<PAGE>
As filed with the Securities and Exchange Commission on July 26, 1999
Registration No. 333-79909
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
Splitrock Services, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 7370 76-0529757
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
8665 New Trails Drive
The Woodlands, Texas 77381
(281) 465-1200
(Address, including zip code, and telephone number, including area code, of
registrants' principal executive offices)
----------------
Patrick J. McGettigan, Jr., Esq.
Senior Vice President
8665 New Trails Drive
The Woodlands, Texas 77381
(281) 465-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Andrew P. Varney, Esq. John D. Watson, Jr., Esq.
Fried, Frank, Harris, Shriver & Latham & Watkins
Jacobson 1001 Pennsylvania Avenue, N.W.
1001 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2505
Washington, D.C. 20004-2505 (202) 637-2200
(202) 639-7000
----------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment 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 Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary 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 +
+preliminary 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 or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 26, 1999
PROSPECTUS
10,700,000 Shares
[LOGO OF SPLITROCK APPEARS HERE]
Common Stock
-----------
This is an initial public offering of shares of common stock of Splitrock
Services, Inc. We are selling the 10,700,000 shares of common stock offered
under this prospectus.
There is currently no public market for our shares. We currently estimate that
the initial public offering price will be between $13.00 and $15.00 per share.
Our common stock has been approved for listing on the Nasdaq National Market
under the symbol "SPLT."
See "Risk Factors" beginning on page 7 to read about risks that you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price.......................... $ $
Underwriting discount ......................... $ $
Proceeds, before expenses, to us............... $ $
</TABLE>
-----------
The underwriters may purchase up to an additional 1,447,628 shares of common
stock from us, and an additional 157,372 shares of common stock from some of
our stockholders, at the initial public offering price less the underwriting
discount to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York, New
York on , 1999.
-----------
Bear, Stearns & Co. Inc.
Credit Suisse First Boston
Prudential Securities
The date of this prospectus is , 1999
<PAGE>
Inside front cover (first page of a three-page fold-out):
The text in the upper right corner of the page is: Next-Generation Data
Communications Company.
The left side of the page includes the following text:
<TABLE>
<S> <C>
[Splitrock Logo]
Vision Splitrock's long-term goal is to build a highly
profitable network company that is well-positioned
among the top tier providers of data communications
services.
Business Strategy Create a nationwide, facilities-based, broadband
data communications network that targets the needs
of Internet and corporate customers with a wide
range of high-performance, cost-competitive
services.
Marketing Strategy A key objective in the networking business is to
Maximize network usage load the network with traffic both in the evening
through a multi-service and daytime hours. To achieve that goal Splitrock is
strategy targeting both targeting both wholesale-consumer and business-
wholesale and customer segments with different services. The
business customers. company is already established as a major wholesale
dial and dedicated access provider in the Internet
industry, a major source of evening traffic. We
recently began targeting business customers with a
range of data communications and value-added
services. Splitrock reaches its markets with an
experienced direct sales force. We also utilize
resellers and partners to reach a variety of
markets.
Splitrock Advantage Broad Market Coverage
We are positioned to be a Splitrock provides coverage in 50 states and more
competitive player in than 800 cities, including the top 150 markets. Not
the Internet and data only do we connect all of these markets, but our
communications industry. platform is uniformly capable of providing the same
breadth and quality of service nationwide. In
simple terms, the services we provide in major
markets like Boston and Chicago are available at
the same level of quality and reliability in
smaller markets like Billings and Cheyenne.
Network Infrastructure
We are building a broadband access platform that
will have ATM switches in approximately 370 physical
locations. When linked with our fiber backbone, this
infrastructure will give us the capability and
flexibility to deliver a host of Internet access and
data services across a nationwide end-to-end
network.
Multi-Service Capability
We can deliver a wide range of high-speed, high-
performance data communications services to
corporate and wholesale users. Our marketing, sales,
and backoffice service and support capabilities are
designed for both types of customers.
Management Team
Splitrock has assembled a seasoned, highly motivated
management team with extensive experience in the
data communications industry. We believe that our
senior managers include some of the best technical
and marketing talent in the industry. Our employees
are stakeholders in the company and are committed to
making Splitrock the best company in the industry.
</TABLE>
The right side of the page includes a table with the following data:
Internet and Data Communications
Market Projections
<TABLE>
Projected
Projected compound market size
annual growth rate 2003
Target Markets 1998-2003 ($ billions)
<S> <C> <C>
Business Internet/(1)/............... 71% $41.9
Consumer Internet/(1)/............... 19% 19.9
Web Hosting and other
Value-Added Services/(1)/............ 76% 14.7
Frame Relay/(2)/..................... 19% 10.7
ATM/(2)/............................. 37% 1.6
</TABLE>
Source: (1) Forrester Research,Inc.
(2) International Data Corporation
Below the table on the right side of the page is a graphic image showing nine
different access services connected through an ATM switch to Splitrock's
nationwide fiber backbone, as described below.
The captions at the top of the graphic image are:
Splitrock Broadband Network
Broadband Access Platform
ATM-To-The-Edge
Listed down the left side of the graphic image are the following initials: IP,
ATM, FR, OC3, DS3, DS1, DSL, ISDN and V.90.
To the right of the initials are a triangle labeled "ATM" and a United States
map labeled "Nationwide Fiber Backbone."
The caption at the bottom of the graphic image is:
"The Flexible Splitrock network architecture
supports a range of broadband access services."
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus. The
summary may not contain all of the information that is important to you. This
prospectus includes forward-looking statements which involve risks and
uncertainties. You should carefully read the entire prospectus, including the
risk factors and the financial statements, before deciding whether to invest in
our common stock.
Splitrock Services, Inc.
Our Company
We are a facilities-based provider of advanced data communications services.
We market our services to Internet service providers, telecommunications
carriers and other businesses throughout the United States. We own and operate
a state-of-the-art, broadband access network that:
. consistently achieves among the highest performance ratings in the
industry for network reliability, speed and throughput;
. currently handles more than 1.3 billion minutes of use per month;
. reaches businesses and households in every U.S. market with a population
of at least 100,000 as well as many smaller markets; and
. employs asynchronous transfer mode (ATM) switches at every point-of-
presence (POP).
The combination of our existing broadband access network with our pending
acquisition of significant fiber optic facilities positions us to deliver a
broad array of end-to-end data communications services on our own network,
including:
. dial and dedicated Internet access;
. Internet access for higher bandwidth services, such as digital
subscriber line (DSL) and cable modem;
. value-added services such as virtual private networks and web hosting;
and
. bandwidth leasing and colocation services.
We currently provide Internet dial access and related services to Prodigy
Communications Corporation, our primary customer and one of the largest
Internet service providers in the United States. Prodigy recently announced a
definitive agreement to acquire the Internet access customer base of Cable &
Wireless USA, which we believe will result in a significant increase in Prodigy
subscribers. We believe that our relationship with Prodigy and our high
performance ratings have demonstrated our strength as a network operator and
positioned us to expand our customer base and service offerings. Leveraging our
demonstrated network capabilities, we have recently entered into significant
new customer relationships with Juno Online Services and InfiNet. Juno, a
leading provider of Internet and e-mail services, currently has more than
200,000 subscribers for its billable Internet services launched in July 1998
and has created more than 6.8 million free e-mail accounts since April 1996.
InfiNet, a consortium sponsored by Knight-Ridder, Gannett and Landmark
Communications, provides Internet access and web publishing solutions to nearly
100,000 subscribers nationwide.
1
<PAGE>
Our Strategy
Our mission is to strengthen our position as a leading facilities-based
provider of advanced data communications services. To achieve this objective,
our business strategy focuses on the following key principles:
. expanding our direct marketing activities, increasing the size of our
sales force and developing alternative distribution channels to
capitalize on the expected growth in demand for network services;
. broadening our portfolio of service offerings;
. exploiting the capabilities of our advanced nationwide communications
network;
. building strong customer loyalty through superior customer service;
. leveraging our experienced management team;
. increasing and optimizing total network utilization by offering
comprehensive services and targeting both daytime business users and
evening consumer users to balance our network's usage; and
. evaluating strategic alliances and acquisitions that increase traffic
over our network.
Our Market Opportunity
According to industry reports, data communications is one of the fastest
growing segments of the global telecommunications market. Forrester Research
estimates that business Internet access, web hosting and other value-added
services will grow from $3.7 billion in 1998 to approximately $57 billion in
2003. Forrester also projects that consumer Internet access spending will grow
from approximately $7 billion in 1998 to approximately $19.9 billion in 2003.
Our Network
As of June 30, 1999, our broadband access network included 324 installed
POPs, 270 of which were operational. When our network is completed later this
year, we expect to have approximately 370 active POPs with a physical presence
in all 50 states, targeting over 90% of all U.S. businesses and households with
a local call. We have deployed ATM switches at every core, hub and remote POP
of our network. This network architecture, which we call "ATM-to-the-Edge(TM),"
enables us to serve as a broad-based provider of data communications services
through the creation of a platform that efficiently delivers multiple services,
such as Internet access, virtual private networks and web hosting, across
multiple protocols, including Internet Protocol (IP), frame relay and ATM. The
flexibility inherent in our network design allows us to expand our service
offerings to provide fully integrated data, video and voice services. This
flexibility also allows us to incorporate future technological innovations into
our network architecture with a lower incremental investment than that required
by other communications service providers with legacy systems that have
separate networks for voice and data.
As part of our ongoing efforts to further expand and enhance our network and
service offerings, we have agreed to acquire the indefeasible rights to use
four dark fiber strands in a state-of-the-art fiber optic network currently
under construction by Level 3 Communications, with an option to use up to 12
additional fibers. This nationwide fiber network will cover approximately
15,000 route miles and will be delivered in segments that are expected to
become available from the end of 1999 through the first quarter of 2001. The
combination of this fiber optic backbone with our broadband access network
positions us to:
. deliver, on our own facilities, a broad array of end-to-end data
communications services at the high level of quality and reliability
increasingly demanded by customers;
. reduce significantly our network costs as a percentage of revenues as we
substitute the acquired bandwidth for existing leased circuit
arrangements with various telecommunications carriers;
2
<PAGE>
. expand our service offerings by providing bandwidth leasing services on
a stand-alone basis or bundled with our other services;
. increase the reliability and redundancy of our network; and
. increase the variety of service options and speeds available to
customers.
----------------
We were incorporated in Texas on March 5, 1997 and reincorporated in
Delaware on May 8, 1998. Our headquarters are located at 8665 New Trails Drive,
The Woodlands, Texas 77381. Our telephone number at that location is (281) 465-
1200. Our website address is www.splitrock.net. The information contained on
our website is not part of this prospectus.
----------------
The terms "the Company," "Splitrock," "we," "our," and "us," as used in this
prospectus refer to Splitrock Services, Inc. Investors should carefully
consider the information set forth under "Risk Factors." Technical terms that
are important to an understanding of our business are defined in the Glossary
of Terms beginning on page G-1 of this prospectus. Except as otherwise noted,
the information in this prospectus (1) assumes that the underwriters' over-
allotment option will not be exercised and (2) reflects a 100-for-1 split of
our common stock that was effected on June 3, 1997, a 10-for-1 split of our
common stock that was effected on August 8, 1997, and a 0.563-for-1 reverse
stock split that was effected on July 12, 1999.
3
<PAGE>
The Offering
Common stock offered by
us.......................... 10,700,000 shares
Common stock to be
outstanding after this
offering.................... 57,381,424 shares
Use of proceeds............. We intend to use the net proceeds from this
offering to fund:
. capital expenditures, including the
acquisition of rights to use dark fiber, the
acquisition of related electronics equipment
and the completion of our broadband access
network;
. operating losses, working capital requirements
and other general corporate purposes; and
. possible future acquisitions or strategic
investments.
Proposed Nasdaq National
Market symbol............... SPLT
The number of shares of common stock to be outstanding after this offering
is based on the 46,681,424 shares outstanding as of June 30, 1999 and the
10,700,000 shares of common stock being sold by us in this offering. The shares
of common stock to be outstanding after this offering excludes:
. any shares of common stock to be issued pursuant to the over-allotment
option;
. 1,487,791 shares of common stock issuable on or after July 26, 1999 upon
the exercise of outstanding warrants with an exercise price of $0.02 per
share;
. 2,896,128 shares of common stock issuable upon the exercise of
outstanding options with a weighted average exercise price of $5.10 per
share; and
. 7,735,845 shares of common stock reserved for issuance upon the exercise
of options available to be granted under our stock option plans,
including options to purchase 1,233,711 shares exercisable at the
initial public offering price which we expect to grant when the initial
public offering price is determined.
4
<PAGE>
SUMMARY FINANCIAL DATA
Our statement of operations data for the period from inception (March 5,
1997) to December 31, 1997 and for the year ended December 31, 1998, and our
balance sheet data as of December 31, 1997 and 1998, shown in the table below
are derived from our audited financial statements. Our statement of operations
data for the six months ended June 30, 1998 and 1999 and our balance sheet data
as of June 30, 1999 have been derived from our unaudited financial statements
which, in the opinion of management, include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
for the unaudited interim periods presented. You should read this information
together with our financial statements and the notes relating to those
statements and with the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. Results of operations for the periods presented are not necessarily
indicative of results of operations for future periods.
The "As Adjusted" summary balance sheet data reflects the sale of the shares
of common stock offered by this prospectus at an assumed initial public
offering price of $14.00 per share, after deducting the underwriting discount
and the estimated offering expenses payable by us. For more information, see
"Use of Proceeds."
