranties, insurance policies, insurance
claims, warranty claims and other contractual, equitable and legal rights of
whatever kind or nature in respect of the Equipment, including with respect to
the access and use of the Equipment pursuant to the Prodigy Agreement;
2.
<PAGE> 3
(iii) all books, records and other written, electronic or other
documentation in whatever form maintained by or for Debtor in connection with
the ownership or use of the Equipment or evidencing or containing any
information relating to the Collateral; and
(iv) all products and proceeds, including insurance proceeds, whether
constituting accounts, deposit accounts, general intangibles, chattel paper,
instruments or rights to payment, including proceeds of proceeds, of any and
all of the foregoing.
(b) Anything herein to the contrary notwithstanding, (i) Debtor shall
remain liable under any contracts, agreements and other documents included in
the Collateral, to the extent set forth therein, to perform all of its duties
and obligations thereunder to the same extent as if this Agreement had not been
executed, (ii) the exercise by Secured Party of any of the rights hereunder
shall not release Debtor from any of its duties or obligations under such
contracts, agreements and other documents included in the Collateral, and (iii)
Secured Party shall not have any obligation or liability under any contracts,
agreements and other documents included in the Collateral by reason of this
Agreement, nor shall Secured Party be obligated to perform any of the
obligations or duties of Debtor thereunder or to take any action to collect or
enforce any such contract, agreement or other document included in the
Collateral hereunder.
(c) This Agreement shall create a continuing security interest in the
Collateral which shall remain in effect until terminated in accordance with
Section 18 hereof.
SECTION 3 Financing Statements, Etc. Debtor shall execute and deliver to
Secured Party concurrently with the execution of this Agreement, and at any
time and from time to time thereafter, all financing statements, assignments,
continuation financing statements, termination statements, account control
agreements, and other documents and instruments, in form reasonably satisfactory
to Secured Party, and take all other action, as Secured Party may reasonably
request, to perfect and continue perfected, maintain the priority of or provide
notice of the security interest of Secured Party in the Collateral and to
accomplish the purposes of this Agreement.
SECTION 4 Representations and Warranties. Debtor represents and warrants
to Secured Party that:
(a) Debtor is a corporation duly organized, validly existing and in good
standing under the law of the jurisdiction of its incorporation and has all
requisite power and authority to execute, deliver and perform its obligations
under this Agreement.
(b) The execution, delivery and performance by Debtor of this Agreement
have been duly authorized by all necessary corporate action of Debtor, and this
Agreement constitutes the legal, valid and binding obligation of Debtor,
enforceable against Debtor in accordance with its terms.
(c) No authorization, consent, approval, license, exemption of, or filing
or registration with, any governmental authority or agency, or approval or
consent of any other Person, is required for the due execution, delivery or
performance by Debtor of this Agreement.
3.
<PAGE> 4
(d) Debtor's chief executive office and principal place of business is
located at the address set forth in Schedule 1; all other locations where Debtor
conducts business or Collateral is kept are set forth in Schedule 1; and all
trade names and fictitious names under which Debtor at any time in the past has
conducted or presently conducts its business operations are set forth in
Schedule 1 or Schedule 2.
(e) Debtor is the sole and complete owner of the Collateral, free from any
Lien other than Permitted Liens.
SECTION 5 Covenants. So long as any of the Obligations remain unsatisfied,
Debtor agrees that:
(a) Debtor shall appear in and defend any action, suit or proceeding which
may affect to a material extent its title to, or right or interest in, or
Secured Party's right or interest in, the Collateral, and shall do and perform
all reasonable acts that may be necessary and appropriate to maintain, preserve
and protect the Collateral.
(b) Debtor shall comply in all material respects with all laws,
regulations and ordinances, and all policies of insurance, relating in a
material way to the possession, operation, maintenance and control of the
Collateral.
(c) Debtor shall give prompt written notice to Secured Party (and in any
event not later than five (5) business days following any change described
below in this subsection) of: (i) any change in the location of Debtor's chief
executive office or principal place of business, (ii) any change in the
locations set forth in Schedule 1; (iii) any change in its name, (iv) any
changes in, additions to or other modifications of its trade names and trade
styles set forth in Schedule 1 or Schedule 2, and (v) any changes in its
identity or structure in any manner which might make any financing statement
filed hereunder incorrect or misleading.
(d) Debtor shall carry and maintain in full force and effect, at its own
expense and with financially sound and reputable insurance companies, insurance
with respect to the Collateral in such amounts, with such deductibles and
covering such risks as is customarily carried by companies engaged in the same
or similar businesses and owning similar properties in the localities where
Debtor operates. All insurance policies shall provide that any losses payable
thereunder be payable directly to Secured Party unless written authority to the
contrary is obtained. In its sole discretion Secured Party may apply all or any
portion of such insurance proceeds to the payment of Obligations or may release
all or any portion thereof to Debtor. Debtor shall from time to time provide to
Secured Party, upon Secured Party's reasonable request from time to time,
certified copies of all policies of insurance in respect of the Collateral,
together with loss payee endorsements for all such policies naming Lender as
lender loss payee and an additional insured.
(e) Debtor shall keep, accurate and complete books and records with
respect to the Collateral, disclosing Secured Party's security interest
hereunder.
(f) Debtor shall not surrender or lose possession of (other than to
Secured Party), sell, lease, rent, or otherwise dispose of or transfer any of
the Collateral or any right or
4.
<PAGE> 5
interest therein, except in the ordinary course of business and provided that
any such Collateral so disposed of or otherwise transferred shall be
immediately replaced with like Collateral of equal or greater dollar market
value.
(g) Debtor shall keep the Collateral free of all Liens except Permitted
Liens.
(h) Debtor shall pay and discharge all taxes, fees, assessments and
governmental charges or levies so imposed upon it with respect to the
Collateral prior to the date on which penalties attach thereto, except to the
extent such taxes, fees, assessments or governmental charges or levies are
being contested in good faith by appropriate proceedings.
(i) Debtor shall maintain and preserve its corporate existence, its
rights to transact business and all other rights, franchises and privileges
necessary or desirable in the normal course of its business and operations and
the ownership of the Collateral, except in connection with any transactions
expressly permitted by the Note or any other Document.
(j) Debtor shall (i) notify Secured Party of any material claim made or
asserted against the Collateral by any Person and of any change in the
composition of the Collateral or other event which could materially adversely
affect the value of the Collateral or Secured Party's Lien thereon; (ii)
furnish to Secured Party such statements and schedules further identifying and
describing the Collateral and such other reports and other information in
connection with the Collateral (including, without limitation, the location of
any and all Collateral) as Secured Party may reasonably request, all in
reasonable detail; and (iii) upon reasonable request of Secured Party make such
demands and requests for information and reports as Debtor is entitled to make
in respect of the Collateral.
(k) Upon Secured Party's request, Debtor shall promptly provide to
Secured Party, in reasonable detail, a list of locations where Yurie equipment
has been deployed by or on behalf of Debtor in connection with phase 1 of
Debtor's national network deployment of ISP points of presence, together with a
description of such equipment in such detail as Secured Party shall reasonably
request.
SECTION 6 Authorization; Secured Party Appointed Attorney-in-Fact.
Secured Party shall have the right to, in the name of Debtor, or in the name of
Secured Party or otherwise, upon notice to but without the requirement of
assent by Debtor, and Debtor hereby constitutes and appoints Secured Party (and
any of Secured Party's officers, employees or agents designated by Secured
Party) as Debtor's true and lawful attorney-in-fact, with full power and
authority to: (i) sign any of the financing statements and other documents and
instruments which must be executed or filed to perfect or continue perfected,
maintain the priority of or provide notice of Secured Party's security interest
in the Collateral (including any notices to or agreements with any securities
intermediary); (ii) assert, adjust, sue for, compromise or release any claims
under any policies of insurance in respect of the Collateral; and (iii) execute
any and all such other documents and instruments, and do any and all acts and
things for and on behalf of Debtor, which Secured Party may deem reasonably
necessary or advisable to maintain, protect, realize upon and preserve the
Collateral and Secured Party's security interest therein and to accomplish the
purposes of this Agreement. Secured Party agrees that, except upon and during
the continuance of an Event of Default, it shall not exercise the power of
attorney, or any rights
5.
<PAGE> 6
granted to Secured Party, pursuant to clauses (ii) and (iii). The foregoing
power of attorney is coupled with an interest and irrevocable so long as the
Obligations have not been paid and performed in full. Debtor hereby ratifies,
to the extent permitted by law, all that Secured Party shall lawfully and in
good faith do or cause to be done by virtue of and in compliance with this
Section 6.
SECTION 7 Events of Default. Any of the following events which shall occur
shall constitute an "Event of Default":
(a) Debtor shall fail to pay when due any amount of principal of or
interest on the Note or other amount payable hereunder or under the Note or in
respect of the Obligations and, except in the case of payments of principal
(for which there shall be no grace period), such failure shall continue for
five (5) days.
(b) Any representation or warranty by Debtor under or in connection with
this Agreement, the Note or any other Document shall prove to have been
incorrect in any material respect when made or deemed made.
(c) Debtor shall fail to perform or observe in any material respect any
other term, covenant or agreement contained in this Agreement, the Note or any
other Document on its part to be performed or observed and any such failure
shall remain unremedied for a period of 10 days from the occurrence thereof.
(d) Any "Event of Default" as defined in the Note shall have occurred.
(e) Debtor shall (i) liquidate, wind up or dissolve (or suffer any
liquidation, wind-up or dissolution), (ii) suspend its operations other than in
the ordinary course of business, or (iii) take any corporate action to
authorize any of the actions or events set forth above in this subsection (e).
(f) Any material impairment in the value of the Collateral or the priority
of Secured Party's Lien hereunder
(g) Any levy upon, seizure or attachment of any of the Collateral.
(h) Any loss, theft or substantial damage to, or destruction of, any
material portion of the Collateral (unless within 10 days after the occurrence
of any such event, Debtor furnishes to Secured Party evidence satisfactory to
Secured Party that the amount of any such loss, theft, damage to or destruction
of the Collateral is fully insured under policies naming Secured Party as an
additional named insured or loss payee).
SECTION 8 Remedies.
(a) Upon the occurrence and continuance of any Event of Default, Secured
Party may declare any of the Obligations to be immediately due and payable and
shall have, in addition to all other rights and remedies granted to it in this
Agreement or the Note, all rights and remedies of a secured party under the
UCC and other applicable laws. Without limiting the
6.
<PAGE> 7
generality of the foregoing, Secured Party may sell, resell, lease, use,
assign, license, sublicense, transfer or otherwise dispose of any or all of the
Collateral in its then condition or following any commercially reasonable
preparation or processing (at Debtor's expense) at public or private sale, by
one or more contracts, in one or more parcels, at the same or different times,
for cash or credit, or for future delivery without assumption of any credit
risk, all as Secured Party deems advisable; provided, however that Debtor shall
be credited with the net proceeds of sale only when such proceeds are finally
collected by Secured Party. Secured Party shall have the right upon any such
public sale, and, to the extent permitted by law, upon any such private sale,
to purchase the whole or any part of the Collateral so sold, free of any right
or equity of redemption, which right or equity of redemption Debtor hereby
releases, to the extent permitted by law. Debtor hereby agrees that the sending
of notice by ordinary mail, postage prepaid, to the address of Debtor set forth
herein, of the place and time of any public sale or of the time after which any
private sale or other intended disposition is to be made, shall be deemed
reasonable notice thereof if such notice is sent ten days prior to the date of
such sale or other disposition or the date on or after which such sale or other
disposition may occur, provided that Secured Party may provide Debtor shorter
notice or no notice, to the extent permitted by the UCC or other applicable
law.
(b) The cash proceeds actually received from the sale or other disposition
or collection of Collateral, and any other amounts received in respect of the
Collateral the application of which is not otherwise provided for herein, shall
be applied first, to the payment of the reasonable costs and expenses of
Secured Party in exercising or enforcing its rights hereunder and in collecting
or attempting to collect any of the Collateral, and to the payment of all
other amounts payable to Secured Party pursuant to Section 12 hereof; and
second, to the payment of the Obligations. Any surplus thereof which exists
after payment and performance in full of the Obligations shall be promptly paid
over to Debtor or otherwise disposed of in accordance with the UCC or other
applicable law. Debtor shall remain liable to Secured Party for any deficiency
which exists after any sale or other disposition or collection of Collateral.
SECTION 9 Certain Waivers. Debtor waives, to the fullest extent permitted
by law, (i) any right of redemption with respect to the Collateral, whether
before or after sale hereunder, and all rights, if any, of marshalling of the
Collateral or other collateral or security for the Obligations; (ii) any right
to require Secured Party (A) to proceed against any person, (B) to exhaust any
other collateral or security for any of the Obligations, (C) to pursue any
remedy in Secured Party's power, or (D) to make or give any presentments,
demands for performance, notices of nonperformance, protests, notices of
protests or notices of dishonor in connection with any of the Obligations or
Collateral; and (iii) all claims, damages, and demands against Secured Party
arising out of the repossession, retention, sale or application of the proceeds
of any sale of the Collateral.
SECTION 10 Notices. All notices and other communications hereunder shall
be given to each party at their respective address listed below, or as
otherwise provided in a written notice by such party to the other party:
7.
<PAGE> 8
If to Secured Party: If to Debtor:
Ericsson Inc. Splitrock Services, Inc.
740 East Campbell Road 2170 Buckthorne Pl., Ste. 350
Richardson, TX 75081 The Woodlands, TX 77380
Attn: Vice President of Finance Attn: Chief Financial Officer
and Chief Financial Officer Fax: (281) 419-0860
Fax: (972) 583-1818
cc: Vice President
and General Counsel
Fax: (972) 583-1839
SECTION 11 No Waiver, Cumulative Remedies. No failure on the part of
Secured Party to exercise, and no delay in exercising, any right, remedy, power
or privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right, remedy, power or privilege preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege. The rights and remedies under this Agreement are
cumulative and not exclusive of any rights, remedies, powers and privileges
that may otherwise be available to Secured Party.
SECTION 12 Costs and Expenses.
(a) Debtor agrees to pay on demand:
(i) the reasonable out-of-pocket costs and expenses of Secured Party, and
the reasonable fees and disbursements of counsel to Secured Party, in
connection with the negotiation, preparation, execution, delivery and
administration of this Agreement and the Note, provided, however, that Debtor's
reimbursement obligation in respect of attorney's fees of Secured Party's legal
counsel in connection with the negotiation, preparation, execution and delivery
of this Agreement and the Note shall not exceed $7500, and any amendments,
modifications or waivers of the terms thereof, and the custody of the
Collateral;
(ii) all title, appraisal, survey, audit, consulting, search, recording,
filing and similar costs, fees and expenses (including, without limitation, all
filing costs in connection with the filing of any and all UCC financing
statements) incurred or sustained by Secured Party in connection with this
Agreement or the Collateral; and
(iii) all reasonable costs and expenses of Secured Party, and the
reasonable fees and disbursements of counsel, in connection with the
enforcement or attempted enforcement of, and preservation of any rights or
interests under, this Agreement and the Note, including in any out-of-court
workout or other refinancing or restructuring or in any bankruptcy case, and
the protection, sale or collection of, or other realization upon, any of the
Collateral, including all expenses of taking, collecting, holding, sorting,
handling, preparing for sale, selling, or the like, and other such expenses of
sales and collections of Collateral.
8.
<PAGE> 9
(b) Any amounts payable to Secured Party under this Section 12 or
otherwise under this Agreement if not paid when due shall bear interest from
the date such payment is due until paid in full, at the rate of interest set
forth in the Note.
SECTION 13 Binding Effect. This Agreement shall be binding upon, inure to
the benefit of and be enforceable by Debtor, Secured Party and their respective
successors and permitted assigns.
SECTION 14 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the law of the State of New York, except as
required by mandatory provisions of law and to the extent the validity or
perfection of the security interests hereunder, or the remedies hereunder, in
respect of any Collateral are governed by the law of a jurisdiction other than
New York.
SECTION 15 Entire Agreement; Amendment. This Agreement contains the entire
agreement of the parties with respect to the subject matter hereof and shall
not be amended except by the written agreement of the parties.
SECTION 16 Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under all applicable laws and regulations. If, however, any provision of this
Agreement shall be prohibited by or invalid under any such law or regulation in
any jurisdiction, it shall, as to such jurisdiction, be deemed modified to
conform to the minimum requirements of such law or regulation, or, if for any
reason it is not deemed so modified, it shall be ineffective and invalid only
to the extent of such prohibition or invalidity without affecting the remaining
provisions of this Agreement, or the validity or effectiveness of such
provision in any other jurisdiction.
SECTION 17 Counterparts. This Agreement may be executed in any number of
counterparts and by different 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 but one and the same agreement.
SECTION 18 Termination. Upon indefeasible payment and performance in full
of all Obligations, this Agreement shall terminate and Secured Party shall
promptly execute and deliver to Debtor such documents and instruments
reasonably requested by Debtor as shall be necessary to evidence termination of
all security interests given by Debtor to Secured Party hereunder; provided,
however, that the obligations of Debtor under Section 12 hereof shall survive
such termination.
[Signature page follows.]
9.
<PAGE> 10
' IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement,
as of the date first above written.
SPLITROCK SERVICES, INC.
By /s/ ILLEGIBLE
----------------------------------
Name:
Title:
ERICSSON INC.
By /s/ JOHN L. MOTTRAM
----------------------------------
Name: John L. Mottram
Title: Director Customer Finance
10
<PAGE> 1
EXHIBIT 10.6
PURCHASE AGREEMENT
This Purchase Agreement ("Agreement") is made as of July 1, 1997 by and
between Splitrock Services, Inc. a Texas Corporation ("Splitrock") and Yurie
Systems, Inc., a Delaware corporation ("Yurie").
1. During the 18 months following execution of this Purchase Agreement,
Splitrock will purchase a minimum of twenty million dollars ($20 million) of
standard Yurie products at a discount of forty percent (40%) off of Yurie's
list prices for such products, pursuant to Yurie's commercial terms and
conditions. The parties shall negotiate annual purchase volume and discount
levels for each subsequent year.
2. Yurie's acceptance of Splitrock Purchase Orders shall be subject to
its standard practice and policies, including credit worthiness. If Yourie does
not accept a Purchase Order based on credit worthiness, Splitrock may reduce
its dollar volume commitment in paragraph 1. by the dollar amount of product
contained in such Purchase Order.
3. In consideration for Splitrock's purchase commitment in paragraph 1.,
Yurie is also agreeing to provide additional services to Splitrock in support
of the products purchased pursuant to paragraph 1, as outlined in attachment A.
Such services will be provided to Splitrock pursuant to Splitrock's
specifications and directions. Accordingly, Yurie makes no warranties or
representations regarding these additional services, nor any warranties or
representations of any products or materials, whether acquired by Yurie or
Splitrock, other than Yurie's commercial warranty terms for the Yurie products
purchased pursuant to paragraph 1.
4. Splitrock agrees to pay Yurie for the additional services in
paragraph 3 on a time and materials cost basis, with costs to include direct
labor and material, and overhead burdens applied to both labor and material,
consistent with Yurie accounting practices. Splitrock also agrees that it will
pay Yurie for any and all materials purchased as part of the additional services
being provided.
Dated: 18 July 1997 SPLITROCK SERVICES, INC.
By: /s/ WILLIAM WILSON
----------------------------
William Wilson, President
Dated: YURIE SYSTEMS, INC.
By:
----------------------------
Harry J. Carr, President
<PAGE> 1
EXHIBIT 10.7
IBM Customer Agreement
Statement of Work for Custom Solution
1. Statement of Work Term
This Statement of Work will be effective April 1, 1998 (called the Commencement
Date) upon our mutual agreement to this Statement of Work, and continue
thereafter month to month until terminated by either party upon sixty (60) days
notice.
2. Description
We provide to you Dial Access for Data Transport as described in this Statement
of Work as an IBM "Service" (called a Custom Solution). The Service shall
include the receipt of inbound data dial traffic from Splitrock Services, Inc.
("Splitrock") customers and the routing of such traffic to servers provided by
Splitrock as defined in Paragraph 2.1. Under this Custom Solution, IBM provides
this Service to Splitrock in selected U.S. cities as described in Attachment A
where IBM provided similar services to Prodigy, as recently as March, 1998.
IBM shall at its sole discretion decide the number of dial ports it provides to
serve each site, as well as the method it uses to provide Service to each site.
Examples of methods IBM may use to provide this Service include:
- a physical site presence with modem ports;
- a virtual presence using call forwarding or a foreign exchange;
- an 800 number service; or
- --------------------------------------------------------------------------------
Each of us agrees that the complete agreement between us about this Transaction
consists of 1) this Transaction Document and 2) the IBM Customer Agreement and
its Attachment for IBM Global Services' Network Services (or any equivalent
agreement signed by both of us).
Agreed to: Agreed to:
Splitrock Services, Inc. IBM
By /s/ WILLIAM WILSON By
------------------------ -------------------------
Authorized Signature Authorized Signature
Name (type or print): William Wilson Name (Type or print):
Date: March 6, 1998 Date:
Enterprise Number: IBM Customer Agreement Number:
IBM Customer Number: Customer Solution Number: 98-SPR2
2170 Buckthorne Place, Suite 350
The Woodlands, TX 77380
1
<PAGE> 2
2.1 Architecture
IBM will route all incoming data traffic using TCP/IP to a Splitrock server(s)
in Yorktown over two DS3 connections. IBM will route PLLP incoming traffic to
the Splitrock primary server located in Yorktown with the code name "Key West."
If the primary server is busy, IBM will route the data traffic to a Splitrock
secondary Key West server in Yorktown. Splitrock will provide IBM with the IP
address of the primary and secondary Key West servers for the PLLP access
sites.
IBM will provide to Splitrock formatted Radius records for authentication and
accounting for PPP sessions. The format of the Radius records will be mutually
agreed upon. Splitrock is responsible for provision, management and operation
of its servers at the Yorktown location, including the Radius server(s) and the
enabling of any required Proxy servers.
The DS3 connections that IBM provides to Splitrock are those DS3 Connections
which IBM currently provides to Prodigy. Splitrock Agrees to assume
responsibility for payment of such connections As of the effective date of this
Statement of Work and for the Prices as specified in the section "Charges."
Any additional connections or any changes to these connections will Be for an
additional fee to be agreed upon in writing by both Parties prior to the
provision of any additions or changes.
IBM will provide additional assistance to Splitrock, such as the Downloading of
IP address, to assist in the transition from the Regional server solution
employed by Prodigy and this Custom Solution. Such additional assistance shall
be for a fee to be Mutually agreed upon in writing by both parties prior to the
Provision of such assistance.
It is the responsibility of Splitrock to ensure that the transition Above has
been completed, such that IBM may perform its Responsibilities under this
Custom Solution. Under this Custom Solution, IBM does not provide for support
for the Prodigy PLS Solution.
3. 0ur Other Responsibilities
We will:
1. provide you with a number for your operations group to contact our
help desk support, which shall be available 24 hours a Day, 7 days a
week;
2. be responsible to license, develop, operate and maintain the Software
on the equipment we provide;
3. provide Splitrock with standard monthly reports that IBM Produces that
are related to the Services provided under This Custom Solution,
including information relative to Availability and traffic statistics;
and
4. Maintain the components we provide under this Custom Solution.
3
<PAGE> 3
4. Your Other Responsibilities
You agree to:
1. be responsible for supporting your End Users directly through
your help desk. Your operations group will contact the IBM help
desk in regards to any reported problems with the Service being
provided by IBM;
2. be responsible to license, develop, operate and maintain the
software on the equipment you are providing under this Custom
Solution.
5. Charges
The prices provided under this Custom Solution assume that the dial ports
provided are not dedicated exclusively to the use of Splitrock. If Splitrock
requests that any dial parts be dedicated exclusively to the use of Splitrock,
then IBM reserves the right to immediately reprice the dial service based on
dedicated dial ports. If Splitrock does not accept IBM's repricing proposal
within sixty (60) days, then IBM may immediately terminate this Statement of
Work.
IBM shall invoice Splitrock according to Table I for the dial connect time
associated with the Services as provided in the cities shown in Attachment A
Section 1.
Table 1.
<TABLE>
<CAPTION>
Volumes (hours) Price/Hour
--------------- ----------
<S> <C>
1 to 250,000 $0.99
250,001 to 500,000 $0.92
500,001 to 750,000 $0.86
750,001 to 1,000,000 $0.80
1,000,001 to 2,000,000 $0.75
2,000,001 to 3,000,000 $0.73
3,000,001 and above $0.71
</TABLE>
IBM shall invoice Splitrock according to Table 2 for the dial connect time
associated with the Services as provided in the cities shown in Attachment A
Section 2.
Table 2.
<TABLE>
<CAPTION>
Volumes (hours) Price/Hour
--------------- ----------
<S> <C>
1 to 250,000 $1.22
250,001 to 500,000 $1.14
500,001 to 750,000 $1.06
750,001 to 1,000,000 $0.99
1,000,001 to 2,000,000 $0.93
2,000,001 to 3,000,000 $0.91
3,000,001 and above $0.88
</TABLE>
4
<PAGE> 4
IBM shall invoice Splitrock an amount equal to the Remote Call Forwarding
(RCF) costs that IBM incurs plus 22% of such costs for the dial connect time
associated with the Services as provided in the cities shown in Attachment A
Section 3.
The prices set forth above are not eligible for allowance or discount.
IBM will invoice Splitrock for all calls routed to a Splitrock server. The
sequence of a call is:
- the dial part goes off hook, modem synchronization;
- protocol management;
- call routed;
- Splitrock authentication;
- session live while user performing tasks;
- user initiates end of session; eventually resulting in modem
off-line and session termination (carrier dropped).
IBM will invoice Splitrock monthly for the sum of all calls, rounded by city to
the nearest hour.
Each individual call will be calculated from the time the port goes off hook to
session end (modem off-line), rounded up to the nearest second. IBM does not
intend to invoice Splitrock for calls that do not get routed to Splitrock
server, unless the Splitrock server does not accept the routed call. IBM does
intend to invoice Splitrock for all other partial calls.
IBM shall invoice Splitrock an amount equal to the sum of the carrier cost for
the DS3 connection plus an amount, determined by IBM, which represents the cost
IBM incurs in utilizing the backbone network (backbone router to backbone
router) in support of each such DS3 connection. These prices are not eligible
for allowance or discount and are not proratable.
IBM shall also invoice Splitrock $23,000 monthly for ongoing support costs.
IBM shall make reasonable efforts to provide invoices on or before the
fifteenth day of the month. Payment shall be made within 30 days of the date of
the invoice.
Applicable taxes, such as sales, use or excise taxes are not included in the
above charges.
IBM shall be responsible for sales, use, property and other taxes on machines,
software, or goods and services used or furnished by IBM in providing its
services to Splitrock.
Splitrock shall be responsible for sales, use, property and other taxes on
machines, software, or goods and services provided by Splitrock. Furthermore,
Splitrock shall be responsible for taxes assessed on the provision of Services
by IBM for Splitrock, or any charges by IBM to Splitrock under this Statement
of Work.
5
<PAGE> 5
Charges and associated terms for generally available IBM Global Services'
Network Services are as we specify in the applicable IBM Service Descriptions
and Fee Schedules.
6. Dial Connection Information
IBM shall supply to Splitrock dial connection information regarding each dial
connection of a Splitrock End User. IBM will provide Splitrock with a record
layout of the format that will identify basic fields and optional fields. IBM
may add, delete or change optional fields at its sole discretion with thirty
days prior notice. IBM will not add, delete or change basic fields without
thirty days prior notification and the agreement of Splitrock.
7. Changes and Termination
IBM reserves the right to change its generally available dial city support and
corresponding phone number with prior notice, however, IBM will use
commercially reasonable efforts to provide Splitrock with 60 days prior notice
of such a change. Splitrock agrees to notify its customers that are affected by
the change.
Both parties agree that Services will be discontinued in cities listed in
Attachment A Section 3 effective July 1, 1998. Splitrock agrees to use
commercially reasonable efforts to provide IBM 60 days prior notice of a
reduction or expansion of 30% or greater in use in an Attachment A city.
IBM reserves the right to eliminate cities from Attachment A with 60 days
prior notice to Splitrock. Splitrock agrees to notify its customers of such
changes.
In the event that either party materially defaults in the performance of any of
its duties or obligations under this Statement of Work, and it does not
substantially cure such default within 60 days after being given written notice
specifying the default, then the party not in default may, by giving written
notice to the defaulting party, terminate this Statement of Work (herein
termination "for cause").
In the event that Splitrock is in default and IBM elects to terminate this
Statement of Work, then Splitrock may request an extension of this Statement
of Work of up to three months as a transition period, provided that IBM, at its
sole discretion, agrees to provide such an extension.
In the event that Splitrock terminates this Statement of Work because IBM is in
material default, then IBM will provide reasonable transition assistance to
Splitrock, for a period of up to six months. During this period, the terms of
this Statement of Work shall remain in force. This transition assistance is the
sole remedy of Splitrock for any "Breach" as defined above.
6
<PAGE> 6
8. Other Terms
Splitrock shall indemnify (including reasonable attorney's fees), defend and
hold harmless IBM from any claim or action against IBM based on an allegation
that IBM's use of software provided by Splitrock infringes any patent,
copyright, trademark, trade secret or other proprietary right of any third
party.
The indemnification provided by Splitrock under the Statement of Work is in
addition to any other remedies available to IBM under the Statement of Work and
survives the termination of the Statement of Work.
Splitrock will not be allowed to test or repair the IBM dial network.
IBM is not responsible for telephone access charges associated with dialing the
IBM provided local dial telephone numbers.
Splitrock acknowledges and agrees that IBM is not responsible for any data, or
text, including the content, and, including its accuracy, which is received,
routed or sent as a result of the Services IBM provides hereunder.
Splitrock may request additional cities be added during the term of the
Statement of Work. Splitrock shall submit requests for additional cities in
writing to IBM and IBM shall provide a response to Splitrock within sixty (60)
days. Additional cities will be added under the same terms and prices as the
existing terms and prices under this Statement of Work.
9. Escalation Procedures
In the event of any dispute between the parties hereto arising from this
Statement of Work, then, upon the written request of either party, each of the
parties will appoint a designated representative to endeavor to resolve such
dispute. The designated representatives will negotiate in good faith to resolve
the dispute. Except for those disputes where injunctive relief may be an
appropriate remedy, no legal action relating to such dispute may be commenced
until the earlier of (i) the designated representatives conclude in good faith
that amicable resolution through continued negotiation of the matter in issue
does not appear likely or (ii) ninety (60) days after the start of such
negotiations.
7
<PAGE> 1
IBM CUSTOMER AGREEMENT
- -------------------------------------------------------------------------------
Thank you for doing business with us. We strive to provide you with the highest
quality Products and Services. If, at any time, you have any questions or
problems, or are not completely satisfied, please let us know. Our goal is to
do our best for you.
This IBM Customer Agreement (called the "Agreement") covers business
transactions you may do with us to purchase Machines, license Programs, and
acquire Services.
This Agreement and its applicable Attachments and Transaction Documents are the
complete agreement regarding these transactions, and replace any prior oral or
written communications between us.
By signing below for our respective Enterprises, each of us agrees to the terms
of this Agreement. Once signed, 1) any reproduction of this agreement, an
Attachment, or Transaction Document made by reliable means (for example,
photocopy or facsimile) is considered an original and 2) all Products and
Services you order under this Agreement are subject to it.
Agreed to: Agreed to:
Splitrock Services, Inc. International Business Machines Corporation
By /s/ William R. Wilson By /s/ Martin J. Madden
------------------------- -----------------------------
Authorized signature Authorized signature
Name (type or print): Name (type or print):
William R. Wilson Martin J. Madden
Date: 3/2/1998 Date: 3/4/1998
Enterprise number: S383569 Agreement number: GB10597
Enterprise address: IBM Office address:
Splitrock Services, Inc. 27 Commerce Drive
2170 Buckthorne Place, Suite 350 Cranford, NJ 07016
The Woodlands, Texas 77380
After signing, please return a copy of this Agreement to the local
"IBM Office address" shown above.
PAGE 1 OF 19
<PAGE> 2
IBM CUSTOMER AGREEMENT
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECTION TITLE PAGE SECTION TITLE PAGE
<S> <C> <C> <C> <C> <C>
PART 1 - GENERAL ......................... 3 PART 4 - PROGRAMS ........................ 13
1.1 Definitions ..................... 3 4.1 License ......................... 13
1.2 Agreement Structure ............. 4 4.2 License Details ................. 13
1.3 Delivery ........................ 4 4.3 Program Features Not Used
1.4 Prices and Payment .............. 5 on the Designated Machine ....... 13
1.5 Types of Service for Machines ... 5 4.4 Additional License Copies ....... 14
1.6 Patents and Copyrights .......... 6 4.5 Program Testing ................. 14
1.7 Limitation of Liability ......... 7 4.6 Packaged Programs ............... 14
1.8 Mutual Responsibilities ......... 7 4.7 Program Protection .............. 14
1.9 Your Other Responsibilities...... 7 4.8 Program Services ................ 14
1.10 IBM Business Partners ........... 8 4.9 License Termination ............. 15
1.11 Changes to the Agreement Terms .. 8
1.12 Agreement Termination ........... 8 PART 5 - SERVICES ........................ 16
1.13 Geographic Scope ................ 8
1.14 Governing Law ................... 8 5.1 Maintenance Services ............ 16
5.2 Continuing Support Services...... 17
PART 2 - WARRANTIES ...................... 9 5.3 Project Support Services ........ 17
5.4 The Statement of Work ........... 18
2.1 The IBM Warranties .............. 9 5.5 Materials Ownership and License.. 18
2.2 Extent of Warranty .............. 10
2.3 Items Not Covered by Warranty ... 10
PART 3 - MACHINES ....................... 11
3.1 Title and Risk of Loss ......... 11
3.2 Production Status .............. 11
3.3 Installation ................... 11
3.4 Licensed Internal Code ......... 11
</TABLE>
PAGE 2 OF 19
<PAGE> 3
IBM CUSTOMER AGREEMENT
PART 1 - GENERAL
- --------------------------------------------------------------------------------
1.1 DEFINITIONS
CUSTOMER-SET-UP MACHINE is an IBM Machine that you install according to our
instructions.
DATE OF INSTALLATION is the following:
1. for an IBM Machine --
a. the business day after the day we install it or, if you defer
installation, make it available to you for installation, or
b. the second business day after the end of a Customer-set-up
Machine's standard transit allowance period;
2. for a non-IBM Machine, the second business day after its arrival; and
3. for a Program, the latest of --
a. the day after its testing period ends,
b. 10 days after we ship it, or
c. the day, specified in a Transaction Document, on which we authorize
you to make an Additional License Copy or a copy of a Program
feature.
DESIGNATED MACHINE is the machine, that we require you to identify to us by
type/model and serial number, on which you intend to use a Program for
processing. When we specify that you do not have to provide this
identification to us, the term "Designated Machine" means the single
machine on which you may use the Program at any one time.
ENTERPRISE is any legal entity (such as a corporation) and the subsidiaries
it owns by more than 50 percent. The term "Enterprise" applies only to the
portion of the enterprise located in the United States or Puerto Rico.
MACHINE is a machine, its features, conversions, upgrades, elements, or
accessories, or any combination of them. The term "Machine" includes an IBM
Machine and any non-IBM Machine (including other equipment) that we may
provide to you.
MATERIALS are literary works or other works of authorship (such as
programs, program listings, programming tools, documentation, reports,
drawings and similar works) that we may deliver to you. The term
"Materials" does not include Programs or Licensed Internal Code.
PRODUCT is a Machine or a Program.
PROGRAM is the following, including features and any whole or partial
copies:
1. machine-readable instructions;
2. a collection of machine-readable data, such as a data base; and
3. related licensed materials, including documentation and listings, in
any form.
The term "Program" includes an IBM Program and any non-IBM Program that we
may provide to you. The term does not include Licensed Internal Code or
Materials.
SERVICE is performance of a task, provision of advice and counsel,
assistance, or use of a resource (such as access to an information data
base) we make available to you.
SPECIFICATIONS is a document that provides information specific to a
Product. For a Machine, we call the document "Official Published
Specifications." For a Program, we call it "Licensed Program
Specifications," or "License Information."
SPECIFIED OPERATING ENVIRONMENT is the Machines and Programs with which a
Program is designed to operate, as described in the Program's
Specifications.
PAGE 3 OF 19
<PAGE> 4
1.2 AGREEMENT STRUCTURE
ATTACHMENTS
Some Products and Services have terms in addition to those we specify in
this Agreement. We provide the additional terms in documents called
"Attachments," which are also part of this Agreement. We make the
Attachments available to you for signature.
TRANSACTION DOCUMENTS
For each business transaction, we will provide you with the appropriate
"Transaction Documents" that confirm the specific details of the
transaction. Some Transaction Documents require signature, and others do
not. The following are examples of Transaction Documents that must be
signed by both of us with examples of the information they may contain:
1. addenda (contract-period duration, start date, and total quantity);
and
2. statements of work (scope of Services, responsibilities, deliverables,
Completion Criteria, estimated schedule, and charges).