<TABLE>
<CAPTION>
Period from
Inception
(March 5, Year Ended Six Months Ended June
1997) through December 30,
December 31, 31, ------------------------
1997 1998 1998 1999
------------- ----------- ----------- -----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 22,708 $ 63,611 $ 32,214 $ 34,241
Operating expenses:
Splitrock network
costs................ 2,362 32,912 10,724 34,150
Legacy network costs.. 25,804 58,292 27,111 21,871
Selling, general and
administrative....... 1,276 6,390 2,441 6,338
Depreciation and
amortization......... 3,500 13,850 4,907 11,237
----------- ----------- ----------- -----------
Total operating
expenses........... 32,942 111,444 45,183 73,596
----------- ----------- ----------- -----------
Loss from operations.... (10,234) (47,833) (12,969) (39,355)
Other income (expense):
Interest income....... 348 5,393 183 4,335
Interest expense...... (235) (15,390) (842) (16,346)
----------- ----------- ----------- -----------
Loss before income tax.. (10,121) (57,830) (13,628) (51,366)
Provision for income
tax.................... -- -- -- --
----------- ----------- ----------- -----------
Net loss................ $ (10,121) $ (57,830) $ (13,628) $ (51,366)
=========== =========== =========== ===========
Net loss per share--
basic and diluted...... $ (0.42) $ (1.30) $ (0.31) $ (1.10)
=========== =========== =========== ===========
Weighted average
shares--basic and
diluted................ 24,109,823 44,388,948 43,288,168 46,668,728
</TABLE>
5
<PAGE>
<TABLE>
As of June 30, 1999
--------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet
Data:
Cash and cash
equivalents... $ 8,327 $ 147,290
Unrestricted
investments... 56,166 56,166
Restricted
investments
(1)........... 44,840 44,840
Property and
equipment,
net........... 88,721 88,721
Total assets... 232,729 371,692
Long-term debt
and capital
lease
obligations
(including
current
portion)...... 270,769 270,769
Stockholders'
equity
(deficit)..... (81,925) 57,038
</TABLE>
<TABLE>
<CAPTION>
Period from
Inception
(March 5, Six Months Ended
1997) through Year Ended June 30,
December 31, December 31, -----------------
1997 1998 1998 1999
------------- ------------ ------- --------
(in thousands)
<S> <C> <C> <C> <C>
Other Financial Data:
Capital expenditures..................... $ 16,969 $ 45,261 $ 5,548 $ 25,311
EBITDA (2)............................... (6,734) (33,983) (8,062) (28,118)
Cash provided by (used in):
Operating activities................... (2,233) (735) (3,712) (47,723)
Investing activities................... (17,198) (169,512) (7,714) 33,064
Financing activities................... 27,141 190,867 8,893 (5,344)
</TABLE>
- --------
(1) Restricted investments as of June 30, 1999, represent escrowed funds that,
together with interest received on those funds, will be sufficient to pay,
when due, the next three semi-annual interest payments on our outstanding
11 3/4% senior notes.
(2) EBITDA is defined as net loss plus net interest expense, provision for
income taxes, depreciation and amortization. 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 flow or other income or cash flow data or
as a measure of a company's profitability or liquidity and is not a measure
calculated in accordance with generally accepted accounting principles.
EBITDA is not necessarily comparable with similarly titled measures
reported by other companies.
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently consider immaterial may also impair our
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In this case, the trading price of the common stock could decline,
and you may lose all or part of your investment.
We make many forward-looking statements in this prospectus that are not
based on historical facts, but discuss our future expectations. You can
identify these statements by our use of forward-looking terms, such as
"anticipates," "believes," "plans," "expects," "future," "intends" and similar
expressions. Because these forward-looking statements involve risks and
uncertainties, there are important factors that may cause our actual results to
differ materially from those expressed or implied in our forward-looking
statements, including those discussed under this section and elsewhere in this
prospectus.
Our business is difficult to evaluate because we have a limited operating
history and implementation of our current business plan is not reflected in our
historical financial statements.
We were incorporated and commenced operations in March 1997. Accordingly, we
have a limited operating history from which you can evaluate our business and
prospects. In addition, we currently derive substantially all of our revenues
from Internet dial access services. We are now significantly expanding our
sales and marketing effort and our service offerings with the expectation of
broadening our customer base. We are also making a substantial capital
investment to acquire exclusive rights to use a fiber optic backbone, and
neither the revenues nor the expenses that may be associated with this
investment are reflected in our historical financial statements. As a result,
not only is our operating history limited, but our historical financial
statements do not reflect important elements of our business plan on a going
forward basis. The combination of these factors may make evaluation of our
business and prospects difficult.
As a participant in a new and rapidly evolving business, we face risks and
uncertainties relating to our ability to successfully implement our business
plan.
We have developed a business plan in the context of the rapidly evolving
data communications industry that leverages our current service offerings and
technical expertise and expands our operations into new service areas. The
risks and uncertainties associated with implementing our business plan relate
to:
. completing the construction and installation of our broadband access
network;
. expanding our sales and marketing activities;
. expanding and scaling operations support systems for planned services;
. providing services to our customers that are reliable and cost-
effective;
. responding to technological development or service offerings by
competitors;
. acquiring and integrating our fiber backbone into our network;
. increasing awareness of our brand;
. identifying and integrating strategic acquisitions and alliances; and
. attracting and retaining qualified personnel.
If we are unsuccessful in addressing these risks and uncertainties, our
business, results of operations and financial condition will be materially
adversely affected.
7
<PAGE>
We have a history of losses and we expect to continue to incur losses in the
foreseeable future.
We have incurred net losses and negative cash flows from operations since
our inception and we expect to continue to do so for the foreseeable future.
Starting up our company and building our network has required substantial
capital and other expenditures. As a result, we reported net losses of
approximately $57.8 million and $51.4 million, respectively during the year
ended December 31, 1998 and the six months ended June 30, 1999, and incurred
negative cash flows from operations of approximately $0.7 million and
$47.7 million for the same periods. As of June 30, 1999, we had an accumulated
deficit of $119.3 million. We cannot assure you that we will be able to achieve
or sustain revenue growth, profitability or positive cash flow on either a
quarterly or annual basis.
We currently depend on Prodigy for substantially all of our revenues, and our
revenues could decrease significantly if the number or usage of Prodigy
subscribers decreases or if Prodigy ceases to be a customer.
We currently derive substantially all of our revenues from Prodigy. Prodigy
accounted for 100%, 99% and 93% of our revenues for the period from inception
through December 31, 1997, the year ended December 31, 1998, and the six months
ended June 30, 1999, respectively. While we expect revenues from Prodigy to
decrease as a percentage of our total revenues in future periods, we believe
that Prodigy will continue to account for a significant portion of our
revenues. The initial four-year term of our agreement with Prodigy expires on
June 30, 2001. Prodigy may also terminate our agreement prior to June 30, 2001
if (1) we fail to meet specified service level objectives or otherwise fail to
comply with the agreement or (2) Prodigy gives us 12 months' notice of
termination and pays us a termination fee of $3.0 million. The loss of Prodigy
as a customer would have a material adverse effect on our business, financial
condition and results of operation.
Prodigy operates in a highly competitive environment and competes with a
wide range of national, regional and local Internet service providers. A
decrease in the number of Prodigy subscribers or their usage would likely
result in a corresponding decrease in our revenues under our agreement with
Prodigy. Prodigy reports that a majority of its subscriber enrollments result
from bundling arrangements with personal computer manufacturers and Microsoft.
Prodigy's loss of these arrangements and relationships or a decrease in the
number of enrollments it receives as a result of these marketing channels could
adversely affect our results of operations.
Prodigy's results may be affected by seasonal factors. Historically, the
growth in Prodigy subscribers and their total usage has been higher in the
first and fourth quarters of the calendar year, in part due to increased
marketing efforts and consumer demand during the year-end holiday season. The
seasonal nature of Prodigy's business could affect our quarterly revenues.
We may not be able to hire and retain qualified employees.
Our future success depends on our ability to attract, train, motivate and
retain highly skilled employees, especially qualified, competent and motivated
sales and marketing staff with contacts and expertise in the communications
sector. Competition for employees in the data communications industry,
especially sales and marketing personnel, is intense and our business plan
depends on hiring a significant number of these individuals. We may be unable
to retain our key employees or attract, assimilate or retain other highly
qualified employees in the future. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications.
We depend on our key management personnel for our future success.
Our future success depends to a significant extent on the continued service
and coordination of our management team, particularly Kwok L. Li, our Chairman
of the Board and Chief Technical Officer, and
8
<PAGE>
William R. Wilson, our Chief Executive Officer. The departure of any of our
officers or key employees could have a material adverse effect on our business,
financial condition and results of operations. Mr. Li currently acts as a
consultant for Lucent Technologies, Inc. and is the majority owner of Linsang
Partners L.L.C. Mr. Li devotes a portion of his work time to Lucent and
Linsang. Mr. Li's inability to devote his time exclusively to our affairs could
have a material adverse effect on our business.
Our quarterly financial results may not be a good indicator of future results
and may fluctuate significantly and could result in lower prices for our stock.
We expect our quarterly revenues, expenses and operating results to
fluctuate significantly in the future as a result of a variety of factors, some
of which are outside of our control. As a result, we believe that quarter to
quarter comparisons of our operating results are not a good indication of our
future performance and it is possible that our operating results may be below
the expectations of securities analysts or investors in some future period. If
the latter occurs, the trading price of our common stock would likely decline,
perhaps significantly. The factors which affect whether our results fluctuate
include:
. the number and level of usage of Prodigy subscribers;
. demand for network and Internet access services;
. capital expenditures and other costs relating to the construction and
installation of our network;
. marketing and other expenses aimed at increasing our customer base;
. pricing changes and the introduction of new products or services by us
or our competitors;
. our ability to obtain sufficient supplies of sole- or limited-source
equipment and telecom facilities on a timely basis;
. our ability to balance the use of our network over a 24-hour period;
. potential adverse regulatory developments;
. delays in the construction of our fiber optic backbone network;
. technical difficulties, system downtime, undetected software errors and
other problems affecting the Internet generally or the operation of our
network;
. economic conditions specific to the Internet and online media and
general economic conditions; and
. longer sales cycles for newer service offerings.
We base our expenses to a significant extent on our expectations of future
revenues. Most of our expenses are fixed in the short term, and we may not be
able to quickly reduce spending if our revenues are lower than we expect.
Moreover, in an attempt to enhance our long-term competitive position, we may
from time to time make decisions regarding pricing, marketing, services and
technology that could have a near-term material adverse effect on our business,
financial condition and operating results. For more information, see "Selected
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We face intense competition in the data communications services industry.
The market for data communications, Internet and related services is
intensely competitive, quickly evolving and subject to rapid technological
change. We anticipate that competition will continue to intensify as the use of
data communications and the Internet grows. The tremendous growth and potential
size of the market have attracted many new start-ups as well as established
businesses from different industries. Our current and prospective competitors
fall into three major categories:
. companies that provide access services to Internet service providers
with both residential and small business customers, including Verio,
UUNET Technologies, Concentric Network, PSINet, and Netcom On-Line
Communications Services;
9
<PAGE>
. companies that provide access, virtual private network and other value-
added services to medium and large businesses, including UUNET
Technologies, Concentric Network, GTE Internetworking, and DIGEX, as
well as most major long distance telephone companies; and
. companies with high-speed networks that provide bandwidth capacity and
other network services, including IXC Communications, Qwest and Level 3
Communications.
Some of these competitors have significantly greater market presence, brand
recognition and financial, technical and personnel resources than we do. Many
of our competitors may also have the ability to bundle Internet access and data
transmission with basic local and long distance telecommunications services.
This bundling of services may have an adverse effect on our ability to compete
effectively with them and may result in pricing pressure on us.
We also believe that new competitors will enter the network services market
with new technologies and methods of distribution, including large computer
hardware, software and media and other technology and telecommunications
companies, resulting in greater competition and pricing pressure as more
capacity becomes available. For instance, cable companies, AT&T and Microsoft
have announced that they are exploring broadband services for high speed
Internet connectivity that will rely on cable modems and economical network
upgrades. Other companies have announced plans to provide Internet access via
wireless terrestrial and satellite-based technologies. This capacity will be
added to that of the U.S. long distance fiber optic networks owned by each of
AT&T, MCI WorldCom and Sprint, as well as numerous local networks. Others,
including Qwest, IXC Communications and Williams Companies, are deploying
additional networks that use advanced technology similar to that of our fiber
backbone being constructed by Level 3.
The increase in the number of competitors in this industry has been
accompanied by vertical and horizontal integration and consolidation among
competitors. The number of businesses providing Internet-related and network
services is growing rapidly. We are aware of other companies, in addition to
those named above, that have entered into or are forming joint ventures or
consortia to provide services similar to those provided by us. Others may
acquire the capabilities necessary to compete with us through acquisitions.
As a result of the increase in the number of competitors and the vertical
and horizontal integration in the industry, we currently encounter and expect
to continue to encounter significant pricing pressure and other competition in
the future. Increased price or other competition could result in erosion of our
market share and could have a material adverse effect on our business,
financial condition and results of operations. We cannot assure you that we
will have the financial resources, technical expertise, portfolio of services
or marketing and support capabilities to continue to compete successfully. For
more information, see "Business--Competition."
Increased industry capacity and other factors could lead to lower prices for
our services.
The long distance transmission industry has been characterized by
overcapacity and falling prices since shortly after the break-up of AT&T in
1984. We expect that prices for communications services generally will continue
to fall over the next several years, primarily due to:
. recent technological advances that permit large increases in the
transmission capacity of both new and existing fiber;
. strategic alliances or similar transactions, such as purchasing
alliances for long distance capacity among local exchange carriers that
increase the parties' purchasing power; and
. construction of new networks and competing satellite systems.
10
<PAGE>
We face risks associated with entering new lines of business that could cause
our results to suffer.
A key component of our strategy is to acquire fiber optic backbone that
increases our capacity to deliver services that require higher bandwidth and to
lease some of our fiber optic capacity to other companies. The following risks
are inherent in entering this new line of business:
. a potential decrease in the price for our bandwidth capacity resulting
from a significant increase in capacity in the marketplace as networks
currently under construction come on line;
. a lack of financial resources to make the necessary capital expenditures
to take full advantage of the bandwidth available to us;
. unexpected changes in regulatory requirements as a result of combining
our old lines of business with the new lines of business;
. loss of management and marketing staff focus and attention;
. problems reaching our new target market for bandwidth leasing services;
. failure to integrate the sales and marketing of our new lines of
business with our existing services; and
. inability to compete in the new line of business against established
brand names.
We have incurred substantial indebtedness and may not be able to service our
debt.
We have and will continue to have a significant amount of outstanding
indebtedness and debt service requirements. At June 30, 1999, our total debt
(including current portion of capital lease obligations) was $270.8 million and
stockholders' deficit was $81.9 million. Interest on this indebtedness totals
approximately $33 million per year. Our debt has important consequences for our
company and for you, including the following:
. our ability to obtain additional financing in the future, whether for
working capital, capital expenditures, acquisitions or other purposes,
may be impaired;
. a substantial portion of our cash flow from operations is dedicated to
the payment of interest on our debt, which reduces the funds available
to us for other purposes;
. our flexibility in planning for or reacting to changes in market
conditions may be limited; and
. we may be more vulnerable in the event of a downturn in our business.
Our ability to meet our debt service obligations will depend on our future
operating performance and financial results. This ability will be subject in
part to factors beyond our control. Although we believe that our cash flow will
be adequate to meet our interest payments, we cannot assure you that we will
continue to generate sufficient cash flow in the future to meet our debt
service requirements. If we are unable to generate cash flow in the future
sufficient to cover our fixed charges and are unable to borrow sufficient funds
from other sources, then we may be required to:
. refinance all or a portion of our existing debt;
. attempt to issue additional equity securities, which may result in
dilution of ownership percentages for our existing shareholders; or
. sell all or a portion of our assets.
We cannot assure you that a refinancing or offering of equity securities
would be possible. We cannot assure you that any asset sales would be timely or
that the proceeds which we could realize from asset sales would be sufficient
to meet our debt service requirements. In addition, the terms of our debt
securities and fiber agreements restrict our ability to sell or sublease our
assets and our use of the proceeds from any asset sale.
11
<PAGE>
We will need additional capital in the future and additional financing may not
be available.
We currently anticipate that our available cash resources, combined with the
net proceeds from this offering, will be sufficient to meet our anticipated
working capital and capital expenditure requirements through the end of 2000.
We cannot assure you that these resources will be sufficient for unanticipated
working capital and capital expenditure requirements during this period.
Moreover, we expect that full implementation of our current business plan will
require that we raise substantial additional capital for the needs that we
anticipate funding during 2001 and 2002. We may also need to raise additional
funds in order to:
. take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies;
. develop new services; or
. respond to unanticipated competitive pressures.
We may also raise additional funds through public or private debt or equity
financings if these sources of financing become available on favorable terms.
We cannot assure you that the additional financing we will need will be
available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, we may not be able to take
advantage of unanticipated opportunities, develop new services or otherwise
respond to unanticipated competitive pressures. In that case, our business,
results of operations and financial condition could be materially adversely
affected. Our forecast of the period of time through which our financial
resources will be sufficient to support our operations is a forward looking
statement that involves risks and uncertainties, and actual results could vary
materially as a result of a number of factors, including those set forth above.
Restrictions imposed on us as a result of our current indebtedness could
adversely affect our ability to raise further capital.
The terms of our current indebtedness contain financial and operating
covenants that limit the discretion of our management. These covenants place
significant restrictions on our ability to:
. incur additional indebtedness;
. create liens or other encumbrances;
. make dividend payments and investments;
. sell or otherwise dispose of assets; or
. merge or consolidate with other companies.
These restrictions could adversely affect our ability to raise further capital.
Any failure or delays by Level 3 in completing our new fiber optic backbone
network could materially and adversely affect our business.
In April 1999, we entered into an agreement with Level 3 Communications
which gives us the exclusive right to use portions of Level 3's nationwide
fiber network for a 20-year period. Our ability to fully implement our present
business plan could be adversely affected if Level 3 fails to perform its
obligations under this agreement. Level 3 may be delayed or prevented from
completing its fiber network and performing its obligations under our agreement
due to:
. insufficient capital resources;
. failure of its suppliers to provide the necessary equipment and
services;
. regulatory changes affecting its rights of way;
. a change in management strategy; or
. presently unforeseeable legal, technical or other factors.
12
<PAGE>
Our business plan assumes that we will use dark fiber strands from Level 3
to deliver our services on the fiber optic portion of our network. If Level 3
does not successfully complete the installation of these dark fiber segments,
we may not be able to provide our services or provide them at the level of
quality, efficiency and economy assumed in our business plan. While we believe
that we could transfer our business to another supplier if Level 3's segments
are not available, we may not find an alternate network which would provide
comparable technology at a competitive cost. Level 3 has not completed
construction of its network segments. Any failure by Level 3 to complete
construction of, or deploy and maintain, its dark fiber segments could hurt our
business.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, we may be
required to notify the Federal Trade Commission of the transactions
contemplated by our agreement with Level 3. If this notification is required,
we will not be able to consummate the transactions contemplated by the Level 3
agreement until the requirements of the Hart-Scott-Rodino Act have been
satisfied and any applicable waiting period has expired or terminated.
Our business plan assumes that we will be able to expand and scale our network
infrastructure to accommodate increased volumes of traffic and customers;
however, our ability to scale our network by large proportions is unproven.
Our network currently handles approximately 1.3 billion minutes of use per
month. However, our ability to scale the network up to meet our expected
customer usage levels while maintaining superior performance and integrating
and managing the fiber optic backbone is unproven. As the number of our
customers grows or as network usage increases, we may need to make additional
investments to expand and adapt our network infrastructure and maintain
adequate data transmission speeds. Any future expansion and adaptation of our
communications and facility infrastructure could require substantial financial,
operational, technical and management resources. If we are required to expand
our network significantly and rapidly due to increased usage, additional stress
will be placed upon our network hardware, traffic management systems and
facilities.
Our business depends on the continued growth of the Internet and the demand for
data communications services and could suffer if demand declines.
Our business would be adversely affected if use of the Internet and the data
communications industry does not continue to grow or grows more slowly than
expected. Factors that may inhibit the continued growth of the Internet and the
data communications industry include the following:
. the ability of the Internet and data networking infrastructure to
support the growing demands placed on it;
. access costs;
. the performance and reliability of products and services as the number
of users and amount of traffic increases;
. the ability of businesses to adequately address security and privacy
concerns;
. the development of legislation or regulation related to the Internet;
and
. the nature and pace of technological changes relating to the Internet
and data communications.
In addition, websites have experienced interruptions in their service as a
result of outages and other delays occurring throughout the Internet network
infrastructure. If these outages or delays occur frequently, use of the
Internet as a commercial or business medium could, in the future, grow more
slowly than expected or decline. This would have an adverse affect on our
business.
13
<PAGE>
Our network system could fail resulting in losses and loss of user confidence.
Our success depends upon our ability to deliver reliable, high-speed access
to the Internet and upon the ability and willingness of our telecommunications
providers to deliver reliable, high-speed telecommunications service through
their networks. Our network, and other networks providing services to us, are
vulnerable to damage or cessation of operations from fire, earthquakes, severe
storms, power loss, telecommunications failures, excessive, sustained, or peak
user demand, and similar events, particularly if these events occur within a
high traffic location of the network. We cannot assure you that we will not
experience failures or shutdowns relating to individual POPs or even
catastrophic failure of the entire network. We carry business personal property
insurance to protect us against losses due to property damage and business
interruption. This coverage, however, may not be adequate or available to
compensate us for all losses that may occur. In any event, significant or
prolonged system failures or shutdowns could damage our reputation and result
in the loss of customers.
Our network is potentially vulnerable to viruses, break-ins or disruptions.
Despite our security measures, our network's infrastructure is potentially
vulnerable to computer viruses, break-ins and similar disruptive problems
caused by our customers or others. Computer viruses, break-ins or other
problems could lead to interruptions, delays or cessation in service to our
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 our customers. This could, in turn, deter
potential customers and adversely affect our existing customer relationships.
Security problems represent an ongoing threat to public and private data
networks. The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Although we attempt to limit contractually our
liability in these instances, the occurrence of problems may result in claims
against us or liability on our part. These claims, regardless of their ultimate
outcome, could result in costly litigation and could have a material adverse
effect on our business or reputation or on our ability to attract and retain
customers for our products. Moreover, until more consumer reliance is placed on
security technologies available, the security and privacy concerns of existing
and potential customers may inhibit the growth of the Internet service industry
and our customer base and revenues.
We must keep pace with technological change and evolving industry standards to
remain competitive and increase our revenues.
The market for data communications and Internet access and related services
is characterized by rapidly changing technology, evolving industry standards,
changes in customer needs and frequent new product and service introductions.
Our future success will depend, in part, on our ability to:
. effectively use and develop leading technologies;
. continue to develop our technical expertise;
. enhance our current services;
. develop new services that meet changing customer needs; and
. respond to emerging industry standards and technological changes in a
cost-effective manner.
If our services do not continue to be compatible and interoperable with
products and architectures offered by various other members of the industry,
our ability to compete could be impaired. We cannot assure you that we will be
successful in responding to changing technology or market trends. In addition,
services or technologies developed by others may render our services or
technologies uncompetitive or obsolete. Furthermore, changes to our services in
response to market demand may require the adoption of new technologies that
could likewise render many of our assets technologically uncompetitive or
obsolete. Even if we do successfully respond to technological advances and
emerging industry standards, the integration of new technology may require
substantial time and expense, and we cannot assure you that we will succeed in
adapting our network infrastructure in a timely and cost-effective manner.
14
<PAGE>
Changes in government regulations could adversely affect our business by
increasing costs or imposing limitations on the services we provide.
To date, we have not been subject to common carrier regulation by the FCC or
state public utility commissions, but the growth of Internet telephony and
changing technology has led regulators to consider regulating some Internet
services. We do not believe that we are subject to this type of regulation.
However, if such regulation is applied to us, we could incur substantial
regulatory costs, including obligations to contribute directly to federal and
state universal service funds. Government entities have also attempted to apply
various forms of content regulation to Internet service providers, though in
some cases Congress or the courts have made decisions that shielded Internet
service providers from liability for the content that they convey. Other
legislative and regulatory decisions designed to encourage the development of
competition in the provision of telecommunications services could benefit
certain of our competitors that are affiliated with facilities-based carriers,
and may provide at least a temporary competitive advantage to those companies.
For more information, see "Business--Regulation."
The imposition of taxes on our services could adversely affect our business.
We are uncertain what additional laws and regulations regarding taxation of
our services may be adopted due to the increasing popularity, development and
use of data communications facilities and services and the Internet in
particular. A number of state and local government officials have asserted the
right or indicated a willingness to impose taxes on Internet-related services
and commerce, including sales, use and access taxes. We cannot predict how the
activities in our industry will be taxed, and therefore how the costs of
supplying our services may be affected, in the future because there is no
precedent for many of these activities. The imposition of new taxes, directly
or indirectly, on our services could adversely affect our business, financial
condition and results of operations depending on their magnitude and our
ability to pass on the costs to end-users.
The services we provide to Prodigy may be subject to sales or use taxes in a
number of states. We believe that, under our agreement with Prodigy, we are
entitled to be reimbursed by Prodigy for these taxes if they are due. We have
billed Prodigy approximately $240,000 per month since May 1999 for taxes on
services provided and have informed Prodigy that we will be billing it for
prior periods. Prodigy has asserted that we may not be entitled to recover
these charges under the terms of our agreement. If our services to Prodigy are
ultimately determined to be subject to sales, use or other taxes and we are
unable to pass along these charges to Prodigy, our results of operations could
be materially adversely affected.
Potential problems related to the Year 2000 may decrease use of Internet
services, cause us reputational harm and adversely affect our business.
Some computer programs and systems use two digits, rather than four digits,
to define the applicable year and could fail or misfunction because they cannot
distinguish between 20th century and 21st century dates. This, in turn, could
result in a major system failure or miscalculations, including an inability to
process transactions, send invoices or engage in similar normal business
activities. The Internet and related service industries are susceptible to
year-2000 problems due to their reliance on computer hardware and software. If
these systems and programs should cause widespread problems across the
Internet, we expect users to curtail their use of the Internet dramatically
with consequent material adverse consequences to our revenues. However, we
cannot reasonably assess the magnitude of the consequences and risks of the
year-2000 problems on the basis of information currently available to us.
A failure of our systems or the systems of our suppliers, customers and
third parties with whom we do business could result in financial losses, legal
liability and reputational harm to our customers. If Internet usage and our
customers' subscriber count is reduced, it could result in a significant
reduction in our revenues and have a material adverse effect on our business.
Furthermore, Prodigy's and our other customers' purchasing patterns may be
affected by year-2000 issues as they expend significant resources to correct
their current systems for year 2000 compliance. We have not incurred material
costs in ensuring year-2000 compliance to date and do not expect to incur
material costs to make our software year-2000 compliant.
15
<PAGE>
We depend on sole- and limited-source suppliers for critical products and
services.
We rely on other companies to supply key components of our network,
operations support, and administration infrastructure. These components include
critical telecommunications services and networking equipment, which, in the
quantities and quality demanded by us, are available only from sole- or
limited-sources. We depend on sole- or limited-source suppliers for the
following products or services:
. ATM switching products--Lucent Technologies supplies us with all of our
ATM switching products, including the AC-120 switch, which is a key
component of our network.