The following are examples of administrative, unsigned Transaction
Documents with examples of the information they may contain;
1. exhibits (eligible Products by category);
2. invoices (item, quantity, price, and amount payable); and
3. supplements (Machine quantity and type ordered, price, estimated
shipment date, and warranty period). Certain supplements may require
signature if requested by either of us.
CONFLICTING TERMS
If there is a conflict among the terms in the various documents, those of
an Attachment prevail over those of this Agreement. The terms of a
Transaction Document prevail over those of both of these documents.
OUR ACCEPTANCE OF YOUR ORDER
A Product or Service becomes subject to this Agreement when we accept your
order. We accept your order by doing any of the following:
1. sending you a Transaction Document;
2. shipping the Product; or
3. providing the Service.
YOUR ACCEPTANCE OF ADDITIONAL TERMS
You accept the additional terms in an Attachment or Transaction Document by
doing any of the following:
1. signing the Attachment or Transaction Document;
2. using the Product or Service, or allowing others to do so; or
3. making any payment for the Product or Service.
1.3 DELIVERY
We will try to meet your delivery requirements for Products and Services
you order, and will inform you of their status. Transportation charges, if
applicable, will be specified in a Transaction Document.
PAGE 4 OF 19
<PAGE> 5
1.4 PRICES AND PAYMENT
The amount payable for a Product or Service will be based on one or more
of the following types of charges:
1. one-time (for example, the price of a Machine);
2. recurring (for example, a periodic charge for Maintenance Services);
3. time and materials (for example, charges for Hourly Services); or
4. fixed price (for example, a specific amount agreed to between us for
Project Support Services).
Depending on the particular Product, Service, or circumstance, additional
charges may apply. We will inform you in advance whenever additional
charges apply.
For a Product with a one-time charge, payment is due on its Date of
Installation. Recurring charges for a Product begin on its Date of
Installation. Payment for Services is due as we specify, either in
advance, as the work progresses, or after the work is completed. You agree
to pay amounts due for Products and Services, including any late payment
fees, as we specify in the invoice.
If any authority imposes a duty, tax, levy, or fee, excluding those based
on our net income, upon any transaction under this Agreement, then you
agree to pay that amount as specified in the invoice or supply exemption
documentation. You are responsible for personal property taxes for each
Product from the date we ship it to you.
One-time and recurring charges may be based on measurements of actual or
authorized use (for example, number of users or processor size for
Programs and meter readings for Maintenance Services). You agree to
promptly notify us and pay any applicable charges if you change the basis
of measurement for usage based charges. Recurring charges will be adjusted
accordingly. We do not give credits or refunds for charges already due or
paid. In the event that we change the basis of measurement, the changes
will be subject to our price change terms.
We may increase recurring charges for Products and Services (including
hourly rates and minimums) by giving you three months' written notice. An
increase applies on the first day of the applicable invoice period on or
after the effective date we specify in the notice.
We may increase one-time charges without notice. However, an increase to
one-time charges does not apply to you if 1) we receive your order before
the announcement date of the increase and 2) one of the following occurs
within three months after our receipt of your order:
1. we ship you the Product;
2. with our authorization, you make an Additional License Copy of a
Program or a copy of a Distribution Feature; or
3. a Program's group-upgrade charge becomes due.
You receive the benefit of a decrease in charges for amounts which become
due on or after the effective date of the decrease.
1.5 TYPES OF SERVICE FOR MACHINES
We provide certain types of repair and exchange service either at your
location or at our service center to keep Machines in, or restore them to,
good working order.
Under carry-in service, you may deliver the failing Machine or ship it
suitably packaged (prepaid, unless we specify otherwise) to a location we
designate. After we have repaired or exchanged the Machine, we will return
it to you at our expense unless we specify otherwise.
Under on-site service, we may repair the failing Machine at your site or
exchange it, at our discretion, depending on the nature of the failure.
PAGE 5 OF 19
<PAGE> 6
When a type of service involves the exchange of a Machine or part, the item
we replace becomes our property and the replacement becomes yours. You
represent that all removed items are genuine and unaltered. The replacement
may not be new, but will be in good working order and at least functionally
equivalent to the item replaced. The replacement assumes the warranty and
Maintenance Service status of the replaced item. Before we exchange a
Machine or part, you agree to remove all features, parts, options,
alterations, and attachments not under our service. You also agree to
ensure that the item is free of any legal obligations or restrictions that
prevent its exchange.
You agree to:
1. obtain authorization from the owner to have us service a Machine that
you do not own; and
2. where applicable, before we provide service -
a. follow the problem determination, problem analysis, and
service-request procedures that we provide,
b. secure all programs, data, and funds contained in a Machine, and
c. inform us of changes in a Machine's location.
1.6 PATENTS AND COPYRIGHTS
For purposes of this Section, the term "Product" includes Materials (alone
or in combination with Products we provide to you as a system) and Licensed
Internal Code.
If a third party claims that a Product we provide to you infringes that
party's patent or copyright, we will defend you against that claim at our
expense and pay all costs, damages, and attorney's fees that a court
finally awards, provided that you:
1. promptly notify us in writing of the claim; and
2. allow us to control, and cooperate with us in, the defense and any
related settlement negotiations.
If such a claim is made or appears likely to be made, you agree to permit
us to enable you to continue to use the Product, or to modify it, or
replace it with one that is at least functionally equivalent. If we
determine that none of these alternatives is reasonably available, you
agree to return the Product to us on our written request. We will then give
you a credit equal to your net book value for the Product, provided you
have followed generally-accepted accounting principles.
This is our entire obligation to you regarding any claim of infringement.
CLAIMS FOR WHICH WE ARE NOT RESPONSIBLE
We have no obligation regarding any claim based on any of the following:
1. anything you provide which is incorporated into a Product;
2. your modification of a Product, or a Program's use in other than its
Specified Operating Environment;
3. the combination, operation, or use of a Product with other Products
not provided by us as a system, or the combination, operation, or use
of a Product with any product, data, or apparatus that we did not
provide; or
4. infringement by a non-IBM Product alone, as opposed to its
combination with Products we provide to you as a system.
PAGE 6 OF 19
<PAGE> 7
1.7 LIMITATION OF LIABILITY
Circumstances may arise where, because of a default on our part or other
liability, you are entitled to recover damages from us. In each such
instance, regardless of the basis on which you are entitled to claim
damages from us (including fundamental breach, negligence,
misrepresentation, or other contract or tort claim), we are liable only
for:
1. payments referred to in our patents and copyrights terms described
above;
2. damages for bodily injury (including death) and damage to real
property and tangible personal property; and
3. the amount of any other actual direct damages or loss, up to the
greater of $100,000 or the charges (if recurring, 12 months' charges
apply) for the Product or Service that is the subject of the claim.
For purposes of this item, the term "Product" includes Materials and
Licensed Internal Code.
This limit also applies to any of our subcontractors and Program
developers. It is the maximum for which we and our subcontractors and
Program developers are collectively responsible.
ITEMS FOR WHICH WE ARE NOT LIABLE
Under no circumstances are we, our subcontractors, or Program developers
liable for any of the following:
1. third-party claims against you for losses or damages (other than those
under the first two items listed above);
2. loss of, or damage to, your records or data; or
3. special, incidental, or indirect damages or for any economic
consequential damages (including lost profits or savings), even if we
are informed of their possibility.
1.8 MUTUAL RESPONSIBILITIES
Both of us agree that under this Agreement:
1. neither of us grants the other the right to use its trademarks, trade
names, or other designations in any promotion or publication;
2. all information exchanged is nonconfidential. If either of us
requires the exchange of confidential information, it will be made
under a signed confidentiality agreement;
3. each is free to enter into similar agreements with others;
4. each grants the other only the licenses and rights specified. No
other licenses or rights (including licenses or rights under patents)
are granted;
5. each may communicate with the other by electronic means and such
communication is acceptable as a signed writing. An identification
code (called a "USERID") contained in an electronic document is
legally sufficient to verify the sender's identity and the document's
authenticity;
6. each will allow the other reasonable opportunity to comply before it
claims that the other has not met its obligations;
7. neither of us will bring a legal action more than two years after the
cause of action arose; and
8. neither of us is responsible for failure to fulfill any obligations
due to causes beyond its control.
1.9 YOUR OTHER RESPONSIBILITIES
You agree:
1. not to assign, or otherwise transfer, this Agreement or your rights
under it, delegate your obligations, or resell any Service, without
prior written consent. Any attempt to do so is void;
PAGE 7 OF 19
<PAGE> 8
2. to acquire Machines with the intent to use them within your Enterprise
and not for reselling, leasing, or transferring to a third party,
unless either of the following applies -
a. you are arranging lease-back financing for the Machines, or
b. you purchase them without any discount or allowance, and do not
remarket them in competition with our authorized remarketers;
3. to allow us to install mandatory engineering changes (such as those
required for safety) on IBM Machines. Any parts we remove become our
property. You represent that you have the permission from the owner
and any lien holders to transfer ownership and possession of removed
parts to us:
4. that you are responsible for the results obtained from the use of the
Products and Services; and
5. to provide us with sufficient, free, and safe access to your
facilities for us to fulfill our obligations.
1.10 IBM BUSINESS PARTNERS
We have signed agreements with certain organizations (called "IBM Business
Partners") to promote, market, and support certain Products and Services.
When you order our Products or Services (marketed to you by IBM Business
Partners) under this Agreement, we confirm that we are responsible for
providing the Products or Services to you under the warranties and other
terms of this Agreement. We are not responsible for 1) the actions of IBM
Business Partners, 2) any additional obligations they have to you, or 3)
any products or services that they supply to you under their agreements.
1.11 CHANGES TO THE AGREEMENT TERMS
In order to maintain flexibility in our Products and Services, we may
change the terms of this Agreement by giving you three months' written
notice. However, these changes are not retroactive. They apply, as of the
effective date we specify in the notice, only to new orders (those we
receive on or after the date of the notice) and to on-going transactions,
such as licenses and Services.
Otherwise, for a change to be valid, both of us must sign it. Additional
or different terms in any order or written communication from you are void.
1.12 AGREEMENT TERMINATION
You may terminate this Agreement on written notice to us following the
expiration or termination of your obligations.
Either of us may terminate this Agreement if the other does not comply with
any of its terms, provided the one who is not complying is given written
notice and reasonable time to comply.
Any terms of this Agreement which by their nature extend beyond its
termination remain in effect until fulfilled, and apply to respective
successors and assignees.
1.13 GEOGRAPHIC SCOPE
All your rights, all our obligations, and all licenses (except for Licensed
Internal Code and as specifically granted) are valid only in the United
States and Puerto Rico.
1.14 GOVERNING LAW
The laws of the State of New York govern this Agreement.
PAGE 8 OF 19
<PAGE> 9
IBM CUSTOMER AGREEMENT
PART 2 - WARRANTIES
2.1 THE IBM WARRANTIES
WARRANTY FOR IBM MACHINES
For each IBM Machine, we warrant that it:
1. is free from defects in materials and workmanship; and
2. conforms to its Specifications.
The warranty period for a Machine is a specified, fixed period commencing
on its Date of installation.
During the warranty period, we provide warranty service under the type of
service we designate for the Machine or under the alternative service you
select under Maintenance Services.
For us to provide warranty service for a feature, conversion, or upgrade,
we require that the Machine on which it is installed be 1) for certain
Machines, the designated, serial-numbered Machine and 2) at an
engineering-change level compatible with the feature, conversion, or
upgrade.
During the warranty period, we manage and install engineering changes that
apply to the Machine.
If a Machine does not function as warranted during the warranty period, we
will repair it or replace it with one that is at least functionally
equivalent, without charge. If we are unable to do so, you may return it
to us and we will refund your money.
WARRANTY FOR IBM PROGRAMS
For each warranted IBM Program, we warrant that when it is used in the
Specified Operating Environment, it will conform to its Specifications.
The warranty period for a program commences on its Date of Installation
and expires when its Program Services are no longer available.
During the warranty period, we provide warranty service, without charge,
for a Program Services. Program Services are available for a warranted
Program for at least one year following its general availability.
Therefore, the duration of warranty service depends on when you obtain
your license.
If a Program does not function as warranted during the first year after
you obtain your license and we are unable to make it do so, you may return
the Program to us and we will refund your money. To be eligible, you must
have acquired the Program while Program Services (regardless of the
remaining duration) were available for it.
WARRANTY FOR IBM SERVICES
For each IBM Service, we warrant that we perform it:
1. In a workmanlike manner, and
2. according to its current description (including any Completion
Criteria) contained in this Agreement, an Attachment, or a
Transaction Document.
PAGE 9 OF 19
<PAGE> 10
WARRANTY FOR SYSTEMS
Where we provide Products to you as a system, we warrant that they are
compatible and will operate with one another. This warranty is in addition
to our other applicable warranties.
2.2 EXTENT OF WARRANTY
If a Machine is subject to federal or state consumer warranty laws, our
statement of limited warranty included with the Machine applies in place of
these Machine warranties.
The warranties may be voided by misuse, accident, modification, unsuitable
physical or operating environment, operation in other than the Specified
Operating Environment, improper maintenance by you, removal or alteration
of Product or parts identification labels, or failure caused by a product
for which we are not responsible.
THESE WARRANTIES REPLACE ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
2.3 ITEMS NOT COVERED BY WARRANTY
We do not warrant uninterrupted or error-free operation of a Product or
Service.
We will identify IBM Products that we do not warrant.
Unless we specify otherwise, we provide Materials, non-IBM Products, and
non-IBM Services on a "AS IS" basis. However, non-IBM manufacturers,
suppliers, or publishers may provide their own warranties to you.
PAGE 10 OF 19
<PAGE> 11
[IBM LOGO]
CUSTOMER AGREEMENT
PART 3 - MACHINES
- --------------------------------------------------------------------------------
3.1 TITLE AND RISK OF LOSS
When we accept your order, we agree to sell you the Machine described in a
Transaction Document. We transfer title to you or, if you choose, your
lessor when we ship the Machine. However, we reserve a purchase money
security interest in the Machine until we receive the amounts due. For a
feature, conversion, or upgrade involving the removal of parts which become
our property, we reserve the security interest until we receive the amounts
due and the removed parts. You agree to sign an appropriate document to
permit us to perfect our purchase money security interest.
We bear the risk of loss for the Machine through its Date of Installation.
Thereafter, you assume the risk.
3.2 PRODUCTION STATUS
Each IBM Machine is manufactured from new parts, or new and used parts. In
some cases, the Machine may not be new and may have been previously
installed. Regardless of the Machine's production status, our warranty
terms apply.
3.3 INSTALLATION
For the Machine to function properly, it must be installed in a suitable
physical environment. You agree to provide an environment meeting our
specified requirements for the Machine.
We have standard installation procedures. We will successfully complete
these procedures before we consider an IBM Machine (other than a
Customer-set-up Machine) installed.
You are responsible for installing a Customer-set-up Machine (we provide
instructions to enable you to do so) and a non-IBM Machine.
MACHINE FEATURES, CONVERSIONS, AND UPGRADES
We sell features, conversions, and upgrades for installation on Machines,
and, in certain instances, only for installation on a designated,
serial-numbered Machine. Many of these transactions involve the removal of
parts and their return to us. As applicable, you represent that you have
the permission from the owner and any lien holders to 1) install features,
conversions, and upgrades and 2) transfer ownership and possession of
removed parts (which become our property) to us. You further represent that
all removed parts are genuine and unaltered. A part that replaces a removed
part will assume the warranty and Maintenance Service status of the
replaced part.
You agree to allow us to install the feature, conversion, or upgrade within
30 days of its delivery. Otherwise, we may terminate the transaction and
you must return the feature, conversion, or upgrade to us at your expense.
3.4 LICENSED INTERNAL CODE
Certain Machines we specify (called "Specific Machines") use Licensed
Internal Code (called "Code"). We own copyrights in Code. We own all copies
of Code, including all copies made from them.
We will identify each Specific Machine in a Transaction Document. If you
are the rightful possessor of a Specific Machine, we grant you a license to
use the Code (or any replacement
PAGE 11 OF 19
<PAGE> 12
we provide) on, or in conjunction with, only the Specific Machine, designated
by serial number, for which the Code is provided. We license the Code to only
one rightful possessor at a time.
Under each license, we authorize you to do only the following:
1. execute the Code to enable the Specific Machine to function according to
its Specifications;
2. make a backup or archival copy of the Code (unless we make one available
for your use), provided you reproduce the copyright notice and any other
legend of ownership on the copy. You may use the copy only to replace the
original, when necessary; and
3. execute and display the Code as necessary to maintain the Specific Machine.
You agree to acquire any replacement for, or additional copy of, Code directly
from us in accordance with our standard policies and practices. You also agree
to use that Code under these terms.
You may transfer possession of the Code to another party only with the transfer
of the Specific Machine. If you do so, you must 1) destroy all your copies of
the Code that were not provided by us, 2) either give the other party all your
IBM-provided copies of the Code or destroy them, and 3) notify the other party
of these terms. We license the other party when it accepts these terms by
initial use of the Code. These terms apply to all Code you acquire from any
source.
Your license terminates when you no longer rightfully possess the Specific
Machine.
ACTIONS YOU MAY NOT TAKE
You agree to use the Code only as authorized above. You may not do, for
example, any of the following:
1. otherwise copy, display, transfer, adapt, modify, or distribute the Code
(electronically or otherwise), except as we may authorize in the Specific
Machine's Specifications or in writing to you;
2. reverse assemble, reverse compile, or otherwise translate the Code unless
expressly permitted by applicable law without the possibility of
contractual waiver;
3. sublicense or assign the license for the Code; or
4. lease the Code or any copy of it.
PAGE 12 OF 19
<PAGE> 13
IBM CUSTOMER AGREEMENT
PART 4 - PROGRAMS
- --------------------------------------------------------------------------------
4.1 LICENSE
When we accept your order, we grant you a non-exclusive license for the
Program. Programs are copyrighted and licensed (not sold).
4.2 LICENSE DETAILS
Under each license, we authorize you to:
1. use the Program's machine-readable portion on only the Designated
Machine or, if it is inoperable, a backup Machine. If the Designated
Machine cannot assemble or compile the Program, you may assemble or
compile it on another Machine.
If a Program is stored on a network server solely for the purpose of
being distributed to other Machines, it is not considered to be in
use.
Certain Programs IBM designates for home or travel use may be stored
on the Designated Machine and another Machine, provided the Program is
not in active use on both Machines at the same time.
If you change the Designated Machine previously identified to us, you
agree to notify us of the change end its date:
2. make and store copies of a Program, managed by a license management
tool, on Designated Machines under control of that tool, but your use
may not exceed the total number of users or amount of resource
authorized;
3. do the following to support your authorized use as described above-
a. make copies of the Program, provided you reproduce copyright
notices and any other legends of ownership on each copy or
partial copy, and
b. merge the Program into another Program; and
4. use any portion of the Program we 1) provide in source form, or 2)
mark restricted (for example, "Restricted Materials of IBM") only to -
a. resolve problems related to the use of the Program, and
b. modify the Program so that it will work together with other
products.
You agree to comply with any additional terms (such as usage restrictions)
we may place on a Program. We identify these in the Program's
Specifications or in a Transaction Document.
ACTIONS YOU MAY NOT TAKE
You agree not to do any of the following:
1. sublicense, assign, or transfer (unless we specify otherwise in the
Program Specifications) the license for any Program:
2. distribute any Program to any third party; or
3. reverse assemble, reverse compile, or otherwise translate any Program.
4.3 PROGRAM FEATURES NOT USED ON THE DESIGNATED MACHINE
Some Programs have features that are designed for use on Machines other
than the Designated Machine on which the Program is used. You may make
copies of a feature and its documentation in support of your authorized use
of the Program. Persons using a Machine outside of your Enterprise may use
the copy only to access the associated Program. You agree to pay us for
each copy you make of any feature we refer to as a "Distributed Feature."
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<PAGE> 14
4.4 ADDITIONAL LICENSE COPIES
You may order additional licenses for Programs. If you prefer, for each
license we grant, rather than shipping you another copy of the Program, we
will authorize you to make an additional copy (called an "Additional
License Copy").
For some Programs, you may make a copy under a Distributed System License
Option (called a "DSLO" license). We charge less for a DSLO license than
we do for the original license (called the "Basic" license). In return for
the lesser charge, you agree to do the following while licensed under a
DSLO:
1. have a Basic license for the Program;
2. provide problem documentation and receive Program Services (if any)
only through the location of the Basic license; and
3. distribute to, and install on, the DSLO's Designated Machine, any
release, correction, or bypass that we provide for the Basic license.
4.5 PROGRAM TESTING
We provide a testing period for certain Programs to help you evaluate if
they meet your needs. If we offer a testing period, it will start 1) 10
days after we ship the Program or 2) on the day we authorize you to make
an Additional License Copy. We will inform you of the duration of the
Program's testing period.
If you terminate your license during this period, we will credit you with
any charges you may have paid for the Program.
For the first order of each Distributed Feature, the testing period is the
same as its associated Program.
We do not provide a testing period for a Program under a DSLO license.
4.6 PACKAGED PROGRAMS
We provide certain Programs together with their own license agreements.
These Programs are licensed under the terms of the agreements provided
with them.
4.7 PROGRAM PROTECTION
For each Program, you agree to:
1. ensure that anyone who uses it (accessed either locally or remotely)
does so only for your authorized use and complies with our terms
regarding Programs;
2. maintain a record of all copies; and
3. if it is a licensed data base containing information we provide to
you, allow access to the information contained in it only to your
employees, agents, or subcontractors, and only in support of their
work for you.
4.8 PROGRAM SERVICES
We provide Program Services for warranted Programs and for selected other
Programs. If we can reproduce your reported problem in the Specified
Operating Environment, we will issue defect correction information, a
restriction, or a bypass. We provide Program Services for only the
unmodified portion of a current release of a Program.
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<PAGE> 15
We provide Program Services 1) on an on-going basis (with at least six
months' written notice before we terminate services for a Program), 2)
until the date we specify, or 3) for a period we specify.
4.9 LICENSE TERMINATION
You may terminate the license for a Program on one month's written notice
or at any time during the Program's testing period.
Licenses for certain replacement Programs may be acquired for an upgrade
charge. In this event, when you license these Programs, you agree to
terminate the license of the replaced Program.
We may terminate any license we grant you under the terms of this Part if
you do not meet your obligations regarding Programs.
You agree to destroy all copies of the Program after license termination.
However, you may keep a copy in your archives.
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<PAGE> 16
IBM CUSTOMER AGREEMENT
PART 5 - SERVICES
- --------------------------------------------------------------------------------
5.1 MAINTENANCE SERVICES
We will restore the Machine to good working order or exchange it, based on
the type of service you select from those available for the Machine. We may
also perform preventive maintenance. We manage and install engineering
changes that apply to IBM Machines. We provide Maintenance Services for
selected non-IBM Machines.
We will inform you of the date on which Maintenance Services begin. We may
inspect the Machine within one month following that date. If the Machine is
not in an acceptable condition for service, you may have us restore it for
a charge. Alternatively, you may withdraw your request for Maintenance
Services. However, you will be charged for any Maintenance Services which
we have performed at your request.
For a Machine under a usage plan, you agree to provide us with the meter
reading as of the last working day of the period that the minimum
maintenance charge covers.
Maintenance Services do not cover accessories, supply items, and certain
parts, such as batteries, frames, and covers. In addition, Maintenance
Services do not cover service of a Machine damaged by misuse, accident,
modification, unsuitable physical or operating environment, improper
maintenance by you, removal or alteration of Machine or parts
identification labels, or failure caused by a product for which we are not
responsible. Unless otherwise agreed, Maintenance Services do not cover
service of Machine alterations.
ALTERNATIVE SERVICE DURING WARRANTY
For certain Machines, you may choose alternative warranty service. We
provide the alternative type of service for an additional charge. When the
alternative service ends, we will continue Maintenance Services for the
Machine under the same type of service you selected.
MAINTENANCE SERVICES TERMINATION
You may terminate Maintenance Services for a Machine on one month's written
notice to us under any of the following circumstances:
1. after it has been under Maintenance Services for at least six months;
2. if you permanently remove it from productive use within your
Enterprise;
3. as of the effective date of an increase in Maintenance Services
charges; or
4. if you terminate coverage for a Machine also covered by a Maintenance
Service Option because we 1) remove a Machine type from eligibility or
2) increase total adjusted charges for Maintenance Services.
We may terminate Maintenance Services for a Machine on three months'
written notice, provided it has been under Maintenance Services for at
least one year.
Either of us may terminate service for any Machine if the other does not
meet its obligations concerning Maintenance Services. On termination of
service for a Machine, we will give you any applicable credit.
MAINTENANCE SERVICE OPTIONS
We provide Maintenance Service Options for certain Machines. We provide the
terms specific to an Option in an Attachment or Statement of Work. We will
inform you periodically of any changes. We will defer an unfavorable change
(and all changes related to it) until the next anniversary of the start of
your contract period, if you request it in writing before the effective
date of the change.
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<PAGE> 17
5.2 CONTINUING SUPPORT SERVICES
We provide Continuing Support Services on a contract-period basis to
assist you in improving the availability of your systems. We provide the
terms specific to a Service in an Attachment or Statement of Work. If we
make a change to the terms that 1) affects your current contract period
and 2) you consider unfavorable, on your request, we will defer it until
the next anniversary of the start of the contract period.
Each of us agrees to notify the other (before your current contract period
expires) if they do not intend to renew.
CONTINUING SUPPORT SERVICES TERMINATION
You may terminate a Continuing Support Service by providing us one month's
written notice upon fulfillment of any minimum commitments.
The termination of Services with contract periods longer than one year
results in adjustment charges. In this case, you agree to pay the lesser
of:
1. the difference between the total charges you paid through the
termination date and those you would have paid for the same period of
time at the charge level of the next shorter contract period;
2. the monthly charge multiplied by the applicable adjustment charge
factor; or
3. the total charges remaining to complete the contract period.
When an increase results in a change to your total monthly charge for a
Service of more than the adjustment charge we specify, you may terminate
that Service on the effective date of the increase. Adjustment or
termination charges do not apply in this case.
5.3 PROJECT SUPPORT SERVICES
Following are examples of Project Support Services we make available to
you:
1. Consulting Services, such as reengineering business processes,
linking business and technology strategies, improving manufacturing
processes, and enhancing application development and information
processing capabilities. We are responsible for managing the
engagement;
2. Custom Services, such as managing and performing project tasks to
deliver Materials or acting as a prime contractor to deliver an
integrated system that may consist of a combination of Products,
Services, Materials, and other items. We are responsible for managing
the project, unless specified otherwise in the Statement of Work; and
3. Hourly Services, such as assisting on a technical task. You are
responsible for managing the project and for any results achieved.
The Statement of Work will specify the hourly rate and estimated
number of hours. The estimate is not a fixed-price commitment.
Charges = (actual hours x rate) + expenses.
Hourly Services end when the first of the following occurs: 1) you
advise us, in writing, that further Services are not required, 2) we
provide the specified number of hours, or 3) the estimated end date
expires. You may authorize, in writing, additional hours or extension
of the end date.
PROJECT SUPPORT SERVICES TERMINATION
Either of us may terminate a project on written notice to the other if the
other does not meet its obligations concerning the Statement of Work. Upon
termination, we will stop our work in an orderly manner as soon as
practical.
You agree to pay us for all Services we provide and any Materials we
deliver through the project's termination and any charges we incur in
terminating subcontracts.
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5.4 THE STATEMENT OF WORK
A separate Statement of Work will be signed by both of us for each Services
transaction not covered by another Transaction Document. When we accept
your order, we agree to provide the Services described in the Statement of
Work.
The Statement of Work includes, for example:
1. our respective responsibilities;
2. the specific conditions (called the "Completion Criteria"), if any,
that we are required to meet to fulfill our obligations;
3. a contract period for Maintenance and Continuing Support Services and
an estimated schedule for Project Support Services that we provide for
planning purposes; and
4. applicable charges (not including taxes) and any other terms.
If a Statement of Work contains an estimated schedule, each of us agrees to
make reasonable efforts to carry out our respective responsibilities
according to that schedule. If the Statement of Work contains Completion
Criteria, we will inform you when we meet each of them. You then have 10
days to inform us if you believe that we have not met those criteria. The
project is complete when we meet the Completion Criteria.
CHANGES TO STATEMENTS OF WORK
When both of us agree to change a Statement of Work other than as permitted
in the Maintenance Service Options and Continuing Support Services Sections
of this Agreement, we will prepare a written description of the agreed
change (called a "Change Authorization"), which both of us must sign. The
terms of a Change Authorization prevail over those of the Statement of Work
and any of its previous Change Authorizations.
Any change in the Statement of Work may affect the charges, estimated
schedule, or other terms. Depending on the extent and complexity of the
requested changes, we may charge for our effort required to analyze it.
When charges are necessary, we will give you a written estimate and begin
the analysis only on your written authorization.
PERSONNEL
Each of us will:
1. designate a coordinator who will represent each of us, respectively,
in all matters concerning Project Support Services and other Services
where applicable; and
2. be responsible for the supervision, direction, and control of our
respective personnel.
We will try to honor your requests regarding the assignment of our
personnel to your project. However, we reserve the right to determine the
assignment of our personnel.
We may subcontract a Service, or any part of it, we provide to you, to
subcontractors selected by us.
5.5 MATERIALS OWNERSHIP AND LICENSE
We will specify Materials to be delivered to you. We will identify them as
being "Type I Materials," "Type II Materials," or otherwise as we both
agree. If not specified, Materials will be considered Type II Materials.
Type I Materials are those, created during the Service performance period,
in which you will have all right, title, and interest (including ownership
of copyright). We will retain one copy of the Materials. You grant us 1) an
irrevocable, nonexclusive, worldwide, paid-up license to use, execute,
reproduce, display, perform, distribute (internally and externally) copies
of, and prepare derivative works based on Type I Materials and 2) the right
to authorize others to do any of the former.
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Type II Materials are those, created during the Service performance period
or otherwise (such as those that preexist the Service), in which we or
third parties have all right, title, and interest (including ownership of
copyright). We will deliver one copy of the specified Materials to you. We
grant you an irrevocable, nonexclusive, worldwide, paid-up license to use,
execute, reproduce, display, perform, and distribute, within your
Enterprise only, copies of Type II Materials.
Each of us agrees to reproduce the copyright notice and any other legend of
ownership on any copies made under the licenses granted in this Section.
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<PAGE> 1
EXHIBIT 10.9
IBM Proposal for
PRODUCT SUPPORT
SERVICES
prepared for
SPLITROCK SERVICES, INC.
2170 BUCKTHORNE PLACE
SUITE 350
THE WOODLANDS, TX 77380
February 27, 1998
The information in this proposal shall not be disclosed outside the Splitrock
Services, Inc. organization and shall not be duplicated, used or disclosed in
whole or in part for any purpose other than to evaluate the proposal, provided
that if a contract is awarded to IBM as a result of or in connection with the
submission of this proposal, Splitrock Services, Inc. shall have the right to
duplicate, use or disclose the information to the extent provided by the
contract. This restriction does not limit the right of Splitrock Services, Inc.
to use information contained in the proposal if it is obtained from another
source without restriction.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1.0 STATEMENT OF WORK ................................................... 1
1.1 PROJECT SCOPE ....................................................... 1
1.2 KEY ASSUMPTIONS ..................................................... 2
1.3 IBM RESPONSIBILITIES ................................................ 4
1.4 SPLITROCK SERVICES RESPONSIBILITIES ................................. 7
1.5 DELIVERABLE MATERIALS ............................................... 8
1.6 ESTIMATED SCHEDULE .................................................. 8
1.7 COMPLETION CRITERIA ................................................. 9
1.8 CHARGES ............................................................. 9
1.9 OTHER TERMS AND CONDITIONS .......................................... 10
APPENDIX A. GUIDELINES FOR DELIVERABLE MATERIALS ........................ 12
APPENDIX B. PROJECT CHANGE CONTROL PROCEDURE ............................ 13
SIGNATURE PAGE .......................................................... 14
AMENDMENT ............................................................... 15
</TABLE>
<PAGE> 3
1.0 STATEMENT OF WORK
This Statement of Work listed below shall be appended to and made a part of the
IBM Customer Agreement (Agreement) - and any applicable attachments - which is
hereby incorporated by reference. In the event of any contradiction,
inconsistency or ambiguity between the terms and conditions of the two
documents, this Statement of Work shall govern. This agreement represents the
entire agreement between the two parties regarding this matter and replaces any
prior oral or written communication.
This Statement of Work defines the scope of work to be accomplished by IBM. The
tasks to be performed by IBM are defined and an estimated schedule is provided.
In addition, the responsibilities of Splitrock Services, Inc. (Splitrock) are
listed.
Changes to this Statement of Work will be processed in accordance with the
procedure described in Appendix B, "Project Change Control Procedure". The
investigation and the implementation of changes may result in modifications to
the Estimated Schedule, Charges, or other terms of this Statement of Work.
The following are incorporated in and made part of this Statement of Work:
Appendix A. Guidelines For Deliverable Materials
Appendix B. Project Change Control Procedure
1.1 PROJECT SCOPE
This section describes the Services that IBM will provide Splitrock. You have
selected the following services:
o Project Management Services
o Installation Management Services
o Right to locate Splitrock equipment to be serviced by IBM under this
Statement of Work ("Splitrock Equipment") in IBM premises ("IBM
Facilities") mutually agreed up by the parties ("IBM Sites").
The details of the selected Services are described in the following sections.
The Services described in this Statement of Work do not address the capability
of your systems to handle date data within and between the twentieth and
twenty-first centuries. You acknowledge that it is your responsibility to
assess your current systems and take appropriate action to migrate to Year 2000
ready systems.
1
<PAGE> 4
1.2 KEY ASSUMPTIONS
The services to be provided under this Statement of Work and the associated
charges are based on the following assumptions. Any assumptions found invalid
could have an effect on price or schedule and will be handled in accordance
with the procedure described in Appendix B, "Project Change Control Procedure".
o General Assumptions
1. This contract supersedes and replaces the existing Field
Technical Manager (FTM) contract by and between Prodigy Services
Inc. and IBM (reference IBM contract #2G24711, dated 11/12/96).
2. Services will be provided during normal IBM business hours, 8:00
AM to 5:00 PM, Monday through Friday, excluding IBM holidays.
3. IBM may use subcontractors to perform some of the proposed work.
4. IBM requires ten (10) business days' notice to begin work after
contract acceptance.
5. IBM estimated time frames subjected to delays caused by
Splitrock in delivering requested or required information may
result in changes to the project schedule and/or additional
charges. IBM will inform Splitrock as soon as is practical in
this event and the change will be processed in accordance with
the procedure described in Appendix B, "Project Change Control
Procedure".
6. The price does not include: obtaining permits; cabling in
asbestos or otherwise hazardous environments; drilling through
walls, ceilings or floors; moving of furniture, desks or lift
equipment.
7. IBM will have reasonable access to and from all areas and
systems affected by performance of the tasks as defined in the
1.3, "IBM Responsibilities" section of this Statement of Work.
8. Any work cancellation may require a commercially reasonable
effort to reschedule the engagement. Cancellation within
forty-eight (48) hours of a scheduled engagement will result in
a charge of four (4) hours of labor for each scheduled IBM
resource against the IBM Customer Engineering (CE) hours
available for this project.
9. Splitrock personnel assigned to this project will have the
technical skills necessary to participate in this effort.
10. Splitrock will provide IBM with a list of locations at contract
start date.
11. Splitrock is responsible for all taxes.
12. Splitrock is responsible for all permits, licenses and rights of
way. IBM will not be responsible for any costs or delays related
to these permits, licenses or rights of way.
13. Splitrock is responsible for all expenses incurred in its
performance on this Statement of Work.
2
<PAGE> 5
o INSTALLATION ASSUMPTIONS
1. Any delay caused by Splitrock including, but not limited to,
interference of work schedule, material delivery, change of
work, or concealed conditions, resulting in an increase of cost
to IBM to perform the work, will be handled in the manner
described in Appendix B, "Project Change Control Procedure".
2. Splitrock is responsible for the network design and the
selection of network equipment as it relates to the performance
of the network.
3. IBM requires the following conditions to be met prior to the
start of the installation of software:
o media format must match the target system;
o appropriate quantity of software licenses are supplied;
o the target system has adequate capability and capacity;
o required configuration information is available;
o software will be readily available at the point of
installation;
o supporting documentation and manufacturer's support
information will be supplied; and
o there is no conflict with proprietary software.
4. Installations will be made using the manufacturer's default
settings. Software problem resolution will be charged at the
applicable hourly rate and handled via the Project Change
Control Procedure if the system does not properly perform when
installed with the manufacturer's specifications. Note: Use of
custom or proprietary software increases the probability of
software problems.
5. Splitrock assumes all responsibility for data and application
integrity, and may engage IBM to perform backup and restores at
the applicable hourly rate.
6. Resolution of problems caused by system configurations or
software not identified in this Statement of Work will be
charged on an hourly basis and handled via the Project Change
Control Procedure. IBM will install the hardware and software to
the manufacturer's specifications. If the system does not
function properly or the system is defective, then IBM will
notify Splitrock.
7. IBM reserves the right to adjust the hourly rates in situations
where insufficient information has been provided and a different
skill level is required to complete the required task.