. Internet dial access platform--Bay Networks provides us with its
Internet dial access platform.
. Routers--Cisco Systems manufactures the routers used in our network.
We do not carry significant inventories of these components and have no
guaranteed supply arrangements for these components. Our suppliers also sell
products to our competitors and may in the future themselves become our
competitors. We cannot assure you that our suppliers will not enter into
exclusive arrangements with our competitors or stop selling their products or
components to us at commercially reasonable prices, or at all. Our inability to
obtain sufficient quantities of sole- or limited-source components or to
develop alternative sources, if required, could result in delays and increased
costs in expanding, and overburdening of, our network infrastructure. Any
delay, increased costs or overburdening of our network would have a material
adverse effect on our business, financial condition and results of operations.
We also depend on local and long distance telephone companies to provide
telecommunications services to us and our customers. We experience delays from
time to time in receiving supplies and telecommunications services from our
suppliers. We cannot assure you that we will be able to obtain these supplies
or services on the scale, of the quality, and within the time frames required
by us at an affordable cost, or at all. Any failure to obtain these services on
a sufficient scale, on a timely basis or at an affordable cost would have a
material adverse effect on our business, financial condition and results of
operations.
We may be subject to legal liability for distributing or publishing content
over the Internet which could be costly for us to defend.
Congress and several states have enacted or are considering measures that
would, under some circumstances, impose civil and criminal liability upon
Internet service providers, or providers of transmission capacity to Internet
service providers, for the transmission or dissemination of information and
materials. It is possible that costly claims will be made against us in
connection with the nature and content of the materials disseminated through
our networks. Currently, several private lawsuits of this sort are pending
against other online services companies and Internet access providers. Given
the heightened attention this topic has recently received, and will continue to
receive if any of the current lawsuits are successful, we might be required to
respond by investing substantial resources or discontinuing some of our service
offerings. These factors may also cause growth of Internet use to decline.
Finally, although we carry general liability insurance, it may not be adequate
to compensate us or it may not cover us in the event we become liable for
information carried on or disseminated through our networks. Any costs not
covered by insurance incurred as a result of liability or asserted liability
for information carried on or disseminated through our networks could hurt our
business.
We depend on other companies for peering and interconnection arrangements.
We maintain peering and interconnection arrangements with other network
service providers so that we can exchange traffic with them. Recently,
companies that previously offered peering have eliminated peering relationships
or established new, more restrictive criteria for peering. We are uncertain
whether other network service providers will continue peering and
interconnection arrangements on acceptable terms or impose settlement charges
as a result of an increasingly competitive Internet services industry dominated
by a smaller group of national network providers. For more information, see
"Business--Our Network--Peering and Interconnection."
16
<PAGE>
The network design and technical expertise that we depend on may be developed
or similarly deployed by others.
Our success and ability to compete is dependent in part upon our technical
expertise. We do not have proprietary rights that would prevent our competitors
from deploying technologies or independently developing a network design and
technical expertise that are substantially equivalent or superior to our own.
For example, Sprint is in the process of designing a network which will contain
ATM switches at every core, hub and remote site. The construction by our
competitors of networks similar to our own may adversely affect our ability to
compete effectively.
Third parties may claim we infringe their proprietary rights and these claims
could result in increased costs.
Although we do not believe we infringe the proprietary rights of any third
parties, we cannot assure you that third parties will not assert claims against
us in the future or that those claims will not be successful. We could incur
substantial costs and diversion of management resources to defend any claims
relating to proprietary rights, which could have a material adverse effect on
our business, financial condition and results of operations. Furthermore,
parties making those claims could secure a judgment awarding substantial
damages, as well as injunctive or other equitable relief that could effectively
block our ability to license our products in the United States or abroad. Such
a judgment would have a material adverse effect on our business, financial
condition and results of operations. In addition, we are obligated under
various agreements to indemnify the other party for claims that we infringe on
the proprietary rights of third parties. If we are required to indemnify
parties under these agreements, our business, financial condition and results
of operations could be materially adversely affected. If someone asserts a
claim relating to proprietary technology or information against us, we may seek
licenses to that intellectual property. We cannot assure you, however, that we
could obtain licenses on commercially reasonable terms, if at all. The failure
to obtain the necessary licenses or other rights could have a material adverse
effect on our business, financial condition and results of operations.
We may not be able to successfully manage our expansion.
Our anticipated future growth will continue to place a significant strain on
our management systems and resources. We expect that we will need to continue
to improve our financial and managerial controls and reporting systems and
procedures. We will also need to continue to expand and maintain close
coordination among our technical, accounting, finance and sales and marketing
organizations. Key members of our management team, including our Chief
Financial Officer, Chief Marketing Officer and Senior Vice President for
Network Operations, have joined us within the last few months. These
individuals have not previously worked together and are becoming integrated
into our management team. They may not be able to work together effectively or
successfully manage our growth. Our inability to manage growth effectively
could have a material adverse effect on our business, financial condition and
results of operations.
We may be unable to successfully acquire other companies, form strategic
alliances or successfully integrate any acquisition or alliance.
We will evaluate strategic alliances and acquisitions both domestically and
internationally as they present themselves. Any future strategic alliance or
acquisition involves risks commonly encountered in business relationships. We
may encounter obstacles while integrating the operations and personnel of the
companies and the integration efforts may disrupt our ongoing business. Our
management may be unable to successfully incorporate licensed or acquired
technology and rights into our service offerings or maintain uniform standards,
controls, procedures and policies within the two organizations. Changes in
management resulting from an alliance or acquisition could impair relationships
with employees and customers. Any international alliance or acquisition would
involve 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. We may not
successfully overcome these risks or any other problems encountered in
connection with strategic alliances or acquisitions. In addition, we could
incur substantial expenses, including the expenses of integrating the parties'
businesses in a strategic alliance or after an acquisition, which could, in
turn, adversely affect our business, financial condition and results of
operations.
17
<PAGE>
Our directors have relationships that could present conflicts of interest.
Our directors have relationships with other companies that could result in
potential conflicts of interest.
. Since 1991, Mr. Nakfoor has served as the Vice President of Securities
Trading for Inversora Bursatil, S.A. de C.V., a wholly-owned subsidiary
of Grupo Financiera Inbursa, S.A. de C.V., and an affiliate of our
second largest shareholder, Carso Global. Carso Global currently
controls our largest customer, Prodigy, on whose board Mr. Nakfoor has
served since September 1997. Prodigy's President and Chief Executive
Officer, Samer Salameh, was a member of our board of directors until
April 1999.
. Mr. Li was Director, Vice Chairman, Chief Technology Officer and owner
of 12.4% of the common stock of Yurie, which was one of our principal
suppliers until it was sold to Lucent. 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
AC-120 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 is Chief
Technical Officer, Carrier Network Division of Lucent and has agreed not
to participate in designing, developing, producing, manufacturing or
marketing multi-service access equipment other than for Lucent. Mr. Li
and members of his family also control Linsang, which is our largest
shareholder.
. Mr. Turner is also a member of the board of directors of our largest
shareholder, Linsang Partners, LLC, a limited liability company
controlled by Mr. Li and members of his family.
As a result of these relationships, there is a potential for conflicts of
interest to arise when our directors are faced with a decision that could have
different implications for our company and the other companies with which our
directors have a relationship. Due to the nature of the potential conflicts of
interest presented by these relationships on an ongoing basis, we cannot
assure you that the directors involved will act in the best interests of our
company and our stockholders.
Affiliates of ours have engaged in numerous transactions with us in the
past. These transactions were not necessarily a result of arms'-length
negotiations. We may engage in additional related party transactions in the
future and we cannot assure you that these transactions will be on arms'-
length terms. For more information, see "Certain Transactions."
Investors in this offering will suffer immediate and substantial dilution.
The initial public offering price of our common stock will be substantially
higher than the net tangible book value per share of the common stock
outstanding immediately after this offering. Therefore, investors purchasing
shares in this offering will incur immediate and substantial dilution in net
tangible book value per share. You will incur further dilution if outstanding
options or warrants to purchase common stock are exercised. For more
information, see "Dilution."
We will retain broad discretion in using the net proceeds of this offering and
may spend a substantial portion in ways with which you do not agree.
We will retain a significant amount of discretion over the application of
the net proceeds of this offering as well as over the timing of our
expenditures. Because of the number and variability of factors that determine
our use of the net proceeds of the offering, we may apply the net proceeds of
this offering in ways that vary substantially from our current intentions. For
more information, see "Use of Proceeds."
Our existing stockholders will maintain control of us following the offering.
Our executive officers and directors and entities affiliated with them
will, in the aggregate, beneficially own approximately 79.5% of our common
stock following this offering and 77.3% if the over-allotment option is
exercised in full. These stockholders will be able to exercise control over
all matters requiring approval by our stockholders, including the election of
directors and the approval of significant corporate transactions. This
18
<PAGE>
concentration of ownership may also have the effect of delaying or preventing a
change in control of our company, which could negatively affect our stock
price. For more information, see "Principal Stockholders."
Future sales of our common stock may negatively affect our stock price.
Following the offering, we will have a large number of shares of common
stock outstanding and available for resale beginning at various points in time
in the future. The market price of our common stock could decline as a result
of sales of a large number of shares of our common stock in the market
following this offering, or the perception that sales could occur. These sales
also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. For more information,
see "Shares Eligible for Future Sale." Our directors, executive officers, and
two largest shareholders, Linsang and Carso Global, who collectively hold a
total of 45,508,979 outstanding shares of common stock, have agreed not to
dispose of any shares of common stock, subject to limited exceptions, for a
period of 180 days after the date of this prospectus, without the prior written
consent of Bear, Stearns & Co. Inc., on behalf of the underwriters.
Provisions of our certificate of incorporation, bylaws and Delaware law could
deter takeover attempts.
Our certificate of incorporation and bylaws and the Delaware corporations
law contain provisions that could have the effect of making it more difficult
for a third party to acquire, or discourage a third party from attempting to
acquire, control of us. These provisions could limit the price that investors
might be willing to pay in the future for shares of our common stock. For more
information, see "Description of Capital Stock."
There has been no prior public market for our common stock, and our stock price
may experience extreme price and volume fluctuations.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for the shares will be determined by
negotiation between us and the representatives of the underwriters based upon
several factors and may not be indicative of prices that will prevail in the
trading market. For a discussion of the factors to be considered in determining
the initial public offering price, see "Underwriting."
The stock market has experienced extreme price and volume fluctuations. The
market prices of the securities of technology companies and Internet-related
companies in particular have been especially volatile. This volatility has
included rapid and significant increases in the trading prices of Internet
companies following initial public offerings to levels that do not bear any
reasonable relationship to the operating performance of those companies and
large inter-day swings in the trading prices of their securities. These
fluctuations may materially affect the trading price of our common stock. We
cannot guarantee that you will be able to sell your shares at or above the
initial public offering price.
In the past, stockholders have often instituted securities class action
litigation following periods of volatility in the market price for a company's
securities. Such litigation could result in substantial costs and the diversion
of management's attention and resources, which could have a material adverse
effect on our business, financial condition and results of operations.
The reliability of market data included in this prospectus is uncertain.
Since we are a new company and operate in a new and rapidly changing market,
we have included market data from industry publications, including reports
produced by Forrester Research, Inc. and International Data Corporation. The
reliability of these data cannot be assured. These industry publications
generally indicate that they have obtained information from sources believed to
be reliable, but do not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be reliable, we
have not independently verified their data. We also have not sought the consent
of any of these organizations to refer to their reports in this prospectus.
19
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of our common
stock offered by this prospectus of approximately $139.0 million, or
approximately $157.9 million if the underwriters' over-allotment option is
exercised in full. These estimates are based on an assumed initial public
offering price of $14.00 per share and include the deduction of the
underwriting discount and other estimated fees and expenses payable by us.
We intend to use the net proceeds from this offering principally for capital
expenditures, including:
. the acquisition of rights to use dark fiber and of the related
electronics equipment necessary to transmit data over the fiber;
. the completion of our broadband access network;
. the enhancement of our network to provide additional value-added services;
and
. the improvement of our network management, billing, and other back office
systems.
We will also use a portion of the net proceeds from this offering to fund
operating losses, working capital requirements and other general corporate
purposes.
In addition, we may use a portion of the net proceeds from this offering for
possible future investments, acquisitions or strategic alliances in businesses
or assets that are related or complementary to our existing business. We
periodically evaluate investment, acquisition and strategic alliance candidates
as a key part of our growth strategy. We currently have no commitments or
agreements and are not involved in any negotiations with respect to these
transactions.
We currently intend to allocate substantial proceeds among the foregoing
uses. The precise allocation of funds among these uses will depend on future
commercial, technological, regulatory and other developments in or affecting
our business, the competitive climate in which we operate and the emergence of
future opportunities. Because of the number and variability of factors that
determine our use of the net proceeds of the offering, we cannot assure that
our application of the net proceeds will not vary substantially from our
current intentions. Pending these uses, we intend to invest the net proceeds of
this offering in short-term U.S. investment grade and government securities.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to fund the development and
growth of our business. Declaration or payment of future dividends, if any,
will be at the discretion of our board of directors after taking into account
various factors, including our financial condition, operating results and
current and anticipated cash needs and plans for expansion. In addition, our
ability to pay dividends on the common stock is restricted by certain covenants
in the indenture governing our outstanding 11 3/4% senior notes.
20
<PAGE>
CAPITALIZATION
The following table shows our cash and cash equivalents, investments and
total capitalization:
. on an actual basis as of June 30, 1999; and
. as adjusted to reflect the sale of 10,700,000 shares of common stock
offered by this prospectus at an assumed initial public offering price
of $14.00 per share, after deducting the underwriting discount and the
estimated offering expenses payable by us.