8. All hardware and software to be installed by IBM under this
Statement of Work will be provided by Splitrock.
9. The project schedule will be developed by Splitrock. IBM will be
provided the opportunity to modify the schedule to facilitate
resource balancing.
o IBM SPACE ASSUMPTIONS
1. The IBM Sites and the non-IBM sites owned or leased by Splitrock
are sometimes collectively called "Splitrock Local Sites" or
"SLS".
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<PAGE> 6
1.3 IBM RESPONSIBILITIES
The tasks IBM will perform are described below. These tasks will be performed
by IBM personnel or personnel subcontracted by IBM.
1.3.1 IBM PROJECT MANAGEMENT
Prior to the start of this Statement of Work, IBM will designate a person,
known as the Project Manager, to whom Splitrock will address all project
communications.
DESCRIPTION: The objective of this task is to provide technical direction and
control of IBM project personnel and to establish a framework for project
communications, reporting, procedural and contractual activity. The subtasks
are:
1. Review the Statement of Work and the contractual responsibilities of
both parties with the Splitrock Project Manager.
2. Review and administer the Project Change Control Procedure with the
Splitrock Project Manager.
3. Direct and manage the tasks of the IBM supplied personnel.
4. Attend Bi-Monthly meetings, scheduled by Splitrock at either the
White Plains or Yorktown facility.
5. Prepare and submit a Quarterly Project Status Report to the Splitrock
Project Manager.
6. Work with Splitrock Project Manager to resolve service issues.
7. Distribute project information to IBM Branch Offices for your
Locations.
COMPLETION CRITERIA: This task will be considered complete when all other IBM
tasks in this Statement of Work are completed or up to 180 hours of Project
Management has been provided, which ever occurs first.
DELIVERABLE: Quarterly Project Status Report -- Type II.
1.3.2 USE OF IBM SPACE
DESCRIPTION: IBM will allow Splitrock to house the Splitrock equipment that IBM
will service under this Statement of Work in IBM Facilities, identified by
Splitrock and agreed to by IBM. These IBM sites will be located throughout the
continental United States. Splitrock will pay IBM the Equipment and Housing
Charge, as defined in, and in accordance with, section 1.8 hereof, for such
right to house its equipment at the IBM sites.
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<PAGE> 7
The subtasks are:
1. The IBM Project Manager will perform a quarterly review of the
existing IBM sites and will inform Splitrock of any impending IBM
Facilities closings discovered during that review.
COMPLETION CRITERIA: This task will be considered complete when IBM has
performed a quarterly review of the existing IBM sites and has informed
Splitrock of impending site closings of IBM Facilities discovered during that
review.
DELIVERABLE: None.
1.3.3 INSTALLATION MANAGEMENT SERVICES
DESCRIPTION: IBM will provide Splitrock with Field Technical Manager (FTM)
Services.
The tasks to be performed, under the direction of the Splitrock Project
Manager, at each location (as specified in the "Amendment to Terms and
Conditions for Splitrock Services Co-Locate sites") are as follows:
1. Troubleshoot operational problems to provide problem determination
and resolution.
2. Perform maintenance and changes/upgrades on equipment listed in
Appendix C, "Splitrock Equipment List" within the Splitrock schedule.
3. Perform changes to the Splitrock environmental monitoring device and
DSUs listed in Appendix C, "Splitrock Equipment List".
4. Install hardware (additions or new installations) such as integrated
Communications Subsystem, frame relay, and associated equipment and
other hardware which is considered part of the local processor
configuration.
5. Perform equipment removal and retrieval for shipment and delivery to
Splitrock.
6. Make changes to software which includes the installation of the local
processor program fixes, driver codes, operating system and other
replacement as needed.
7. Provide site access and standby for installation of local and
backbone lines. Provide new circuit IDs and telephone numbers
provided to IBM by telephone vendor to the Splitrock Project
Manager.
8. Perform inventory control by verifying equipment upgrades to the
Splitrock Project Manager and the Network Control Center and
communicate the inventory accounting information (serial numbers) to
the Splitrock Project Manager for new equipment installed at the
Splitrock Local Site.
9. Interface with local vendors and provide feedback on the vendor
activities at the Splitrock Local Site and as appropriate, update the
Splitrock Project Manager on vendor activities.
10. Perform site maintenance by changing the Cypher lock combination as
requested and providing the new combination to the Splitrock Project
Manager, scheduling and monitoring air conditioning preventative
maintenance; and notifying the Splitrock Project Manager of scheduled
building maintenance at IBM sites only. IBM will make arrangements to
keep the Splitrock Local Site active if the outage is during service
hours.
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<PAGE> 8
11. Perform periodic site visits as scheduled to verify per Splitrock
Field Technical Manager's direction:
o Dial tone on phone lines
o Air conditioner alarms
o Site temperature
o Proper local processor operation
o Proper ICS fan operation
o DSU lights operation
o Proper function of modem lights
o Site door security
o Visitor log (noting visits)
o Update white board
o Proper telemonitor operation
o Cables and connectors are secure
o Circuit breakers are not tripped
o UPS battery charger functioning properly (UPS sites only)
Periodically:
o Speak to building manager to find out about scheduled repairs or
changes
As Required:
o Run Splitrock provided verification diskette to check out local
processor components.
Quarterly:
o Check voltage on cable racks
o Provide access at non-IBM sites as needed for scheduled air
conditioning maintenance
In the dispatch system, each site will be assigned to a "primary" trained CE
with backup personnel also identified.
COMPLETION CRITERIA: This task will be considered complete when IBM has
provided up to 2400 hours of IBM Customer Engineering time in support of the
tasks outlined in this section.
DELIVERABLE: None.
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<PAGE> 9
1.4 SPLITROCK SERVICES RESPONSIBILITIES
The responsibilities listed in this section are in addition to those
responsibilities specified in the Agreement and are to be provided at no charge
to IBM. IBM's performance is predicated upon the following responsibilities
being fulfilled by Splitrock.
1.4.1 SPLITROCK PROJECT MANAGER
Prior to the start of this Statement of Work under the Agreement, Splitrock
will designate a person, known as the Splitrock Project Manager, to whom all
IBM communications will be addressed and who has the authority to act for
Splitrock in all aspects of the contract.
The Splitrock Project Manager's responsibilities include:
o Review the Statement of Work with the IBM Project Manager.
o Serve as the interface between the IBM Project Manager and all
Splitrock departments participating in this project.
o With the IBM Project Manager, administer the Project Change Control
Procedure.
o Obtain and provide information, data, decisions and approvals, within
three (3) working days of IBM's request unless Splitrock and IBM
agree to an extended response time.
o Help resolve project issues and escalate issues within the Splitrock
organization, as necessary.
o Schedule and attend local Bi-Monthly meetings with the IBM Project
Manager.
o Ensure IBM services personnel have access to all necessary and
appropriate resources (e.g. manuals, program directories, userids,
systems programming personnel) for the duration of the project.
o Ensure IBM services personnel are provided appropriate access and
authorization to the Splitrock system and resources for the duration
of this project.
o Ensure a working environment that is safe and in compliance with all
applicable local, state, and federal laws.
o Coordinate services through Splitrock's Network Control Center and
Splitrock FTMs.
o Receive, review and maintain IBM-prepared status reports.
The person designated as Splitrock Project Manager or his/her back-up must be
available to the project on a regular basis during the Contract Term.
1.4.2 THE USE OF IBM FACILITIES FOR HOUSING SPLITROCK EQUIPMENT
Splitrock will inform the IBM Project Manager on a monthly basis of its desire
to continue or discontinue its use of each IBM Site where it is currently
housing Splitrock Equipment.
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<PAGE> 10
1.4.3 INSTALLATION MANAGEMENT SERVICE
Prior to the Start Date in the Estimated Schedule of Services, Splitrock will
identify to IBM all SLS's requiring Services. For each SLS, the information
will specify 1) the address, 2) the name of your responsible FTM, and 3)
whether the site is an IBM or a non-IBM Site.
You will also:
o provide IBM CEs with site specific training as required
o provide access for IBM personnel in non-IBM Sites
o provide all permits, licenses, and rights of way
o provide adequate and secure on-site storage for all deliveries
1.4.4 OFFICE SPACE, SUPPLIES AND FACILITIES
At the start of this contract, and for the duration, Splitrock will provide
suitable office space, office supplies, furniture, telephone and other
facilities equivalent to those provided to Splitrock personnel for the IBM
project personnel while working on the non-IBM Sites.
1.4.5 SECURITY AND LAWS
Splitrock is responsible for the actual content of any data file, selection and
implementation of controls on its access and use, and security of the stored
data. Splitrock will identify and make the interpretation of any applicable
federal, state and local laws, regulations and statutes and ensure that
products of the system meet those requirements.
1.5 DELIVERABLE MATERIALS
The following Deliverable Materials will be delivered to Splitrock under this
Statement of Work. See Appendix A, "Guidelines for Deliverable Materials" for a
description of each deliverable.
1. Quarterly Project Status Report (Type II)
1.6 ESTIMATED SCHEDULE
The estimated start date for the services is March 1, 1998. The estimated end
date for the services is February 28, 1999. The actual project dates will be
negotiated by IBM and Splitrock once this Statement of Work is in effect.
8
<PAGE> 11
1.7 COMPLETION CRITERIA
The project will be considered complete when the IBM tasks described in this
Statement of Work have been fulfilled, including the delivery to Splitrock of
the materials described in 1.5 "Deliverable Materials" or when either Splitrock
or IBM terminates this Statement of Work in accordance with the provisions of
the Agreement.
1.8 CHARGES
The target price for performing the IBM tasks defined in this Statement of Work
is $314,400 plus any applicable taxes.
PRICING BREAKDOWN:
o FTM Services -- estimated target price $228,600 (2400 hours at
$95.25/hour)
The estimated target pricing listed above is based on Splitrock
utilizing up to (2,400) hours of CE time including up to (150) hours
of Project Management -- equivalent to (600) hours per quarter.
Should the target of (600) hours not be met each quarter, the hourly
rate will vary as follows:
<TABLE>
<CAPTION>
Hours logged per quarter Fee per hour
------------------------ ------------
<S> <C>
1 - 250 hours $125.25
251 - 500 hours $110.25
501 + hours $ 95.25
</TABLE>
o Equipment Housing Charge - $85,800
Price for Equipment Housing is an estimate assuming that there are
seventeen (17) sites on the contract which consist of sixteen (16) 80
sq. ft. sites and one (1) 150 sq. ft. site.
Existing Sites $85,800
One (1) existing site occupies 150 square feet and will be billed at
a rate of $750 per month per site. The other sixteen (16) existing
sites on the contract each occupy 80 square feet and will be billed
at a rate of $400 per month per site.
The total Equipment Housing Charge will be adjusted in the event that
the number of, or square footage of, any of the IBM Sites changes.
Equipment Housing Charges for new IBM Sites will be as set forth in
the Addendum.
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<PAGE> 12
TRAVEL:
Travel Expenses -- Travel expenses will be invoiced based upon the actual
travel expenses incurred. Travel expenses are in addition to the travel labor
charges defined in the following paragraph. All travel expenses (air fare,
lodging, meals, and car rentals) will be actual and reasonable.
Travel Labor -- Normal travel has been included in the rates specified above
for travel to installation sites less then one hour from an IBM service
reporting location. If an installation location requires travel of one hour or
more, one way, from the IBM service reporting location, the excess travel shall
be invoiced at an hourly rate of $95.25 per hour.
OVERTIME:
If a services engagement requires work to be performed outside IBM normal
business hours of 8 AM - 5 PM, Monday - Friday, local time, the excess hours
over and above forty (40) hours shall be subject to premium charges.
Work performed in excess of 8.8 contiguous hours (excluding meal breaks) in one
day or forty-four (44) hours in one week will be considered overtime. IBM will
invoice for all overtime work that is performed as a part of this agreement.
INVOICING:
IBM will bill you quarterly for the actual number of hours of FTM services
which have been provided. Rental charges will be billed quarterly. Payment is
due upon receipt.
This offer is valid for thirty days.
1.9 OTHER TERMS AND CONDITIONS
1.9.1 CONTRACT HOURS
o This contract entitles Splitrock up to two thousand, eight hundred,
eight hours (2,400) of IBM Customer Engineer time per year to be used
as needed in any of the sites identified by Splitrock to perform the
services described in items 1-10 of the section 1.3.3, "Installation
Management Services".
o Customer Engineer time will be tracked and reported on a quarterly
basis.
o Travel time as well as time performing FTM services will be counted
against the (2,400) hours of the contract.
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<PAGE> 13
o Splitrock will be invoiced for CE hours used in excess of (2400)
hours at the same rate per hour as the block of hours rate of $95.25
per hour. The scope of work for the CE is defined in the section
1.3.3, "Installation Management Services".
o All changes will be handled by the Project Change Control Procedure.
1.9.2 IDENTIFYING SITES FOR COVERAGE
Sites listed in the Addendum to the Statement of Work will be included in this
contract upon acceptance of the terms and conditions of this agreement by
Splitrock.
New IBM Sites, and non-IBM Sites, will be added to this agreement upon mutual
agreement of both IBM and Splitrock.
1.9.3 DISTRIBUTION RIGHTS
The content of this Statement of Work and associated attachments shall not be
distributed outside Splitrock, and shall not be duplicated, used, or disclosed
in whole or in part for any purpose other than to evaluate this Proposal. Any
other use is prohibited unless authorized in writing by IBM.
1.9.4 EQUIPMENT OWNERSHIP
You represent that you are either the owner of each item of Splitrock Equipment
or are authorized by its owner to include it under this Statement of Work.
1.9.5 TERMINATION
Splitrock has the right to cancel this contract -- without any financial
penalty -- if IBM performs unsatisfactorily and IBM does not correct the
problems within 30 days. In this instance, Splitrock will only be responsible
for charges associated with services already rendered.
Either party may terminate this Statement of Work without cause upon thirty
(30) days prior written notice. In the event of cancellation by Splitrock, a
penalty shall be incurred for the cancellation of dedicated on-site support
in the form of two (2) additional months of charges (320 hours) at the hourly
rate of $95.25 per hour for a total penalty fee of $30,480. This sum, shall be
in addition to the payment or charges associated with services actually
performed.
IBM reserves the right at any time, upon reasonable notice to Splitrock, to
terminate Splitrock's right to house the Splitrock Equipment at any IBM Site.
In the event of any termination of this Statement of Work or the IBM Customer
Agreement, Splitrock's right to house the Splitrock Equipment at the IBM Sites
shall be automatically terminated.
If Splitrock's right to house the Splitrock Equipment is terminated; IBM or
Splitrock will remove the Splitrock Equipment and Splitrock will reimburse IBM
for any repair IBM deems necessary
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<PAGE> 14
due to damage caused by such removal. IBM's sole responsibility shall be to
refund to Splitrock any prepaid Equipment Housing charges not yet earned.
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<PAGE> 15
APPENDIX A. GUIDELINES FOR DELIVERABLE MATERIALS
QUARTERLY PROJECT STATUS REPORT
PURPOSE: IBM will provide a Quarterly Project Status Report to the Splitrock
Project Manager advising Splitrock of the progress and status of the IBM
activities.
CONTENT: The report will consist of the following, as appropriate:
o Activities, performed during the reporting period.
o Summary of hours expended
o Activities planned for the next reporting period.
o Project change control summary.
o Problems, concerns, and recommendations.
DELIVERY: One (1) hard copy will be delivered to the Splitrock Project Manager
within five (5) business days following the reporting period.
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<PAGE> 16
APPENDIX B. PROJECT CHANGE CONTROL PROCEDURE
The following provides a detailed process to follow if a change to this
Statement of Work (SOW) is required:
When both of us agree to a change in this Statement of Work, we will prepare a
written description of the agreed change (called a "Change Authorization"),
which both of us must sign. The Change Authorization will describe the change,
the rationale for the change, and specify any change in the charges, estimated
schedule, or other terms. Depending on the extent and complexity of the
requested changes, we may charge for our effort required to analyze it. When,
charges are necessary in order for us to analyze a change, we will give you a
written estimate and begin the analysis on your written authorization. The
terms of a mutually agreed upon Change Authorization will prevail over those of
this Statement of Work or any previous Change Authorization.
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<PAGE> 17
CUSTOMER AGREEMENT
STATEMENT OF WORK FOR PROJECT SUPPORT SERVICES
_______________________________________________________________________________
CUSTOM SERVICES
This document is a Statement of Work to the New Customer Agreement. Project
Support Services only if no machine or licensed program procedures are acquired
under the Statement of Work. Such types are available only under the name of 1)
the New Customer Agreement (or any equipment agreement signed by both of us) or
2) the applicable third party agreement.
Scope of Services, Competition Criteria, charges and other applicable terms:
Refer to IBM Proposal for Product Support Services dated February 27, 1998
section "Statement of Work".
Charges: $314,400
_______________________________________________________________________________
Each of us agrees that the corporate agreement between us above [ILLEGIBLE]
Services consists of 1) this Statement of Work and 2) the IBM Customer
Agreement or IBM Customer Agreement -- Project Support Services, as applicable,
(or any equivalent agreement signed by both of us).
<TABLE>
<CAPTION>
<C> <S>
Agreed to (IBM Customer Name): Agreed to:
Splitrock Services International Business Machines
By /s/ William Wilson By /s/ Masha Yankelev
___________________________ ____________________________
Authorized signature Authorized signature
Name (type or print) Name (type or print)
William Wilson Masha Yankelev
Date: 3/2/98 Date: 3/13/98
Customer number: [ILLEGIBLE] Relocation Agreement number:
6B10697
Customer address: Statement of Work number: [ILLEGIBLE]
2170 Buckthorne Place IBM office number: 100
Suite 350
The Woodlands, Texas 77380
IBM Office Address:
Project name or identification: [ILLEGIBLE]
Product Support Services Sleepy Hollow, NY [ILLEGIBLE]
Estimated Start Date: March 1, [ILLEGIBLE]
Estimated End Date: February 29, [ILLEGIBLE]
</TABLE>
15
<PAGE> 18
INTERNATIONAL BUSINESS MACHINES CORPORATION ARMONK, NEW YORK 10504
ADDENDUM TO THE STATEMENT OF WORK
FOR SPLITROCK SERVICES
IBM SITES
Name and Address of Customer: Reference Agreement No.:
SPLITROCK SERVICES
1565 FRONT STREET Reference SOW No.: 2H34516
YORKTOWN, NY 10598
IBM Branch Office No.: 180
IBM Branch Office Address: Customer No.: 8383569
IBM GLOBAL SERVICES
RT. 9 TOWN OF MT PLEASANT
SLEEPY HOLLOW, NY 10591
Splitrock Services (you) and International Business Machines Corporation (IBM)
agree that the following terms and conditions amend and/or add to the
referenced Agreement and the referenced Statement of Work (SOW). IBM will allow
Splitrock to house Splitrock Equipment in IBM Sites.
1. TERM
This Contract becomes effective on the date this Contract, signed by you, is
accepted by IBM. The Commencement Date of this Contract shall be the date
mutually agreed upon by you and IBM provided such date follows IBM's acceptance
of this Contract. IBM will indicate the Commencement Date in the Supplement.
The Term of this Contract will begin on such Commencement Date and continue
for a duration to the contract end date.
Unless notified by IBM to the contrary, you may renew this Contract for an
additional Term of one year. IBM will advise you of the terms and conditions
for such renewal. You must provide written notice to IBM by November 1, 1998 of
any intent to renew this contract.
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<PAGE> 19
2. EXISTING IBM SITES
Your right to house the Splitrock Equipment at each IBM Site will begin March
1, 1998 at 12:01 AM and will expire on February 28, 1999 at 11:59 PM unless
terminated earlier pursuant to the Statement of Work number 2H34516.
o The following list details the IBM Sites:
Albuquerque
Austin
Birmingham
Cincinnati
Toledo
Columbus
Durham
Grand Rapids
Honolulu
Jacksonville
Louisville
Melbourne
Nashville
Norfolk
Pittsburgh
Omaha
Akron
If IBM does not have an IBM facility available to house Splitrock's Equipment,
Splitrock will be responsible for finding a new non-IBM Site. You agree to
advise IBM, at least 2 weeks in advance, of the date you will install Splitrock
Equipment at each IBM Site or non-IBM Site to ensure that the site is ready for
the Splitrock Equipment installation.
All new IBM Sites where Splitrock houses its equipment after March 1, 1998
through February 28, 1999 will have some fixed cost associated with the new IBM
Sites. The charges will be as follows:
$60 sq. ft., UPS-$6500, Project Management-$1400, Site Support-$5000
The site support cost includes supporting the new site for 90 days and training
for the CE. At the end of the 90 days, the new site will follow the same Terms
and Conditions as an existing site.
3. ACCESS
IBM will contact IBM personnel, or subcontractor personnel, responsible to
service your equipment and provide them access to IBM Sites during normal
business hours. However, outside normal business hours, IBM will contact such
personnel and will dispatch an IBM
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<PAGE> 20
representative to provide them access subject to the terms of the referenced
SOW. IBM will provide a list of personnel in each location for you to contact
for access 24 hours a day, 7 days a week.
4. HOUSING EQUIPMENT CHARGES-PAID QUARTERLY
You agree to pay IBM the Charge for each IBM Site. For new IBM Sites, this
Charge will be calculated using an annual rate of $60 per square foot for each
IBM Site.
5. PAYMENT AND TAXES
IBM will invoice you quarterly for the Housing Equipment Charge for each IBM
Site. Payment is due within 30 days of the date of invoice.
In addition to the Housing Equipment Charges under this Contract, you agree to
pay an amount equal to any taxes, other than real estate taxes, resulting from
this Contract, or any activities hereunder, exclusive of the taxes based upon
IBM's net income.
6. POINTS OF CONTACT
Prior to the Commencement Date of this Contract, each party will designate a
person who will be the point of contact for the party in communicating with the
other party and will be responsible for coordinating activities under this
Contract.
7. WITHDRAWAL/TERMINATION
You may withdraw IBM Sites or terminate this Contract prior to the end of its
Term, upon thirty (30) days written notice to IBM. IBM may terminate this
contract or Splitrock's rights as to any SLS in accordance with Section 1.9.5
"Termination" of the Statement of Work.
8. OPERATION AND MAINTENANCE
It is IBM's intent that the IBM sites will remain operational 24 hours a day, 7
days a week.
IBM will use reasonable efforts to provide Splitrock beneficial use of IBM
Sites as outlined in this Statement of Work for the entire Term of the
Contract. Should this not occur, due to events caused by IBM, IBM will suspend
the Monthly Charges and obligations for the period when beneficial use is not
available.
9. INSURANCE
Throughout the Term, Splitrock shall maintain a policy of insurance covering
the Splitrock Equipment against loss, damage, or destruction caused by boiler
explosion, machine breakdown, fire and the perils specified in the standard
extended coverage endorsement, by vandalism and
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<PAGE> 21
malicious mischief, and by sprinkler, gas, water, steam and sewer
leakage. The amount of insurance shall equal one hundred percent
(100%) of the replacement cost of the Splitrock Equipment.
Splitrock hereby waives its right of recovery against IBM and releases IBM from
any claim arising out of loss, damage or destruction to the Splitrock Equipment
and contents thereon or therein whether or not such loss, damage or destruction
may be attributable to the fault or negligence of IBM or its agents, invitees,
contractors or employees. Such casualty insurance policy shall include a waiver
of the insurer's rights of subrogation against IBM not an insured under said
policy. Splitrock shall look solely to the proceeds of its casualty insurance
policy (and to its own funds to the extent it is self-insured) to compensate it
for any such loss, damage or destruction.
10. GENERAL
You may not assign this Contract without the specific written permission of
IBM. Any attempt to assign any of the rights, duties or obligations of this
Contract without such consent is void.
If there is a conflict between the terms and conditions of this Contract and
the Agreement this Contract will prevail.
THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS CONTRACT, UNDERSTAND IT, AND
AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, THEY AGREE THAT THE
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES SHALL
CONSIST OF THIS CONTRACT, THE AGREEMENT, THE REFERENCED SOW, AND APPLICABLE
SUPPLEMENTS, INCLUDING THOSE EFFECTIVE IN THE FUTURE. THIS STATEMENT OF THE
AGREEMENT SUPERSEDES ALL OTHER PRIOR PROPOSALS, ORAL OR WRITTEN, AND ALL OTHER
COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THIS SUBJECT.
Accepted by: Splitrock Services, Inc.
INTERNATIONAL BUSINESS MACHINES --------------------------
CORPORATION Customer
By /s/ Masha Yankelev By /s/ William Wilson
- ------------------------------ ------------------------------
Masha Yankelev 3/13/98 William Wilson 3/2/98
- ------------------------------ ------------------------------
Name (Type or Print) Date Name (Type or Print) Date
19
<PAGE> 1
EXHIBIT 10.10
================================================================================
NON-QUALIFIED
STOCK OPTION AGREEMENT
between
SPLITROCK SERVICES, INC.
and
CLARK MCLEOD
Splitrock Services, Inc. 1997 Incentive Share Plan
Date of Grant: May 28, 1998
================================================================================
<PAGE> 2
NON-QUALIFIED
STOCK OPTION AGREEMENT
This Non-Qualified Stock Option Agreement (this "Agreement") is made and
entered into on May 28th, 1998 (the "Date of Grant"), between Splitrock
Services, Inc., a Delaware corporation (the "Company"), and the undersigned
optionee (the "Optionee").
WITNESSETH
WHEREAS, the Company has heretofore adopted the Splitrock Services, Inc.
1997 Incentive Share Plan (the "Plan"); and
WHEREAS, the Company desires to grant non-qualified stock options (the
"Option") to the Optionee pursuant to the Plan.
NOW, THEREFORE, the parties hereto agree that this Option is granted under
and governed by (i) the "Terms and Conditions of Non-Qualified Stock Option,"
attached hereto and (ii) the terms and conditions of the Plan.
Subject to the foregoing, the Company hereby grants to the Optionee the
right and option to purchase from the Company up to 1,000,000 shares (the
"Shares") of the Company's common stock (subject to adjustment pursuant to the
terms and conditions of the Plan) at an exercise price of $1.10 per share (the
"Option Price") (subject to adjustment pursuant to the terms and conditions of
the Plan).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
SPLITROCK SERVICES, INC.
By: /s/ WILLIAM R. WILSON
-------------------------------------
William R. Wilson
President and Chief Executive Officer
OPTIONEE
Signature: /s/ CLARK MCLEOD
------------------------------
Clark McLeod
Optionee's Designated Beneficiary:
/s/ MARY E. MCLEOD
-----------------------------------------
<PAGE> 1
EXHIBIT 10.11
PROMISSORY NOTE
$5,000,000.00 June 1, 1998
For value received, Splitrock Services, Inc. (hereinafter called
"Maker") promises and agrees to pay to the order of Linsang Partners, L.L.C.
(hereinafter called "Payee") at its offices at Landover, Maryland, in lawful
money of the United States of America the sum of five million dollars
($5,000,000.00) together with interest thereon from the date hereof until
maturity at a fixed rate of nine and three-fourths (9 3/4%) percent per annum.
All past due principal and interest shall bear interest at a rate per
annum which is one percent (1%) per annum above the prematurity rate specified
above (but in no event to exceed the maximum rate of nonusurious interest
allowed from time to time by law as now, or to the extent allowed by law) from
maturity until paid. Unless otherwise provided, interest shall be computed on a
per annum basis of a year of 360 days and for the actual number of days
(including the first but excluding the last day) elapsed unless such
calculation would result in a usurious rate, in which case interest shall be
calculated on a per annum basis of a year of 365 or 366 days, as the case
may be.
This note is due and payable as follows to wit:
Accrued interest payable on July 1, 1998 and continuing on the first
(1st) day of each successive month thereafter until paid in full.
Principal is due and payable upon third (30) days written demand, but
if no demand is made, then not later than December 31, 2002.
If any installment or payment of principal or interest of this note is
not paid when due; or if Maker becomes insolvent (however, such insolvency may
be evidenced); be dissolved, wound up, liquidated or otherwise terminated; at
the option of Payee, this note shall become and be due and payable forthwith
upon written demand following thirty (30) days notice of nonpayment or such
other event.
Maker reserves the option of prepaying the principal of this note, in
whole or in part, at any time after the date hereof without penalty. At the
option of Payee, it may demand (at any time at or after prepayment) all accrued
and unpaid interest with respect to the principal amount prepaid through the
date of prepayment. All payments hereunder, whether designated as payments of
principal or interest, shall be applied to the principal or interest of this
note or to expenses provided for herein, or any combination of the foregoing,
as directed by Payee at its option.
1 of 2
<PAGE> 2
Unless otherwise specified below, this note shall be construed under
and governed by the laws of the State of Texas
MAKER:
Splitrock Services, Inc.
BY: /s/ WILLIAM R. WILSON
----------------------------------
William R. Wilson, President
2 of 2
<PAGE> 1
EXHIBIT 10.12
WARRANT AGREEMENT
Dated as of
July 24, 1998
between
SPLITROCK SERVICES, INC.
and
BANK OF MONTREAL TRUST COMPANY,
as Warrant Agent
---------------------------------------------
Warrants for
Common Stock of
Splitrock Services, Inc.
---------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
ARTICLE I
Definitions
SECTION 1.01. Definitions...............................................................................1
SECTION 1.02. Other Definitions.........................................................................5
SECTION 1.03. Rules of Construction.....................................................................6
ARTICLE II
Warrant Certificates
SECTION 2.01. Form and Dating...........................................................................6
SECTION 2.02. Execution and Countersignature............................................................6
SECTION 2.03. Warrant Registrar.........................................................................7
SECTION 2.04. Warrantholder Lists.......................................................................8
SECTION 2.05. Transfer and Exchange.....................................................................8
SECTION 2.06. Replacement Certificate...................................................................9
SECTION 2.07. Outstanding Warrants......................................................................9
SECTION 2.08. Temporary Warrants...................................................................... 10
SECTION 2.09. Cancelation..............................................................................10
SECTION 2.10. CUSIP Numbers............................................................................10
ARTICLE III
Exercise Terms
SECTION 3.01. Exercise.................................................................................10
SECTION 3.02. Exercise Periods.........................................................................11
SECTION 3.03. Expiration...............................................................................11
SECTION 3.04. Manner of Exercise.......................................................................11
SECTION 3.05. Issuance of Warrant Shares...............................................................12
SECTION 3.06. Fractional Warrant Shares................................................................13
SECTION 3.07. Reservation of Warrant Shares............................................................13
SECTION 3.08. Compliance with Law......................................................................14
ARTICLE IV
Antidilution Provisions
SECTION 4.01. Changes in Common Stock..................................................................14
SECTION 4.02. Cash Dividends and Other
Distributions..........................................................................15
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
SECTION 4.03. Common Stock Issue.......................................................................16
SECTION 4.04. Issuance of Rights or Options............................................................17
SECTION 4.05. Combination; Liquidation.................................................................18
SECTION 4.06. Other Events.............................................................................19
SECTION 4.07. Superseding Adjustment...................................................................19
SECTION 4.08. Minimum Adjustment.......................................................................19
SECTION 4.09. Notice of Adjustment.....................................................................20
SECTION 4.10. Notice of Certain Transactions...........................................................21
SECTION 4.11. Adjustment to Warrant Certificate........................................................21
ARTICLE V
Registration Rights; Indemnification
SECTION 5.01. Effectiveness of Registration Statement..................................................22
SECTION 5.02. Suspension...............................................................................25
SECTION 5.03. Blue Sky.................................................................................25
SECTION 5.04. Accuracy of Disclosure...................................................................26
SECTION 5.05. Indemnification..........................................................................26
SECTION 5.06. Additional Acts..........................................................................31
SECTION 5.07. Expenses.................................................................................31
ARTICLE VI
Warrant Agent
SECTION 6.01. Appointment of Warrant Agent.............................................................32
SECTION 6.02. Rights and Duties of Warrant Agent.......................................................32
SECTION 6.03. Individual Rights of Warrant Agent.......................................................34
SECTION 6.04. Warrant Agent's Disclaimer...............................................................34
SECTION 6.05. Compensation and Indemnity...............................................................34
SECTION 6.06. Successor Warrant Agent..................................................................34
ARTICLE VII
Miscellaneous
SECTION 7.01. SEC Reports..............................................................................36
SECTION 7.02. Persons Benefitting......................................................................37
SECTION 7.03. Rights of Holders........................................................................37
SECTION 7.04. Amendment................................................................................37
SECTION 7.05. Notices..................................................................................38
SECTION 7.06. Governing Law............................................................................38
SECTION 7.07. Successors...............................................................................38
SECTION 7.08. Multiple Originals.......................................................................39
SECTION 7.09. Table of Contents........................................................................39
SECTION 7.10. Severability.............................................................................39
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
APPENDIX PROVISIONS RELATING TO WARRANTS
<S> <C>
EXHIBIT A Form of Face of Warrant Certificate
EXHIBIT B Form of Transferee Letter of Representation
</TABLE>
iii
<PAGE> 5
1
WARRANT AGREEMENT dated as of July 24, 1998
(this "Warrant Agreement"), between SPLITROCK
SERVICES, INC., a Delaware corporation (the
"Company"), and the BANK OF MONTREAL TRUST COMPANY, a
New York banking corporation, as warrant agent (the
"Warrant Agent").
The Company desires to issue the warrants described herein.
The warrants will initially entitle the holders thereof (the "Holders") to
purchase, in the aggregate, 2,642,613 shares of Common Stock, par value $.001
per share, of the Company ("Common Stock") in connection with an offering (the
"Offering") by the Company of 261,000 units (the "Units"). Each Unit consists of
(i) $1,000 principal amount of the Company's 11 3/4% Senior Note due 2008 (a
"Note") and (ii) one warrant (each, a "Warrant") to purchase 10.124954 shares of
Common Stock.
The Warrants will not trade separately from the Notes until
the earliest date (the "Separation Date") to occur of: (i) 90 days after the
date hereof, (ii) a Change of Control, (iii) the occurrence of an Event of
Default, (iv) the date on which a registration statement with respect to the
Notes, a Registered Exchange Offer for the Notes or the Warrants is declared
effective and (v) such earlier date as determined by the Initial Purchaser in
its sole discretion.
The Company further desires the Warrant Agent to act on behalf
of the Company in connection with the issuance of the Warrants as provided
herein and the Warrant Agent is willing to so act.
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the Holders of Warrants:
ARTICLE I
Definitions
SECTION 1.01. Definitions.
"Affiliate" of any specified Person means (i) any other
Person, directly or indirectly, controlling or controlled by or under direct or
indirect common control with such specified Person or (ii) any other Person who
is a director or executive officer (A) of such specified Person,
<PAGE> 6
2
(B) of any subsidiary of such specified Person or (C) of any Person described in
clause (i) above. 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 "controlling" and
"controlled" have meanings correlative to the foregoing. "Affiliate" shall also
mean any beneficial owner of shares representing 5% or more of the total voting
power of all classes of Capital Stock of such Person entitled to vote in the
election of directors, managers or trustees ("Voting Stock") (on a fully diluted
basis) or of rights or warrants to purchase such Voting Stock (whether or not
currently exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof.
"Board of Directors" or "Board" means the Board of Directors
of the Company or any committee thereof duly authorized to act on behalf of such
Board.
"Business Day" means each day that is not a Saturday, Sunday
or other day on which banking institutions in New York State are authorized or
required by law to close.
"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into such equity.
"Cashless Exercise Ratio" means a fraction, the numerator of
which is the excess of the Current Market Value per share of Common Stock on the
Exercise Date over the Exercise Price per share as of the Exercise Date and the
denominator of which is the Current Market Value per share of the Common Stock
on the Exercise Date.
"Certificated Warrants" means certificated
Warrants in fully registered definitive form.
"Change of Control" shall have the meaning
assigned to it in the Indenture.
"Combination" means an event in which the Company consolidates
with, merges with or into, or conveys, transfers or leases all or substantially
all of its assets to, another Person.
<PAGE> 7
3
"Current Market Value" per share of Common Stock or any other
security at any date means (i) if the security is not registered under the
Exchange Act, (a) the value of the security, determined in good faith by the
Board of Directors and certified in a board resolution, based on the most
recently completed arm's-length transaction between the Company and a Person
other than an Affiliate of the Company, the closing of which occurs on such date
or shall have occurred within the six-month period preceding such date, or (b)
if no such transaction shall have occurred on such date or within such six-month
period, the value of the security as determined by a nationally recognized
investment banking firm or (ii) if the security is registered under the Exchange
Act, the average of the daily closing bid prices (or the equivalent in an
over-the-counter market) for each Business Day during the period commencing 15
Business Days before such date and ending on the date one day prior to such
date, or if the security has been registered under the Exchange Act for less
than 15 consecutive Business Days before such date, the average of the daily
closing bid prices (or such equivalent) for all of the Business Days before such
date for which daily closing bid prices are available; provided, however, that
if the closing bid price is not determinable for at least ten Business Days in
such period, the "Current Market Value" of the security shall be determined as
if the security were not registered under the Exchange Act.
"Event of Default" shall have the meaning assigned
to it in the Indenture.
"Exchange Act" means the Securities Exchange Act
of 1934, as amended.