You should read this information together with our financial statements and
the notes relating to those statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Use of
Proceeds" appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 1999
-------------------------------------
Actual As Adjusted
---------------- -------------------
(in thousands, except share data)
<S> <C> <C>
Cash and cash equivalents................. $ 8,327 $ 147,290
================ ================
Investments:
Unrestricted investments--short term.... $ 56,166 $ 56,166
Restricted investments--short term...... 21,597 21,597
Restricted investments--long term....... 23,243 23,243
---------------- ----------------
Total investments......................... $ 101,006 $ 101,006
================ ================
Long Term Debt:
11 3/4% senior notes due 2008........... $ 258,298 $ 258,298
Capital lease obligations............... 12,471 12,471
---------------- ----------------
Total long term debt (including current
portion)................................. 270,769 270,769
Stockholders' Equity (Deficit):
Preferred stock, $.001 par value,
25,000,000
shares authorized, no shares issued.... -- --
Common stock, $.001 par value,
150,000,000 shares authorized,
46,681,424 shares issued and
outstanding actual; 57,381,424 shares
issued and outstanding, as adjusted.... 47 58
Additional paid-in capital.............. 34,831 173,783
Common stock warrants................... 2,849 2,849
Accumulated other comprehensive (loss).. (335) (335)
Accumulated deficit..................... (119,317) (119,317)
---------------- ----------------
Total stockholders' equity (deficit).. (81,925) 57,038
---------------- ----------------
Total capitalization...................... $ 188,844 $ 327,807
================ ================
</TABLE>
The number of shares as adjusted for this offering excludes:
. any shares of common stock to be issued pursuant to the underwriters'
over-allotment option;
. 1,487,791 shares of common stock issuable on or after July 26, 1999 upon
the exercise of outstanding warrants with an exercise price of $0.02 per
share;
. 2,896,128 shares of common stock issuable upon the exercise of
outstanding options at June 30, 1999 with a weighted average exercise
price of $5.10 per share; and
. 7,735,845 shares of common stock reserved for issuance upon the exercise
of options available to be granted under our stock option plans,
including options to purchase 1,233,711 shares exercisable at the
initial public offering price which we expect to grant when the initial
public offering price is determined.
21
<PAGE>
DILUTION
You will experience immediate and substantial dilution in the net tangible
book value per share of your common stock.
We calculate dilution to new investors by subtracting net tangible book
value per share of common stock after this offering from the per share price
paid by new investors in this offering. We calculate net tangible book value
per share by subtracting total liabilities from total tangible assets and then
dividing that number by the number of shares of common stock outstanding at
June 30, 1999. The following table illustrates the per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share................. $14.00
Net tangible book value deficit per share as of June 30,
1999........................................................... $ (1.86)
Increase attributable to new investors.......................... 2.77
-------
Net tangible book value per share after this offering........... .91
-------
Dilution per share to new investors in this offering............ $13.09
=======
</TABLE>
The following table summarizes, after giving effect to this offering as of
June 30, 1999, the total number of shares of common stock purchased from us,
the total consideration paid to us and the average consideration per share paid
by the existing stockholders and by the investors purchasing shares of common
stock in this offering at an assumed initial public offering price of $14.00
per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 46,681,424 81.4% $ 34,804,000 18.9% $ 0.75
New investors................. 10,700,000 18.6% 149,800,000 81.1% 14.00
---------- ------ ------------ ------ ------
Total....................... 57,381,424 100.0% 184,604,000 100.0% 3.22
========== ====== ============ ====== ======
</TABLE>
The calculations above exclude from the number of outstanding shares of
common stock:
. any shares to be issued pursuant to the underwriters' over-allotment
option;
. 1,487,791 shares of common stock issuable on or after July 26, 1999,
upon the exercise of outstanding warrants with an exercise price of
$0.02 per share;
. 2,896,128 shares of common stock issuable upon the exercise of
outstanding options at June 30, 1999 with a weighted average exercise
price of $5.10 per share; and
. 7,735,845 shares of common stock reserved for issuance upon the exercise
of options available to be granted under our stock option plans,
including options to purchase 1,233,711 shares exercisable at the
initial public offering price which we expect to grant when the initial
public offering price is determined.
If all of the options and warrants outstanding as of June 30, 1999, had been
exercised at that date, dilution to new investors in this offering would be
$12.91 per share.
22
<PAGE>
SELECTED FINANCIAL DATA
Our statement of operations data for the period from inception (March 5,
1997) to December 31, 1997 and for the year ended December 31, 1998, and our
balance sheet data as of December 31, 1997 and 1998, shown in the table below
are derived from our audited financial statements. Our statement of operations
data for the six months ended June 30, 1998 and 1999 and our balance sheet data
as of June 30, 1999 have been derived from our unaudited financial statements
which, in the opinion of management, include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
for the unaudited interim periods presented. You should read this information
together with our financial statements and the notes relating to those
statements and with the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
prospectus.
The "As Adjusted" balance sheet data reflects the sale of the shares of
common stock offered by this prospectus at an assumed initial public offering
price of $14.00 per share, after deducting the underwriting discount and the
estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Period from
Inception
(March 5,
1997) through Year Ended Six Months Ended June 30,
December 31, December 31, -----------------------------------
1997 1998 1998 1999
------------- ------------------------------------------------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.............. $ 22,708 $ 63,611 $ 32,214 $ 34,241
Operating expenses:
Splitrock network
costs.............. 2,362 32,912 10,724 34,150
Legacy network
costs.............. 25,804 58,292 27,111 21,871
Selling, general and
administrative..... 1,276 6,390 2,441 6,338
Depreciation and
amortization....... 3,500 13,850 4,907 11,237
---------- ----------------------- ----------------------- ----------
Total operating
expenses......... 32,942 111,444 45,183 73,596
---------- ----------------------- ----------------------- ----------
Loss from operations.. (10,234) (47,833) (12,969) (39,355)
Other income
(expense):
Interest income..... 348 5,393 183 4,335
Interest expense.... (235) (15,390) (842) (16,346)
---------- ----------------------- ----------------------- ----------
Loss before income
tax.................. (10,121) (57,830) (13,628) (51,366)
Provision for income
tax.................. -- -- -- --
---------- ----------------------- ----------------------- ----------
Net Loss.............. $ (10,121) $ (57,830) $ (13,628) $ (51,366)
========== ======================= ======================= ==========
Net Loss per share--
basic and diluted.... $ (0.42) $ (1.30) $ (0.31) $ (1.10)
========== ======================= ======================= ==========
Weighted average
shares--basic and
diluted.............. 24,109,823 44,388,948 43,288,168 46,668,728
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
As of December
31, As of June 30, 1999
-------------- --------------------
1997 1998 Actual As Adjusted
------ ------- ------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $7,710 $28,330 $ 8,327 $147,290
Unrestricted investments................ -- 120,475 56,166 56,166
Restricted investments (1).............. 3,472 58,477 44,840 44,840
Property and equipment, net............. 38,504 73,899 88,721 88,721
Total assets.......................... 54,388 296,141 232,729 371,692
Long-term debt and capital lease
obligations (including current
portion)............................... 25,120 275,581 270,769 270,769
Stockholders' equity (deficit).......... 20,407 (30,291) (81,925) 57,038
</TABLE>
<TABLE>
<CAPTION>
Period from
Inception
(March 5, Six Months Ended June
1997) through Year Ended 30,
December 31, December 31, -----------------------
1997 1998 1998 1999
------------- ------------ ---------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Other Financial Data:
Capital expenditures..... $16,969 $ 45,261 $ 5,548 $ 25,311
EBITDA (2)............... (6,734) (33,983) (8,062) (28,118)
Cash provided by (used
in):
Operating activities... (2,233) (735) (3,712) (47,723)
Investing activities... (17,198) (169,512) (7,714) 33,064
Financing activities... 27,141 190,867 8,893 (5,344)
</TABLE>
- --------
(1) Restricted investments as of June 30, 1999, represent escrowed funds that,
together with interest received those funds, will be sufficient to pay,
when due, the next three semi-annual interest payments on our outstanding
11 3/4% senior notes.
(2) EBITDA is defined as net loss plus interest expense, provision for income
taxes, depreciation and amortization. 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 liquidity and is not a measure calculated in accordance with
generally accepted accounting principles. EBITDA is not necessarily
comparable with similarly titled measures reported by other companies.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our financial
statements and the notes to those statements included elsewhere in this
prospectus. The results shown in this prospectus are not necessarily indicative
of the results we will achieve in any future periods. This discussion contains
forward-looking statements based upon our current expectations which involve
risks and uncertainties. Our actual results could differ materially from those
described in the forward-looking statements due to a number of factors,
including those set forth in the section entitled "Risk Factors" and elsewhere
in this prospectus.
Overview
We are a facilities-based provider of advanced data communications services.
We market our services to Internet service providers, telecommunications
carriers and other businesses throughout the United States. Our services
include an array of Internet access and data communications services delivered
over our high capacity, facilities-based network.
We were founded in March 1997. In July 1997, we acquired the existing legacy
network infrastructure of Prodigy Communications Corporation, and agreed to
build and operate a nationwide communications network and to provide network
services for Prodigy's customers. We initially provided service to Prodigy's
subscribers using Prodigy's legacy network. For locations outside the coverage
area of the legacy network, we have been using the IBM Global Services network.
From September 1997 through April 1998, we deployed our broadband access
network in metropolitan areas across the country. Over time, as more coverage
has become available on our access network, we have been decommissioning the
Prodigy legacy network POPs and reducing our usage of the IBM network. In July
1998, we raised $261 million through the issuance of our 11 3/4% senior notes
and warrants to purchase common stock, principally to finance capital
expenditures related to the construction and installation of our broadband
access network. As of June 30, 1999, our network included 324 installed POPs,
270 of which were operational. Later this year, we expect to have approximately
370 active POPs, giving us a physical presence in all 50 states, and targeting
90% of U.S. businesses and households with a local call. Our expanding network
is supported by two network operations centers equipped with state-of-the-art
network management systems.
As part of our ongoing efforts to further expand and enhance our network and
service offerings, we have agreed to acquire indefeasible rights to use four
dark fiber strands in a state-of-the-art fiber optic network currently under
construction by Level 3 Communications, LLC, with an option to acquire
indefeasible rights to use an additional 12 fibers. This nationwide fiber
network will cover approximately 15,000 route miles and will be delivered in
segments that are expected to become available from the end of 1999 through the
first quarter of 2001. The combination of this fiber optic backbone with our
broadband access network positions us to:
. deliver, on our own facilities, a broad array of end-to-end data
communications services at the high level of quality and reliability
increasingly demanded by customers;
. reduce significantly our network costs as a percentage of revenues as we
substitute the acquired bandwidth for existing leased circuit
arrangements with various telecommunications carriers;
. expand our service offerings by providing bandwidth leasing services on
a stand alone basis or bundled with our other services;
. increase the reliability and redundancy of our network; and
. increase the variety of service options and speeds available to
customers.
Revenues
Historically, Prodigy has been our primary customer and has accounted for
substantially all of our revenues since our inception. For the year ended
December 31, 1998 Prodigy accounted for 99% of our revenues. For the six months
ended June 30, 1999 Prodigy accounted for 93% of our revenues. While we expect
revenues from Prodigy to decrease as a percentage of our total revenues in
future periods, we believe that Prodigy will continue to account for a
significant portion of our revenues.
25
<PAGE>
We provide network services, including Internet dial services and other
network connections, to Prodigy in exchange for a monthly service charge. The
service charge is calculated based on the lower of two alternative rates,
subject to a minimum. One rate is calculated based upon the total hours of
usage and the other rate is calculated based upon the total number of
subscribers. The minimum monthly service charge is $4.0 million and will
increase to $4.5 million on July 1, 2000. Through March 31, 1998, our Prodigy
revenues were a function of the amount of usage rather than the number of
subscribers. However, since April 1998, these revenues have been, and over the
long term are expected to continue to be, a function of the number of
subscribers rather than the amount of usage. In addition, if the average
monthly hours per subscriber exceeds a target amount, we will be entitled to
receive additional fees.
Our original four-year agreement with Prodigy expires on June 30, 2001.
After the initial term, either party may terminate the agreement upon 12
months' prior written notice. If no notice is received, the term of the
agreement is automatically extended for successive 12-month terms. Under the
agreement, we are required, among other things, to provide Prodigy with
financial and other information and to meet network performance standards. We
are required to provide credits to Prodigy if we fail to meet these standards.
Prodigy may terminate the agreement following a cure period if we fail to meet
specified service level objectives or otherwise fail to comply with our
agreement. Prodigy may also terminate the agreement during the initial term
without cause by providing 12 months' prior written notice and paying a
termination charge of $3.0 million.
Prodigy has announced plans to discontinue Prodigy Classic, its original on-
line service, on or before October 31, 1999 because of a shift in business
focus to Internet-based products and services and a determination not to make
Prodigy Classic Year 2000 compliant. Prodigy has reported that, although it
will continue to encourage Prodigy Classic subscribers to migrate to Prodigy
Internet, it has had difficulty in generating this migration and a substantial
portion of the remaining Prodigy Classic subscribers lack the minimum hardware
requirements for the Prodigy Internet service. While we expect continued growth
in Prodigy Internet subscribers, we do not expect that any significant portion
of this growth will be attributable to the migration of Prodigy Classic
subscribers.
On May 27, 1999, Prodigy announced that it had entered into a definitive
agreement to acquire the Internet access customer base of Cable & Wireless USA,
which we believe will result in a significant increase in Prodigy subscribers.
In addition to providing Internet dial access and related services to
Prodigy, we began offering Internet dedicated access services on a limited
basis to select customers during the second half of 1998. Given the nature of
our network costs and the fact that current network utilization peaks in the
evening hours to support Prodigy's residential Internet subscribers, we are
targeting providers of daytime intensive traffic as well as providers of
evening intensive traffic to maximize network utilization throughout a 24-hour
period. We plan to focus on providing virtual private network services,
Internet dedicated access, web hosting and Internet dial access services.
Historically, in the data communications industry, providing virtual private
network services increases the length of the sales cycle when compared to
providing Internet dedicated access services. Because we are in the early
stages of building our sales force, we expect growth in revenues to fluctuate
from quarter to quarter depending on the volume of monthly revenue of our
customers and the actual date the service becomes billable to our customers. We
cannot assure you that we will achieve the balance of utilization of the
network facilities necessary to attain or maximize profitability or positive
cash flow from operations.
Leveraging our demonstrated network capabilities, we have recently entered
into significant new customer relationships with Juno Online Services and
InfiNet. Juno, a leading provider of Internet and e-mail services, currently
has more than 200,000 subscribers for its Internet services launched in July
1998 and has created more than 6.8 million free e-mail accounts since April
1996. InfiNet, a consortium sponsored by Knight-Ridder, Gannett and Landmark
Communications, provides Internet access and web publishing solutions to nearly
100,000 subscribers nationwide. We began providing Internet dial access to
InfiNet's subscribers in the second quarter of 1999.
26
<PAGE>
As segments of our fiber backbone are constructed, we plan to use the
additional network capacity to offer bandwidth leasing services. However,
overcapacity could result from the construction of competing networks,
technological advances, strategic alliances, or a decline in the growth rate of
demand for bandwidth capacity. If this occurs, we could encounter significant
pricing pressure, which could limit the amount we could competitively charge
for these services.
Splitrock Network Costs
Our Splitrock network costs include all expenses incurred in connection with
operating our network. These costs primarily include leased telecommunication
line charges for connecting our POPs to local central offices and for backbone
transmission, personnel expenses, and operating expenses related to network
operations, maintenance field operations and facility management.
Increases in Splitrock network operating costs relate to the increase in
Splitrock network facilities and line charges incurred in connection with the
growth in total subscriber usage. As of June 30, 1999, we had 324 installed
POPs, 270 of which were operational, and we expect to have approximately 370
operational POPs when our network construction is completed later this year. We
anticipate continued increases in our network operating costs as additional
lines and facilities are deployed.
We are deliberately increasing our network operating expenditures to expand
our broadband access network and backbone capacity in anticipation of expected
increases in dial access and other services. We may incur expenditures to
increase our capacity to serve customers in advance of entering into new
customer relationships.
During March 1999, in order to maintain the quality and reliability of our
network performance, we entered into an agreement with Lucent Technologies to
provide us with maintenance on our broadband access network. Prior to entering
into this maintenance arrangement with Lucent, we had performed our own
maintenance of equipment and have relied on warranties from our vendors. We
expect our maintenance costs to increase as POP sites are added to the
maintenance contract through year end.
We expect our network operating costs to decrease significantly as a
percentage of revenues as we substitute our acquired fiber optic backbone
network for existing leased circuit arrangements with various
telecommunications carriers. Although we expect to incur new costs for
maintenance, colocation and software in connection with the fiber optic
network, we expect these new costs to be offset in future years by a larger
reduction in charges for backbone transmission.
Legacy Network Costs
Legacy network costs include all expenses incurred in connection with
operating and decommissioning the Prodigy legacy network and costs of operating
the InfiNet legacy network until we transition InfiNet traffic from its network
to our network. These costs include facility leases, line charges, occupancy
costs, equipment maintenance costs and access fees for the IBM network, as well
as significant transition costs which will be incurred until the traffic from
these legacy networks is migrated to our network.
Legacy network costs are expected to continue to decline, as more coverage
becomes available on our own broadband access network. As the construction and
installation of our own network progresses, the Prodigy legacy network is being
decommissioned and usage of the IBM network is declining. As of June 30, 1999,
we had fully deactivated substantially all of the original Prodigy legacy
network POPs. Our network can service a substantial portion of the InfiNet
traffic acquired in May of 1999. We began migrating the InfiNet traffic to our
network in July 1999 and expect to be substantially completed by the end of the
year. Despite the increase in legacy network costs resulting from the InfiNet
network, our legacy network costs in total decreased 32.1% from the first
quarter of 1999 to the second quarter of 1999. We do not expect to incur any
significant legacy network costs beyond the end of 1999.
27
<PAGE>
The largest component of our legacy network costs are paid to IBM for usage
incurred on the IBM network. We have incurred quarterly costs from IBM of $6.3
million, $7.3 million, $11.0 million, $12.0 million, $12.6 million, $11.5
million and $6.5 million, respectively, for the seven quarters from October 1,
1997 through June 30, 1999. The increase in costs through the fourth quarter of
1998 related to a continued quarterly increase in total subscriber usage,
coupled with an increase in the hourly usage rate that went into effect at the
beginning of the second quarter of 1998. The IBM network costs have declined
since the fourth quarter of 1998 and we expect those costs to be substantially
eliminated by the end of 1999.
During construction of new POP sites, access and transmission lines are
installed and charges are incurred as a POP site becomes operational.
Transition costs result from a duplication of expenses on both the new POP and
the associated legacy network POP until the new POP is operational and the
associated legacy network POP is decommissioned.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of personnel and
operating costs relating to executive management, accounting and finance,
information systems, human resources, sales and marketing, customer support,
network planning, development, and administrative employees. We expect our
selling, general and administrative expenses to continue to increase in dollar
amount and as a percentage of revenue in 1999, 2000 and 2001 principally due to
the following factors:
. expansion of our sales and marketing force; and
. expansion of our back-office, customer care, billing, and administrative
functions.
We expect to make a substantial investment in our sales and marketing
programs to achieve and properly support the intended expansion in our customer
base. Through the combination of a direct sales force and alternative
distribution channels, we believe that we will be able to access markets and
increase revenue-producing traffic on our network. To implement our
distribution strategy, we are developing an in-house direct sales force. We
intend to utilize our direct sales force to market our services directly to
Internet service providers, carriers, value added service providers, and medium
and large businesses. We intend to utilize alternate distribution channels,
such as agents, resellers and wholesalers, to market our services to medium and
small businesses. We cannot assure you that we will be successful in our
marketing plan. In addition to the expanded sales force, we anticipate
continued back-office expansion, including the continued implementation of a
new customer care and billing system. We have also signed a lease for 69,000
square feet of additional office space, which we expect to be available for
occupancy by August 1999. This office lease will increase selling, general and
administrative costs and will also require additional capital expenditures for
furniture and fixtures and leasehold improvements.
Depreciation and Amortization
Depreciation and amortization expense consists primarily of depreciation of
network equipment. We anticipate that our depreciation and amortization
expenses will increase significantly as we record amortization on amounts
expected to be paid to acquire dark fiber rights and depreciation expenses for
the related electronic equipment.
Net Losses
We have incurred net losses since our inception in March 1997. We anticipate
that we will continue to incur net losses while we complete the construction
and installation of our nationwide network and expand our sales and marketing
force. The extent to which we continue to incur net losses is largely dependent
upon the timely deployment of the network, the rate at which we can expand our
customer and revenue base and our ability to maximize use of our nationwide
network.
28
<PAGE>
Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues. Revenues for the six months ended June 30, 1999 totaled $34.2
million, an increase of $2.0 million from revenues of $32.2 million for the six
months ended June 30, 1998. This increase was due primarily to providing dial
access service to InfiNet subscribers commencing in May of 1999.
Splitrock Network Costs. Splitrock network costs for the six months ended
June 30, 1999 were $34.2 million compared to $10.7 million for the six months
ended June 30, 1998. This increase was due to the growth in the size of our
network from 70 operational POPs as June 30, 1998 to 270 operational POPs as of
June 30, 1999. As a percentage of revenues, Splitrock network costs increased
to 100.0% of revenue for the six months ended June 30, 1999 from 33.3% of
revenues for the six months ended June 30, 1998.
Legacy Network Costs. Legacy network costs for the six months ended June 30,
1999 were $21.9 million compared to $27.1 million for the six months ended June
30, 1998. This decrease was primarily attributable to a decrease in the IBM
Network access charges as a result of the expanded coverage becoming available
on our network and the migration of additional traffic from the Prodigy legacy
network to our network. This decrease was offset by approximately $1.9 million
of additional costs from servicing InfiNet customers on its legacy network
beginning in May 1999. Despite the increase in legacy network costs resulting
from the InfiNet network, our legacy network costs in total decreased 32.1%
from the first quarter of 1999 to the second quarter of 1999. As a percentage
of revenues, legacy network costs decreased to 63.8% of revenue for the six
months ended June 30, 1999 from 84.2% of revenues for the six months ended June
30, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 1999 were $6.3
million compared to $2.4 million for the six months ended June 30, 1998. The
majority of this increase was due to personnel costs incurred in building our
internal sales force beginning in the second quarter of 1999 and the increase
in personnel throughout 1998 and 1999 to support the growth in the size of our
network. As a percentage of revenues, selling, general and administrative
expenses increased to 18.5% of revenues for the six months ended June 30, 1999
from 7.6% of revenues for the six months ended June 30, 1998.
Depreciation and Amortization. Depreciation and amortization was $11.2
million for the six months ended June 30, 1999 compared to $4.9 million for the
six months ended June 30, 1998. This increase was due to the increase in
equipment and facilities placed in service throughout 1998 and 1999.
Interest Expense. Interest expense was $16.3 million for the six months
ended June 30, 1999, compared to $0.8 million for the six months ended June 30,
1998. Historical interest expense was related to capital leases on equipment
and loans from a stockholder prior to completion of the senior notes offering
in July 1998. Beginning in the third quarter of 1998, interest expense
increased significantly due to the issuance of our senior notes.
Interest Income. Interest income relates to the interest earned on
investments of cash on hand in investment grade commercial paper and money
market accounts. Interest income was $4.3 million for the six months ended June
30, 1999, compared to $0.2 million for the six months ended June 30, 1998. This
increase was due to the interest earned on the proceeds from our senior notes
offering.
Income Taxes. No provision for income taxes has been recognized because we
had operating losses for both tax and financial reporting purposes in all
periods.
On June 30, 1999, we had approximately $45.0 million of gross deferred tax
assets comprised primarily of net operating loss carryforwards. Given our
history of operating losses, it is uncertain that we would realize these
assets, and so we have provided a reserve to reduce the carrying value of the
assets to zero. We will continue to assess the ability to realize the deferred
tax assets based on actual and forecasted results.
29
<PAGE>
Year Ended December 31, 1998 Compared to Period from Inception on March 5,
1997 through December 31, 1997
From inception on March 5, 1997 through June 30, 1997, we had not yet begun
deploying our network nor had we entered into our agreement with Prodigy. As a
result, we generated no revenue and incurred limited operating expenses prior
to the third quarter of 1997. Thus, any comparison of our results of operations
for the year ended December 31, 1998 with those results for the period from our
inception to December 31, 1997 is not meaningful.
Since inception, we have focused on the construction and installation of our
network while maintaining and decommissioning, when appropriate, the Prodigy
legacy network. Through December 31, 1998, we had not focused on increasing
sales, as our network had not yet been completed. Prodigy represented our
primary source of revenue during both 1997 and 1998. In the second quarter of
1998, we began our efforts to raise capital to complete the construction and
installation of our nationwide network. On July 24, 1998, we issued and sold
$261.0 million in senior notes and warrants to acquire 1,487,791 shares of
common stock and began a campaign to recruit and employ the personnel necessary
to complete, operate and maintain our network.
To support our expansion, we have been adding employees. At the end of 1997
and 1998, respectively, we had 67 and 188 full time employees and contractors.
Many of the employees we added represent field and office personnel for
construction management, assembly and installation, provisioning, and related
project management services for POP shelters. Additionally, during 1998, we
added our second state-of-the-art network operations center in The Woodlands,
Texas.
Liquidity and Capital Resources
Our operations have required substantial capital investment for the purchase
of communications equipment and the design and development of our network.
Capital expenditures were $45.3 million and $25.3 million for the year ended
December 31, 1998 and the six months ended June 30, 1999, respectively. We
expect that our capital expenditures will be substantially higher in future
periods in connection with the purchase of dark fiber and the related
facilities and telecommunications equipment.
Since our inception, we have satisfied our cash requirements primarily
through the issuance of equity or debt securities. As of June 30, 1999, we had
raised approximately $298.2 million, including:
. $34.9 million through private sales of our equity securities, including
$18.0 million invested by our senior management and directors and $15.6
million invested by another major stockholder; and
. $263.3 million through the issuance of debt.
In addition we have arranged $30.6 million in equipment financing, primarily
from equipment vendors and leasing companies.
As of June 30, 1999, we had an accumulated deficit of $119.3 million, cash
and cash equivalents of $8.3 million, and restricted and unrestricted
investments of $101.0 million.
Net cash used in operating activities was $47.7 million during the six
months ended June 30, 1999. The net cash used in operating activities in this
period was primarily attributable to the Company's net losses. Net cash used in
operating activities was $0.7 million for the year ended December 31, 1998.
During the year-ended December 31, 1998, the cash flow effect of net losses
were largely offset by increases of $42.0 million in current liabilities due to
the timing of payments for purchases to equipment vendors and accrued interest
to bond holders.
30
<PAGE>
Net cash provided by investing activities during the six months ended June
30, 1999 was $33.1 million. This consisted primarily of net proceeds of $64.3
million from the liquidation of unrestricted investments, $13.3 million net
liquidation of restricted investments which were used to pay the interest on
the senior notes, offset by $25.3 million used for purchases of property and
equipment, the payment of a deposit of $11.2 million related to dark fiber and
approximately $8.0 million primarily for costs incurred in connection with the
construction of our broadband access platform. Net cash used by investing
activities for the year ended December 31, 1998 was $169.5 million and
consisted primarily of the purchase of unrestricted investments of $119.5
million and $45.3 million in equipment purchases.