"Exercise Date" means, for a given Warrant, the day on which
such Warrant is exercised pursuant to Section 3.04.
"Extraordinary Cash Dividend" means that portion, if any, of
the aggregate amount of all dividends paid by the Company on the Common Stock in
any fiscal year that exceeds $5 million.
"Holder" or "Warrantholder" means the Person in whose name a
Warrant is registered on the Warrant Registrar's books.
"Indenture" means the Indenture dated as of July 24, 1998,
between the Company and the Trustee, with respect to the Notes, as it may be
amended or supplemented from time to time.
<PAGE> 8
4
"Initial Purchaser" means Chase Securities Inc.
"Issue Date" means the date on which the Warrants
are initially issued.
"Offering Memorandum" means the Offering
Memorandum dated July 21, 1998, of the Company.
"Officer" means the Chairman of the Board of
Directors, the Chief Executive Officer, the Chief Financial
Officer, the President, any Vice President, the Treasurer or
the Secretary of the Company.
"Officers' Certificate" means a certificate signed
by two Officers.
"Opinion of Counsel" means a written opinion from legal
counsel who is acceptable to the Warrant Agent. Such counsel may be an employee
of or counsel to the Company or the Warrant Agent.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however designated) which
is preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over shares of Capital Stock of any other class of such Person.
"Registered Exchange Offer" shall have the meaning
assigned to it in the Indenture.
"SEC" or "Commission" means the Securities and
Exchange Commission.
"Securities" means the Warrants and the Warrant
Shares.
"Securities Act" means the Securities Act of 1933,
as amended.
"Separation Date" has the meaning assigned to it
in the recitals hereto.
<PAGE> 9
5
"Trustee" means Bank of Montreal Trust Company, or any
successor trustee under the Indenture.
"Uniform Commercial Code" shall have the meaning
assigned to it in the Indenture.
"Warrant Agent" means the party named as such in this Warrant
Agreement until a successor replaces it and, thereafter, means the successor.
"Warrant Agreement" means this Warrant Agreement as amended or
supplemented from time to time.
"Warrant Certificates" mean the registered certificates
(including the Global Warrants) issued by the Company under this Warrant
Agreement representing the Warrants.
"Warrant Officer" means the Chairman of the Board, the
President or any other officer or assistant officer of the Warrant Agent
assigned by the Warrant Agent to administer its corporate trust matters.
"Warrant Shares" mean the shares of Common Stock (and any
other securities) for which the Warrants are exercisable or which have been
issued upon exercise of Warrants.
"Wholly Owned Subsidiaries" shall have the meaning
assigned to it in the Indenture.
SECTION 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
<S> <C>
"Advice"............................................................... 5.01
"Cashless Exercise".................................................... 3.04
"Common Shelf Registration Statement".................................. 5.01
"Effectiveness Period"................................................. 5.01
"Exercise Price"....................................................... 3.01
"Expiration Date"...................................................... 3.02(b)
"Holders' Information"................................................. 5.01
"Registration Statement"............................................... 5.01
"Stock Registrar"...................................................... 3.07
"Stock Transfer Agent"................................................. 3.05
"Successor Company".................................................... 4.05(a)
"Warrant Registrar".................................................... 2.03
"Warrant Shelf Registration
Statement"............................................................ 5.01
</TABLE>
<PAGE> 10
6
SECTION 1.03. Rules of Construction. Unless the
context otherwise requires:
(i) a defined term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning
assigned to it in accordance with generally accepted accounting
principles as in effect from time to time;
(iii) "or" is not exclusive;
(iv) "including" means including without
limitation; and
(v) words in the singular include the plural and
words in the plural include the singular.
ARTICLE II
Warrant Certificates
SECTION 2.01. Form and Dating. Provisions relating to Warrants
are set forth in the Appendix, which is hereby incorporated in and expressly
made a part of this Warrant Agreement. The Warrant Certificates shall each be
substantially in the form of Exhibit A hereto, which is hereby incorporated in
and expressly made a part of this Warrant Agreement. The Warrant Certificates
may have notations, legends or endorsements required by law, stock exchange
rule, agreements to which the Company is subject, if any, or usage (provided
that any such notation, legend or endorsement is in a form acceptable to the
Company). Each Warrant Certificate shall be dated the date that it is executed
by the Company and countersigned by the Warrant Agent.
SECTION 2.02. Execution and Countersignature.
Two Officers shall sign the Warrant Certificates for the
Company by manual or facsimile signature.
If an Officer whose signature is on a Warrant Certificate no
longer holds that office at the time the Warrant Agent countersigns the Warrant
Certificate, the Warrant Certificate shall be valid nevertheless.
A Warrant shall not be valid until an authorized signatory of
the Warrant Agent manually countersigns the Warrant Certificate. The signature
shall be conclusive
<PAGE> 11
7
evidence that the Warrant has been authenticated under this Warrant Agreement.
The Warrant Agent shall countersign and make available for
delivery Warrant Certificates as set forth in the Appendix.
The Warrant Agent may appoint an agent reasonably acceptable
to the Company to countersign the Warrants. Any such appointment shall be
evidenced by an instrument signed by a Warrant Officer, a copy of which shall be
furnished to the Company. Unless limited by the terms of such appointment, an
agent of the Warrant Agent may countersign Warrants whenever the Warrant Agent
may do so. Each reference in this Warrant Agreement to countersigning by the
Warrant Agent includes countersigning by such agent.
SECTION 2.03. Warrant Registrar. The Company shall maintain an
office or agency where Warrants may be presented for registration of transfer,
exchange or exercise (the "Warrant Registrar"). The Warrant Registrar shall keep
a register of the Warrants and of their transfer, exchange or exercise. The
Company may have one or more coregistrars. The term Warrant Registrar includes
any coregistrars. The Company initially appoints the Warrant Agent as (i)
Warrant Registrar in connection with the Warrants and (ii) the Warrant Custodian
(as defined in the Appendix) with respect to the Global Warrants.
The Company shall enter into an appropriate agency agreement
with any Warrant Registrar not a party to this Warrant Agreement. The agreement
shall implement the provisions of this Warrant Agreement that relate to such
agent. The Company shall notify the Warrant Agent of the name and address of any
such agent. If the Company fails to maintain a Warrant Registrar, the Warrant
Agent shall act as such and shall be entitled to appropriate compensation
therefor pursuant to Section 6.05. The Company or any of its domestically
organized Wholly Owned Subsidiaries may act as Warrant Registrar.
The Company may remove any Warrant Registrar upon written
notice to such Warrant Registrar and to the Warrant Agent; provided, however,
that no such removal shall become effective until (1) acceptance of an
appointment by a successor as evidenced by an appropriate agreement entered into
by the Company and such successor Warrant Registrar and delivered to the Warrant
Agent or (2) notification to the Warrant Agent that the Warrant Agent shall
serve as Warrant Registrar until the appointment of a successor in accordance
with clause (1) above. The Warrant Registrar may resign at
<PAGE> 12
8
any time upon written notice; provided, however, that the Warrant Agent may
resign as Warrant Registrar only if the Warrant Agent also resigns as Warrant
Agent in accordance with Section 6.06. The Company and the Warrant Agent may
deem and treat the Person in whose name a Warrant Certificate is registered as
the absolute owner of such Warrant Certificate for all purposes whatsoever and
neither the Company nor the Warrant Agent shall be affected by notice to the
contrary.
SECTION 2.04. Warrantholder Lists. The Warrant Agent shall
preserve in as current a form as is reasonably practicable the most recent list
available to it of the names and addresses of Warrantholders. If the Warrant
Agent is not the Warrant Registrar, the Company shall furnish, or cause the
Warrant Registrar to furnish, to the Warrant Agent, at such times as the Warrant
Agent may request in writing, a list in such form and as of such date as the
Warrant Agent may reasonably require of the names and addresses of
Warrantholders.
SECTION 2.05. Transfer and Exchange. The Warrants shall be
issued in registered form and shall be transferable only upon the surrender of a
Warrant Certificate for registration of transfer and in compliance with the
Appendix. When a Warrant is presented to the Warrant Registrar with a request to
register a transfer, the Warrant Registrar shall register the transfer as
requested if the requirements of Section 8-401(a) of the Uniform Commercial Code
are met. When Warrants are presented to the Warrant Registrar with a request to
exchange them for an equal number of Warrants of other denominations, the
Warrant Registrar shall make the exchange as requested if the requirements of
Section 8-401(a)(1) and (2) of the Uniform Commercial Code are met. To permit
registration of transfers and exchanges, the Company shall execute and the
Warrant Agent shall countersign Warrant Certificates at the Warrant Registrar's
request. The Company may require payment of a sum sufficient to pay all taxes,
assessments or other governmental charges in connection with any transfer,
exchange or exercise pursuant to this Section 2.05.
Any Holder of a Global Warrant (as defined in the Appendix)
shall, by acceptance of such Global Warrant, agree that transfers of beneficial
interests in such Global Warrant may be effected only through a book-entry
system maintained by (i) the Holder of such Global Warrant (or its agent) or
(ii) any Holder of a beneficial interest in such Global Warrant, and that
ownership of a beneficial interest in such Global Warrant shall be required to
be reflected in a book entry.
<PAGE> 13
9
All Warrants issued upon any transfer or exchange pursuant to
the terms of this Warrant Agreement will evidence the same Warrants as the
Warrants surrendered upon such transfer or exchange.
SECTION 2.06. Replacement Certificate. If a mutilated Warrant
is surrendered to the Warrant Agent or if the Holder of a Warrant claims that
the Warrant Certificate has been lost, destroyed or wrongfully taken, the
Company shall execute and the Warrant Agent shall countersign a replacement
Warrant Certificate if the requirements of Section 8-405 of the Uniform
Commercial Code are met, such that the Holder (i) notifies the Company or the
Warrant Agent within a reasonable time after he has notice of such loss,
destruction or wrongful taking and the Warrant Agent does not register a
transfer prior to receiving such notification, (ii) makes such request to the
Company or the Warrant Agent prior to the Warrant being acquired by a protected
purchaser as defined in Section 8-303 of the Uniform Commercial Code (a
"protected purchaser") and (iii) satisfies any other reasonable requirements of
the Warrant Agent. If required by the Warrant Agent or the Company, such Holder
shall furnish an indemnity bond sufficient in the judgment of the Warrant Agent
to protect the Company and the Warrant Agent from any loss that either of them
may suffer if a Warrant is replaced. The Company and the Warrant Agent may
charge the Holder for their expenses in replacing a Warrant Certificate. Every
replacement Warrant is an additional obligation of the Company.
The provisions of this Section 2.06 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement of mutilated, lost, destroyed or wrongfully taken Securities.
SECTION 2.07. Outstanding Warrants. Warrants outstanding at
any time are all Warrant Certificates executed by the Company and countersigned
by the Warrant Agent except for those canceled by it, those delivered to it for
cancelation and those described in this Section 2.07 as not outstanding. A
Warrant does not cease to be outstanding because an Affiliate of the Company
holds the Warrant. A Warrant ceases to be outstanding if the Company holds the
Warrant.
If a Warrant Certificate is replaced pursuant to Section 2.06,
it ceases to be outstanding unless the Warrant Agent and the Company receive
proof satisfactory to them that the replaced Warrant Certificate is held by a
protected purchaser.
<PAGE> 14
10
SECTION 2.08. Temporary Warrants. In the event that Definitive
Warrants (as defined in the Appendix) are to be issued under the terms of this
Warrant Agreement, until such Definitive Warrants are ready for delivery, the
Company may prepare and the Warrant Agent shall countersign temporary Warrant
Certificates. Temporary Warrant Certificates shall be substantially in the form
of Definitive Warrants but may have variations that the Company considers
appropriate for temporary Warrants. Without unreasonable delay, the Company
shall prepare and the Warrant Agent shall countersign Definitive Warrants and
deliver them in exchange for temporary Warrant Certificates upon surrender of
such temporary Warrant Certificates.
SECTION 2.09. Cancelation. The Company at any time may deliver
Warrant Certificates to the Warrant Agent for cancelation. The Warrant Agent and
no one else shall cancel all Warrant Certificates surrendered for registration
of transfer, exchange, exercise or cancelation and deliver canceled Warrant
Certificates to the Company pursuant to written direction by an Officer. The
Company may not issue new Warrant Certificates to replace Warrants Certificates
that have been exercised or Warrants which the Company has purchased or
otherwise acquired. The Warrant Agent shall not countersign Warrant Certificates
to replace canceled Warrant Certificates other than pursuant to the terms of
this Warrant Agreement.
SECTION 2.10. CUSIP Numbers. The Company in issuing the
Warrants may use "CUSIP" numbers (if then generally in use) and, if so, the
Warrant Agent shall also use "CUSIP" numbers in notices to Holders; provided,
however, that any such notice may state that no representation is made as to the
correctness of such numbers either as printed on the Warrant Certificates or as
contained in any notice and that reliance may be placed only on the other
identification numbers printed on the Warrant Certificates, and any such notice
shall not be affected by any defect in or omission of such numbers.
ARTICLE III
Exercise Terms
SECTION 3.01. Exercise. Each Warrant shall initially entitle
the Holder thereof, subject to adjustment pursuant to the terms of this Warrant
Agreement, to purchase 10.124954 shares of Common Stock. The exercise price (the
"Exercise Price") of each Warrant is $.01 per share.
<PAGE> 15
11
SECTION 3.02. Exercise Periods. (a) Subject to the terms and
conditions set forth herein, the Warrants shall be exercisable at any time and
from time to time on any Business Day after the first anniversary of the Issue
Date; provided, however, that holders of Warrants will be able to exercise their
Warrants only if (i) the Common Shelf Registration Statement relating to the
Warrant Shares is effective or (ii) the exercise of such Warrants is exempt from
the registration requirements of the Securities Act, and the Warrant Shares are
qualified for sale or exempt from qualification under the applicable securities
laws of the states or other jurisdictions in which such Holders reside.
(b) No Warrant shall be exercisable after July 15, 2008 (the
"Expiration Date").
SECTION 3.03. Expiration. A Warrant shall terminate and become
void as of the earlier of (i) the close of business on the Expiration Date or
(ii) the date such Warrant is exercised. The Company shall give notice not less
than 90, and not more than 120, days prior to the Expiration Date to the Holders
of all then outstanding Warrants to the effect that the Warrants will terminate
and become void as of the close of business on the Expiration Date; provided,
however, that if the Company fails to give notice as provided in this Section
3.03, the Warrants will nevertheless expire and become void on the Expiration
Date.
SECTION 3.04. Manner of Exercise. Warrants may be exercised
upon (i) surrender to the Warrant Agent at the office of the Warrant Agent of
the related Warrant Certificate, together with the form of election attached
thereto to purchase Common Stock on the reverse thereof duly filled in and
signed by the Holder thereof and (ii) payment to the Warrant Agent, for the
account of the Company, of the Exercise Price for each Warrant Share or other
security issuable upon the exercise of such Warrants then exercised. Such
payment shall be made (i) in cash or by certified or official bank check payable
to the order of the Company or by wire transfer of funds to an account
designated by the Company for such purpose or (ii) without the payment of cash,
by reducing the number of shares of Common Stock obtainable upon the exercise of
a Warrant and payment of the Exercise Price in cash so as to yield a number of
shares of Common Stock upon the exercise of such Warrant equal to the product of
(a) the number of shares of Common Stock issuable as of the Exercise Date upon
the exercise of such Warrant (if payment of the Exercise Price were being made
in cash) and (b) the Cashless Exercise Ratio. An exercise of a Warrant in
accordance with the immediately preceding clause (ii) is herein called a
"Cashless Exercise". Upon surrender
<PAGE> 16
12
of a Warrant Certificate representing more than one Warrant in connection with
the Holder's option to elect a Cashless Exercise, the number of shares of Common
Stock deliverable upon a Cashless Exercise shall be equal to the number of
shares of Common Stock issuable upon the exercise of Warrants that the holder
specifies are to be exercised pursuant to a Cashless Exercise multiplied by the
Cashless Exercise Ratio. All provisions of this Warrant Agreement shall be
applicable with respect to a surrender of a Warrant Certificate pursuant to a
Cashless Exercise for less than the full number of Warrants represented thereby.
Subject to Section 3.02, the rights represented by the Warrants shall be
exercisable at the election of the Holders thereof either in full at any time or
from time to time in part and in the event that a Warrant Certificate is
surrendered for exercise of less than all the Warrants represented by such
Warrant Certificate at any time prior to the Expiration Date, a new Warrant
Certificate representing the remaining Warrants shall be issued. The Warrant
Agent shall countersign and deliver the required new Warrant Certificates, and
the Company, at the Warrant Agent's request, shall supply the Warrant Agent with
Warrant Certificates duly signed on behalf of the Company for such purpose.
SECTION 3.05. Issuance of Warrant Shares. Subject to Section
2.06, upon the surrender of Warrant Certificates and payment of the per share
Exercise Price or election of a Cashless Exercise, as set forth in Section 3.04,
the Warrant Agent shall requisition from the Company, and the Company shall
issue and, if appointed, cause the transfer agent for the Common Stock ("Stock
Transfer Agent") to countersign and deliver to or upon the written order of the
Holder and in such name or names as the Holder may designate, a certificate or
certificates for the number of full Warrant Shares so purchased upon the
exercise of such Warrants or other securities or property to which it is
entitled, registered or otherwise, to the Person or Persons entitled to receive
the same (including any depositary institution so designated by a Holder),
together with cash as provided in Section 3.06 in respect of any fractional
Warrant Shares otherwise issuable upon such exercise. Such certificate or
certificates shall be deemed to have been issued and any Person so designated to
be named therein shall be deemed to have become a holder of record of such
Warrant Shares as of the date of the surrender of such Warrant Certificates and
payment of the per share Exercise Price or election of a Cashless Exercise, as
aforesaid; provided, however, that if, at such date, the transfer books for the
Warrant Shares shall be closed, the certificates for the Warrant Shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which
<PAGE> 17
13
such books shall next be opened and until such date the Company shall be under
no duty to deliver any certificates for such Warrant Shares; provided further,
however, that such transfer books, unless otherwise required by law, shall not
be closed at any one time for a period longer than 20 calendar days.
SECTION 3.06. Fractional Warrant Shares. The Company shall not
be required to issue fractional Warrant Shares on the exercise of Warrants. If
more than one Warrant shall be exercised in full at the same time by the same
Holder, the number of full Warrant Shares which shall be issuable upon such
exercise shall be computed on the basis of the aggregate number of Warrant
Shares which may be purchasable pursuant thereto. If any fraction of a Warrant
Share would, except for the provisions of this Section 3.06, be issuable upon
the exercise of any Warrant (or specified portion thereof), the Company shall
pay an amount in cash equal to the Current Market Value per Warrant Share, as
determined on the day immediately preceding the date the Warrant is presented
for exercise, multiplied by such fraction, computed to the nearest whole cent.
SECTION 3.07. Reservation of Warrant Shares. The Company
shall at all times keep reserved out of its authorized shares of Common Stock a
number of shares of Common Stock sufficient to provide for the exercise of all
outstanding Warrants. The registrar for the Common Stock (the "Stock Registrar")
shall at all times until the Expiration Date reserve such number of authorized
shares as shall be required for such purpose. The Company will keep a copy of
this Warrant Agreement on file with the Stock Transfer Agent if such Stock
Transfer Agent is appointed. The Company will supply such Stock Transfer Agent,
if appointed, with duly executed stock certificates for such purpose and will
itself provide or otherwise make available any cash which may be payable as
provided in Section 3.06. The Company will furnish to such Stock Transfer Agent,
if appointed, a copy of all notices of adjustments (and certificates related
thereto) transmitted to each Holder.
Before taking any action which would cause an adjustment
pursuant to Article IV to reduce the Exercise Price below the then par value (if
any) of the Common Stock, the Company shall take any and all corporate action
which may, in the opinion of counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock at
the Exercise Price as so adjusted.
<PAGE> 18
14
The Company covenants that all Warrant Shares which may be
issued upon exercise of Warrants shall, upon issue, be fully paid,
nonassessable, free of preemptive rights, free from all taxes and free from all
liens, charges and security interests with respect to the issue thereof.
SECTION 3.08. Compliance with Law. (a) Notwithstanding
anything in this Warrant Agreement to the contrary, in no event shall a Holder
be entitled to exercise a Warrant unless (i) a registration statement filed
under the Securities Act in respect of the issuance of the Warrant Shares is
then effective or (ii) in the opinion of counsel the exercise of such Warrants
is exempt from the registration requirements of the Securities Act and such
securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states or other jurisdictions in which such
Holders reside.
(b) If any shares of Common Stock required to be reserved for
purposes of the exercise of Warrants require, under any other Federal or state
law or applicable governing rule or regulation of any national securities
exchange, registration with or approval of any governmental authority, or
listing on any such national securities exchange before such shares may be
issued upon exercise, the Company will use its best efforts to cause such shares
to be duly registered or approved by such governmental authority or listed on
the relevant national securities exchange, as the case may be.
ARTICLE IV
Antidilution Provisions
SECTION 4.01. Changes in Common Stock. In the event that at
any time and from time to time the Company shall (i) pay a dividend or make a
distribution on the Common Stock in shares of Common Stock or other shares of
Capital Stock, (ii) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock or (iv) increase or
decrease the number of shares of Common Stock outstanding by reclassification of
its Common Stock, then the number of shares of Common Stock issuable upon
exercise of each Warrant immediately after the happening of such event shall be
adjusted so that, after giving effect to such adjustment, the Holder of each
Warrant shall be entitled to receive the number of shares of Common Stock upon
exercise of such Warrant that such Holder would have owned or have been
<PAGE> 19
15
entitled to receive had such Warrants been exercised immediately prior to the
happening of the events described above (or, in the case of a dividend or
distribution of Common Stock, immediately prior to the record date there for).
An adjustment made pursuant to this Section 4.01 shall become effective
immediately after the distribution date, retroactive to the record date therefor
in the case of a dividend or distribution in shares of Common Stock or other
shares of Capital Stock, and shall become effective immediately after the
effective date in the case of a sub division, combination or reclassification.
SECTION 4.02. Cash Dividends and Other Distributions. In the
event that at any time and from time to time the Company shall distribute to all
holders of Common Stock (i) any dividend or other distribution (including any
dividend or distribution made in connection with a consolidation or merger in
which the Company is the continuing corporation) of cash, evidences of its
indebtedness, shares of its Capital Stock or any other properties or securities
or (ii) any options, warrants or other rights to subscribe for, purchase, or
which are convertible into, any of the foregoing (other than, in the case of
clause (i) and (ii) above, (A) any dividend or distribution described in Section
4.01, (B) any rights, options, warrants or securities described in Section 4.03
or Section 4.04 and (C) any cash dividends or other cash distributions from
current or retained earnings other than Extraordinary Cash Dividends), then the
number of shares of Common Stock issuable upon the exercise of each Warrant
immediately prior to such record date for any such dividend or distribution
shall be increased to a number determined by multiplying the number of shares of
Common Stock issuable upon the exercise of such Warrant immediately prior to
such record date for any such dividend or distribution by a fraction, the
numerator of which shall be the Current Market Value per share of Common Stock
on the record date for such dividend or distribution, and the denominator of
which shall be such Current Market Value per share of Common Stock less the sum
of (x) the amount of cash, if any, distributed per share of Common Stock and (y)
the then fair value (as determined in good faith by the Board of Directors,
whose determination shall be evidenced by a board resolution filed with the
Warrant Agent, a copy of which will be sent to Holders upon request) of the
portion, if any, of the distribution applicable to one share of Common Stock
consisting of evidences of indebtedness, shares of stock, securities, other
property, warrants, options or subscription or purchase rights; and subject to
Section 4.08, the Exercise Price shall be adjusted to a number determined by
dividing the Exercise Price immediately prior to such record
<PAGE> 20
16
date by the above fraction. Such adjustments shall be made, and shall only
become effective, whenever any dividend or distribution to which this Section
4.02 applies is made; provided, however, that the Company is not required to
make an adjustment pursuant to this Section 4.02 if at the time of such
distribution the Company makes the same distribution to Holders of Warrants as
it makes to holders of Common Stock pro rata based on the number of shares of
Common Stock for which such Warrants are exercisable (whether or not currently
exercisable). No adjustment shall be made pursuant to this Section 4.02 which
shall have the effect of decreasing the number of shares of Common Stock
issuable upon exercise of each Warrant or increasing the Exercise Price.
SECTION 4.03. Common Stock Issue. In the event that at any
time or from time to time the Company shall issue shares of Common Stock for a
consideration per share that is less than the Current Market Value per share of
Common Stock as of the issuance date of such shares, the number of shares of
Common Stock issuable upon the exercise of each Warrant immediately after such
issuance date shall be determined by multiplying the number of shares of Common
Stock issuable upon exercise of each Warrant immediately prior to such issuance
date by a fraction, the numerator of which shall be the number of shares of
Common Stock out standing immediately preceding the issuance of such shares plus
the number of additional shares of Common Stock to be issued in such
transaction, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately preceding the date for the issuance of such
shares plus the total number of shares of Common Stock which the aggregate
consideration expected to be received by the Company upon the issuance of such
shares (as determined in good faith by the Board of Directors, whose
determination shall be evidenced by a board resolution filed with the Warrant
Agent, a copy of which will be sent to Holders upon request) would purchase at
the Current Market Value per share of Common Stock as of the date of such
issuance; and, subject to Section 4.08, in the event of any such adjustment, the
Exercise Price shall be adjusted to a number determined by dividing the Exercise
Price immediately prior to such date of issuance by the aforementioned fraction;
provided, however, that no adjustment to the number of Warrant Shares issuable
upon the exercise of the Warrants or to the Exercise Price shall be made as a
result of (i) the issuance of shares of Common Stock in bona fide public
offerings that are underwritten or in which a placement agent is retained by the
Company, (ii) the issuance of shares of Common Stock (including upon exercise of
options) pursuant to the terms of and in order to give effect to the
<PAGE> 21
17
1997 Incentive Share Plan (as defined in the Offering Memorandum) in an amount
of up to 10% (calculated giving effect to all issuances of such options since
the date hereof) of the fully diluted shares of Common Stock, or such greater
amount (calculated giving effect to all issuances of such options since the date
hereof) as is approved by a majority of the disinterested members of the Board
of Directors, and (iii) the issuance of shares of Common Stock in connection
with acquisitions of products and businesses other than to Affiliates of the
Company. Such adjustment shall be made, and shall only become effective,
whenever such shares are issued. No adjustment shall be made pursuant to this
Section 4.03 which shall have the effect of decreasing the number of shares of
Common Stock issuable upon exercise of each Warrant or increasing the Exercise
Price.
SECTION 4.04. Issuance of Rights or Options. In the event
that at any time or from time to time the Company shall issue to holders of
Common Stock (i) rights, options or warrants to acquire (provided, however, that
no adjustment shall be made under Section 4.03 or 4.04 upon the exercise of such
rights, options or warrants), or (ii) securities convertible or exchangeable
into (provided, however, that no adjustment shall be made under Section 4.03 or
4.04 upon the conversion or exchange of such securities (other than issuances
specified in (i) or (ii) which are made as the result of anti-dilution
adjustments in such securities)), Common Stock entitling the holders thereof to
subscribe for or purchase shares of Common Stock at a price per share that is
less than the Current Market Value per share of Common Stock in effect
immediately prior to such issuance other than in connection with the adoption of
a shareholder rights plan by the Company, the number of shares of Common Stock
issuable upon the exercise of each Warrant immediately after such issuance shall
be determined by multiplying the number of shares of Common Stock issuable upon
exercise of each Warrant immediately prior to such issuance by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, options, warrants or
securities plus the number of additional shares of Common Stock offered for
subscription or purchase or into which such securities are convertible or
exchangeable, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to the issuance of such rights,
options, warrants or securities plus the total number of shares of Common Stock
which the aggregate consideration expected to be received by the Company upon
the exercise, conversion or exchange of such rights, options, warrants or
securities (as determined in good faith by the Board, whose determination shall
be evidenced by a board resolution filed with the Warrant Agent, a copy of which
will be sent to Holders upon request) would purchase at the Current Market Value
per share of Common Stock as of the record date; and, subject to Section 4.08,
in the event of any such adjustment, the Exercise Price shall be adjusted to
<PAGE> 22
18
a number determined by dividing the Exercise Price immediately prior to such
date of issuance by the afore mentioned fraction; provided, however, that no
adjustment to the number of Warrant Shares issuable upon the exercise of the
Warrants or to the Exercise Price shall be made as a result of the issuance of
options to acquire additional shares of Common Stock pursuant to the terms of
and in order to give effect to the 1997 Incentive Share Plan (as defined in the
Offering Memorandum) in an amount of up to 10% (calculated giving effect to all
issuances of such options since the date hereof) of the fully diluted shares of
Common Stock, or such greater amount (calculated giving effect to all issuances
of such options since the date hereof) as is approved by a majority of the
disinterested members of the Board of Directors. Such adjustment shall be made,
and shall only become effective, whenever such rights, options, warrants or
securities are issued. No adjustment shall be made pursuant to this Section 4.04
which shall have the effect of decreasing the number of shares of Common Stock
issuable upon exercise of each Warrant or increasing the Exercise Price.
SECTION 4.05. Combination; Liquidation. (a) Except as provided
in Section 4.05(b), in the event of a Combination, each Holder shall have the
right to receive upon exercise of the Warrants the kind and amount of shares of
Capital Stock or other securities or property which such Holder would have been
entitled to receive upon completion of or as a result of such Combination had
such Warrant been exercised immediately prior to such event or to the relevant
record date for any such entitlement. Unless paragraph (b) is applicable to a
Combination, the Company shall provide, and deliver to the Warrant Agent, an
Opinion of Counsel to the effect that the surviving or acquiring Person (the
"Successor Company") in such Combination will enter into an agreement with the
Warrant Agent confirming the Holders' rights pursuant to this Section 4.05(a)
and providing for adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article IV. The provisions
of this Section 4.05(a) shall similarly apply to successive Combinations
involving any Successor Company.
(b) In the event of (i) a Combination where consideration to
the holders of Common Stock in exchange for their shares is payable solely in
cash or (ii) the dissolution, liquidation or winding-up of the Company, the
Holders of the Warrants shall be entitled to receive, upon surrender of their
Warrant Certificates, such cash distributions on an equal basis with the holders
of Common Stock or other securities issuable upon exercise of the Warrants, as
if the Warrants had been exercised immediately prior to such event, less the
Exercise Price.
In the event of any Combination described in this Section
4.05(b), the surviving or acquiring Person and, in
<PAGE> 23
19
the event of any dissolution, liquidation or winding-up of the Company, the
Company, shall deposit promptly with the Warrant Agent the funds, if any,
necessary to pay the Holders of the Warrants the amounts to which they are
entitled as described above. After such funds and the surrendered Warrant
Certificates are received, the Warrant Agent shall make payment to the Holders
by delivering a check in such amount as is appropriate (or, in the case of
consideration other than cash, such other consideration as is appropriate) to
such Person or Persons as it may be directed in writing by the Holders
surrendering such Warrants.
SECTION 4.06. Other Events. If any event occurs as to which
the foregoing provisions of this Article IV are not strictly applicable or, if
strictly applicable, would not, in the good faith judgment of the Board of
Directors, fairly and adequately protect the purchase rights of the Warrants in
accordance with the essential intent and principles of such provisions, then
such Board of Directors shall make such adjustments in the application of such
provisions, in accordance with such essential intent and principles, as shall be
reasonably necessary, in the good faith opinion of such Board of Directors, to
protect such purchase rights as aforesaid, but in no event shall any such
adjustment have the effect of increasing the Exercise Price or decreasing the
number of shares of Common Stock issuable upon exercise of the Warrants.
SECTION 4.07. Superseding Adjustment. Upon the expiration of
any rights, options, warrants or conversion or exchange privileges which
resulted in adjustments pursuant to this Article IV, if any thereof shall not
have been exercised, the number of Warrant Shares issuable upon the exercise of
each Warrant shall be readjusted pursuant to the applicable section of Article
IV as if (i) the only shares of Common Stock issuable upon exercise of such
rights, options, warrants, conversion or exchange privileges were the shares of
Common Stock, if any, actually issued upon the exercise of such rights, options,
warrants or conversion or exchange privileges and (ii) shares of Common Stock
actually issued, if any, were issuable for the consideration actually received
by the Company upon such exercise plus the aggregate consideration, if any,
actually received by the Company for the issuance, sale or grant of all such
rights, options, warrants or conversion or exchange privileges whether or not
exercised and the Exercise Price shall be readjusted inversely; provided,
however, that no such readjustment (except by reason of an intervening
adjustment under Section 4.01) shall have the effect of decreasing the number of
Warrant Shares issuable upon the exercise of each
<PAGE> 24
20
Warrant or increasing the Exercise Price by an amount in excess of the amount of
the adjustment initially made in respect of the issuance, sale or grant of such
rights, options, warrants or conversion or exchange privileges.
SECTION 4.08. Minimum Adjustment. The adjustments required by
the preceding sections of this Article IV shall be made whenever and as often as
any specified event requiring an adjustment shall occur, except that no
adjustment of the Exercise Price or the number of shares of Common Stock
issuable upon exercise of the Warrants that would otherwise be required shall be
made unless and until such adjustment either by itself or with other adjustments
not previously made increases or decreases by at least 1% the Exercise Price or
the number of shares of Common Stock issuable upon exercise of the Warrants
immediately prior to the making of such adjustment. Any adjustment representing
a change of less than such minimum amount shall be carried forward and made as
soon as such adjustment, together with other adjustments required by this
Article IV and not previously made, would result in a minimum adjustment. For
the purpose of any adjustment, any specified event shall be deemed to have
occurred at the close of business on the date of its occurrence. In computing
adjustments under this Article IV, fractional interests in Common Stock shall be
taken into account to the nearest one-hundredth of a share.
SECTION 4.09. Notice of Adjustment. Whenever the Exercise
Price or the number of shares of Common Stock and other property, if any,
issuable upon exercise of the Warrants is adjusted, as herein provided, the
Company shall deliver to the Warrant Agent a certificate of a firm of
independent accountants selected by the Board of Directors (who may be the
regular accountants employed by the Company) setting forth, in reasonable
detail, the event requiring the adjustment and the method by which such
adjustment was calculated (including a description of the basis on which (i) the
Board of Directors determined the then fair value of any evidences of
indebtedness, other securities or property or warrants, options or other
subscription or purchase rights and (ii) the Current Market Value of the Common
Stock was determined, if either of such determinations were required), and
specifying the Exercise Price and the number of shares of Common Stock issuable
upon exercise of the Warrants after giving effect to such adjustment. The
Company shall promptly cause the Warrant Agent to mail a copy of such
certificate to each Holder in accordance with Section 7.05. The Warrant Agent
shall be entitled to rely on such certificate and shall be under no duty or
responsibility with respect to any such certificate, except to exhibit the same
from time to time, to any Holder desiring
<PAGE> 25
21
an inspection thereof during reasonable business hours. The Warrant Agent
shall not at any time be under any duty or responsibility to any Holder to
determine whether any facts exist which may require any adjustment of the
Exercise Price or the number of shares of Common Stock or other stock or
property issuable on exercise of the Warrants, or with respect to the nature or
extent of any such adjustment when made, or with respect to the method employed
in making such adjustment or the validity or value of any shares of Common
Stock, evidences of indebtedness, warrants, options, or other securities or
property.
SECTION 4.10. Notice of Certain Transactions. In the event
that the Company shall propose to (a) pay any dividend payable in securities of
any class to the holders of its Common Stock or to make any other non-cash
dividend or distribution to the holders of its Common Stock, (b) offer the
holders of its Common Stock rights to subscribe for or to purchase any
securities convertible into shares of Common Stock or shares of stock of any
class or any other securities, rights or options, (c) issue any (i) shares of
Common Stock, (ii) rights, options or warrants entitling the holders thereof to
subscribe for shares of Common Stock or (iii) securities convertible into or
exchangeable or exercisable for Common Stock (in the case of (i), (ii) and
(iii), if such issuance or adjustment would result in an adjustment hereunder),
(d) effect any capital reorganization, reclassification, consolidation or
merger, (e) effect the voluntary or involuntary dissolution, liquidation or
winding-up of the Company or (f) make a tender offer or exchange offer with
respect to the Common Stock, the Company shall within five days after any such
action or offer send to the Warrant Agent a notice and the Warrant Agent shall
within five days after receipt thereof send the Holders a notice (in such form
as shall be furnished to the Warrant Agent by the Company) of such proposed
action or offer. Such notice shall be mailed by the Warrant Agent to the Holders
at their addresses as they appear in the books of the Warrant Registrar, which
shall specify the record date for the purposes of such dividend, distribution or
rights, or the date such issuance or event is to take place and the date of
participation therein by the holders of Common Stock, if any such date is to be
fixed, and shall briefly indicate the effect, if any, of such action on the
Common Stock and on the number and kind of any other shares of stock and on
other property, if any, and the number of shares of Common Stock and other
property, if any, issuable upon exercise of each Warrant and the Exercise Price
after giving effect to any adjustment pursuant to Article IV which will be
required as a result of such action. Such notice shall be given as promptly as
<PAGE> 26
22
possible and (x) in the case of any action covered by clause (a) or (b) above,
at least 10 days prior to the record date for determining holders of the Common
Stock for purposes of such action or (y) in the case of any other such action,
at least 20 days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of Common Stock, whichever shall be
the earlier.
SECTION 4.11. Adjustment to Warrant Certificate. The form of
Warrant Certificate need not be changed because of any adjustment made pursuant
to this Article IV, and Warrant Certificates issued after such adjustment may
state the same Exercise Price and the same number of shares of Common Stock
issuable upon exercise of the Warrants as are stated in the Warrant Certificates
initially issued pursuant to this Warrant Agreement. The Company, however, may
at any time in its sole discretion make any change in the form of Warrant
Certificate that it may deem appropriate to give effect to such adjustments and
that does not affect the substance of the Warrant Certificate, and any Warrant
Certificate thereafter issued or countersigned, whether in exchange or
substitution for an outstanding Warrant Certificate or otherwise, may be in the
form as so changed.
ARTICLE V
Registration Rights; Indemnification
SECTION 5.01. Effectiveness of Registration Statement. Subject
to Section 5.02, the Company shall cause to be filed pursuant to Rule 415 (or
any successor provision) of the Securities Act not later than 45 days after the
Issue Date, a shelf registration statement relating to the offer and sale of the
Warrants by the Holders from time to time in accordance with the methods of
distribution elected by such holders and set forth in such registration
statement (the "Warrant Shelf Registration Statement"), and shall use its best
efforts to cause the Warrant Shelf Registration Statement to be declared
effective under the Securities Act on or before 105 days after the Issue Date,
and shall cause to be filed a shelf registration statement covering the issuance
of Warrant Shares to the Holders upon exercise of the Warrants by the Holders
thereof (the "Common Shelf Registration Statement", and together with the
Warrant Shelf Registration Statement, the "Registration Statements") and shall
use its best efforts to cause the Common Shelf Registration Statement to be
declared effective on or before 365 days after the Issue Date. The Company shall
use its best efforts to cause (a) the Warrant Shelf Registration Statement to
remain
<PAGE> 27
23
continuously effective until the earliest of (i) such time as all Warrants
have been sold thereunder, (ii) two years after its effective date and (iii)
until all Warrants can be sold without restriction under the Securities Act and
(b) the Common Shelf Registration Statement to remain continuously effective
until the earlier of (i) such time as all Warrants have been exercised and (ii)
the Expiration Date. In connection with any Registration Statement, (i) the
Company shall furnish to the Warrant Agent and the Initial Purchaser, prior to
the filing with the Commission, a copy of any Registration Statement, and each
amendment thereof and each amendment or supplement, if any, to the prospectus
included therein and shall use its reasonable best efforts to reflect in each
such document, when filed with the Commission, such comments as the Warrant
Agent or the Initial Purchaser may reasonably propose, (ii) the Company shall
furnish to each Holder, without charge, at least one conformed copy of any
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, and, if the Holder so requests in writing,
all exhibits thereto (including those incorporated by reference), (iii) the
Company shall, for so long as any Registration Statement is effective, deliver
to each Holder and the Initial Purchaser, without charge, as many copies of the
prospectus (including each preliminary prospectus) included in such Registration
Statement and any amendment or supplement thereto as such Holder or Initial
Purchaser may reasonably request, and the Company consents to the proper use of
the prospectus therein and any amendment or supplement thereto by each of the
selling Holders in connection with the offering and sale of the Warrants or the
exercise, offering or sale of Warrant Shares, as the case may be, covered by
such prospectus and any amendment or supplement thereto, (iv) the Company may
require each Holder of Warrants to be sold pursuant to the Warrant Shelf
Registration Statement or to be exercised in connection with the Common Shelf
Registration Statement to furnish to the Company such information regarding the
Holder and the distribution of such Warrants or Warrant Shares as the Company
may from time to time reasonably request for inclusion in such Registration
Statement (the "Holders' Information"), and the Company may exclude from such
registration the Transfer Restricted Warrants (as defined in the Appendix) of
any Holder that fails to furnish such information within a reasonable time after
receiving such request, (v) the Company shall, if requested, promptly
incorporate in a prospectus supplement or post-effective amendment to such
Registration Statement such information as a majority in interest of the Holders
reasonably agree should be included therein and shall make all required filings
of such prospectus supplement or post-effective
<PAGE> 28
24
amendment as soon as practicable following notification of the matters to be
incorporated in such prospectus supplement or post-effective amendment, (vi) the
Company shall enter into such agreements (including underwriting agreements) as
are appropriate, customary and reasonably necessary in connection with any such
Registration Statement and (vii) the Company shall (A) make reasonably available
for inspection by a representative of, and counsel acting for Holders of a
majority of the Warrants and any underwriter participating in any disposition of
Warrants, all relevant financial and other records, pertinent corporate
documents and properties of the Company, (B) use its reasonable best efforts to
have its officers, directors, employees, accountants and counsel supply all
relevant information reasonably requested by such representative, counsel or any
such underwriter in connection with such Registration Statement, and (C) if
requested by Holders of a majority of Warrants, their counsel or the managing
underwriters (if any) in connection with such Registration Statement, use its
reasonable best efforts to cause (x) its counsel to deliver an opinion relating
to the Registration Statement and the Warrants or Warrant Shares, as the case
may be, in customary form, (y) its officers to execute and deliver all customary
documents and certificates requested by Holders of a majority of the Warrants,
their counsel or the managing underwriters (if any) and (z) its independent
public accountants to provide a comfort letter or letters in customary form,
subject to receipt of appropriate documentation as contemplated, and only if
permitted, by Statement of Auditing Standards No. 72.
(b) The Company shall notify Holders and, if requested,
confirm in writing (which notice pursuant to clauses (ii)-(v) hereof shall be
accompanied by an instruction to suspend the use of the prospectus until the
requisite changes have been made): (i) when any Registration Statement and any
amendment thereto has been filed with the Commission and when such Registration
Statement or any post-effective amendment thereto has become effective; (ii) of
any request by the Commission for amendments or supplements to any Registration
Statement or the prospectus included therein or for additional information;
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of any Registration Statement or the initiation of any proceedings
for that purpose; (iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Warrants or the Warrant
Shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; and (v) of the happening of any event that requires
the making of any changes in any
<PAGE> 29
25
Registration Statement or the prospectus included therein in order that the
statements therein are not misleading and do not omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. The Company shall make every reasonable effort to obtain the
withdrawal at the earliest possible time of any order suspending the
effectiveness of any Registration Statement. If any event contemplated by
clauses (ii) through (v) occurs during the period for which the Company is
required to maintain an effective Registration Statement, the Company shall
promptly prepare and file with the Commission a post-effective amendment to the
Registration Statement or a supplement to the related prospectus or file any
other required document so that, as thereafter delivered, the prospectus shall
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. Each Holder agrees
that, upon receipt of any notice from the Company pursuant to clauses (ii)
through (v), such Holder shall discontinue disposition of such Warrants or
Warrant Shares until such Holder's receipt of copies of a supplemental or
amended prospectus or until advised in writing (the "Advice") by the Company
that the use of the applicable prospectus may be resumed. If the Company shall
give any notice under clauses (ii) through (v) during the period that the
Company is required to maintain an effective Registration Statement (the
"Effectiveness Period"), such Effectiveness Period, in the case of the Warrant
Shelf Registration Statement, shall be extended by the number of days during
such period from and including the date of the giving of such notice to and
including the date when each seller of Warrants or Warrant Shares covered by
such Registration Statement shall have received (x) the copies of a supplemental
or amended prospectus (if an amended or supplemental prospectus is required) or
(y) the Advice (if no amended or supplemental prospectus is required).
SECTION 5.02. Suspension. During any consecutive 365-day
period, the Company shall be entitled to suspend the availability of each of the
Warrant Shelf Registration Statement and the Common Shelf Registration Statement
for up to two 45 consecutive-day periods (except for the 45 consecutive-day
period immediately prior to the Expiration Date) if the Company's Board
determines in the exercise of its reasonable judgment that there is a valid
business purpose for such suspension and provides notice that such determination
was made to the Holders of the Warrants; provided, however, that in no event
shall the Company be required to disclose the business purpose for such
<PAGE> 30
26
suspension if the Company determines in good faith that such business purpose
must remain confidential.
SECTION 5.03. Blue Sky. The Company shall use its best efforts
to register or qualify the Warrants and the Warrant Shares under all applicable
securities laws, blue sky laws or similar laws of all jurisdictions in the
United States and Canada in which any holder of Warrants may or may be deemed to
purchase Warrants or Warrant Shares upon the exercise of Warrants and shall use
its best efforts to maintain such registration or qualification for so long as
it is required to cause the Warrant Shelf Registration Statement (in the case of
the Warrants) and the Common Shelf Registration Statement (in the case of the
Warrant Shares) to remain effective under the Securities Act pursuant to Section
5.01; provided, however, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 5.03 or to take any action which would
subject it to general service of process or to taxation in any such jurisdiction
where it is not then so subject.
SECTION 5.04. Accuracy of Disclosure. The Company represents
and warrants to each Holder and agrees for the benefit of each Holder that (i)
each of the Warrant Shelf Registration Statement and the Common Shelf
Registration Statement and any amendment thereto will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein not
misleading and (ii) each of the prospectus furnished to such Holder for delivery
in connection with the sale of Warrants and the prospectus delivered to such
Holder upon the exercise of Warrants and the documents incorporated by reference
therein will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the Company shall have
no liability under clauses (i) or (ii) of this Section 5.04 with respect to any
such untrue statement or omission made in any Registration Statement in reliance
upon and in conformity with information furnished to the Company by or on behalf
of the Holders specifically for inclusion therein.
SECTION 5.05. Indemnification. (a) In connection with any
Registration Statement, the Company shall indemnify and hold harmless each
Holder (including, without limitation, the Initial Purchaser), its affiliates,
<PAGE> 31
27
their respective officers, directors, employees, representatives and agents, and
each person, if any, who controls such Holder within the meaning of the
Securities Act or the Exchange Act (collectively referred to for purposes of
this Section 5.05 as a Holder) from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof (including,
without limitation, any loss, claim, damage, liability or action relating to
purchases and sales of Warrants or Warrant Shares), to which that Holder may
become subject, whether commenced or threatened, under the Securities Act, the
Exchange Act, any other Federal or state statutory law or regulation, at common
law or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in any such Registration Statement or any
prospectus forming part thereof or in any amendment or supplement thereto or
(ii) the omission or alleged omission to state therein a material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading, and
shall reimburse each Holder promptly upon demand for any legal or other expenses
reasonably incurred by that Holder in connection with investigating or defending
or preparing to defend against or appearing as a third party witness in
connection with any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with any Holders' Information; and provided,
further, that with respect to any such untrue statement in or omission from any
related preliminary prospectus, the indemnity agreement contained in this
Section 5.05(a) shall not inure to the benefit of any Holder from whom the
person asserting any such loss, claim, damage, liability or action received
Warrants or Warrant Shares to the extent that such loss, claim, damage,
liability or action of or with respect to such Holder results from the fact that
both (A) a copy of the final prospectus was not sent or given to such person at
or prior to the written confirmation of the sale of such Warrants (in the case
of the sale of Warrants), to such person and (B) the untrue statement in or
omission from the related preliminary prospectus was corrected in the final
prospectus unless, in either case, such failure to deliver the final prospectus
was a result of noncompliance by the Company with Section 5.01. This indemnity
agreement will be in addition to any liability which the Company may otherwise
<PAGE> 32
28
have to a Holder. The Company shall also indemnify underwriters, selling
brokers, dealer-managers and similar securities industry professionals
participating in the distribution (in each case as described in the Registration
Statement), their officers and directors and each person who controls such
persons within the meaning of the Securities Act or the Exchange Act to the same
extent as provided above with respect to the indemnification of the Holders of
the Securities if requested by such Holders.
(b) In connection with any Registration Statement each Holder,
severally and not jointly, shall indemnify and hold harmless the Company, its
affiliates, their respective officers, directors, employees, representatives and
agents, and each person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act (collectively referred to for purposes of
this Section 5.05 as the Company), from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which the
Company may become subject, whether commenced or threatened, under the
Securities Act, the Exchange Act, any other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained in any such Registration
Statement or any prospectus forming part thereof or in any amendment or
supplement thereto or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to made the
statements therein, in the light of the circumstances under which they were
made, not misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with any Holders' Information furnished to
the Company by such Holder, and shall reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending or preparing to defend against or appearing as a
third party witness in connection with any such loss, claim, damage, liability
or action as such expenses are incurred; provided, however, that no such Holder
shall be liable for any indemnity claims hereunder in excess of the amount of
net proceeds received by such Holder from the sale of Warrants, in the case of
the Warrant Shelf Registration Statement, or the Current Market Value of Warrant
Shares at the time they were received in the case of the Common Stock Shelf
Registration Statement.
(c) Promptly after receipt by an indemnified party under this
Section 5.05 of notice of any claim or the
<PAGE> 33
29
commencement of any action, the indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party pursuant to Section 5.05(a)
or 5.05(b), notify the indemnifying party in writing of the claim or the
commencement of that action; provided, however, that the failure to notify the
indemnifying party shall not relieve it from any liability which it may have
under this Section 5.05 except to the extent that it has been materially
prejudiced (through the forfeiture of substantive rights or defenses) by such
failure; and provided, further, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have to an
indemnified party otherwise than under this Section 5.05. If any such claim or
action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 5.05 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than the reasonable costs of investigation; provided, however,
that an indemnified party shall have the right to employ its own counsel in any
such action, but the fees, expenses and other charges of such counsel for the
indemnified party will be at the expense of such indemnified party unless (1)
the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based upon advice of counsel to the indemnified party) that there may
be legal defenses available to it or other indemnified parties that are
different from or in addition to those available to the indemnifying party, (3)
a conflict or potential conflict exists (based upon advice of counsel to
the indemnified party) between the indemnified party and the indemnifying party
(in which case the indemnifying party will not have the right to direct the
defense of such action on behalf of the indemnified party) or (4) the
indemnifying party has not in fact employed counsel reasonably satisfactory to
the indemnified party to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
<PAGE> 34
30
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm of attorneys (in
addition to any local counsel) at any one time for all such indemnified party or
parties. Each indemnified party, as a condition of the indemnity agreements
contained in Sections 5.05(a) and 5.05(b), shall use all reasonable efforts to
cooperate with the indemnifying party in the defense of any such action or
claim. No indemnifying party shall be liable for any settlement of any such
action effected without its written consent (which consent shall not be
unreasonably withheld), but if settled with its written consent or if there be a
final judgment for the plaintiff in any such action, the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against any
loss or liability by reason of such settlement or judgment. No indemnifying
party shall, without the prior written consent of the indemnified party (which
consent shall not be unreasonably withheld), effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(d) If the indemnification provided for above is unavailable
or insufficient to hold harmless an indemnified party under Section 5.05(a) or
5.05(b), then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in respect
thereof, (i) in such proportion as shall be appropriate to reflect the relative
benefits received by the Company, on the one hand, and a Holder, on the other,
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, on the one hand, and such Holder, on the other, with respect to the
statements or omissions that resulted in such loss, claim, damage or liability,
or action in respect thereof, as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to the
Company or information supplied by the Company, on the one hand, or to any
Holders' Information supplied by such Holder, on the other, the intent of the
parties and their relative knowledge, access
<PAGE> 35
31
to information and opportunity to correct or prevent such untrue statement or
omission. The parties hereto agree that it would not be just and equitable if
contributions pursuant to this Section 5.05(d) were to be determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 5.05(d) shall be
deemed to include, for purposes of this Section 5.05(d), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending or preparing to defend any such action or claim.
Notwithstanding the provisions of this Section 5.05(d), an indemnifying party
that is a Holder shall not be required to contribute any amount in excess of the
amount by which the total price at which the Warrants sold, in the case of the
Warrant Shelf Registration Statement, and the Current Market Value of the
Warrant Shares at the time they were received, in the case of the Common Stock
Registration Statement, by such indemnifying party to any purchaser exceeds the
amount of any damages which such indemnifying party has otherwise paid or become
liable to pay by reason of any untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(e) The agreements contained in this Section 5.05 shall
survive the sale of the Securities pursuant to the Registration Statements and
shall remain in full force and effect, regardless of any termination or
cancelation of this Warrant Agreement or any investigation made by or on behalf
of any indemnified party.
SECTION 5.06. Additional Acts. If the sale of Warrants or the
issuance or sale of any Common Stock or other securities issuable upon the
exercise of the Warrants requires registration or approval of any governmental
authority (other than the registration requirements under the Securities Act),
or the taking of any other action under the laws of the United States or any
political subdivision thereof before such securities may be validly offered or
sold in compliance with such laws, then the Company covenants that it will, in
good faith and as expeditiously as reasonably possible, use its reasonable best
efforts to secure and maintain such registration or approval or to take such
other action, as the case may be. The Company shall promptly notify the Warrant
Agent in writing when (i) the
<PAGE> 36
32
Company has obtained all such governmental approvals and authorizations and (ii)
such approvals and authorizations thereafter cease to be in effect.
SECTION 5.07. Expenses. All expenses incident to the Company's
performance of or compliance with its obligations under this Article V will be
borne by the Company, including without limitation: (i) all SEC, stock exchange
or National Association of Securities Dealers, Inc. registration and filing
fees, (ii) all reasonable fees and expenses incurred in connection with the
compliance with state securities or blue sky laws, (iii) all expenses of any
Persons incurred by or on behalf of the Company in preparing or assisting in
preparing, printing and distributing the Warrant Shelf Registration Statement,
the Common Shelf Registration Statement or any other registration statement,
prospectus, any amendments or supplements thereto and other documents relating
to the performance of and compliance with this Article V, (iv) the fees and
disbursements of the Warrant Agent as agreed, (v) the fees and disbursements of
counsel for the Company and the Warrant Agent as agreed, (vi) the fees and
disbursements of one firm of attorneys (in addition to any local counsel) chosen
by a majority of the Holders of Warrants in the case of each of the Warrant
Shelf Registration Statement and the Common Stock Registration Statement and
(vii) the fees and disbursements of the independent public accountants of the
Company, including the expenses of any special audits or comfort letters
required by or incident to such performance and compliance.
ARTICLE VI
Warrant Agent
SECTION 6.01. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as agent for the Company in accordance with
the provisions of this Warrant Agreement and the Warrant Agent hereby accepts
such appointment.
SECTION 6.02. Rights and Duties of Warrant Agent. (a) Agent
for the Company. In acting under this Warrant Agreement and in connection with
the Warrant Certificates, the Warrant Agent is acting solely as agent of the
Company and does not assume any obligation or relationship or agency or trust
for or with any of the holders of Warrant Certificates or beneficial owners of
Warrants.
(b) Counsel. The Warrant Agent may consult with counsel
satisfactory to it (and may require an Opinion of
<PAGE> 37
33
Counsel before it acts or refrains from acting), and the advice of such 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 accordance with
the advice of such counsel.
(c) Documents. The Warrant Agent shall be protected and shall
incur no liability for or in respect of any action taken or thing suffered by it
in reliance upon any Warrant Certificate, notice, direction, consent,
certificate, affidavit, statement or other paper or document reasonably believed
by it to be genuine and to have been presented or signed by the proper parties.
(d) No Implied Obligations. The Warrant Agent shall be
obligated to perform only such duties as are specifically set forth herein and
in the Warrant Certificates, and no implied duties or obligations of the Warrant
Agent shall be read into this Warrant Agreement or the Warrant Certificates
against the Warrant Agent. The Warrant Agent shall not be under any obligation
to take any action hereunder which may tend to involve it in any expense or
liability for which it does not receive indemnity if such indemnity is
reasonably requested. The Warrant Agent shall not be accountable or under any
duty or responsibility for the use by the Company of any of the Warrant
Certificates countersigned by the Warrant Agent and delivered by it to the
Holders or on behalf of the Holders pursuant to this Warrant Agreement or for
the application by the Company of the proceeds of the Warrants. The Warrant
Agent shall have no duty or responsibility in case of any default by the Company
in the performance of its covenants or agreements contained herein or in the
Warrant Certificates or in the case of the receipt of any written demand from a
Holder with respect to such default, including any duty or responsibility to
initiate or attempt to initiate any proceedings at law or otherwise.
(e) Not Responsible for Adjustments or Validity of Stock. The
Warrant Agent shall not at any time be under any duty or responsibility to any
Holder to determine whether any facts exist that may require an adjustment of
the number of shares of Common Stock issuable upon exercise of each Warrant or
the Exercise Price, or with respect to the nature or extent of any adjustment
when made, or with respect to the method employed, or herein or in any supple
mental agreement provided to be employed, in making the same. The Warrant Agent
shall not be accountable with respect to the validity or value of any shares of
Common Stock or of any securities or property which may at any time be issued or
delivered upon the exercise of any Warrant or
<PAGE> 38
34
upon any adjustment pursuant to Article IV, and it makes no representation with
respect thereto. The Warrant Agent shall not be responsible for any failure of
the Company to make any cash payment or to issue, transfer or deliver any shares
of Common Stock or stock certificates upon the surrender of any Warrant
Certificate for the purpose of exercise or upon any adjustment pursuant to
Article IV, or to comply with any of the covenants of the Company contained in
Article IV.
SECTION 6.03. Individual Rights of Warrant Agent. The Warrant
Agent and any stockholder, director, officer or employee of the Warrant Agent
may buy, sell or deal in any of the Warrants or other securities of the Company
or its affiliates and may otherwise deal with the Company or its affiliates with
the same rights it would have if it were not Warrant Agent. Nothing herein shall
preclude the Warrant Agent from acting in any other capacity for the Company or
for any other legal entity.
SECTION 6.04. Warrant Agent's Disclaimer. The Warrant Agent
shall not be responsible for and makes no representation as to the validity or
adequacy of this Warrant Agreement or the Warrant Certificates and it shall not
be responsible for any statement in this Warrant Agreement or the Warrant
Certificates other than its countersignature thereon.
SECTION 6.05. Compensation and Indemnity. The Company agrees
to pay the Warrant Agent from time to time reasonable compensation for its
services as agreed and to reimburse the Warrant Agent upon request for all
reasonable out-of-pocket expenses incurred by it, including the reasonable
compensation and expenses of the Warrant Agent's agents and counsel as agreed.
The Company shall indemnify the Warrant Agent against any loss, liability or
expense (including reasonable agents' and attorneys' fees and expenses) incurred
by it without negligence or bad faith on its part arising out of or in
connection with the acceptance or performance of its duties under this Warrant
Agreement. The Warrant Agent shall notify the Company promptly of any claim for
which it may seek indemnity. The Company need not reimburse any expense or
indemnify against any loss or liability incurred by the Warrant Agent through
wilful misconduct, negligence or bad faith. The Company's payment obligations
pursuant to this Section 6.05 shall survive the termination of this Warrant
Agreement.
To secure the Company's payment obligations under this Warrant
Agreement, the Warrant Agent shall have a lien
<PAGE> 39
35
prior to the Holders on all money or property held or collected by the Warrant
Agent.
SECTION 6.06. Successor Warrant Agent. (a) The Company To
Provide and Maintain Warrant Agent. The Company agrees for the benefit of the
Holders that there shall at all times be a Warrant Agent hereunder until all the
Warrants have been exercised or are no longer exercisable.
(b) Resignation and Removal. The Warrant Agent may at any time
resign by giving written notice to the Company of such intention on its part,
specifying the date on which its desired resignation shall become effective;
provided, however, that such date shall not be less than 60 days after the date
on which such notice is given unless the Company otherwise agrees. The Warrant
Agent hereunder may be removed at any time by the filing with it of an
instrument in writing signed by or on behalf of the Company and specifying such
removal and the date when it shall become effective, which date shall not be
less than 60 days after such notice is given unless the Warrant Agent otherwise
agrees. Any removal under this Section 6.06 shall take effect upon the
appointment by the Company as hereinafter provided of a successor Warrant Agent
(which shall be a bank or trust company authorized under the laws of the
jurisdiction of its organization to exercise corporate trust powers) and the
acceptance of such appointment by such successor Warrant Agent. At any time that
the Warrant Agent is also acting as Trustee under the Indenture and holders of
the Notes remove the Trustee pursuant to Section 7.08 of the Indenture, the
Company shall remove the Warrant Agent pursuant to this Section 6.06(b).
(c) The Company To Appoint Successor. In the event that at any
time the Warrant Agent shall resign, or shall be removed, or shall become
incapable of acting, or shall be adjudged a bankrupt or insolvent, or shall
commence a voluntary case under the Federal bankruptcy laws, as now or hereafter
constituted, or under any other applicable Federal or state bankruptcy,
insolvency or similar law or shall consent to the appointment of or taking
possession by a receiver, custodian, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Warrant Agent or its property or affairs, or
shall make an assignment for the benefit of creditors, or shall admit in writing
its inability to pay its debts generally as they become due, or shall take
corporate action in furtherance of any such action, or a decree or order for
relief by a court having jurisdiction in the premises shall have been entered in
respect of the Warrant Agent in an involuntary case under the Federal bankruptcy
laws, as now or hereafter
<PAGE> 40
36
constituted, or any other applicable Federal or state bankruptcy, insolvency or
similar law, or a decree or order by a court having jurisdiction in the premises
shall have been entered for the appointment of a receiver, custodian,
liquidator, assignee, trustee, sequestrator (or similar official) of the Warrant
Agent or of its property or affairs, or any public officer shall take charge or
control of the Warrant Agent or of its property or affairs for the purpose of
rehabilitation, conservation, winding up or liquidation, a successor Warrant
Agent, qualified as aforesaid, shall be appointed by the Company by an
instrument in writing, filed with the successor Warrant Agent. Upon the
appointment as aforesaid of a successor Warrant Agent and acceptance by the
successor Warrant Agent of such appointment, the Warrant Agent shall cease to be
Warrant Agent hereunder; provided, however, that in the event of the resignation
of the Warrant Agent under this subsection (c), such resignation shall be
effective on the earlier of (i) the date specified in the Warrant Agent's notice
of resignation and (ii) the appointment and acceptance of a successor Warrant
Agent hereunder.
(d) Successor To Expressly Assume Duties. Any successor
Warrant Agent appointed hereunder shall execute, acknowledge and deliver to its
predecessor and to the Company an instrument accepting such appointment
hereunder, and thereupon such successor Warrant Agent, without any further act,
deed or conveyance, shall become vested with all the rights and obligations of
such predecessor with like effect as if originally named as Warrant Agent
hereunder, and such predecessor, upon payment of its charges and disbursements
then unpaid, shall thereupon become obligated to transfer, deliver and pay over,
and such successor Warrant Agent shall be entitled to receive, all monies,
securities and other property on deposit with or held by such predecessor, as
Warrant Agent hereunder.
(e) Successor by Merger. If the Warrant Agent consolidates
with, merges or converts into, or transfers all or substantially all its
corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Warrant Agent.
ARTICLE VII
Miscellaneous
SECTION 7.01. SEC Reports. Notwithstanding that the Company
may not be subject to the reporting requirements
<PAGE> 41
37
of Section 13 or 15(d) of the Exchange Act the Company shall file with the SEC
and provide the Warrant Agent and Holders within 15 days after it files them
with the SEC, copies of its annual report and the information, documents and
other reports that are specified in Sections 13 and 15(d) of the Exchange Act.
In addition, following a public offering of the common stock of the Company, the
Company shall furnish to the Warrant Agent and the Holders, promptly upon their
becoming available, copies of the annual report to stockholders and any other
information provided by the Company to its public stockholders generally.
SECTION 7.02. Persons Benefitting. Nothing in this Warrant
Agreement is intended or shall be construed to confer upon any Person other than
the Company, the Warrant Agent and the Holders any right, remedy or claim under
or by reason of this Warrant Agreement or any part hereof.
SECTION 7.03. Rights of Holders. Holders of unexercised
Warrants are not entitled to (i) receive dividends or other distributions, (ii)
receive notice of or vote at any meeting of the stockholders, (iii) consent to
any action of the stockholders, (iv) receive notice of any other proceedings of
the Company, (v) exercise any preemptive right or (vi) exercise any other rights
whatsoever as stockholders of the Company.
SECTION 7.04. Amendment. This Warrant Agreement may be amended
by the parties hereto without the consent of any Holder for the purpose of
curing any ambiguity, or of curing, correcting or supplementing any defective
provision contained herein or adding or changing any other provisions with
respect to matters or questions arising under this Warrant Agreement as the
Company and the Warrant Agent may deem necessary or desirable (including without
limitation any addition or modification to provide for compliance with the
transfer restrictions set forth herein); provided, however, that such action
shall not adversely affect the rights of any of the Holders. Any amendment or
supplement to this Warrant Agreement that has an adverse effect on the interests
of the Holders shall require the written consent of the Holders of a majority of
the then outstanding Warrants. The consent of each Holder affected shall be
required for any amendment pursuant to which the Exercise Price would be
increased, the number of Warrant Shares issuable upon exercise of Warrants would
be decreased (other than pursuant to adjustments provided herein) or the
antidilution provisions in Article IV are altered in a manner which adversely
affects the Holders. In determining whether the Holders of the required number
of Warrants have concurred in any direction, waiver or consent, Warrants
<PAGE> 42
38
owned by the Company or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company shall
be disregarded and deemed not to be outstanding, except that, for the purpose of
determining whether the Warrant Agent shall be protected in relying on any such
direction, waiver or consent, only Warrants which the Warrant Agent knows are so
owned shall be so disregarded. Also, subject to the foregoing, only Warrants
outstanding at the time shall be considered in any such determination.
SECTION 7.05. Notices. Any notice or communication shall be in
writing and delivered in person or mailed by first-class mail addressed as
follows:
if to the Company:
Splitrock Services, Inc.
8665 New Trails Drive, Suite 200
The Woodlands, TX 77381
Attention of: Vice President and
General Counsel
if to the Warrant Agent:
Bank of Montreal Trust Company
88 Pine Street
New York, NY 10005
Attention of: Corporate Trust
Department
The Company or the Warrant Agent by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Holder shall be mailed
to the Holder at the Holder's address as it
appears on the records of the Warrant Registrar and shall be sufficiently given
if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other Holders. If
a notice or communication is mailed in the manner provided above, it is duly
given, whether or not the addressee receives it.
SECTION 7.06. Governing Law. THIS WARRANT AGREEMENT AND THE
WARRANTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF
<PAGE> 43
39
NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW
TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE
REQUIRED THEREBY.
SECTION 7.07. Successors. All agreements of the Company in
this Warrant Agreement and the Warrant Certificates shall bind its successors.
All agreements of the Warrant Agent in this Agreement shall bind its successors.
SECTION 7.08. Multiple Originals. The parties may sign any
number of copies of this Warrant Agreement. Each signed copy shall be an
original, but all of them together represent the same agreement. One signed copy
is enough to prove this Warrant Agreement.
SECTION 7.09. Table of Contents. The table of contents and
headings of the Articles and Sections of this Warrant Agreement have been
inserted for convenience of reference only, are not intended to be considered a
part hereof and shall not modify or restrict any of the terms or provisions
hereof.
SECTION 7.10. Severability. The provisions of this Warrant
Agreement are severable, and if any clause or provision shall be held invalid,
illegal or unenforceable in whole or in part in any jurisdiction, then such
invalidity or unenforceability shall affect in that jurisdiction only such
clause or provision, or part thereof, and shall not in any manner affect such
clause or provision in any other jurisdiction or any other clause or provision
of this Warrant Agreement in any jurisdiction.
<PAGE> 44
40
IN WITNESS WHEREOF, the parties have caused this Warrant
Agreement to be duly executed as of the date first written above.
SPLITROCK SERVICES, INC.,
by /s/
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
BANK OF MONTREAL TRUST
COMPANY, as Warrant Agent,
by /s/
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
<PAGE> 1
EXHIBIT 10.13
SPLITROCK SERVICES, INC.
1997 INCENTIVE SHARE PLAN
------------------------------------
SECTION 1. PURPOSE AND EFFECTIVE DATE
1.1 Purpose. This is an amendment and restatement of the Splitrock
Services, Inc. 1997 Incentive Share Plan. The purposes of the Plan continue to
be to advance the interests of Splitrock Services, Inc. (the "Company") and its
shareholders by enabling the Company and each of its Subsidiaries (as
hereinafter defined) to (A) provide share ownership opportunities to certain of
their key employees to participate in the Company's growth and (B) enhance their
ability to attract and retain individuals of superior managerial ability and to
motivate employees, consultants, independent contractors, agents, and other
persons to exert their best efforts towards future progress and profitability of
the Company.
1.2 Effective Date. The Plan became effective on June 16, 1997. This
amendment and restatement is adopted by the Board of Directors of the Company on
April 1, 1998, effective June 16, 1997. No Award may be granted under the Plan
after January 1, 2007.
SECTION 2. DEFINITIONS
As used in this Plan, the following terms shall have the meanings set
forth below unless the context otherwise requires:
2.1 "Award" shall mean the grant of a Stock Option, a Stock
Appreciation Right, Restricted Stock, a Performance Award, or any other
grant of incentive compensation pursuant to this Plan.
2.2 "Award Period" shall have the meaning set forth in
Subsection 16.2 of this Plan.
2.3 "Board" shall mean the Board of Directors of the Company,
as the same may be constituted from time to time.
2.4 "Change in Control" shall mean, after the effective date
of the amendment and restatement of this Plan stated in Subsection 1.2,
(i) the occurrence of an event of a nature that would be required to be
reported by the Company in response to Item 1 of a Current Report on
Form 8-K (or any successor to such form), whether or not the Company
is, in fact, required to report on such form, promulgated pursuant to
the Exchange Act; provided that, without limitation, such a Change in
Control shall be deemed to have occurred if (a) any Person or group (as
defined in the Exchange Act), other than (A) the Company, (B) a
wholly-owned Subsidiary, (C) any employee benefit plan (including,
without limitation, an employee stock ownership plan) adopted by the
Company or any wholly-owned Subsidiary or (D) any trustee or other
fiduciary holding securities under any employee benefit plan adopted by
the Company or any Subsidiary, becomes the "beneficial
<PAGE> 2
owner" (as defined in Rule 13d-3 (or any successor to such rule)
promulgated under the Exchange Act), directly or indirectly, of
securities of the Company representing fifty percent (50%) or more of
the combined voting power of the Company's then outstanding securities
or (b) during any period of twenty-four (24) months, individuals who at
the beginning of such period constitute the Board cease for any reason
to constitute at least a majority thereof, unless the election by the
Board or the nomination for election by the Company's shareholders was
approved by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors at the beginning of such
twenty-four (24) month period or whose election or nomination for
election was previously so approved; (ii) a Corporate Transaction is
consummated, other than a Corporate Transaction that would result in
substantially all of the holders of voting securities of the Company
outstanding immediately prior thereto owning (directly or indirectly
and in substantially the same proportions relative to each other) not
less than fifty percent (50%) of the combined voting power of the
voting securities of the issuing/surviving/resulting entity outstanding
immediately after such Corporate Transaction; or (iii) an agreement for
the sale or other disposition of all or substantially all of the
Company's assets (evaluated on a consolidated basis, without regard to
whether the sale or disposition is effected via a sale or disposition
of assets of the Company, the sale or disposition of the securities of
one or more Subsidiaries or the sale or disposition of the assets of
one or more Subsidiaries) is consummated.
2.5 "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time (or any successor to such legislation).
2.6 "Committee" shall mean the Compensation Committee of the Board, if such
a committee shall have been appointed and consist of two (2) or more directors
of the Company who are both "Non-Employee Directors" (as that term is defined in
Rule 16b-3 (or any successor to such rule) promulgated under the Exchange Act)
and "outside directors" within the meaning of Section 162(m) of the Code and
such Treasury regulations as may be promulgated thereunder. If a separate
Compensation Committee with such membership shall not have been appointed,
"Committee" shall mean the Board.
2.7 "Company" shall mean Splitrock Services, Inc., a Texas corporation.
2.8 "Consultant" shall mean any Person who or which is engaged by the
Company or any Subsidiary to render services as a consultant or advisor.
2.9 "Corporate Transaction" shall mean any reorganization, merger,
consolidation or conversion involving the Company or any exchange of securities
involving Shares, other than a Recapitalization.
2.10 "Designated Beneficiary" shall mean the beneficiary designated by a
Participant, in a manner authorized by the Committee, to exercise the rights of
such Participant in the event of such Participant's death. In the absence of an
effective designation by a Participant, the Designated Beneficiary shall be such
Participant's estate.
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<PAGE> 3
2.11 "Disability" shall mean permanent and total inability to engage in any
substantial gainful activity, even with reasonable accommodation, by reason of
any medically determinable physical or mental impairment which has lasted or can
reasonably be expected to last without material interruption for a period of not
less than twelve (12) months, as determined in the sole discretion of the
Committee.
2.12 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time (or any successor to such legislation).