Net cash used in financing activities for the six months ended June 30, 1999
was $5.3 million and consisted primarily of principal payments on capital
leases. Net cash provided by financing activities for the year ended December
31, 1998 was $190.9 million, which was derived primarily from the issuance of
our senior notes, net of issuance costs and proceeds restricted to finance
future interest payments.
As of June 30, 1999, we had aggregate operating and capital lease payments
of $5.4 million remaining in 1999, and $9.9 million, $3.4 million, $2.6 million
and $2.1 million due in each of the next four years.
We also have agreed to acquire indefeasible rights to use four dark fibers,
with an option to use up to 12 additional fibers, in the fiber optic network
under construction by Level 3. We are required to pay for the dark fiber in
segments as they become available, which is expected to occur from the end of
1999 through the first quarter of 2001.
We expect our future liquidity and capital requirements to relate primarily
to:
. capital expenditures;
. operating losses;
. debt service payments; and
. working capital and other corporate purposes.
We currently estimate that our capital expenditures for 1999, 2000 and 2001
will be approximately $73 million, $139 million and $76 million, respectively,
including capital expenditures for:
. the acquisition of rights to use four dark fiber strands and the related
electronics necessary to transmit data over the fiber;
. the completion of our broadband access network;
. the enhancement of our network to provide additional value added
services; and
. the improvement of our network management, billing and other back office
systems.
Actual capital expenditures will depend on numerous factors beyond our control
or ability to predict, including the availability of financing, the timing of
our acquisition of dark fiber, customer demand, competition, regulatory
developments, and general economic conditions. Moreover, our capital
requirements would increase significantly if we were to exercise our options to
acquire rights to use up to 12 additional dark fiber strands over and above the
four strands for which we have committed.
We believe that our available cash resources, combined with the net proceeds
from this offering, will be sufficient to meet our anticipated cash needs
through the end of 2000. However, we cannot assure you that our financial
resources will be adequate to fund all of our anticipated or unanticipated
working capital requirements and capital expenditures during this period.
Moreover, we expect that full implementation of our current business plan will
require that we raise substantial additional capital for the needs that we
anticipate funding during 2001 and 2002. We may be required to raise additional
funds through public or private financing, strategic relationships or other
arrangements. The terms of our debt securities restrict our ability to incur
indebtedness, create liens, and make dividend payments and
31
<PAGE>
investments, and may make it more difficult for us to raise the capital we will
need to fully implement our business plan. We cannot assure you that the
additional financing we will need, will be available on terms acceptable to us,
or at all. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants and significant interest expense.
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 our
financial condition and results of operations, the nature and extent of which
cannot reasonably be determined by us on the basis of information currently
available to us.
Our Year 2000 Program
We have established a program to ensure that, to the extent reasonably
possible, all systems are or will be year-2000 compliant prior to the end of
1999. Our Y2K program, designed with the assistance of an outside consultant,
consists of five phases:
. inventory of our potential exposures, including significant third-party
supplier and customer relationships;
. analysis of the assets to determine compliance or non-compliance;
. remediation and contingency plan development;
. remediation; and
. testing of affected systems.
A team consisting of our managers from Information Technology, Finance and
Operations has been established as the Y2K Readiness Team. With the assistance
of our outside consultant, the Y2K Readiness Team has designed an aggressive
schedule to identify information technology (IT) and non-IT assets requiring
compliance upgrades and a timetable for performance and testing of the affected
systems. In addition, the Y2K Program calls for validation of compliance by
significant suppliers and customers.
Current Status
Our Year 2000 assessment is completed. An inventory of computing,
communications and facility systems has been prepared and validated.
Significant suppliers, including competitive local exchange carriers, have also
been identified and validated.
We have performed a technical review of significant third party suppliers
and customers and, if available, have surveyed the public year-2000 statements
issued by them. In addition, we have sent inquiry letters to certain third
party suppliers and customers requesting information regarding their
vulnerability to year-2000 issues. We have responded to these inquiries and
have evaluated the responses we received to determine if alternate business
actions are necessary. We continue to monitor new software and vendors to
insure their compliance.
32
<PAGE>
To date, we have not incurred and do not anticipate incurring a significant
amount of costs to implement remedial actions required for year-2000
compliance.
Contingency Plans
Where any significant systems, customers or suppliers are determined to have
questionable remediation potential, the Y2K Readiness Team has established and
will continue to establish contingency plans to address the at-risk area. As we
continue to monitor all systems and suppliers, and identify specific risk
areas, we will take appropriate steps to implement remedial actions and
contingency plans as required under the circumstances.
Risks
The failure to correct a year-2000 issue could result in the interruption or
failure of certain normal business activities or operations. We believe that
the most reasonably likely worst-case scenario would result from interruption
or failure of third party services. Because we are dependent on a number of
third party vendors to provide network services, a significant year-2000-
related disruption of these network services could cause customers to consider
seeking alternate service providers, decrease Internet traffic generally or
cause a significant burden on customer service and technical support.
We are not presently aware of any vendor-related year-2000 issue that is
likely to result in any disruption of this type. Although there is inherent
uncertainty in the year-2000 issue, we expect that as we progress in our Y2K
Program, the level of uncertainty about the impact of the year-2000 issue will
be reduced significantly.
Disclosures about Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. Market risk
generally represents the risk of loss that may result from the potential change
in the value of a financial instrument as a result of fluctuations in interest
rates and market prices. We have not traded or otherwise bought and sold
derivatives nor do we expect to in the future. We also do not invest in market
risk sensitive instruments for trading purposes.
This discussion contains forward-looking statements that are subject to
risks and uncertainties. Actual results could vary materially as a result of a
number of factors including those set forth under the captions "Risk Factors--
We have incurred substantial indebtedness and may not be able to service our
debt" and "Risk Factors--We may need additional capital in the future and
additional financing may not be available."
Interest Rate Risk
We may be exposed to market risk related to changes in interest rates. At
this time, we have not entered into any interest rate risk arrangements, and
while we may enter into interest rate risk hedging arrangements in the future,
we cannot assure you that we will be able to find commercially satisfactory
terms at that time. Our investment policy is to manage our investment portfolio
to preserve principal and liquidity while maximizing the return on the
investment portfolio through the full investment of available funds. We
diversify our marketable securities portfolio by investing in multiple types of
investment-grade securities. Our investment portfolio is primarily invested in
short-term securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source of
funds. Although changes in interest rates may affect the fair value of the
investment portfolio and cause unrealized gains or losses, such gains or losses
would not be realized unless the investments are sold.
Our Short-Term Investments. As of June 30, 1999, we had unrestricted short-
term investments of $56.2 million and restricted short-term investments of
$21.6 million. These short-term investments are highly liquid investments with
original maturities at the date of purchase of between three and twelve months
and consist
33
<PAGE>
primarily of money market funds and high-grade securities such as corporate
notes, municipal securities and U.S. Treasury notes. We value these investments
at fair market value. These investments are subject to interest rate risk and
will fall in value if market interest rates increase. A hypothetical increase
in market interest rates by 10% from levels at June 30, 1999 would cause the
fair value of these short-term investments to decline by an immaterial amount.
We have the ability to hold these investments until maturity, and therefore
would not expect the value of these investments to be affected to any
significant degree by the effect of a sudden change in market interest rates.
Declines in interest rates over time will, however, reduce our interest income,
especially from money market funds whose rates change on a daily basis. For
more information, see Note 1 to the Financial Statements.
Our Long-Term Investments. As of June 30, 1999, we maintained restricted
long-term investments totaling $23.2 million in connection with our 11 3/4%
senior notes due 2008. These long-term investments consist of high-grade
securities such as corporate notes, municipal securities and U.S. Treasury
notes, all of which are considered liquid and available for sale. Certain of
these securities will not be held to maturity. A hypothetical increase in
market interest rates by 10% from levels at June 30, 1999 would cause the fair
value of these securities to decline by an immaterial amount.
Outstanding Debt. As of June 30, 1999, the carrying value of our
outstanding senior notes was approximately $258.3 million at a fixed interest
rate of 11 3/4%. In certain circumstances, we may redeem this long-term debt.
Because the interest rates on these instruments are fixed, a hypothetical 10%
decrease in interest rates would not have a material impact on our financial
condition, revenues or operations. Increases in interest rates could, however,
increase the interest expense associated with future borrowings, if any. We do
not hedge against interest rate increases.
Equity Price Risk
We do not own an equity stake or investment in another company or business
entity and therefore we do not believe that we have any direct equity price
risk. We do not hedge against equity price changes.
Foreign Currency Exchange Rate Risk
All of our revenues are realized in dollars and all of our revenues are from
customers in the United States. Therefore, we do not believe that we have any
significant direct foreign currency exchange rate risk. We do not hedge against
foreign currency exchange rate changes.
34
<PAGE>
BUSINESS
Our Company
We are a facilities-based provider of advanced data communications services.
We market our services to Internet service providers, telecommunications
carriers and other businesses throughout the United States. We own and operate
a state-of-the-art, broadband access network that:
. consistently achieves among the highest performance ratings in the
industry for network reliability, speed and throughput;
. currently handles more than 1.3 billion minutes of use per month;
. reaches businesses and households in every U.S. market with a population
of at least 100,000 as well as several smaller markets; and
. employs ATM switches at every POP.
We recently agreed to acquire indefeasible rights to use four dark fiber
optic strands, with an option to use up to 12 additional fibers, in a
nationwide network that will cover approximately 15,000 route miles. The
combination of our existing broadband access network with our pending
acquisition of significant fiber optic facilities positions us to deliver a
broad array of end-to-end data communications services on our own network,
including:
. dial and dedicated Internet access;
. Internet access for higher bandwidth services, such as DSL and cable
modem;
. value-added services such as virtual private networks and web hosting; and
. bandwidth leasing and colocation services.
As compared to router-based, data-oriented networks we believe our network
platform is more flexible for handling and deploying multiple and new services.
Our broadband access network can accept input from a wide range of devices
under all widely deployed protocols over all commercially deployed transmission
speeds. This enables quicker and more economical deployment of new service
offerings when combined with intelligent ATM processing residing solely at the
core sites.
We currently provide nationwide Internet dial access and related services to
Prodigy, our primary customer and one of the largest Internet service providers
in the United States. We are also offering to businesses nationwide dial and
dedicated access for virtual private network services, and plan to begin
offering web hosting and other value-added services by year end 1999. We
believe that our relationship with Prodigy and our high network performance
have demonstrated our strength as a network operator and positioned us to
expand our customer base and service offerings. Leveraging our demonstrated
network capabilities, we have recently entered into significant new customer
relationships with Juno Online Services, Inc. and InfiNet. Juno, a leading
provider of Internet and e-mail services, currently has more than 200,000
subscribers for its Internet services launched in July 1998, and has created
more than 6.8 million free e-mail accounts since April 1996. InfiNet, a
consortium sponsored by Knight-Ridder, Gannett and Landmark Communications,
provides Internet access and web publishing solutions to nearly 100,000
subscribers nationwide.
Industry Overview
Data communications services, including Internet and other network services,
is one of the fastest growing segments of the global telecommunications market
place. Businesses of all sizes are demanding advanced, highly reliable
solutions for their data transmission needs that enhance productivity, improve
efficiency and reduce operating expenses. As a result, businesses are seeking
communications providers that can securely and
35
<PAGE>
efficiently connect geographically-dispersed locations uniformly and offer a
full range of value-added services that meet their data networking needs.
Businesses have begun to utilize value-added data communications services such
as web hosting, e-mail, file transfer and, more recently, intranet and extranet
services, e-mail outsourcing, e-mail broadcast and security. High speed data
communications access services link 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 the high-speed
dedicated access services used primarily by mid-sized and larger organizations.
Businesses have also rapidly established corporate websites as a means to
expand customer reach and improve communications efficiency. Many businesses
are currently using the Internet as a lower cost alternative to building
expensive private data communications networks. For example, many corporations
are connecting their remote locations using intranets to enable efficient
communications with employees, customers and suppliers, reducing
telecommunications costs by using IP-based faxing and migrating legacy database
applications to run over IP-based networks.
Market Size and Growth
According to industry reports, data communications services is one of the
fastest growing segments of the global telecommunications market. For example,
according to Forrester Research:
. business Internet access services are projected to grow at a compound
annual growth rate of 71% from $2.8 billion in 1998 to $41.9 billion in
2003;
. consumer Internet access spending is projected to increase from
approximately $7 billion in 1998 to approximately $19.9 billion in
2003; and
. web hosting and other value-added services are projected to grow at a
compound annual growth rate of 76% from $0.9 billion in 1998 to $14.7
billion in 2003.
In addition, according to International Data Corporation:
. frame relay services are projected to grow at a compound annual rate of
19% from $4.4 billion in 1998 to $10.7 billion in 2003; and
. ATM services are projected to grow at a compound annual rate of 37%
from $0.3 billion in 1998 to $1.6 billion in 2003.
Our Strategy
Our mission is to strengthen our position as a leading facilities-based
provider of advanced data communications services. To achieve this objective,
our business strategy focuses on the following key principles:
Expand Our Marketing Activities to Capitalize on Expected Demand
We intend to capitalize on the expected growth in demand for network
services from businesses by aggressively marketing our services through a
variety of distribution channels. We believe that utilizing a range of
distribution channels will enable us to cost-effectively reach a broad base of
potential customers. We are significantly expanding our direct sales force to
attract Internet service providers, telecommunications carriers, value-added
service providers and medium and large businesses. We are hiring highly
motivated personnel who have a background in or experience with the data
communications industry. In addition, we intend to use alternative distribution
channels, including agents, resellers and wholesalers, to gain access to a
substantially larger base of potential customers than we could otherwise
initially address through our direct sales force. Through the combination of a
direct sales force and alternative distribution channels, we will seek to
rapidly increase network traffic, market penetration and customer base.