2.13 "Fair Market Value" shall mean with respect to the Shares, as of any
date, (i) if the Shares are listed or admitted to trade on a national securities
exchange, the closing price of the Shares on the composite tape, as published in
the Wall Street Journal, of the principal national securities exchange on which
the Shares are so listed or admitted to trade, on such date or, if there is no
trading in Shares on such date, then the closing price of the Shares as quoted
on such composite tape on the next preceding date on which there was trading in
such Shares; (ii) if the Shares are not listed or admitted to trade on a
national securities exchange, then the closing price of the Shares as quoted on
the National Market System of the NASD; (iii) if the Shares are not listed or
admitted to trade on a national securities exchange or the National Market
System of the NASD, the mean between the bid and asked price for the Shares on
such date, as furnished by the NASD through NASDAQ or a similar organization if
NASDAQ is no longer reporting such information; or (iv) if the Shares are not
listed or admitted to trade on a national securities exchange or the National
Market System of the NASD and if bid and asked prices for the Shares are not so
furnished by the NASD or a similar organization, the value established by the
Board, determined without regard to any restriction other than a restriction
which, by its terms, will never lapse.
2.14 "Incentive Stock Option" shall mean any option to purchase Shares
awarded pursuant to this Plan which qualifies as an "Incentive Stock Option"
pursuant to Section 422 of the Code.
2.15 "Named Executive Officer" shall have the meaning set forth in
Subsection 17.1 of this Plan.
2.16 "NASD" shall mean the National Association of Securities Dealers, Inc.
2.17 "Non-Qualified Stock Option" shall mean any option to purchase Shares
awarded pursuant to this Plan that does not qualify as an Incentive Stock Option
(including, without limitation, any option to purchase Shares originally
designated as or intended to qualify as an Incentive Stock Option) but which
does not (for whatever reason) qualify as an Incentive Stock Option.
2.18 "Non-Tandem Stock Appreciation Right" shall mean any Stock Appreciation
Right granted alone and not in connection with an Award which is a Stock Option.
2.19 "Optionee" shall mean any Participant who has been granted and holds a
Stock Option awarded pursuant to this Plan.
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<PAGE> 4
2.20 "Participant" shall mean any Person who has been granted and holds an
Award granted pursuant to this Plan.
2.21 "Performance Award" shall mean any Award granted pursuant to this Plan
of Shares, rights based upon, payable in or otherwise related to Shares
(including Restricted Stock) or cash, as the Committee may determine, at the end
of a specified performance period established by the Committee.
2.22 "Permitted Modification" shall be deemed to be any modification of an
Award which is made in connection with a Corporate Transaction and which
provides (i) in connection with a Stock Option, that subsequent to the
consummation of the Corporate Transaction (A) the exercise price of such Stock
Option will be proportionately adjusted to reflect the exchange ratio applicable
to the particular Corporate Transaction and/or (B) the nature and amount of
consideration to be received upon exercise of the Stock Option will be the same
(on a per share basis) as was received by Persons who were holders of Shares
immediately prior to the consummation of the Corporate Transaction, (ii) in
connection with a Stock Appreciation Right, that subsequent to the consummation
of the Corporate Transaction (A) the base price of such Stock Appreciation Right
will be proportionately adjusted to reflect the exchange ratio applicable to the
particular Corporate Transaction and/or (B) the benefits to be received by the
holder of such Stock Appreciation Right will be measured based upon the nature
and amount of consideration received (on a per share basis) by Persons who were
holders of Shares immediately prior to the consummation of the Corporate
Transaction, or (iii) for a modification expressly provided for in this Plan or
in an Award agreement.
2.23 "Person" shall mean an individual, partnership, limited liability
company, corporation, joint stock company, trust, estate, joint venture,
association or unincorporated organization or any other form of business
organization.
2.24 "Plan" shall mean this Splitrock Services, Inc. 1997 Incentive Share
Plan as set out in this document and as it may be amended from time to time.
2.25 "Reload Option" shall mean a Stock Option as defined in Subsection
6.6(b) of this Plan.
2.26 "Recapitalization" shall mean any stock split, stock dividend, reverse
stock split, combination or subdivision of Shares or any other similar increase
or decrease in the number of Shares issued and outstanding, without the Company
receiving consideration therefor in money, services, or property (other than
securities issued by the Company).
2.27 "Restricted Stock" shall mean any Shares granted pursuant to this Plan
that are subject to restrictions or substantial risk of forfeiture.
2.28 "Retirement" shall mean the termination of employment of an employee of
the Company or any Subsidiary pursuant to the terms of any retirement plan or
policy maintained by the Company or any Subsidiary in which such employee
participates.
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<PAGE> 5
2.29 "Securities Act" shall mean the Securities Act of 1933, as amended from
time to time (or any successor to such legislation).
2.30 "Shares" shall mean shares of the common stock of the Company and any
shares of capital stock or other securities hereafter issued or issuable upon,
in respect of or in substitution or exchange for shares of common stock of the
Company.
2.31 "Stock Appreciation Right" shall mean the right of the holder thereof
to receive property or Shares with a Fair Market Value equal to or cash in an
amount equal to the excess of the Fair Market Value of the aggregate number of
Shares subject to such Stock Appreciation Right on the date of exercise over the
Fair Market Value of the aggregate number of Shares subject to such Stock
Appreciation Right on the date of the grant of such Stock Appreciation Right (or
such other value as may be specified in the agreement granting such Stock
Appreciation Right). A Stock Appreciation Right may be a Tandem Stock
Appreciation Right or a Non-Tandem Stock Appreciation Right.
2.32 "Stock Option" shall mean any Incentive Stock Option or Non-Qualified
Stock Option.
2.33 "Subsidiary" shall mean a subsidiary corporation of the Company, as
defined in Section 424(f) of the Code.
2.34 "Tandem Stock Appreciation Right" shall mean a Stock Appreciation Right
granted in connection with an Award which is a Stock Option.
2.35 "Transactional Consideration" shall have the meaning set forth in
Subsection 12(b) of this Plan.
SECTION 3. ADMINISTRATION OF THIS PLAN
3.1 Committee. This Plan shall be administered and interpreted by the
Committee.
3.2 Administration.
(a) Subject to the provisions of this Plan and directions from the Board,
the Committee is authorized to:
(i) determine the Persons to whom Awards are to be granted;
(ii) determine the types and combinations of Awards to be granted; the
number of Shares to be covered by an Award; the exercise price of an Award; the
time or times when an Award shall be granted and may be exercised; the terms,
performance criteria or other conditions, vesting periods or any restrictions
for an Award; any restrictions on Shares acquired pursuant to the exercise of an
Award; and any other terms and conditions of an Award;
-5-
<PAGE> 6
(iii) conclusively interpret the provisions of this Plan;
(iv) prescribe, amend and rescind rules and regulations relating to this
Plan;
(v) rely upon employees of the Company for such clerical and recordkeeping
duties as may be necessary in connection with the administration of this Plan;
(vi) accelerate or defer (with the consent of the Participant) the vesting
of any rights pursuant to an Award; and
(vii) make all other determinations and take all other actions necessary or
advisable for the administration of this Plan.
The President of the Company shall also be authorized, subject to the
provisions of this Plan and directions from the Board and the
Committee, to determine the types and combinations of Awards to be
granted; the number of Shares to be covered by an Award; the exercise
price of an Award; the time or times when an Award shall be granted and
may be exercised; the terms, performance criteria or other conditions,
vesting periods or any restrictions for an Award; any restrictions on
Shares acquired pursuant to the exercise of an Award; and any other
terms and conditions of an Award; provided, however, that the President
of the Company may not (1) grant any Award that would be subject to
Section 16 of the Exchange Act (without regard to Rule 16b-3 of the
Securities and Exchange Commission), (2) grant Awards to any one person
with respect to more than 100,000 Shares in the aggregate (which number
shall be adjusted pro rata in the event of any adjustment to the
limitation set forth in Section 4.1 hereof), or (3) modify any Award
made by the Committee or Board.
(b) A majority of the Committee members shall constitute a quorum for
action by the Committee. All determinations of the Committee in connection with
the Plan shall be made by not less than a majority of its members. All questions
of interpretation and application of this Plan or pertaining to any question of
fact or Award granted hereunder will be decided by the Committee, whose decision
will be final, conclusive and binding upon the Company and each other affected
party.
SECTION 4. SHARES SUBJECT TO PLAN
4.1 Limitations. The maximum number of Shares that may be issued with
respect to Awards granted pursuant to this Plan shall not exceed 20,000,000
unless increased or decreased by reason of changes in the capitalization of the
Company as hereinafter provided or by amendment of this Plan. The Shares issued
pursuant to this Plan may be authorized but unissued Shares, or may be issued
Shares which have been reacquired by the Company.
4.2 Changes. To the extent that any Award granted pursuant to this Plan
shall be forfeited, shall expire or shall be cancelled, in whole or in part,
then the number of Shares covered by the Award so forfeited, expired or
cancelled may again be awarded pursuant to the provisions of this Plan. In
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<PAGE> 7
the event that Shares are delivered to the Company in full or partial payment of
the exercise price for the exercise of a Stock Option, the number of Shares
available for future Awards granted pursuant to this Plan shall be reduced only
by the net number of Shares issued upon the exercise of the Stock Option. Awards
that may be satisfied either by the issuance of Shares or by cash or other
consideration shall, until the form of consideration to be paid is finally
determined, be counted against the maximum number of Shares that may be issued
pursuant to this Plan. If the Award is ultimately satisfied by the payment of
consideration other than Shares, such Shares may again be made the subject of an
Award granted pursuant to this Plan. Awards will not reduce the number of Shares
that may be issued pursuant to this Plan if the settlement of the Award will not
require the issuance of Shares, as, for example, a Stock Appreciation Right that
can be satisfied only by the payment of cash.
SECTION 5. ELIGIBILITY
Eligibility for participation in this Plan shall be confined to those
individuals who are employed by the Company or a Subsidiary and such Consultants
and non-employee Directors as may be designated by the Committee. In making any
determination as to Persons to whom Awards shall be granted, the type of Award
and/or the number of Shares to be covered by the Award, the Committee shall
consider the position and responsibilities of the Person, the importance of the
Person to the Company, the duties of the Person, the past, present and potential
contributions of the Person to the growth and success of the Company and such
other factors as the Committee may deem relevant in connection with
accomplishing the purposes of this Plan.
SECTION 6. STOCK OPTIONS
6.1 Grants. The Committee may grant Stock Options alone or in addition to
other Awards granted pursuant to this Plan to any eligible Person. Each Person
so selected shall be offered a Stock Option to purchase the number of Shares
determined by the Committee. The Committee shall specify whether such Stock
Option is an Incentive Stock Option or Non-Qualified Stock Option and any other
terms or conditions relating to such Award; provided, however only employees of
the Company or a Subsidiary may be granted Incentive Stock Options. To the
extent that any Stock Option designated as an Incentive Stock Option does not
qualify as an Incentive Stock Option (whether because of its provisions, the
failure of the shareholders of the Company to authorize the issuance of
Incentive Stock Options, the time or manner of its exercise or otherwise), such
Stock Option or the portion thereof which does not qualify shall be deemed to
constitute a Non-Qualified Stock Option. Each Person to be granted a Stock
Option shall enter into a written agreement with the Company, in such form as
the Committee may prescribe, setting forth the terms and conditions (including,
without limitation, the exercise price and vesting schedule) of the Stock
Option. At any time and from time to time, the Optionee and the Committee may
agree to modify an option agreement in such respects as they may deem
appropriate, including, without limitation, the conversion of an Incentive Stock
Option into a Non-Qualified Stock Option. The Committee may require that an
Optionee meet certain conditions before the Stock Option or a portion thereof
may vest or be exercised, as, for example, that the Optionee remain in the
employ of the Company or a Subsidiary for a stated period or periods of time.
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<PAGE> 8
6.2 Incentive Stock Options Limitations.
(a) In no event shall any individual be granted Incentive Stock Options to
the extent that the Shares covered by any Incentive Stock Options (and any
incentive stock options granted pursuant to any other plans of the Company or
its Subsidiaries) that may be exercised for the first time by such individual in
any calendar year have an aggregate Fair Market Value in excess of $100,000. For
this purpose, the Fair Market Value of the Shares shall be determined as of the
date(s) on which the Incentive Stock Options are granted. It is intended that
the limitation on Incentive Stock Options provided in this Subsection 6.2(a) be
the maximum limitation on Stock Options which may be considered Incentive Stock
Options pursuant to the Code.
(b) The option exercise price of an Incentive Stock Option shall not be
less than one hundred percent (100%) of the Fair Market Value of the Shares
subject to such Incentive Stock Option on the date of the grant of such
Incentive Stock Option.
(c) Notwithstanding anything herein to the contrary, in no event shall any
employee owning more than ten percent (10%) of the total combined voting power
of the Company or any Subsidiary be granted an Incentive Stock Option unless the
option exercise price of such Incentive Stock Option shall be at least one
hundred ten percent (110%) of the Fair Market Value of the Shares subject to
such Incentive Stock Option on the date of the grant of such Incentive Stock
Option.
(d) In no event shall any individual be granted an Incentive Stock Option
after the expiration of ten (10) years from the date this Plan is adopted or is
approved by the shareholders of the Company (if shareholder approval is required
by Section 422 of the Code).
(e) To the extent shareholder approval of this Plan is required by Section
422 of the Code, no individual shall be granted an Incentive Stock Option unless
this Plan is approved by the shareholders of the Company within twelve (12)
months before or after the date this Plan is initially adopted. In the event
this Plan is amended to increase the number of Shares subject to issuance upon
the exercise of Incentive Stock Options or to change the class of employees
eligible to receive Incentive Stock Options, no individual shall be granted an
Incentive Stock Option unless such amendment is approved by the shareholders of
the Company within twelve (12) months before or after such amendment.
(f) No Incentive Stock Option shall be granted to any employee owning more
than ten percent (10%) of the total combined voting power of the Company or any
Subsidiary unless the term of such Incentive Stock Option is equal to or less
than five (5) years measured from the date on which such Incentive Stock Option
is granted.
6.3 Option Term. The term of a Stock Option shall be for such period of
time from the date of its grant as may be determined by the Committee; provided,
however, that no Incentive Stock Option shall be exercisable later than ten (10)
years from the date of its grant.
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<PAGE> 9
6.4 Time of Exercise. No Stock Option may be exercised unless it is
exercised prior to the expiration of its stated term and, in connection with
options granted to employees of the Company or its Subsidiaries, at the time of
such exercise, the Optionee is, and has been continuously since the date of
grant of such Stock Option, employed by the Company or a Subsidiary, except
that:
(a) A Stock Option may, to the extent vested as of the date the Optionee
ceases to be an employee of the Company or a Subsidiary, be exercised during the
three-month period immediately following the date the Optionee ceases (for any
reason other than death, Disability or Retirement) to be an employee of the
Company or a Subsidiary (or within such other period as may be specified in the
applicable option agreement), provided that, if the Stock Option has been
designated as an Incentive Stock Option and the option agreement provides for a
longer exercise period, the exercise of such Stock Option after such three-month
period shall be treated as the exercise of a Non-Qualified Stock Option;
(b) If the Optionee dies while entitled to exercise a Stock Option, such
Stock Option may, to the extent vested as of the date of the Optionee's death,
be exercised by the Optionee's Designated Beneficiary during the three year
period immediately following the date of the Optionee's death (or within such
other period as may be specified in the applicable option agreement); provided
that, if the Stock Option has been designated as an Incentive Stock Option and
the option agreement provides for a longer exercise period, the exercise of such
Stock Option after such one-year period shall be treated as the exercise of a
Non-Qualified Stock Option;
(c) If the Optionee ceases to be an employee of the Company or a Subsidiary
by reason of the Optionee's Disability or Retirement, a Stock Option, to the
extent vested as of the date the Optionee ceases to be an employee of the
Company or a Subsidiary, may be exercised during the three year period
immediately following the date of such cessation of employment (or within such
other period as may be specified in the applicable option agreement); provided
that, if the Stock Option has been designated as an Incentive Stock Option and
the option agreement provides for a longer exercise period, the exercise of such
Stock Option after such one-year period shall be treated as the exercise of a
Non-Qualified Stock Option; and
Nothing contained in this Subsection 6.4 will be deemed to extend the
term of a Stock Option or to revive any Stock Option which has
previously lapsed or been cancelled, terminated or surrendered. Stock
Options granted under this Plan to Consultants or non-employee
Directors will contain such terms and conditions with respect to the
death or disability of a Consultant or non-employee Director or
termination of a Consultant's or non-employee Director's relationship
with the Company as the Committee deems necessary or appropriate. Such
terms and conditions will be set forth in the option agreements
evidencing the grant of such Stock Options.
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<PAGE> 10
6.5 Vesting of Stock Options.
(a) Each Stock Option granted pursuant to this Plan may only be exercised
to the extent that the Optionee is vested in such Stock Option. Each Stock
Option shall vest separately in accordance with the option vesting schedule
determined by the Committee, which will be incorporated in the option agreement
entered into between the Company and such Optionee. The option vesting schedule
may be accelerated if, in the sole discretion of the Committee, the acceleration
of the option vesting schedule would be in the best interests the Company.
(b) In the event of the dissolution or liquidation of the Company, each
Stock Option granted pursuant to this Plan shall terminate as of a date to be
fixed by the Committee; provided, however, that not less than thirty (30) days'
written notice of the date so fixed shall be given to each Optionee. During such
period all Stock Options which have not previously been terminated, exercised or
surrendered will (subject to the provisions of Subsections 6.3 and 6.4) fully
vest and become exercisable, notwithstanding the vesting schedule set forth in
the option agreement evidencing the grant of such Stock Option. Upon the date
fixed by the Committee, any unexercised Stock Options shall terminate and be of
no further effect.
(c) Upon the occurrence of a Change in Control, all Stock Options and any
associated Stock Appreciation Rights shall become fully vested and immediately
exercisable, and shall remain exercisable for their full terms except as
provided in Subsections 6.5(b) and 12(a)(ii).
6.6 Manner of Exercise of Stock Options.
(a) Except as otherwise provided in this Plan, Stock Options may be
exercised as to Shares only in amounts and at intervals of time specified in the
written option agreement between the Company and the Optionee. Each exercise of
a Stock Option, or any part thereof, shall be evidenced by a written notice
delivered by the Optionee to the Company. The purchase price of the Shares as to
which a Stock Option shall be exercised shall be paid in full at the time of
exercise, and may be paid to the Company either:
(i) in cash (including check, bank draft or money order); or
(ii) by other consideration deemed acceptable by the Committee in its sole
discretion.
(b) If, as permitted in the option agreement or by the Committee, an
Optionee delivers Shares already owned by the Optionee in full or partial
payment of the exercise price for any Stock Option or the Optionee elects to
have the Company retain that number of Shares out of the Shares being acquired
through the exercise of the Stock Option having a Fair Market Value equal to the
exercise price of the Stock Option being exercised, the Committee may, in its
sole discretion, authorize the grant of a new Stock Option (a "Reload Option")
for that number of Shares equal to the number of already owned Shares
surrendered or newly acquired Shares being retained by the Company in payment of
the option exercise price of the underlying Stock Option being exercised. The
grant of a Reload Option will become effective upon the exercise of the
underlying Stock Option. The option
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exercise price of the Reload Option shall be the Fair Market Value of a Share on
the effective date of the grant of the Reload Option. Each Reload Option shall
be exercisable no later than the time when the underlying stock option being
exercised could be last exercised. The Committee may also specify additional
terms, conditions and restrictions for the Reload Option and the Shares to be
acquired upon the exercise thereof.
(c) The amount, as determined by the Committee, of any federal, state or
local tax required to be withheld by the Company due to the exercise of a Stock
Option shall, subject to the authorization of the Committee, be satisfied, at
the election of the Optionee, either (i) by payment by the Optionee to the
Company of the amount of such withholding obligation in cash or other
consideration acceptable to the Committee in its sole discretion or (ii) through
either the retention by the Company of a number of Shares out of the Shares
being acquired through the exercise of the Stock Option or the delivery of
already owned Shares having a Fair Market Value equal to the amount of the
withholding obligation. If an Optionee elects to use the method described in
clause (ii) of the preceding sentence in full or partial satisfaction of any tax
liability resulting from the exercise of a Stock Option, the Committee may
authorize the grant of a Reload Option for that number of Shares as shall equal
the number of Shares used to satisfy the tax liabilities of the Optionee arising
out of the exercise of such Stock Option. Such Reload Option will be granted at
the price and on the terms set forth in Subsection 6.6 (b). The cash payment or
an amount equal to the Fair Market Value of the Shares so withheld, as the case
may be, shall be remitted by the Company to the appropriate taxing authorities.
(d) An Optionee shall not have any of the rights of a shareholder of the
Company with respect to the Shares subject to a Stock Option except to the
extent that such Stock Option is exercised and one or more certificates
representing such Shares shall have been delivered to the Optionee.
SECTION 7. STOCK APPRECIATION RIGHTS
7.1 Grants. The Committee may grant to any eligible Consultant,
non-employee Director or employee of the Company or a Subsidiary either
Non-Tandem Stock Appreciation Rights or Tandem Stock Appreciation Rights. Stock
Appreciation Rights shall be subject to such terms and conditions as the
Committee shall impose. The grant of the Stock Appreciation Right may provide
that the holder will be paid for the value of the Stock Appreciation Right
either in cash or in Shares, or a combination thereof, at the sole discretion of
the Committee. In the event of the exercise of a Stock Appreciation Right
payable in Shares, the holder of the Stock Appreciation Right shall receive that
number of whole Shares having an aggregate Fair Market Value on the date of
exercise equal to the value obtained by multiplying (i) either (a) in the case
of a Tandem Stock Appreciation Right, the difference between the Fair Market
Value of a Share on the date of exercise over the per share exercise price of
the related Stock Option, or (b) in the case of a Non-Tandem Stock Appreciation
Right, the difference between the Fair Market Value of a Share on the date of
exercise over the Fair Market Value on the date of the grant by (ii) the number
of Shares as to which the Stock Appreciation Right is exercised. However,
notwithstanding the foregoing, the Committee, in its sole discretion, may place
a ceiling on the amount payable upon exercise of a Stock Appreciation Right, but
any such limitation shall be specified at the time that the Stock Appreciation
Right is granted.
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7.2 Exercisability. A Tandem Stock Appreciation Right granted in connection
with an Incentive Stock Option (i) may be exercised at, and only at, the times
and to the extent the related Incentive Stock Option is exercisable, (ii) will
expire upon the termination of the related Incentive Stock Option, (iii) may not
exceed 100% of the difference between the exercise price of the related
Incentive Stock Option and the Fair Market Value of the Shares subject to the
related Incentive Stock Option at the time the Tandem Stock Appreciation Right
is exercised and (iv) may be exercised at, and only at, such times as the Fair
Market Value of the Shares subject to the related Incentive Stock Option exceeds
the exercise price of the related Incentive Stock Option. A Tandem Stock
Appreciation Right may be transferred at, and only at, the times and to the
extent the related Stock Option is transferable. If a Tandem Stock Appreciation
Right is granted, there shall be surrendered and cancelled from the related
Stock Option at the time of exercise of the Tandem Stock Appreciation Right, in
lieu of exercise pursuant to the related Stock Option, that number of Shares of
the Stock Option to which the exercised Tandem Stock Appreciation Right relates.
7.3 Certain Limitations on Non-Tandem Stock Appreciation Rights. A
Non-Tandem Stock Appreciation Right will be exercisable as provided by the
Committee and will have such other terms and conditions as the Committee may
determine. A Non-Tandem Stock Appreciation Right is subject to acceleration of
vesting or immediate termination in certain circumstances in the same manner as
Stock Options pursuant to Subsections 6.4 and 6.5 of this Plan.
7.4 Limited Stock Appreciation Rights. The Committee may grant limited
Stock Appreciation Rights, either as Tandem Stock Appreciation Rights or
Non-Tandem Stock Appreciation Rights, which may become exercisable only upon the
occurrence of a Change in Control or such other event as the Committee may
designate at the time of grant or thereafter.
SECTION 8. RESTRICTED STOCK
8.1 Grants. The Committee may grant Awards of Restricted Stock to any
eligible Consultant, non-employee Director or employee of the Company or a
Subsidiary for such minimum consideration, if any, as may be required by
applicable law or such greater consideration as may be determined by the
Committee, in its sole discretion. The terms and conditions of the Restricted
Stock shall be specified by the grant agreement. The Committee, in its sole
discretion, may specify any particular rights which the Participant to whom a
grant of Restricted Stock is made shall have in the Restricted Stock during the
restriction period and the restrictions applicable to the particular Award, the
vesting schedule (which may be based on service, performance or other factors)
and rights to acceleration of vesting (including, without limitation, whether
non-vested Shares are forfeited or vested upon termination of employment).
Further, the Committee may grant performance-based Awards consisting of
Restricted Stock by conditioning the grant, or vesting or such other factors,
such as the release, expiration or lapse of restrictions upon any such Award
(including the acceleration of any such conditions or terms) of such Restricted
Stock upon the attainment of specified performance goals or such other factors
as the Committee may determine. The Committee shall also determine when the
restrictions shall lapse or expire and the conditions, if any, pursuant to which
the Restricted Stock will be forfeited or sold back to the Company. Each
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Award of Restricted Stock may have different restrictions and conditions. Unless
otherwise set forth in the grant agreement, Restricted Stock may not be sold,
pledged, encumbered or otherwise disposed of by the recipient until the
restrictions specified in the Award expire. Awards of Restricted Stock are
subject to acceleration of vesting, termination of restrictions and termination
in the same manner as Stock Options pursuant to Subsections 6.4 and 6.5 of this
Plan.
8.2 Awards and Certificates. Any Restricted Stock issued hereunder may be
evidenced in such manner as the Committee, in its sole discretion, shall deem
appropriate including, without limitation, book-entry registration or issuance
of a stock certificate or certificates. In the event any stock certificate is
issued in respect of Shares of Restricted Stock, such certificate shall bear an
appropriate legend with respect to the restrictions applicable to such Award.
The Company may retain, at its option, the physical custody of any stock
certificate representing any awards of Restricted Stock during the restriction
period or require that the certificates evidencing Restricted Stock be placed in
escrow or trust, along with a stock power endorsed in blank, until all
restrictions are removed or expire.
SECTION 9. PERFORMANCE AWARDS
9.1 Grants. A Performance Award may consist of either or both, as the
Committee may determine, of (i) the right to receive Shares or Restricted Stock,
or any combination thereof as the Committee may determine or (ii) the right to
receive a fixed dollar amount payable in Shares, Restricted Stock, cash or any
combination thereof, as the Committee may determine. The Committee may grant
Performance Awards to any eligible Consultant, non-employee Director or employee
of the Company or a Subsidiary, for such minimum consideration, if any, as may
be required by applicable law or such greater consideration as may be determined
by the Committee, in its sole discretion. The terms and conditions of
Performance Awards shall be specified at the time of the grant and may include
provisions establishing the performance period, the performance criteria to be
achieved during a performance period, the criteria used to determine vesting
(including the acceleration thereof), whether Performance Awards are forfeited
or vest upon termination of employment during a performance period and the
maximum or minimum settlement values. Each Performance Award shall have its own
terms and conditions, which shall be determined in the sole discretion of the
Committee. If the Committee determines, in its sole discretion, that the
established performance measures or objectives are no longer suitable because of
a change in the Company's business, operations, corporate structure or for other
reasons that the Committee deems satisfactory, the Committee may modify the
performance measures or objectives and/or the performance period. Performance
Awards are subject to acceleration of vesting, termination of restrictions and
termination in the same manner as Stock Options pursuant to Subsections 6.4 and
6.5 of this Plan.
9.2 Terms and Conditions. Performance Awards may be valued by reference to
the Fair Market Value of a Share or according to any other formula or method
deemed appropriate by the Committee, in its sole discretion, including, but not
limited to, achievement of specific financial, production, sales, cost or
earnings performance objectives that the Committee believes to be relevant or
the Company's performance or the performance of the Shares measured against the
performance of the market, the Company's industry segment or its direct
competitors. Performance Awards may also
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be conditioned upon the applicable Participant remaining in the employ of the
Company or one of its Subsidiaries for a specified period. Performance Awards
may be paid in cash, Shares (including Restricted Stock) or other consideration,
or any combination thereof. Performance Awards may be payable in a single
payment or in installments and may be payable at a specified date or dates or
upon attaining the performance objective or objectives, all at the sole
discretion of the Committee. The extent to which any applicable performance
objective has been achieved shall be conclusively determined by the Committee in
its sole discretion.
SECTION 10. OTHER AWARDS
The Committee may grant to any eligible Consultant, non-employee
Director or employee of the Company or a Subsidiary other forms of Awards based
upon, payable in or otherwise related to, in whole or in part, Shares, if the
Committee, in its sole discretion, determines that such other form of Award is
consistent with the purposes of this Plan. The terms and conditions of such
other form of Award shall be specified in a written agreement which sets forth
the terms and conditions of such Award, including, but not limited to, the
price, if any, and the vesting schedule, if any, of such Award. Such Awards may
be granted for such minimum consideration, if any, as may be required by
applicable law or for such other greater consideration as may be determined by
the Committee, in its sole discretion.
SECTION 11. COMPLIANCE WITH SECURITIES AND OTHER LAWS
As a condition to the issuance or transfer of any Award or any security
issuable in connection with such Award, the Company may require an opinion of
counsel, satisfactory to the Company, to the effect that (i) such issuance
and/or transfer will not be in violation of the Securities Act or any other
applicable securities laws and (ii) such issuance and/or transfer will not be in
violation of the rules and regulations of any securities exchange or automated
quotation system on which the Shares are listed or admitted to trading. Further,
the Company may refrain from issuing, delivering or transferring any Award or
any security issuable in connection with such Award until the Committee has
determined that such issuance, delivery or transfer will not violate such
securities laws or rules and regulations and that either the recipient has
tendered to the Company, or the Company or a Subsidiary has withheld, any
federal, state or local tax owed as a result of such issuance, delivery or
transfer, when the Company has a legal liability to satisfy such tax. The
Company shall not be liable for damages due to delay in the issuance, delivery
or transfer of any Award or any security issuable in connection with such Award
or any agreement, instrument or certificate evidencing such Award or security
for any reason whatsoever, including, but not limited to, a delay caused by the
listing requirements of any securities exchange or automated quotation system or
any registration requirements under the Securities Act, the Exchange Act, or
under any other state or federal law, rule or regulation. The Company is under
no obligation to take any action or incur any expense to register or qualify the
issuance, delivery or transfer of any Award or any security issuable in
connection with such Award under applicable securities laws or to perfect any
exemption from such registration or qualification or to list any security on any
securities exchange or automated quotation system. Furthermore, the Company will
have no liability to any person for refusing to issue, deliver or transfer any
Award or any security issuable in connection with such Award if such refusal is
based
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upon the foregoing provisions of this Section 11. As a condition to any
issuance, delivery or transfer of any Award or any security issuable in
connection with such Award, the Company may place legends on any agreement,
instrument or certificate evidencing such Award or security, issue stop transfer
orders with respect thereto and require such agreements or undertakings as the
Company may deem necessary or advisable to assure compliance with applicable
laws or regulations, including, if the Company or its counsel deems it
appropriate, representations from the recipient of such Award or security to the
effect that such recipient is acquiring such Award or security solely for
investment and not with a view to distribution and that no distribution of the
Award or the security will be made unless registered pursuant to applicable
federal and state securities laws, or in the opinion of counsel to the Company,
such registration is unnecessary.
SECTION 12. ADJUSTMENTS UPON THE OCCURRENCE OF A RECAPITALIZATION OR
CORPORATE TRANSACTION
(a) In the event of a Recapitalization, the number and class of Shares
subject to this Plan and to each outstanding Award, and the exercise price of
each Award which is based upon Shares, shall (to the extent deemed appropriate
by the Committee) be proportionately adjusted (as determined by the Committee in
its sole discretion) to account for any increase or decrease in the number, or
change in the class, of issued and outstanding Shares of the Company resulting
from such Recapitalization.
(b) If a Corporate Transaction is consummated and immediately following the
consummation of such Corporate Transaction the Persons who were holders of
Shares immediately prior to the consummation of such Corporate Transaction do
not receive any securities or other property (hereinafter collectively referred
to as "Transactional Consideration") as a result of such Corporate Transaction
and substantially all of such Persons continue to hold the Shares held by them
immediately prior to the consummation of such Corporate Transaction (in
substantially the same proportions relative to each other), the Awards will
remain outstanding and will (subject to, and except as provided in, the other
provisions of this Plan and the Award agreement) continue in full force and
effect in accordance with its terms (without any modification) following the
consummation of the Corporate Transaction.
(c) If a Corporate Transaction is consummated and immediately following the
consummation of such Corporate Transaction the Persons who were holders of
Shares immediately prior to the consummation of such Corporate Transaction do
receive Transactional Consideration as a result of such Corporate Transaction or
substantially all of such Persons do not continue to hold the Shares held by
them immediately prior to the consummation of such Corporate Transaction (in
substantially the same proportions relative to each other), the terms and
conditions of the Awards will be modified as follows:
(i) If the documentation pursuant to which a Corporate Transaction will be
consummated provides for the assumption (by the entity issuing Transactional
Consideration to the Persons who were the holders of Shares immediately prior to
the consummation of such Corporate Transaction) of the Awards granted pursuant
to this Plan without any modification or amendment (other than Permitted
Modifications), such Awards will remain outstanding and will continue in full
force and
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effect in accordance with its terms following the consummation of such Corporate
Transaction (subject to such Permitted Modifications).
(ii) If the documentation pursuant to which a Corporate Transaction will be
consummated does not provide for the assumption by the entity issuing
Transactional Consideration to the Persons who were the holders of Shares
immediately prior to the consummation of such Corporate Transaction of the
Awards granted pursuant to this Plan without any modification or amendment
(other than Permitted Modifications), all vesting restrictions (performance
based or otherwise) applicable to Awards which will not be so assumed will
accelerate and the holders of such Awards may (subject to the expiration of the
term of such Awards) exercise/receive the benefits of such Awards without regard
to such vesting restrictions during the ten (10) day period immediately
preceding the consummation of such Corporate Transaction. For purposes of the
immediately preceding sentence, all performance based goals will be deemed to
have been satisfied in full. The Company will provide each Participant holding
Awards which will not be so assumed with reasonable notice of the termination of
such vesting restrictions and the impending termination of such Awards. Upon the
consummation of such a Corporate Transaction, all unexercised Awards which are
not to be so assumed will automatically terminate and cease to be outstanding.
Nothing contained in this Section 12 will be deemed to extend the term
of an Award or to revive any Award which has previously lapsed or been
cancelled, terminated or surrendered.
SECTION 13. AMENDMENT OR TERMINATION OF THIS PLAN
13.1 Amendment of This Plan. Notwithstanding anything contained in this Plan
to the contrary, all provisions of this Plan (including, without limitation, the
maximum number of Shares that may be issued with respect to Awards to be granted
pursuant to this Plan) may at any time or from time to time be modified or
amended by the Board; provided, however, that no Award at any time outstanding
pursuant to this Plan may be modified, impaired or cancelled adversely to the
holder of the Award without the consent of such holder.
13.2 Termination of This Plan. The Board may suspend or terminate this Plan
at any time, and such suspension or termination may be retroactive or
prospective. Termination of this Plan shall not impair or affect any Award
previously granted hereunder and the rights of the holder of the Award shall
remain in effect until the Award has been exercised in its entirety or has
expired or otherwise has been terminated by the terms of such Award.
SECTION 14. AMENDMENTS AND ADJUSTMENTS TO AWARDS
The Committee may amend, modify or terminate any outstanding Award with
the Participant's consent at any time prior to payment or exercise in any manner
not inconsistent with the terms of this Plan, including, without limitation, (i)
to change the date or dates as of which and/or the terms and conditions pursuant
to which (A) a Stock Option becomes exercisable or (B) a Performance Award is
deemed earned, (ii) to amend the terms of any outstanding Award to provide an
exercise price per share which is higher or lower than the then current exercise
price per share of
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such outstanding Award or (iii) to cancel an Award and grant a new Award in
substitution therefor under such different terms and conditions as the Committee
determines in its sole discretion to be appropriate including, but not limited
to, having an exercise price per share which may be higher or lower than the
exercise price per share of the cancelled Award. The Committee may also make
adjustments in the terms and conditions of, and the criteria included in
agreements evidencing Awards in recognition of unusual or nonrecurring events
(including, without limitation, the events described in Section 12 hereof)
affecting the Company, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations or accounting
principles, whenever the Committee determines that such adjustments are
appropriate to prevent reduction or enlargement of the benefits or potential
benefits intended to be made available pursuant to this Plan.
SECTION 15. GENERAL PROVISIONS
15.1 No Limit on Other Compensation Arrangements. Nothing contained in this
Plan shall prevent the Company from adopting or continuing in effect other
compensation arrangements, and such arrangements may be either generally
applicable or applicable only in specific cases. This Plan shall not affect any
other stock option, incentive, or other compensation or benefit plan of the
Company or any Subsidiary, except as may be expressly provided therein.
15.2 Other Awards. The grant of an Award shall not confer upon the recipient
the right to receive any future or other Awards under this Plan or any other
plans of the Company or any Subsidiary, whether or not any awards may be granted
to similarly situated employees, or the right to receive future Awards upon the
same terms or conditions as previously granted.
15.3 No Right to Employment or Continuation of Relationship. Nothing in this
Plan or in any Award, nor the grant of any Award, shall confer upon or be
construed as giving any Participant any right to remain in the employ of the
Company or a Subsidiary or to continue as a Consultant or non-employee Director.
Further, the Company or a Subsidiary may at any time dismiss a Participant from
employment or terminate the relationship of any Consultant or non-employee
Director with the Company or any Subsidiary, free from any liability or any
claim pursuant to this Plan. No Consultant, non-employee Director or employee of
the Company or any Subsidiary shall have any claim to be granted any Award, and
there is no obligation for uniformity of treatment of any Consultant,
non-employee Director or employee of the Company or any Subsidiary or of any
Participants.
15.4 Governing Law. The validity, construction and effect of this Plan and
any rules and regulations relating to this Plan shall be determined in
accordance with the laws of the State of Texas, without giving effect to the
conflict of laws principles thereof.
15.5 Severability. If any provision of this Plan or any Award is or becomes
or is deemed to be invalid, illegal or unenforceable in any jurisdiction or as
to any individual or Award, or would disqualify this Plan or any Award under any
law deemed applicable by the Committee, such provision shall be construed or
deemed amended to conform to applicable law, or if it cannot be construed or
deemed amended without, in the sole determination of the Committee, materially
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altering the intent of this Plan or the Award, such provision shall be stricken
as to such jurisdiction, individual or Award and the remainder of this Plan and
any such Award shall remain in full force and effect.
15.6 No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to this Plan or any Award, and the Committee shall determine, in its
sole discretion, whether cash, other securities or other property shall be paid
or transferred in lieu of any fractional Shares or whether such fractional
Shares or any rights thereto shall be cancelled, terminated or otherwise
eliminated.
15.7 Headings. Headings are given to the Sections and Subsections of this
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
this Plan or any provision thereof.
15.8 Gender. If the context requires, words of one gender when used in this
Plan shall include the others and words used in the singular shall include the
plural, and vice versa.
15.9 Transferability of Awards. Awards shall not be transferable otherwise
than by will or the laws of descent and distribution without the written consent
of the Committee (which may be granted or withheld at the sole discretion of the
Committee). Awards may be exercised, during the lifetime of the holder, only by
the holder. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of an Award contrary to the provisions hereof, or the levy of any
execution, attachment or similar process upon an Award shall be null and void
and without effect.
15.10 Rights of Participants. Except as hereinbefore expressly provided in
this Plan, any Person to whom an Award is granted shall have no rights by reason
of any subdivision or consolidation of stock of any class or the payment of any
stock dividend or any other increase or decrease in the number of shares of
stock of any class or by reason of any dissolution, liquidation, reorganization,
merger or consolidation or spinoff of assets or stock of another corporation,
and any issue by the Company of shares of stock of any class or securities
convertible into shares of stock of any class shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
exercise price of Shares subject to an Award.
15.11 No Limitation Upon the Rights of the Company. The grant of an Award
pursuant to this Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, or changes of its capital or
business structure; to merge, convert or consolidate; to dissolve or liquidate;
or sell or transfer all or any part of its business or assets.
15.12 Date of Grant of an Award. Except as noted in this Section 15.12, the
granting of an Award shall take place only upon the execution and delivery by
the Company and the Participant of a written agreement and neither any other
action taken by the Committee nor anything contained in this Plan or in any
resolution adopted or to be adopted by the Committee, the Board or the
shareholders of the Company shall constitute the granting of an Award pursuant
to this Plan. Solely for purposes of determining the Fair Market Value of the
Shares subject to an Award, such Award
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will be deemed to have been granted as of the date specified by the Committee
notwithstanding any delay which may elapse in executing and delivering the
applicable agreement.
15.13 Tax Withholding. The Company or any Subsidiary shall be entitled to
deduct from other compensation payable to an employee any sums required by
federal, state, or local tax law to be withheld with respect to the granting or
exercise of a Stock Option or other Award under this Plan. In the alternative,
the Company or any Subsidiary may require the recipient (or other person
exercising the Award) to pay such sums directly to the employer, and neither the
Company or any Subsidiary shall have any obligation to issue any Shares or make
any payment until such payment has been received.
SECTION 16. NAMED EXECUTIVE OFFICERS
16.1 Applicability of Section 17. The provisions of this Section 16 shall
apply only if the Company is a "publicly held corporation" as defined in Section
162(m)(2) of the Code, and then only to those executive officers (i) whose
compensation is required to be reported in the Company's proxy statement
pursuant to Item 402(a)(3)(i) and (ii) (or any successor thereto) of Regulation
S-K (or any successor thereto) under the general rules and regulations under the
Exchange Act and (ii) whose total compensation, including estimated Awards, is
determined by the Committee to possibly be subject to the limitations on
deductions imposed by Section 162(m) of the Code ("Named Executive Officers").
In the event of any inconsistencies between this Section 16 and the other Plan
provisions as they pertain to Named Executive Officers, the provisions of this
Section 16 shall control.
16.2 Establishment of Performance Goals. Awards for Named Executive
Officers, other than Stock Options and Stock Appreciation Rights, shall be based
on the attainment of certain performance goals. No later than the earlier of (i)
ninety (90) days after the commencement of the applicable fiscal year of the
Company or one of its Subsidiaries or such other award period as may be
established by the Committee ("Award Period") and (ii) the completion of
twenty-five percent (25%) of such Award Period, the Committee shall establish,
in writing, the performance goals applicable to each such Award for Named
Executive Officers. At the time the performance goals are established, their
outcome must be substantially uncertain. In addition, the performance goal must
state, in terms of an objective formula or standard, the method for computing
the amount of compensation payable to the Named Executive Officer if the goal is
obtained. Such formula or standard shall be sufficiently objective so that a
third party with knowledge of the relevant performance results could calculate
the amount to be paid to the subject Named Executive Officer. The material terms
of the performance goals for Named Executive Officers and the compensation
payable thereunder shall be submitted to the shareholders of the Company for
their review and approval if and to the extent required for such compensation to
be deductible pursuant to Section 162(m) (or any successor thereto) of the Code,
and the Treasury Regulations thereunder. Shareholder approval, if necessary,
shall be obtained for such performance goals prior to any Award being paid to
such Named Executive Officer. If shareholder approval is required and not
received with respect to such performance goals, no amount shall be paid to such
Named Executive Officer for such applicable Award Period pursuant to this Plan.
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16.3 Components of Awards. Each Award granted to a Named Executive Officer,
other than Stock Options and Stock Appreciation Rights, shall be based on
performance goals which are sufficiently objective so that a third party having
knowledge of the relevant facts could determine whether the goal was met. Except
as provided in Subsection 16.8 herein, performance measures which may serve as
determinants of Named Executive Officers' Awards shall be limited to the
following measures: earnings per share; return on assets; return on equity;
return on capital; net profit after taxes; net profit before taxes; operating
profits; stock price; and sales or expenses. Within ninety (90) days following
the end of each Award Period, the Committee shall certify in writing that the
performance goals, and any other material terms were satisfied. Thereafter,
Awards shall be made for each Named Executive Officer as determined by the
Committee. The Awards may not vary from the pre-established amount based on the
level of achievement.
16.4 No Mid-Year Change in Awards. Except as provided in Subsections 16.8
and 16.9 herein, each Named Executive Officer's Awards shall be based
exclusively on the performance measures established by the Committee pursuant to
Subsections 16.2 and 16.3.
16.5 No Partial Award Period Participation. A Named Executive Officer who
becomes eligible to participate in this Plan after performance goals have been
established in an Award Period pursuant to Subsections 16.2 and 16.3 may not
participate in this Plan prior to the next succeeding Award Period, except with
respect to Awards which are Stock Options or Stock Appreciation Rights.
16.6 Performance Goals. Except as provided in Subsection 16.8 herein,
performance goals shall not be changed following their establishment, and Named
Executive Officers shall not receive any payout, except with respect to Awards
which are Stock Options or Stock Appreciation Rights, when the minimum
performance goals are not met or exceeded.
16.7 Individual Performance and Discretionary Adjustments. Except as
provided in Subsection 16.8 herein, subjective evaluations of individual
performance of Named Executive Officers shall not be reflected in their Awards,
other than Awards which are Stock Options or Stock Appreciation Rights. The
payment of such Awards shall be entirely dependent upon the attainment of the
preestablished performance goals.
16.8 Amendments. No amendment of this Plan with respect to any Named
Executive Officer may be made which would (i) increase the maximum amount that
can be paid to any one Participant pursuant to this Plan, (ii) change the
specified performance goal for payment of Awards, or (iii) modify the
requirements as to eligibility for participation in this Plan, unless the
Company's shareholders have first approved such amendment in a manner which
would permit the deduction under Section 162(m) (or any successor thereto) of
the Code of such payment in the fiscal year it is paid. The Committee shall
amend this Section 16 and such other provisions as it deems appropriate, to
cause amounts payable to Named Executive Officers to satisfy the requirements of
Section 162(m) (or any successor thereto) and the Treasury regulations
promulgated thereunder.
16.9 Stock Options and Stock Appreciation Rights - Grant Price.
Notwithstanding any provision of this Plan (including the provisions of this
Section 16) to the contrary, the amount of compensation
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<PAGE> 21
which a Named Executive Officer may receive with respect to Stock Options and
Stock Appreciation Rights which are granted hereunder is based solely on an
increase in the value of the applicable Shares after the date of grant of such
Award. Thus, no Stock Option may be granted hereunder to a Named Executive
Officer with an exercise price less than the Fair Market Value of Shares on the
date of grant. Furthermore, the maximum number of Shares (or cash equivalent
value) with respect to which Stock Options or Stock Appreciation Rights may be
granted hereunder to any Named Executive Officer during any calendar year may
not exceed 1,000,000 Shares, subject to adjustment as provided in Section 12
hereunder.
16.10 Maximum Amount of Compensation. The maximum amount of compensation
payable as an Award (other than an Award which is a Stock Option or Stock
Appreciation Right) to any Named Executive Officer during any calendar year may
not exceed $1,000,000.
-21-
<PAGE> 1
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
SplitRock Services, Inc. (hereinafter sometimes referred to as "SplitRock"
or "Company" or "Employer") does hereby employ Patrick J. McGettigan, Jr.
(hereinafter referred to as "McGettigan" or "Employee") on the following agreed
upon terms and conditions:
1. Term. SplitRock employs Employee and Employee hereby accepts
employment with Company, for a period of two (2) years. For purposes of
computing the two year term, the parties agree the commencement date shall be
September 1, 1997, and shall end on August 31, 1999.
2. Duties. Employee is to perform the duties of General Counsel and
other duties as may be assigned by the President consistent with performance of
General Counsel duties and obligations. As such, Employee shall have
responsibilities, duties and authority usually accorded to such position and
will report directly to the President of the Company or such other party as is
designated from time to time by the Board of Directors of the Company (the
"Board").
3. Compensation. (a) Base Salary. Employee shall be paid an annual base
salary of $140,000 for the initial one (1) year of the employment term and such
increase to the base salary during the second year if, in Company's discretion,
any such increase is warranted. Said salary shall be subject to customary
payroll deductions and employment taxes beginning October 1, 1997. Employee
shall be responsible for reporting and paying taxes for gross compensation
earned and paid before October 1, 1997.
(b) Benefits. Employee will be entitled to receive additional benefits
and compensation from the Company in such form and to such extent as specified
below: (i) Health, hospitalization, disability, dental, life and other insurance
plans that the Company may have in effect from time to time, (ii) Participation
in401k plan; and (iii) Reimbursement for
<PAGE> 2
business travel and other out-of-pocket expenses reasonably incurred by
Employee in the performance of Employee's services pursuant to this Agreement.
All reimbursable expenses shall be appropriately documented in reasonable
detail by Employee upon submission of any request for reimbursement, and in a
format and manner consistent with the Company's expense reporting policy.
4. Incentive Bonus. Company agrees to pay Employee a signing bonus of
$65,000, payable upon execution of this Agreement. Employee may be paid
discretionary bonuses during the term hereof in such amounts, if any, as
determined by the Board.
5. Stock Options. Pursuant to the 1997 Incentive Share Plan adopted by
Company, Company grants to Employee options to purchase 250,000 shares of
common stock of Company exercisable at the price of $0.625 per share. Of these
options, 80,000 shares will vest upon execution of this Agreement and will be
exercisable for ten (10) years. The balance of 170,000 shares will vest over
four (4) years in equal amounts on the last day of the month in which each
anniversary of employment (August) occurs, exercisable for ten (10) years after
vesting.
6. Relocation Expense. Company agrees to pay Employee for relocation
costs not to exceed the sum of $20,000, if Employee sells his present residence
before September 1, 1998, with the further understanding that Employee will use
Employee's best efforts to incur only those costs which are reasonable and
necessary to effect a smooth, efficient and orderly relocation.
7. Severance Pay. In the event Employee's services under this Agreement
are terminated for any reason by Company, except for good cause hereinafter
defined, prior to the end of the employment term, Employee shall be entitled to
an amount equal to the number of remaining months of the term of this Agreement
times the monthly compensation as computed for a total of all base salary. Such
amounts will be paid at date of termination. The Company may terminate the
Agreement fifteen (15) days after written notice to Employee for good cause,
which shall be: (1) Employee's willful and
<PAGE> 3
material breach of this Agreement; (2) Employee's intentional nonperformance
(continuing for ten (10) days after receipt of written notice of need to cure)
of Employee's material duties and responsibilities hereunder; (3) Employee's
willful dishonesty, fraud or misconduct with respect to the business or affairs
of the Company which materially and adversely affects the operations or
reputation of the Company; or (4) Employee's conviction of a felony crime. In
the event of a termination for good cause, as enumerated above, Employee shall
have no right to any severance compensation.
8. Termination. At any time prior to the end of the initial term hereof
(August 31, 1999), the Company or Employee may, without cause, terminate
Employee's employment, effective sixty (60) days after written notice is
provided to the other, subject to Company paying to Employee severance pay as
set forth above. If Employee resigns or otherwise terminates Employee's
employment without cause, rather than the Company terminating his employment,
Employee shall receive no severance compensation. If Employee resigns before
the 20th month of the two-year term i.e. April 1, 1999 to become employed by a
company whose business is the same or similar to Company, then Employee shall
pay to Company, at the time of termination, a pro-rata share of the incentive
bonus (identified in paragraph 7 above) computed on the total bonus paid to
Employee divided by 24 months times the remaining months of the initial
two-year term.
9. Miscellaneous. This instrument supersedes all the other agreements,
either oral or written, between the parties to this Agreement, with respect to
the employment of Employee and contains all the covenants and agreements
between the parties with respect to such service. This Agreement may not be
modified except by written instrument signed by the parties. This Agreement
will be governed by and construed in accordance with the laws of the State of
Texas. This Agreement and any and all rights hereunder shall not be assignable
by Employee, however, nothing herein shall
<PAGE> 4
prohibit Company from assigning this contract or the rights and duties accruing
thereunder to any person, firm or other entity provided that any assignee or
successor to Company shall be bound by the provisions of this Agreement and
such assignment shall not substantially affect the duties of Employee
previously in existence. If any provision of this Agreement shall be declared
inoperative, invalid, illegal or unenforceable, then the remaining provisions
of this Agreement shall continue to be fully operative, effective and
unaffected by such invalidity.
This Agreement is executed this 18th day of September, 1997 effective
September 1, 1997 for purposes of calculating a commencement date of the
two-year term.
SPLITROCK SERVICES, INC.
BY: /s/ WILLIAM R. WILSON
EMPLOYEE
BY: /s/ PATRICK J. MCGETTIGAN, JR.
<PAGE> 1
EXHIBIT "A"
SPLITROCK SERVICES, INC.
SUBSCRIPTION AGREEMENT
By execution of this Subscription Agreement (the "Subscription
Agreement"), the undersigned subscriber ("Subscriber") hereby offers to become
a shareholder of Splitrock Services, Inc., a Texas corporation (the "Company"),
subject to the terms and conditions stated herein. In connection therewith,
Subscriber makes the representations contained herein.
A. Subscription and Investment. Subscriber hereby subscribes for and
agreed to purchase 5,000,000 shares of common stock ("Shares") in the Company
at a price of $0.625 U.S. per Share.
B. Acceptance of Subscription. The Company agrees that if Subscriber
complies in full with the terms of this subscription, Company shall accept this
subscription by execution below.
C. Representations and Warranties of Subscriber. Subscriber hereby
represents and warrants to the Company, its agents and employees as follows:
(i) It has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits
and risks of an investment in the Company and the
suitability of the Shares as an investment for it.
(ii) It is an Accredited Investor, as defined in Regulation D
promulgated by the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended (the
"1933 Act").
(iii) The Shares for which it hereby subscribes will be acquired
for investment and not with the view toward resale or
redistribution in violation of applicable state and federal
securities laws and regulations.
(iv) It has received no representations or warranties from the
Company, or its employees or agents, as to the viability of
the Company's operations or its capitalization other than
the fact that the Company has entered into contracts with
Prodigy Services Corporation ("Transaction Documents"). As
an affiliate of Prodigy Services, the undersigned has had
access to the Transaction Documents and is knowledgeable
about the terms and conditions of the Transaction Documents.
The undersigned acknowledges that Prodigy Services
Corporation represents the most significant source of income
for the Company.
<PAGE> 2
(v) It is able to bear the economic risk of the investment in
the Shares and it has sufficient net worth to sustain a loss
of the entire investment in the Company without economic
hardship if such a loss should occur.
(vi) It confirms that all documents, records and books pertaining
to its proposed investment in the Company which it has
requested have been made available to it.
(vii) It has had an opportunity to ask questions of and receive
satisfactory answers from William R. Wilson, Kwok Li, the
Company, or any person or persons acting on behalf of the
Company, concerning the terms and conditions of this
investment, and all such questions have been answered to the
full satisfaction of Subscriber.
(viii) Subscriber represents that it has made other investments of
a similar nature and, by reason of its business and
financial experience and of the business and financial
experience of those persons it has retained to advise it
with respect to its investment in the Company, has acquired
the capacity to protect its own interest in investments of
this nature.
(ix) Its representatives have visited with Kwok Li regarding the
technical aspects of the proposed operations of the Company.
(x) It acknowledges that the Company has been capitalized as of
the date of this Subscription Agreement, and prior to
acceptance of this Subscription Agreement, with $30,500,000
U. S. at a price of $0.625 U. S. per Share for 28,800,000
Shares, including 20,000,000 shares previously issued to
Subscriber and subject to the provisions of (xi) below with
regard to transactions subsequent to the date of transmittal
of this document. In addition, Kwok Li and William R. Wilson
received an aggregate of 28,000,000 Shares for their
contribution of services to the organization of the Company
and their negotiation of the transaction with Prodigy
Services Corporation. Assuming the issuance of all Shares
pursuant to the Company's Incentive Share Plan and
acquisition and exercise by Subscriber of the option granted
to it to acquire an additional 5,000,000 shares pursuant to
Subscription Agreement, Exhibit "A" attached hereto,
the ownership and capitalization of the Company would
be as follows:
Number of
Shareholder Shares % Ownership*
----------- --------- ------------
William R. Wilson 17,000,000 16.70
Kwok Li 11,000,000 10.81
Linsang Partners L.L.C. 28,000,000 27.50
Shares allocated to Incentive Share Plan 20,000,000 19.65
Roy Wilkens 800,000 0.79
Carso Global 20,000,000 19.65
Carso Global (Exhibit "A" option) 5,000,000 4.91
----------- ------
Total: 101,800,000 100.00
* rounded up to nearest integer
-2-
<PAGE> 3
(xi) It acknowledges that the Board of Directors of the Company
may issue additional Shares for such consideration as the
Board of Directors deems adequate. The Shares do not have
preemptive rights; therefore, in the event of such
issuances, the Subscriber's percentage ownership in the
Company as stated above would be diluted.
D. Indemnification. Subscriber acknowledges that it understands the
meaning and legal consequences of the representations and warranties in
paragraph C hereof, and it hereby agrees to indemnify and hold harmless the
Company, each shareholder thereof and their respective officers, directors,
shareholders, agents and employees from and against any and all loss, damage or
liability due to or arising out of a breach of any such representation or
warranties. Notwithstanding the foregoing, however, no representation, warranty,
acknowledgement or agreement made herein by Subscriber shall in any manner be
deemed to constitute a waiver of any rights granted to Subscriber under federal
or state securities laws. The representations and warranties set forth herein
shall survive the date upon which the Subscriber is admitted as a shareholder of
the Company.
E. Limitation on Transfer of Shares. Subscriber acknowledges that it is
aware that there are substantial restrictions on the transferability of the
Shares. Since the Shares will not be, and Subscriber has no right to require
that they be, registered under the 1933 Act, as amended, or any other
securities laws of any jurisdiction (collectively, the "Acts"), the Shares may
not be, and Subscriber agrees that they shall not be, sold, transferred,
pledged or hypothecated unless such sale is exempt from registration under the
Acts. Subscriber further acknowledges that the Shares may not be sold and the
purchaser substituted as a shareholder in the Company without the express
consent of the Company. Subscriber also acknowledges that it shall be
responsible for compliance with all conditions on transfer imposed by any blue
sky or securities law administrator and for any expenses incurred by the
Company for legal or accounting services in connection with reviewing such a
proposed transfer.
F. Compliance with Regulation D. Subscriber understands and agrees that
the following restrictions and limitations are applicable to its purchase and
resale, pledge, hypothecation or other transfer of the Shares pursued to
Regulation D under the 1933 Act, as amended:
(i) Subscriber agrees that the Shares shall not be sold,
pledged, hypothecated or otherwise transferred unless
either: (1) the Shares are registered under the 1933 Act, as
amended, and applicable state securities law; or, (2) the
sale of the Shares is exempt thereon;
(ii) a legend has been or will be placed on any certificate(s) or
other document(s) evidencing the Shares is substantially the
following form:
THE SECURITIES REPRESENTED BY THIS INSTRUMENT OR DOCUMENT HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE, SUCH SECURITIES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED AT ANY TIME WHATSOEVER, EXCEPT UPON
REGISTRATION, OR UPON DELIVERY TO THE COMPANY OF ANY OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED
FOR SUCH TRANSFER OR SUBMISSION TO THE COMPANY OF
-3-
<PAGE> 4
SUCH EVIDENCE AS MAY BE SATISFACTORY TO THE COMPANY TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR ANY RULE OR
REGULATION PROMULGATED THEREUNDER.
G. The following exhibits are attached hereto:
1. Articles of Incorporation, as amended.
2. Bylaws of the Company.
ANYTHING HEREIN TO THE CONTRARY NOTWITHSTANDING, THE COMPANY WILL NOT
CONSIDER THIS SUBSCRIPTION OFFERED TO COMPANY ON A TIMELY BASIS AND COMPANY
WILL NOT CONSIDER THIS SUBSCRIPTION FOR ACCEPTANCE IF IT IS NOT RETURNED FULLY
COMPLETED AND SIGNED BY THE SUBSCRIBER AND COMPANY HAS NOT BEEN PAID BY
SUBSCRIBER IN FULL IN THE AMOUNT OF $3,125,000 U.S. IN GOOD FUNDS TO
THE CREDIT OF COMPANY ON OR BEFORE NOON C.D.T., SEPTEMBER 18, 1998.
THIS DOCUMENT WAS ATTACHED AS EXHIBIT "A" TO SUBSCRIPTION AGREEMENT SENT BY
COMPANY TO SUBSCRIBER ON SEPTEMBER 11, 1997.
-4-
<PAGE> 5
SPLITROCK SERVICES, INC.
SUBSCRIPTION AGREEMENT EXECUTION PAGE
If you are subject to backup withholding, please check this box:
Subscriber, as required by Regulations pursuant to the Internal Revenue
Code, certifies under penalty of perjury that (1) the Federal employer
identification number provided below is correct and (2) Subscriber is not
subject to backup withholding (unless the Backup Withholding Statement blank
above is checked) either because it has not been notified that it is subject to
backup withholding as a result of a failure to report all interest or
dividends, or because the Internal Revenue Service has notified him that it is
no longer subject to backup withholding. Executed as of the date set forth
below.
ORIENT STAR, A SUBSIDIARY OF CARSO GLOBAL
TELECOM, S.A. DE C.V., which owns a majority
interest in Orient Star.
Date: By:
----------- --------------------------------------------------
Name Typed of Printed: ------------------------------
Title:-----------------------------------------------
-----------------------------------------------------
Subscriber's Federal Employer Identification Number
Number of Shares: 5,000,000
Capital Contribution ($0.625 U. S. per share): $3,125,000 U. S.
ANYTHING HEREIN TO THE CONTRARY NOTWITHSTANDING, THE COMPANY WILL NOT
CONSIDER THIS SUBSCRIPTION OFFERED TO COMPANY ON A TIMELY BASIS AND COMPANY WILL
NOT CONSIDER IT FOR ACCEPTANCE IF IT IS NOT RETURNED FULLY COMPLETED AND SIGNED
BY THE SUBSCRIBER AND COMPANY HAS NOT BEEN PAID IN FULL IN THE AMOUNT OF
$3,125,000 U. S. IN GOOD FUNDS TO THE CREDIT OF COMPANY ON OR BEFORE NOON
C.D.T., SEPTEMBER 18, 1998.
THIS DOCUMENT WAS ATTACHED AS EXHIBIT "A" TO SUBSCRIPTION AGREEMENT SENT BY
COMPANY TO SUBSCRIBER ON SEPTEMBER 11, 1997.
ACCEPTED AND AGREED TO as of this day of , 199 .
SPLITROCK SERVICES, INC.
By:
--------------------------------
William R. Wilson, President
-5-
<PAGE> 1
EXHIBIT 12
SPLITROCK SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
December 31, March 31,
1997 1998
------------ ---------
Pre-tax loss from continuing operations $(10,121) $(3,698)
Fixed charges:
Interest expense and amortization
of debt discount and premium on
all indebtedness 235 349
Rentals:
Facilities - 33% 72 82
-------- -------
Total fixed charges 307 431
Loss before income taxes and fixed charges $ (9,814) $(3,267)
======== =======
COMPUTATION OF PROFORMA RATIO OF EARNINGS
TO FIXED CHARGES FOR MARCH 31, 1998 AFTER
ADJUSTMENT FOR ISSUANCE OF SENIOR NOTES
Loss before income taxes and fixed charges, as above: $(3,267)
Fixed charges, as above 431
Adjustments:
Estimated net increase in interest expense
from financing 7,791
-------
Total pro forma fixed charges $ 8,222
Pro forma ratio of earnings to fixed charges
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated April 2, 1998 relating to
the financial statements of Splitrock Services, Inc., which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PricewaterhouseCoopers LLP
Houston, TX
August 12, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Clark McLeod whose signature appears
below, constitutes and appoints William R. Wilson and Patrick J. McGettigan,
Jr., and each one of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign the Registration Statement on Form
S-4 to be filed on behalf of Splitrock Services, Inc. in connection with the
Exchange Offer and any and all amendments (including post-effective amendments)
thereto, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
/s/ CLARK MCLEOD August 12, 1998
- ----------------------------------- ---------------
Clark McLeod
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Roy A. Wilkens, whose signature
appears below, constitutes and appoints William R. Wilson and Patrick J.
McGettigan, Jr., and each one of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Registration
Statement on Form S-4 to be filed on behalf of Splitrock Services, Inc. in
connection with the Exchange Offer and any and all amendments (including
post-effective amendments) thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
/s/ ROY A. WILKENS August 12, 1998
- ----------------------------------- ----------
Roy A. Wilkens
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Samer Salameh, whose signature
appears below, constitutes and appoints William R. Wilson and Patrick J.
McGettigan, Jr., and each one of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Registration
Statement on Form S-4 to be filed on behalf of Splitrock Services, Inc. in
connection with the Exchange Offer and any and all amendments (including
post-effective amendments) thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
/s/ SAMER SALAMEH August 11, 1998
- ----------------------------------- ----------
Samer Salameh
<PAGE> 1
EXHIBIT 25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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)
BANK OF MONTREAL TRUST COMPANY
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)
New York 13-4941093
(JURISDICTION OF INCORPORATION OR ORGANIZATION (I.R.S. EMPLOYER
IF NOT A U.S. NATIONAL BANK) IDENTIFICATION NO.)
Wall Street Plaza
88 Pine Street
New York, New York 10005
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Mark F. McLaughlin
Bank of Montreal Trust Company
Wall Street Plaza
88 Pine Street, New York, New York 10005
(212) 701-7602
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------------------
SPLITROCK SERVICES, INC.
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
Delaware 76-0529757
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
8665 New Trails Drive, Ste. 200
The Woodlands, Texas 77381
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
--------------------------------------
11 3/4% Senior Notes due 2008
(TITLE OF THE INDENTURE SECURITIES)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
- 2 -
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Federal Reserve Bank of New York
33 Liberty Street, New York N.Y. 10045
State of New York Banking Department
2 Rector Street, New York, N.Y. 10006
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust
powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each
such affiliation.
The obligor is not an affiliate of the trustee.
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as part of this statement of eligibility.
Exhibit 1 - Copy of Organization Certificate of Bank of Montreal Trust
Company to transact business and exercise corporate trust
powers; incorporated herein by reference as Exhibit "A"
filed with Form T-1 Statement, Registration No. 33-46118.
Exhibit 4 - Copy of the existing By-Laws of Bank of Montreal Trust
Company; incorporated herein by reference as Exhibit "B"
filed with Form T-1 Statement, Registration No. 33-80928.
Exhibit 6 - The consent of the Trustee required by Section 321(b)
of the Act; incorporated herein by reference as
Exhibit "C" with Form T-1 Statement, Registration
No. 33-46118.
Exhibit 7 - A copy of the latest report of condition of Bank of
Montreal Trust Company published pursuant to law or the
requirements of its supervising or examining authority,
attached hereto as Exhibit "D".
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of
1939 the Trustee, Bank of Montreal Trust Company, a corporation
organized and existing under the laws of the State of New York, has
duly caused this statement of eligibility to be signed on its behalf by
the undersigned, thereunto duly authorized, all in the City of New
York, and State of New York, on the 6th day of August, 1998.
BANK OF MONTREAL TRUST COMPANY
By: /s/ AMY S. ROBERTS
------------------------------------
Amy S. Roberts
Vice President
<PAGE> 3
EXHIBIT 25
EXHIBIT "D"
STATEMENT OF CONDITION
BANK OF MONTREAL TRUST COMPANY
NEW YORK
---------------------------------
<TABLE>
<S> <C>
ASSETS
Due From Banks $ 528,979
---------------
Investment Securities:
State & Municipal 17,085,290
Other 100
---------------
TOTAL SECURITIES 17,085,390
Loans and Advances
Federal Funds Sold 4,400,000
Overdrafts 10,000
---------------
TOTAL LOANS AND ADVANCES 4 ,410,000
---------------
Investment in Harris Trust, NY 8,509,571
Premises and Equipment 288,644
Other Assets 2,965,076
---------------
11,763,291
---------------
TOTAL ASSETS $ 33,787,660
===============
LIABILITIES
Trust Deposits $ 8,680,937
Other Liabilities 824,388
---------------
TOTAL LIABILITIES 9,505,325
---------------
CAPITAL ACCOUNTS
Capital Stock, Authorized, Issued and
Fully Paid - 10,000 Shares of $100 Each 1,000,000
Surplus 4,222,188
Retained Earnings 19,048,815
Equity - Municipal Gain/Loss 11,332
---------------
TOTAL CAPITAL ACCOUNTS 24,282,335
---------------
TOTAL LIABILITIES
AND CAPITAL ACCOUNTS $ 33,787,660
===============
</TABLE>
I, Mark F. McLaughlin, Vice President, of the above-named bank do
hereby declare that this Report of Condition is true and correct to the best of
my knowledge and belief.
Mark F. McLaughlin
December 31, 1997
We, the undersigned directors, attest to the correctness of this
statement of resources and liabilities. We declared that it has been examined by
us, and to the best of our knowledge and belief has been prepared in conformance
with the instructions and is true and correct.
Sanjiv Tandon
Kevin O. Healy
Steven R. Rothbloom
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> OTHER 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 MAR-31-1998
<PERIOD-START> MAR-05-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 7,710 3,349
<SECURITIES> 0 0
<RECEIVABLES> 4,252 6,608
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 15,655 10,269
<PP&E> 42,004 46,826
<DEPRECIATION> 3,500 6,320
<TOTAL-ASSETS> 54,388 51,095
<CURRENT-LIABILITIES> 19,871 15,764
<BONDS> 14,110 18,622
0 0
0 0
<COMMON> 77 77
<OTHER-SE> 20,330 16,632
<TOTAL-LIABILITY-AND-EQUITY> 54,388 51,095
<SALES> 22,708 16,494
<TOTAL-REVENUES> 22,708 16,494
<CGS> 28,166 16,473
<TOTAL-COSTS> 32,942 19,950
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 235 349
<INCOME-PRETAX> (10,121) (3,698)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (10,121) (3,698)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,121) (3,698)
<EPS-PRIMARY> (0.24) (0.05)
<EPS-DILUTED> (0.24) (0.05)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR TENDER OF 11 3/4% SENIOR NOTES DUE 2008
IN EXCHANGE FOR
11 3/4% SERIES B SENIOR NOTES DUE 2008 OF
SPLITROCK SERVICES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
__________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). ORIGINAL NOTES
TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE.
DELIVER TO THE EXCHANGE AGENT:
By Registered or
Certified Mail: By Overnight Courier: By Hand:
[TO BE ADDED] [TO BE ADDED] [TO BE ADDED]
Facsimile Transmission
Number: Confirm by Telephone: Information:
[TO BE ADDED] [TO BE ADDED] [TO BE ADDED]
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE
LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS
ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
<PAGE> 2
The undersigned hereby acknowledges receipt and review of the
Prospectus dated __________, 1998 (the "Prospectus") of Splitrock Services,
Inc. (the "Company") and this Letter of Transmittal (the "Letter of
Transmittal"), which together describe the Company's offer (the "Exchange
Offer") to exchange its 11 3/4% Series B Senior Notes due 2008 (the "Exchange
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 is a part, for a like principal amount of its issued and
outstanding 11 3/4% Senior Notes due 2008 (the "Original Notes"). Capitalized
terms used but not defined herein have the respective meaning given to them in
the Prospectus.
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 in which the Exchange
Offer is extended. The Company shall notify the holders of the Original Notes
of any extension by oral or written notice 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 used by a Holder of Original Notes
either if Original Notes are to be forwarded herewith or if delivery of
Original Notes, if available, is to be made by book-entry transfer to the
account maintained by the Exchange Agent at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures set forth in the
Prospectus under the caption "The Exchange Offer--Book-Entry Transfer."
Holders of Original Notes whose Original Notes are not immediately available,
or who are unable to deliver their Original Notes and all other documents
required by this Letter of Transmittal to the Exchange Agent on or prior to the
Expiration Date, or who are unable to complete the procedure for book-entry
transfer on a timely basis, must tender their Original Notes according to the
guaranteed delivery procedures set forth in the Prospectus under the caption
"The Exchange Offer- Guaranteed Delivery Procedures." See Instruction 2.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person
in whose name Original Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered Holder. The undersigned has completed, executed and delivered this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer. Holders who wish to tender their Original
Notes must complete this Letter of Transmittal in its entirety.
The undersigned has checked 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.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS
CAREFULLY BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE
FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF
THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE
AGENT.
2
<PAGE> 3
List below the Original Notes to which this Letter of Transmittal
relates. If the space below is inadequate, list the registered numbers and
principal amounts on a separate signed schedule and affix the list to this
Letter of Transmittal.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
DESCRIPTION OF ORIGINAL NOTES TENDERED
- ------------------------------------------------------------------------------------------------------------
Aggregate
Principal
Name(s) and Address(es) of Registered Holder(s) Amount Principal
Exactly as Name(s) Appear(s) on Original Notes Registered Represented Amount
(Please fill in, if blank) Numbers* By Note(s) Tendered**
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
---------------------------------------------
---------------------------------------------
---------------------------------------------
---------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry Holders.
** Unless otherwise indicated, any tendering Holder of Original Notes
will be deemed to have tendered the entire aggregate principal
mount represented by such Original Notes. All tenders must be in
integral multiples of $1,000.
- -------------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED ORIGINAL 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
(FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name of Tendering Institution:
----------------------------------------
Account Number:
-------------------------------------------------------
Transaction Code Number:
----------------------------------------------
3
<PAGE> 4
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED PURSUANT TO
A NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE
FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name(s) of Registered Holder(s) of Original Notes:
----------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
-------------------
Window Ticket Number (if available):
----------------------------------
Name of Eligible Institution that Guaranteed Delivery:
----------------
Account Number (if delivered by book-entry transfer):
-----------------
[ ] 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:
--------------------------------------------------------------
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 Original Notes, it
acknowledges that the Original Notes were acquired as a result of market-making
activities or other trading activities and that it will deliver a prospectus in
connection with any resale of such Exchange Notes; 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.
4
<PAGE> 5
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the
undersigned hereby tenders to the Company for exchange the principal amount of
Original Notes indicated above. Subject to and effective upon the acceptance
for exchange of the principal amount of Original Notes tendered in accordance
with this Letter of Transmittal, the undersigned hereby exchanges, assigns and
transfers to the Company all right, title and interest in and to the Original
Notes tendered for exchange hereby. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent, the agent and attorney-in-fact of
the undersigned (with full knowledge that the Exchange Agent also acts as the
agent of the Company in connection with the Exchange Offer) with respect to the
tendered Original Notes with full power of substitution to (i) deliver such
Original Notes, or transfer ownership of such Original Notes on the account
books maintained by the Book-Entry Transfer Facility, to the Company and
deliver all accompanying evidences of transfer and authenticity, and (ii)
present such Original Notes for transfer on the books of the Company and
receive all benefits and otherwise exercise all rights of beneficial ownership
of such Original Notes, all in accordance with the terms of the Exchange Offer.
The power of attorney granted in this paragraph shall be deemed to be
irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that the undersigned
has full power and authority to tender, exchange, assign and transfer the
Original Notes tendered hereby and to acquire the Exchange Notes issuable upon
the exchange of such tendered Original Notes, and that the Company will acquire
good and unencumbered title thereto, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim, when the same
are accepted for exchange by the Company.
The undersigned acknowledges that this Exchange Offer is being made in
reliance upon interpretations contained in no-action letters issued to third
parties by the staff of the Securities and Exchange Commission (the
"Commission") that the Exchange Notes issued in exchange for the Original Notes
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by Holders thereof (other than any such Holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such Holders' business and such Holders are
not engaging in and do not intend to engage in a distribution of the Exchange
Notes and have no arrangement or understanding with any person to participate
in a distribution of such Exchange Notes. The undersigned hereby further
represents to the Company that (i) any Exchange Notes acquired in exchange for
Original Notes tendered hereby are being acquired in the ordinary course of
business of the person receiving such Exchange Notes, whether or not the
undersigned, (ii) neither the undersigned nor any such other person is engaging
in or intends to engage in a distribution of the Exchange Notes, (iii) neither
the undersigned nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such Exchange Notes, (iv)
neither the Holder nor any such other person is an "affiliate," as defined in
Rule 405 under the Securities Act, of the Company or, if it is an affiliate, it
will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable, and (v) if the undersigned is a
broker-dealer, such person has acquired the Original Notes as a result of
market-making activities or other trading activities.
If the undersigned or the person receiving the Exchange Notes is a
broker-dealer that is receiving Exchange Notes for its own account in exchange
for Original Notes that were acquired as a result of market-making activities
or other trading activities, the undersigned acknowledges that it or such other
person will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that the undersigned or such other
person is an "underwriter" within the meaning of the Securities Act. The
undersigned acknowledges that if the undersigned is participating in the
Exchange Offer for the purpose of distributing the Exchange Notes (i) the
undersigned cannot rely on the position of the staff of the Commission in
certain 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 a secondary resale transaction of the
Exchange Notes, in which case the registration statement must contain the
selling security holder information
5
<PAGE> 6
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission, and (ii) failure to comply with such requirements in such instance
could result in the undersigned incurring liability under the Securities Act
for which the undersigned is not indemnified by the Company.
If the undersigned or the person receiving the Exchange Notes is an
"affiliate" (as defined in Rule 405 under the Securities Act), the undersigned
represents to the Company that the undersigned understands and acknowledges
that the Exchange 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 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 Original
Notes tendered hereby, including the transfer of such Original Notes on the
account books maintained by the Book-Entry Transfer Facility.
For purposes of the Exchange Offer, the Company shall be deemed to
have accepted for exchange validly tendered Original Notes when, as and if the
Company gives oral or written notice thereof to the Exchange Agent. Any
tendered Original Notes that are not accepted for exchange pursuant to the
Exchange Offer for any reason will be returned, without expense, to the
undersigned at the address shown below or at a different address as may be
indicated herein under "Special Delivery Instructions" as promptly as
practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned acknowledges that the Company's acceptance of properly
tendered Original Notes pursuant to the procedures described under the caption
"The Exchange Offer-Procedures for Tendering" in the Prospectus and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Company upon the terms and subject to the conditions of the Exchange
offer.
Unless otherwise indicated under "Special Issuance Instructions,"
please issue the Exchange Notes issued in exchange for the Original Notes
accepted for exchange and return any Original Notes not tendered or not
exchanged, in the name(s) of the undersigned. Similarly, unless otherwise
indicated under "Special Delivery Instructions," please mail or deliver the
Exchange Notes issued in exchange for the Original Notes accepted for exchange
and any Original Notes not tendered or not exchanged (and accompanying
documents, as appropriate) to the undersigned at the address shown below the
undersigned's signatures. In the event that both "Special Issuance
Instructions" and "Special Delivery Instructions" are completed, please issue
the Exchange Notes issued in exchange for the Original Notes accepted for
exchange in the name(s) of, and return any Original Notes not tendered or not
exchanged to, the person(s) so indicated. The undersigned recognizes that the
Company has no obligation pursuant to the "Special Issuance Instructions" and
"Special Delivery Instructions" to transfer any Original Notes from the name of
the registered holder(s) thereof if the Company does not accept for exchange
any of the Original Notes so tendered for exchange.
6
<PAGE> 7
- -------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 1, 5, 6 and 7)
To be completed ONLY (i) if Original Notes in a principal amount not
tendered, or Exchange Notes issued in exchange for Original Notes accepted for
exchange, are to be issued in the name of someone other than the undersigned,
or (ii) if Original Notes tendered by book-entry transfer which are not
exchanged are to be returned by credit to an account maintained at the
Book-Entry Transfer Facility. Issue Exchange Notes and/or Original Notes to:
Name(s):
-----------------------------------------
(Please Type or Print)
Address:
-----------------------------------------
-------------------------------------------------
-------------------------------------------------
(Include Zip Code)
-------------------------------------------------
(Tax Identification or Social Security Number)
[ ] Credit unexchanged Original Notes delivered by book-entry transfer to
the Book-Entry Transfer Facility account set forth below:
-------------------------------------------------
(Account Number)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 5, 6 and 7)
To be completed ONLY if Original Notes in a principal amount not tendered,
or Exchange Notes issued in exchange for Original Notes accepted for exchange,
are to be mailed or delivered to someone other than the undersigned, or to the
undersigned at an address other than that shown below the undersigned's
signature.
Mail Certificate(s) to:
Name:
--------------------------------------------
(Please Type or Print)
Address:
-----------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
(Include Zip Code)
-------------------------------------------------
(Tax Identification or Social Security Number)
- -------------------------------------------------------------------------------
7
<PAGE> 8
- -------------------------------------------------------------------------------
SIGNATURES
PLEASE SIGN HERE WHETHER OR NOT
ORIGINAL NOTES ARE BEING PHYSICALLY TENDERED HEREBY
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Signature(s) of Holder(s) of Notes)
Date:______________________________________, 1998
The above lines must be signed by the registered Holder(s) of Original
Notes as name(s) appear(s) on the Original Notes or on a security position
listing, or by person(s) authorized to become registered Holder(s) by a
properly completed bond power from the registered Holder(s), a copy of which
must be transmitted with this Letter of Transmittal. If Original Notes to
which this Letter of Transmittal relate are held of record by two or more joint
Holders, then all such Holders must sign this Letter of Transmittal. If
signature is by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or
representative capacity, then such person must (i) set forth his or her full
title below and (ii) unless waived by the Company, submit evidence satisfactory
to the Company of such person's authority to so act. See Instruction 5
regarding the completion of this Letter of Transmittal, printed below.
Name(s):
-----------------------------------------------------------------------
(Please Type or Print)
Capacity (Full Title):
---------------------------------------------------------
Address:
-----------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number:
------------------------------------------------
Tax Identification or Social Security Number:
----------------------------------
MEDALLION SIGNATURE GUARANTEE
(If Required by Instruction 5)
Certain signatures must be guaranteed by an Eligible Institution.
Signature(s) Guaranteed by an Eligible Institution:
- -------------------------------------------------------------------------------
(Authorized Signature)
- -------------------------------------------------------------------------------
(Name - Please Type or Print)
- -------------------------------------------------------------------------------
(Title)
- -------------------------------------------------------------------------------
(Name of Firm)
- -------------------------------------------------------------------------------
(Address - Include Zip Code)
- -------------------------------------------------------------------------------
(Area Code and Telephone Number)
Date: , 1998
--------------------------------------
- -------------------------------------------------------------------------------
8
<PAGE> 9
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND ORIGINAL NOTES OR
BOOK-ENTRY CONFIRMATIONS. All physically delivered Original Notes or any
confirmation of a book-entry transfer to the Exchange Agent's account at the
Book-Entry Transfer Facility of Original Notes tendered by book-entry transfer
(a "Book-Entry Confirmation"), as well as a properly completed and duly
executed copy of this Letter of Transmittal or facsimile hereof, and any other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. The method of delivery of the tendered
Original Notes, this Letter of Transmittal and all other required documents to
the Exchange Agent 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 or confirmed by the Exchange Agent. Instead of delivery by mail, it
is recommended that the Holder use an overnight or hand delivery service. In
all cases, sufficient time should be allowed to assure delivery to the Exchange
Agent before the Expiration Date. No Letter of Transmittal or Original Notes
should be sent to the Company.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender
their Original Notes and (a) whose Original Notes are not immediately
available, or (b) who cannot deliver their Original Notes, this Letter of
Transmittal or any other documents required hereby to the Exchange Agent prior
to the Expiration Date or (c) who are unable to complete the procedure for
book-entry transfer on a timely basis, must tender their Original Notes
according to the guaranteed delivery procedures set forth in the Prospectus.
Pursuant to such procedures: (i) such tender must be made by or through a firm
which is a member of a registered national securities exchange or of the
National Association of Securities Dealers Inc. or a commercial bank or a trust
company having an office or correspondent in the United States (an "Eligible
Institution"); (ii) prior to the Expiration Date, the Exchange Agent must have
received from the 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 Original
Notes, the registration number(s) of such Original Notes and the principal
amount of Original Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three (3) New York Stock Exchange, Inc.
("NYSE") trading days after the Expiration Date, this Letter of Transmittal (or
facsimile hereof) together with the Original Notes (or a Book-Entry
Confirmation) in proper form for transfer will be received by the Exchange
Agent; and (iii) the certificates for all physically tendered shares of
Original Notes, in proper form for transfer, or Book-Entry Confirmation, as the
case may be, and all other documents required by this Letter of Transmittal are
received by the Exchange Agent within three (3) NYSE trading days after the
date of execution of the Notice of Guaranteed Delivery.
Any Holder of Original Notes who wishes to tender Original Notes
pursuant to the guaranteed delivery procedures described above must ensure that
the Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00
p.m., New York City time, on the Expiration Date. Upon request of the Exchange
Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to
tender their Original Notes according to the guaranteed delivery procedures set
forth above.
See "The Exchange Offer-Guaranteed Delivery Procedures" section of the
Prospectus.
3. TENDER BY HOLDER. Only a Holder of Original Notes may tender
such Original Notes in the Exchange Offer. Any beneficial Holder of Original
Notes who is not the registered Holder and who wishes to tender should arrange
with the registered Holder to execute and deliver this Letter of Transmittal on
the beneficial Holder's behalf or must, prior to completing and executing this
Letter of Transmittal and delivering the beneficial Holder's Original Notes,
either make appropriate arrangements to register ownership of the Original
Notes in such Holder's name or obtain a properly completed bond power from the
registered Holder.
4. PARTIAL TENDERS. Tenders of Original Notes will be accepted
only in integral multiples of $1,000. If less than the entire principal amount
of any Original Notes is tendered, the tendering Holder should fill in the
principal amount tendered in the fourth column of the box entitled.
"Description of Original Notes Tendered" above. The entire principal amount of
Original Notes delivered to the Exchange Agent will be deemed to have been
tendered unless
9
<PAGE> 10
otherwise indicated. If the entire principal amount of all Original Notes is
not tendered, then Original Notes for the principal amount of Original Notes
not tendered and Exchange Notes issued in exchange for any Original Notes
accepted will be sent to the Holder at the Holder's registered address, unless
a different address is provided in the appropriate box on this Letter of
Transmittal, promptly after the Original Notes are accepted for exchange.
5. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND
ENDORSEMENTS; MEDALLION GUARANTEE OF SIGNATURES. If this Letter of Transmittal
(or facsimile hereof) is signed by the record Holder(s) of the Original Notes
tendered hereby, the signature must correspond with the name(s) as written on
the face of the Original Notes without alteration, enlargement or any change
whatsoever. If this Letter of Transmittal is signed by a participant in the
Book- Entry Transfer Facility, the signature must correspond with the name as
it appears on the security position listing as the Holder of the Original
Notes.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder or Holders of Original Notes listed and tendered hereby and
the Exchange Notes issued in exchange therefor is to be issued (or any
untendered principal amount of Original Notes is to be reissued) to the
registered Holder, the Holder need not and should not endorse any tendered
Original Notes, nor provide a separate bond power. In any other case, such
Holder must either properly endorse the Original Notes tendered or transmit a
properly completed separate bond power with this Letter of Transmittal, with
the signatures on the endorsement or bond power guaranteed by an Eligible
Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a
person other than the registered Holder or Holders of any Original Notes
listed, such Original Notes must be endorsed or accompanied by appropriate bond
powers, in each case signed as the name of the registered Holder or Holders
appears on the Original Notes.
If this Letter of Transmittal (or facsimile hereof) or any Original
Notes or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, or 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, evidence satisfactory to the
Company of their authority to so act must be submitted with this Letter of
Transmittal.
Endorsements on Original Notes or signatures on bond powers required
by this Instruction 5 must be guaranteed by an Eligible Institution.
No signature guarantee is required if (i) this Letter of Transmittal
is signed by the registered Holder(s) of the Original Notes tendered herewith
(or by a participant in the Book-Entry Transfer Facility whose name appears on
a security position listing as the owner of the tendered Original Notes) and
the issuance of Exchange Notes (and any Original Notes not tendered or not
accepted) are to be issued directly to such registered Holder(s) (or, if signed
by a participant in the Book-Entry Transfer Facility, any Exchange Notes or
Original Notes not tendered or not accepted are to be deposited to such
participant's account at such Book-Entry Transfer Facility) and neither the box
entitled "Special Delivery Instructions" nor the box entitled "Special
Registration Instructions" has been completed, or (ii) such Original Notes are
tendered for the account of an Eligible Institution. In all other cases, all
signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution.
6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering
Holders should indicate, in the applicable box or boxes, the name and address
(or account at the Book-Entry Transfer Facility) to which Exchange Notes or
substitute Original Notes for principal amounts not tendered or not accepted
for exchange are to be issued or sent, if different from the name and address
of the person signing this Letter of Transmittal. In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
7. TRANSFER TAXES. The Company will pay all transfer taxes, if
any, applicable to the exchange of Original Notes pursuant to the Exchange
offer. If, however, Exchange Notes or Original 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 Original Notes tendered hereby, or if tendered Original 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
exchange of Original Notes pursuant to the Exchange offer, then 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
10
<PAGE> 11
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with this Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering Holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 7, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE ORIGINAL NOTES LISTED IN THIS LETTER
OF TRANSMITTAL.
8. TAX IDENTIFICATION NUMBER. Federal income tax law requires
that a holder of any Original Notes which are accepted for exchange must
provide the Company (as payor) with its correct taxpayer identification number
("TIN"), which, in the-case of a holder who is an individual is his or her
social security number. If the Company is not provided with the correct TIN,
the Holder may be subject to a $50 penalty imposed by the Internal Revenue
Service. (If withholding results in an over-payment of taxes, a refund may be
obtained.) Certain Holders (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional
instructions.
To prevent backup withholding, each tendering Holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the Holder has not been notified by the Internal Revenue
Service that such Holder is subject to backup withholding as a result of
failure to report all interest or dividends or (ii) the Internal Revenue
Service has notified the Holder that such Holder is no longer subject to backup
withholding. If the Original Notes are registered in more than one name or are
not in the name of the actual owner, see the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9," for
information on which TIN to report.
The Company reserves the right in its sole discretion to take whatever
steps are necessary to comply with the Company's obligation regarding backup
withholding.
9. VALIDITY OF TENDERS. All questions as to the validity, form,
eligibility (including time of receipt), and acceptance of tendered Original
Notes will be determined by the Company, in its sole discretion, which
determination will be final and binding. The Company reserves the right to
reject any and all Original Notes not validly tendered or any Original Notes,
the Company's acceptance of which would, in the opinion of the Company or its
counsel, be unlawful. The Company also reserves the right to waive any
conditions of the Exchange Offer or defects or irregularities in tenders of
Original Notes as to any ineligibility of any holder who seeks to tender
Original Notes in the Exchange Offer. The interpretation of the terms and
conditions of the Exchange Offer (includes this Letter of Transmittal and the
instructions hereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
Original Notes must be cured within such time as the Company shall determine.
The Company will use reasonable efforts to give notification of defects or
irregularities with respect to tenders of Original Notes, but shall not incur
any liability for failure to give such notification.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right
to waive, in whole or part, any of the conditions to the Exchange Offer set
forth in the Prospectus.
11. NO CONDITIONAL TENDER. No alternative, conditional, irregular
or contingent tender of Original Notes on transmittal of this Letter of
Transmittal will be accepted.
12. MUTILATED, LOST, STOLEN OR DESTROYED ORIGINAL NOTES. Any
Holder whose Original Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for
assistance or for additional copies of the Prospectus or this Letter of
Transmittal may be directed to the Exchange Agent at the address or telephone
number set forth on the cover page of this Letter of Transmittal. Holders may
also contact their broker, dealer, commercial bank, trust company or other
nominee for assistance concerning the Exchange Offer.
11
<PAGE> 12
14. ACCEPTANCE OF TENDERED ORIGINAL NOTES AND ISSUANCE OF EXCHANGE
NOTES; RETURN OF ORIGINAL NOTES. Subject to the terms and conditions of the
Exchange Offer, the Company will accept for exchange all validly tendered
Original Notes as soon as practicable after the Expiration Date and will issue
Exchange Notes therefor as soon as practicable thereafter. For purposes of the
Exchange Offer, the Company shall be deemed to have accepted tendered Original
Notes when, as and if the Company has given written and oral notice thereof to
the Exchange Agent. If any tendered Original Notes are not exchanged pursuant
to the Exchange Offer for any reason, such unexchanged Original Notes will be
returned, without expense, to the undersigned at the address shown above (or
credited to the undersigned's account at the Book-Entry Transfer Facility
designated above) or at a different address as may be indicated under the box
entitled "Special Delivery Instructions."
15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the
limited withdrawal rights set forth in the Prospectus under the caption "The
Exchange Offer-Withdrawal of Tenders."
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE
HEREOF (TOGETHER WITH THE ORIGINAL NOTES WHICH MUST BE DELIVERED BY BOOK-ENTRY
TRANSFER OR IN ORIGINAL HARD COPY FORM) OR THE NOTICE OF GUARANTEED DELIVERY
MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION TIME.
12
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF 11 3/4% SENIOR NOTES DUE 2008
IN EXCHANGE FOR
11 3/4% SERIES B SENIOR NOTES DUE 2008
SPLITROCK SERVICES INC.
This form or one substantially equivalent hereto must be used by a
holder to accept the Exchange Offer of Splitrock Services, Inc., a Delaware
corporation (the "Company"), who wishes to tender 11 3/4% Senior Notes due 2008
(the "Original Notes") to the Exchange Agent pursuant to the guaranteed
delivery procedures described in "The Exchange Offer-Guaranteed Delivery
Procedures" of the Company's Prospectus, dated __________, 1998 (the
"Prospectus") and in Instruction 2 to the related Letter of Transmittal. Any
holder who wishes to tender Original Notes pursuant to such guaranteed delivery
procedures must ensure that the Exchange Agent receives this Notice of
Guaranteed Delivery prior to the Expiration Date (as defined below) of the
Exchange Offer. Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus or the Letter of Transmittal.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
__________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). ORIGINAL NOTES
TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
--------------------
BY REGISTERED OR CERTIFIED BY HAND:
MAIL OR BY OVERNIGHT COURIER:
BY FACSIMILE:
FACSIMILE:
CONFIRM BY TELEPHONE:
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER
THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER
THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A 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 BOX ON
THE LETTER OF TRANSMITTAL FOR GUARANTEE OF SIGNATURES.
<PAGE> 2
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which IS a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934,
guarantees deposit with the Exchange Agent of the Letter of Transmittal (or
facsimile thereof), together with the Original Notes tendered hereby in proper
form for transfer (or confirmation of the book- entry transfer of such Original
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility
described in the Prospectus under the caption "The Exchange Offer-Guaranteed
Delivery Procedures" and in the Letter of Transmittal, and any other required
documents, all by 5:00 p.m., New York City time, within three New York Stock
Exchange trading days following the Expiration Date.
Name of Firm:
(AUTHORIZED SIGNATURE)
Address: Name:
(INCLUDE ZIP CODE)
Area Code and Tel. Number: Title:
(PLEASE TYPE OR PRINT)
Date: __________, 19__
DO NOT SEND ORIGINAL NOTES WITH THIS FORM. ACTUAL SURRENDER OF ORIGINAL NOTES
MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY A PROPERLY COMPLETED AND DULY
EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
2
<PAGE> 3
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly
completed and duly executed copy of this Notice of Guaranteed Delivery and any
other documents required by this Notice of Guaranteed Delivery must be received
by the Exchange Agent at its address set forth herein prior to the Expiration
Date. The method of delivery of this Notice of Guaranteed Delivery and any
other required documents to the Exchange Agent is at the election and sole risk
of the holder, and the delivery will be deemed made only when actually received
by the Exchange Agent. If delivery is by mail, registered mail with return
receipt requested, properly insured, is recommended. As an alternative to
delivery by mail, the holders may wish to consider using an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
timely delivery. For a description of the guaranteed delivery procedures, see
Instruction 2 of the Letter of Transmittal.
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this
Notice of Guaranteed Delivery is signed by the registered holder(s) of the
Original Notes referred to herein, the signature must correspond with the
name(s) written on the face of the Original Notes without alteration,
enlargement, or any change whatsoever. If this Notice of Guaranteed Delivery
is signed by a participant of the Book-Entry Transfer Facility whose name
appears on a security position listing as the owner of the Original Notes, the
signature must correspond with the name shown on the security position listing
as the owner of the Original Notes.
If this Notice of Guaranteed Delivery is signed by a person other than
the registered holder(s) of any Original Notes listed or a participant of the
Book-Entry Transfer Facility, this Notice of Guaranteed Delivery must be
accompanied by appropriate bond powers, signed as the name of the registered
holder(s) appears on the Original Notes or signed as the name of the
participant shown on the Book-Entry Transfer Facility's security position
listing.
If this Notice of Guaranteed Delivery is signed by a trustee,
executor, administrator, guardian, attorney-in- fact, officer of a corporation,
or other person acting in a fiduciary or representative capacity, such person
should so indicate when signing and submit with the Letter of Transmittal
evidence satisfactory to the Company of such person's authority to so act.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and
requests for assistance and requests for additional copies of the Prospectus
may be directed to the Exchange Agent at the address specified in the
Prospectus. Holders may also contact their broker, dealer, commercial bank,
trust company, or other nominee for assistance concerning the Exchange Offer.
3
<PAGE> 1
EXHIBIT 99.3
LETTER TO BROKERS
FOR
TENDER OF 11 3/4% SENIOR NOTES DUE 2008
IN EXCHANGE FOR
11 3/4% SERIES B SENIOR NOTES DUE 2008
SPLITROCK SERVICES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON __________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
ORIGINAL NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE.
To Registered Holders and Depository
Trust Company Participants:
We are enclosing herewith the material listed below relating to the
offer by Splitrock Services, Inc. (the "Company"), a Delaware corporation, to
exchange its 11 3/4% Series B Senior Notes Due 2008, (the "Exchange Notes"),
which have been, registered under the Securities Act of 193A, as amended (the
Securities Act"), for a like principal amount of its issued and outstanding 11
3/4% Senior Notes Due 2008 (the "Original Notes") upon the terms and subject to
the conditions set forth in the Company's Prospectus, dated 1998, and the
related Letter of Transmittal (which together constitute the "Exchange Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated __________, 1998;
2. Letter of Transmittal (together with accompanying Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9);
3. Notice of Guaranteed Delivery; and
4. Letter which may be sent to your clients tor whose account you hold
Original Notes in your name or in the name of your nominee, with a form for
obtaining such client's instruction with regard to the Exchange Offer.
We urge you to contact your clients promptly. Please note that the
Exchange Offer will expire on the Expiration Date unless extended.
The Exchange Offer is not conditioned upon any minimum number of
Original Notes being tendered.
Pursuant to the Letter of Transmittal, each holder of Original Notes
will, represent to the Company that (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being acquired in the ordinary course of business of the
undersigned, (ii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the distribution
within the meaning of the Securities Act of such Exchange Notes, (iii) if the
undersigned is not a broker-dealer, or is a broker-dealer but will not receive
Exchange Notes for its own account in exchange for Original Notes, neither the
undersigned nor any such other person is engaged in or intends to participate in
the distribution of such Exchange Notes and (iv) neither the undersigned nor any
such other person is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act or, if the undersigned is an "affiliate," that the
undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the undersigned
is a broker-dealer (whether or not it is also an "affiliate") that will receive
Exchange Notes for its own account in exchange for Original Notes, it represents
that such Original Notes were acquired as a result of market-making activities
or other trading activities, and it acknowledges that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. By acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes, the undersigned is not deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
<PAGE> 2
The enclosed Letter to Clients and Instruction to Registered Holder
and/or Book Entry Transfer Participant from Beneficial Owner contain an
authorization by the beneficial owners of the Original Notes for you to make the
foregoing representations.
The Company will not pay any fee or commission to any broker or dealer
or to any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Original Notes pursuant to the Exchange Offer. The
Company will pay or cause to be paid any transfer taxes payable on the transfer
of Original Notes to it, except as otherwise provided in Instruction 7 of the
enclosed Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
---------------------------------------
2
<PAGE> 1
EXHIBIT 99.4
LETTER TO CLIENTS
FOR
TENDER OF 11 3/4% SENIOR NOTES DUE 2008
IN EXCHANGE FOR
11 3/4% SERIES B SENIOR NOTES DUE 2008
SPLITROCK SERVICES, INC.
---------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON __________, 1998, UNLESS EXTENDED (THE
"EXPIRATION DATE").
---------------------------
ORIGINAL NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE.
To Our Clients:
We are enclosing herewith a Prospectus, dated __________, 1998, of
Splitrock Services, Inc. (the "Company"), a Delaware corporation, and a related
Letter of Transmittal (which together constitute the "Exchange Offer") relating
to the offer by the Company, to exchange its 11 3/4% Series B Senior Notes Due
2008 (the "Exchange Notes"), which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), for a like principal amount of its
issued and outstanding 11 3/4% Senior Notes Due 2008 (the "Original Notes"),
upon the terms and subject to the conditions set forth in the Exchange Offer.
The Exchange offer is not conditioned upon any minimum number of
Original Notes being tendered.
We are the holder of record of Original Notes held by us for your own
account. A tender of such Original Notes can be made only by us as the record
holder and pursuant to your instructions. The Letter of Transmittal is furnished
to you for your information only and cannot be used by you to tender Original
Notes held by us for your account.
We request instructions as to whether you wish to tender any or all of
the Original Notes held by us for your account pursuant to the terms and
conditions of the Exchange Offer. We also request that you confirm that we may
on your behalf make the representations contained in the Letter of Transmittal.
Pursuant to the Letter of Transmittal, each holder of Original Notes
will represent to the Company that (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being acquired in the ordinary course of business of the
undersigned, (ii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the distribution
within the meaning of the Securities Act of such Exchange Notes, (iii) if the
undersigned is not a broker-dealer, or is a broker-dealer but will not receive
Exchange Notes for its own account in exchange for Original Notes, neither the
undersigned nor any such other person is engaged in or intends to participate in
the distribution of such Exchange Notes and (iv) neither the undersigned nor any
such other person is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act or, if the undersigned is an "affiliate," that the
undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the undersigned
is a broker-dealer (whether or not it is also an "affiliate") that will receive
Exchange Notes for its own account in exchange for Original Notes, it represents
that such Original Notes were acquired as a result of market-making activities
or other trading activities, and it acknowledges that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. By acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes, the undersigned is not deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Very truly yours,
<PAGE> 1
EXHIBIT 99.5
INSTRUCTION TO REGISTERED HOLDER AND/OR BOOK
ENTRY TRANSFER PARTICIPANT FROM BENEFICIAL OWNER FOR
TENDER OF 11 3/4% SENIOR NOTES DUE 2008
IN EXCHANGE FOR
11 3/4% SERIES B SENIOR NOTES DUE 2008
SPLITROCK SERVICES, INC.
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
__________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
------------------------
ORIGINAL NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE.
To Registered Holder and/or Participant
of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated
__________, 1998 (the "Prospectus") of Splitrock Services, Inc., a Delaware
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer") to exchange its 11 3/4% Series B Senior Notes Due 2008 (the
"Exchange Notes") for all of its outstanding 11 3/4% Senior Notes Due 2008 (the
"Original Notes"). Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry
transfer facility participant, as to the action to be taken by you relating to
the Exchange Offer with respect to the Original Notes held by you for the
account of the undersigned.
The aggregate face amount of the Original Notes held by you for the
account of the undersigned is (FILL IN AMOUNT): $__________ of the 11 3/4%
Senior Notes Due 2008.
With respect to the Exchange Offer, the undersigned hereby instructs
you (CHECK APPROPRIATE BOX):
[ ] To TENDER the following Original Notes held by you for the
account of the undersigned (INSERT PRINCIPAL AMOUNT OF
ORIGINAL NOTES TO BE TENDERED (IF ANY)): $__________
[ ] Not to TENDER any Original Notes held by you for the account
of the undersigned.
If the undersigned instructs you to tender the Original Notes held by
you for the account of the undersigned, it is understood that you are
authorized to make, on behalf of the undersigned (and the undersigned, by its
signature below, hereby makes to you), the representation and warranties
contained in the Letter of Transmittal that are to be made with respect to the
undersigned as a beneficial owner, including, but not limited to, the
representations, that (i) the Exchange Notes acquired pursuant to the Exchange
Offer are being acquired in the ordinary course of business of the undersigned,
(ii) neither the undersigned nor any such other person has an arrangement or
understanding with any person to participate in the distribution within the
meaning of the Securities Act of 1933, as amended (the "Securities Act") of
such Exchange Notes, (iii) if the undersigned is not a broker-dealer, or is a
broker-dealer but will not receive Exchange Notes for its own account in
exchange for Original Notes, neither the undersigned nor any such other person
is engaged in or intends to participate in the distribution of such Exchange
Notes and (iv) neither the undersigned nor any such other person is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or, if the undersigned is an "affiliate," that the undersigned will comply
with the registration and prospectus delivery requirements of the Securities
Act to the extent applicable. If the undersigned is a broker-dealer
(whether or not it is also an "affiliate") that will receive Exchange Notes for
its own account in exchange for Original Notes, it represents that such
Original Notes were acquired as a result of market-making activities or other
trading activities, and it acknowledges that it will deliver
<PAGE> 2
a prospectus meeting the requirements of the Securities Act in connection with
any resale of such Exchange Notes. By acknowledging that it will deliver and
by delivering a Prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes, the undersigned is not
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
SIGN HERE
Name of beneficial owner(s):
---------------------------------------------------
Signature(s):
------------------------------------------------------------------
Name(s) (please print):
--------------------------------------------------------
Address:
-----------------------------------------------------------------------
Telephone Number:
--------------------------------------------------------------
Taxpayer Identification or Social Security Number:
-----------------------------
Date:
--------------------------------------------------------------------------
2
<PAGE> 1
EXHIBIT 99.6
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE
THE PAYER--Social Security numbers have nine digits separated by two hyphens:
I.E. 000-00-0000. Employer identification numbers have nine digits separated
by only one hyphen; I.E. 00-0000000. The table below will help determine the
number to give the payer.
<TABLE>
<CAPTION>
FOR THIS TYPE OF ACCOUNT GIVE THE SOCIAL
SECURITY
NUMBER OF
<S> <C>
1. An individual's account The individual
2. Two or more individuals (joint account) The actual owner of the account
or, if combined funds, the first
individual on the account (1)
3. Custodian account of a minor (Uniform The minor (2)
Gift to Minors Act)
4. a. The usual revocable savings trust The grantor-trustee(1)
account (grantor is also trustee)
b. So-called trust account that is The actual owner(1)
not a legal or valid trust under
State law
5. Sole proprietorship account The owner(3)
FOR THIS TYPE OF ACCOUNT GIVE THE EMPLOYER
IDENTIFICATION NUMBER OF:
6. A valid trust, estate, or pension trust Legal entity (Do not furnish the
taxpayer identification number of
the personal representative or
trustee unless the legal entity
itself is to designated in the
account title).(4)
7. Corporate account The corporation
8. Association, club, religious, The organization
charitable, educational or other tax-
exempt organization account
9. Partnership account The partnership
10. A broker or registered nominee The broker or nominee
11. Account with the Department of The public entity
Agriculture in the name of a public
entity (such as a State or local
government, School district or
prison)that receives agricultural
program payments
</TABLE>
<PAGE> 2
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your social security number
or employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name listed, the
number will be considered to be that of the first name listed
2
<PAGE> 3
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Page __
HOW TO OBTAIN A TIN
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card for
individuals, or Form SS-4, Application for Employer Identification Number (for
business and other entities), or Form W-7, Application for IRS Individual
Taxpayer Identification Number (for certain resident aliens), at the local
office of the Social Security Administration or the Internal Revenue Service
and apply for a number.
If You return the Substitute Form W-9 with the "Awaiting TIN" box checked in
Part 3, you must provide the payer with a Certificate of Awaiting Taxpayer
Identification Number and, within 60 days, a TIN. If you do not provide the
TIN by the date of payment, 31% of all reportable payments will be withheld.
If your certified TIN is received within the 60-day period and you were not
subject to backup withholding during that period, the amounts withheld will be
refunded to you. If no certified TIN is provided to the payer within 60 days,
the amounts withheld will be paid to the IRS.
AS SOON AS YOU RECEIVE YOUR TIN, COMPLETE ANOTHER SUBSTITUTE FORM W-9, INCLUDE
YOUR TIN, SIGN AND DATE THE FORM, AND GIVE IT TO THE PAYER.
For interest, dividends and broker transactions, you must sign the
certification or backup withholding will apply. If you are subject to backup
withholding and you are merely providing your correct TIN to a payer, you must
cross out item 2 in the certification before signing the form.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments by the
Payer include the following:
- A corporation.
- A financial institution.
- An organization exempt from tax under section 501(a), or an individual
retirement plan, or a custodial account under section 403(b)(7) if the
account satisfies the requirements of Section 401(f)(2).
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United States
or any political subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign government,
or any agency or instrumentality thereof.
- An international organization or any agency or instrumentality
thereof.
- A registered dealer in securities or commodities registered in the
U.S., the District of Columbia or a possession of the U.S.
- A real estate investment trust.
- A common trust fund operated by a bank under section 584(a).
- An entity registered at all times under the Investment Company Act of
1940.
3
<PAGE> 4
- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- Payments to nonresident aliens subject to withholding under section
1441.
- Payments to partnerships not engaged in a trade or business in the
U.S. and which have at least one nonresident partner.
- Payments of patronage dividends where the amount received is not paid
in money.
- Payments made by certain foreign organizations.
- Section 404(K) payments made by an ESOP.
Payments of interest not generally subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals. Note: You
are subject to information reporting if this interest is $600 or more
and is paid in the course of the payer's trade or business and backup
withholding if you have not provided your correct TIN to the payer.
- Payments of tax-exempt interest (including exempt interest dividends
under section 852).
- Payments described in section 6049(b) (5) to nonresident aliens.
- Payments on tax-free covenant bonds under section 1451.
- Payments made by certain foreign organizations.
- Mortgage interest paid by you.
Exempt payees described above should file Substitute Form W-9 to avoid possible
erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TIN,
WRITE "EXEMPT" ON THE FACE OF THE FORM IN PART 2, SIGN AND DATE THE FORM, AND
RETURN IT TO THE PAYER.
Certain payments, other than interest, dividends and patronage dividends that
are not subject to information reporting are also not subject to backup
withholding. For details, see sections 6041, 6041A(a), 6042, 6044, 6045, 6049,
6050A and 605ON and the regulations thereunder.
PRIVACY ACT NOTICE. Section 6109 requires most recipients of dividend,
interest or other payments to give their correct TIN to payers who must report
the payments to the IRS. The IRS uses the numbers for identification purposes
and to help verify the accuracy of tax returns. The IRS may also provide this
information to the Department of Justice for civil and criminal litigation and
to cities, states and the District of Columbia to carry out their tax laws.
Payers must be given the TIN whether or not recipients are required to file tax
returns. Payers must generally withhold 31% of taxable interest, dividend and
certain other payments to a payee who does not furnish a taxpayer
identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TIN.--If you fail to furnish your correct
TIN to a payer, you are subject to a penalty of $50 for each such failure
unless your failure is due to reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no
imposition of-backup withholding, you are subject to a penalty of $500.
4
<PAGE> 5
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying
certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
(4) MISUSE OF TINS.--If the payer discloses or uses TIN's in violation of
Federal law, the payer may be subject to civil and criminal penalties.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
5