Broaden Our Portfolio of Service Offerings
We are broadening our portfolio of value-added services to address business
customers who are increasingly outsourcing their critical applications and
integrating web-based services as part of their core data networking strategy.
We are positioned to offer a number of value-added services, including virtual
private
36
<PAGE>
networks with a wide range of access options and speeds, web hosting and
colocation on our nationwide broadband access network. These services can be
bundled with Internet access services to provide complete, turnkey solutions.
We have begun construction on our first web hosting data center in Houston,
Texas and plan to build three additional data centers later this year. In
addition, the enhanced capacity resulting from our recent acquisition of dark
fiber capacity will enable us to offer a wider variety of data services on our
own network, including bandwidth leasing. We believe that providing value-added
services not only improves customer loyalty by making our services more
attractive as a package but also improves profitability, as value-added
services often provide higher margins.
Exploit the Capabilities of Our Advanced Nationwide Communications Network
We are completing deployment of our advanced, high-capacity, facilities-
based nationwide communications network. We believe that our ATM-to-the-
Edge(TM) network results in:
. an easily scalable network architecture;
. the ability to efficiently add new services and integrate further
technological innovations at a lower incremental investment than that
required by other communications service providers with legacy systems
that have separate networks for voice and data;
. interoperability with other network platforms; and
. improved network manageability.
To enhance our broadband access network, we have agreed to acquire
indefeasible rights to use four dark fiber strands, with options to acquire
indefeasible rights to use an additional 12 fibers, in a state-of-the-art
nationwide fiber optic network currently under construction by Level 3. We
believe that the combination of this fiber optic backbone with our broadband
access network positions us to:
. deliver, on our own facilities, a broad array of end-to-end data
communications services at the high level of quality and reliability
increasingly demanded by customers;
. reduce significantly our network costs as a percentage of revenues as we
substitute the acquired bandwidth for existing leased circuit
arrangements with various telecommunications carriers;
. expand our service offerings by providing bandwidth leasing services on
a stand-alone basis or bundled with our other services;
. increase the reliability and redundancy of our network; and
. increase the variety of service options and speeds available to customers.
Build Strong Customer Loyalty Through Superior Customer Service
We believe that superior customer service is a critical element in
attracting and retaining customers. Our broadband network is designed to
provide uniform quality and consistent service offerings at every point
nationwide. We have also made significant investments in personnel and our
scalable operating support systems. We believe that these systems give us a
competitive advantage relative to traditional network service providers because
we can better meet new customer demands and accommodate new service offerings.
We oversee our network operations from two existing network operating centers
24 hours a day, seven days a week. With our integrated web-based network
management tools we can monitor every POP in our network for quick and
efficient problem resolution from our network operations centers.
Leverage Our Experienced Management Team
Our senior management team has extensive experience in the data
communications industry. Our ten most senior executives have an average of over
15 years of industry experience. We believe that our ability to combine and
draw upon the collective talent and expertise of our senior managers gives us a
competitive
37
<PAGE>
advantage in the effective and efficient execution of network deployment,
sales, provisioning, service installation, billing and collection, customer
service and delivering communications solutions to businesses. Our co-founders,
Mr. Li and Mr. Wilson, were both executives at WilTel and helped establish that
organization's ATM and frame relay marketing strategies. Mr. Li was part of the
leadership team that established Yurie Systems as a start-up company, took the
company public and built it into a successful organization that was sold to
Lucent Technology, Inc. for approximately $1 billion in 1998.
Our senior management team also includes experienced marketing, finance and
operating personnel. David Boatner, our Executive Vice President and Chief
Marketing Officer, has built effective nationwide sales teams that target
business customers in the telecommunications industry for McLeodUSA, LDDS-
WorldCom, WilTel, Southwestern Bell and AT&T. Robert Fugate, our Chief
Financial Officer, was part of the team that successfully built SkyTel into a
leading provider of domestic and international wireless messaging services.
Larry Walberg, our Senior Vice President of Operations, has had significant
management experience at both WilTel and MCI WorldCom, where he served as Vice
President, Global Data Network Operations. Todd Wilkens, our Senior Vice
President of Engineering, managed the deployment of a nationwide frame
relay/ATM network at GridNet, now a subsidiary of MCI WorldCom. Other key
executives have significant experience in the critical functions of network
operations, sales and marketing, customer and operations support systems,
finance and regulatory affairs.
Increase and Optimize Network Utilization
Given the nature of our network costs and the fact that our current network
utilization peaks in the evening hours to support Prodigy's residential
Internet subscribers, we seek to increase and optimize total network
utilization primarily by targeting providers of business services with daytime
intensive traffic as well as providers of consumer services with evening
intensive traffic. By pursuing this strategy, we believe that we will be able
to optimize network utilization throughout a 24-hour period by offering both
business-oriented services, such as dial virtual private networks and dedicated
and dial Internet access services, during the day, and consumer-oriented
services, such as Internet dial access services in the evening.
Evaluate Strategic Alliances and Acquisitions That Increase Our Network
Traffic
We also intend to evaluate strategic alliances and acquisitions that could
provide additional traffic over our network. We are primarily focused on the
domestic services market and we believe that many opportunities for strategic
alliances and acquisitions will be available to us in the future. For example,
we may enter into joint marketing relationships with other companies that offer
complementary services to business customers. We may also acquire companies
that would drive increased traffic on our network without corresponding cost
increases.
We also believe that the demand for Internet services outside the United
States will grow over the next few years. We intend to enter into international
alliances to originate and terminate international traffic on our network. We
will be targeting international Internet service providers and other carriers
for two types of opportunities--traffic termination in the United States and
data transport via the United States for termination in other countries. For
example, in cooperation with Telefonos de Mexico, Mexico's primary telephone
company and an affiliate of Prodigy, we intend to test connectivity between our
respective data networks. In addition, we have engaged European Marketing
Services, a marketing firm that successfully introduced Dell and other
technology firms to the European markets, to facilitate our own entry into the
European market.
Our Services
We currently provide Internet dial access services and Internet dedicated
access services, as well as value-added services such as dial and dedicated
virtual private networks. We also have the ability to provide frame relay and
ATM virtual private network services and web hosting and will begin to market
these services by the end of this year. The addition of the fiber optic
backbone to our network and acquisition of dark fiber will also allow us to
offer bandwidth capacity and related colocation services as well.
38
<PAGE>
Internet Access Services
Dial Access. Our Internet dial access services offer a cost effective
Internet solution with V.90 modem access to our advanced network via ordinary
telephone lines. Regional Internet service providers using our Internet dial
service can rapidly scale their service from regional or local coverage to
national coverage. National Internet service providers can expand their market
share by using our extensive local dial and 800 services to reach more
customers. We are primarily targeting Internet service providers with business
as well as residential customers to maximize traffic throughout our network.
We currently provide Internet dial access services to Prodigy for its
subscribers. Leveraging on our demonstrated network capabilities, we have
recently entered into significant new customer relationships with Juno Online
Services and InfiNet.
Dedicated Access. We offer high speed dedicated connectivity to the Internet
for both business users and Internet service providers. Our Internet dedicated
access services provide connectivity at access speeds ranging from 1.54 Mbps to
155 Mbps. We are targeting corporate users and carriers, including Internet
service providers, local exchange companies, regional long distance providers
and wireless providers as potential customers for this service.
In the future, we believe that our fiber backbone will position us to
support Internet access for higher bandwidth services, such as DSL and cable
modem. These high-speed access methods will enable new Internet services such
as video and high quality audio services.
Value-Added Services
We believe that business customers will continue to increase their use of
the Internet and other data services. Customers increasingly rely on a range of
value-added services, including virtual private networks and web hosting. We
will continue to develop new services to meet these business needs that
capitalize on our technologically advanced, high-speed broadband access network
and our fiber optic backbone.
Virtual Private Network Services. Many companies today have private data
communication networks built on expensive leased lines designed to transfer
data between office locations. Private data networks are expensive to set up,
operate and maintain, requiring the use of leased lines and the purchase of
networking hardware and software. Our virtual private network services can
provide businesses with a lower-cost alternative to private data networks.
Virtual private network services are valuable to business customers because
they:
.eliminate the need to invest significant amounts in proprietary equipment
and software;
.securely and efficiently connect multiple, geographically dispersed
locations;
.provide remote access capabilities; and
.allow businesses to add, delete or move company locations to meet changing
needs.
We have begun offering both dial and dedicated access for frame relay and
ATM virtual private network services to businesses, Internet service providers,
competitive local exchange carriers and others. We expect that the provision of
virtual private network services will be an important focus of our future
business.
Web Hosting. We now offer, on a limited basis, web hosting services bundled
with our Internet access services that permit companies to market themselves
and their products on the Internet without having to invest in technology,
infrastructure and operations staff. We are developing for roll-out later this
year a web hosting service that will be marketed on a stand-alone basis or
bundled with our Internet access and virtual private network services. Web
hosting is an ideal solution for customers who want to "publish" web pages on
the
39
<PAGE>
Internet without purchasing, configuring, maintaining and administering the
necessary sophisticated hardware and software. Due to economies of scale, we
can generally offer more sophisticated web hosting solutions than our customers
can provide for themselves. Our data centers will be located at selected core
POP sites and will make use of multiple high bandwidth connections to the
Internet. File structure directories, domain name registration and security
privileges can be set up for customers on our hosting servers, thus enabling
customers to remotely "publish" their content for distribution over the
Internet. In addition, we can provide network and systems administration and
maintenance, tape back-ups and security. In the future, we may also offer
applications hosting and other e-commerce services.
Bandwidth Leasing
With control over our fiber optic backbone network, we expect to offer
bandwidth leasing services that allow Internet service providers and other
business customers to transfer their traffic through our network. Bandwidth
leasing services will enable customers to reduce their data communications
expense by leasing network utilization from us in lieu of leasing point-to-
point circuits from other communications providers. We expect to be able to
offer high volume transmission capacity at a variety of speeds over our fiber
optic network. We may also target large capacity users who want to augment
their own networks or provide diverse routing alternatives in strategic areas
of their systems. Our potential customers for these services include
interexchange carriers, cable, data and transmission companies, the regional
Bell operating companies, Internet service providers, and local exchange
carriers. We expect to offer a variety of pricing and system options to meet
the specific needs of each customer. For instance, a customer may lease the
bandwidth capacity on a short or long term basis for extensive or minimal
coverage.
Colocation
We plan to house business-critical servers and other electrical, networking
and communications equipment in our secure network facilities on behalf of our
customers. The demand for these colocation services has increased as companies
expand into geographic areas in which they do not have appropriate space or
technical personnel to support their equipment and operations. Colocation
customers are typically larger enterprises employing more sophisticated
Internet hardware, software, and web servers, and have the expertise to
maintain their own web sites and related equipment. We plan to offer customers,
including Internet service providers, the opportunity to colocate their web-
server computers at our sites.
Our Network
We own and operate a state-of-the-art, broadband access network that employs
ATM technology at every core, hub and remote POP site. When our broadband
access network is completed later this year, it will include approximately 370
active POPs, giving us a physical presence in all 50 states, and targeting over
90% of U.S. businesses and households with a local call.
We recently agreed to acquire indefeasible rights to use four dark fiber
strands, with an option to acquire indefeasible rights to use an additional 12
fibers, in an approximately 15,000 route mile nationwide fiber optic network.
The combination of our existing broadband access network with our pending
acquisition of significant fiber optic facilities will allow us to deliver a
broad array of end-to-end data communications services on our own facilities at
the high level of quality, cost-effectiveness and reliability increasingly
demanded by customers. The increased bandwidth capacity will allow the network
to support advanced services such as DSL and video.
Through its ATM-to-the-Edge(TM) architecture, our broadband access network
allows us to concurrently provide multiple services such as data, video and
voice to customers and to incorporate future technology changes at relatively
low incremental investments. As a result, we believe that we have created a
more efficient
40
<PAGE>
network than our competitors, thereby reducing future operating costs and
improving reliability to the end user. 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 switching only
along the core sites in the backbone, our broadband access network deploys ATM
switching at every POP site--core, hub and remote. Each POP is supported by the
Lucent AC-120 switch which we believe provides significant quality of service
advantages over typical ATM switches. Our management believes that our network
contains more ATM-based switches than any other commercial network.
Our network was designed to meet the following strategic goals:
. provide uniform service nationwide that is reliable, fast, efficient and
easy to access;
. build high capacity to move data more quickly, more efficiently and at
greater traffic volumes;
. provide better quality service than our competitors at a lower cost;
. provide broad coverage to points not served by other networks;
. use the industry's best suppliers for network components; and
. build redundancy into the network for better reliability.
Network Performance
We believe that our network delivers the high level of quality increasingly
demanded by customers. We have consistently achieved among the highest
performance ratings in the industry for network reliability, speed and
throughput. Inverse Technology measures and reports on nine network performance
parameters of Internet service providers. Our ratings exceeded or equaled the
industry average in each of the categories shown below for five of the last six
months.
<TABLE>
<CAPTION>
Inverse 1999 Rating
-----------------------------
Selected Performance Attributes Jan Feb Mar Apr May June
- ------------------------------- --- --- --- --- --- ----
<S> <C> <C> <C> <C> <C> <C>
24-Hour Call Success................................... A A+ A A A+ A
Evening-Hour Call Success.............................. B A+ A+ A+ A+ A
Business-Hour Call Success............................. A A+ A A A+ B
Modem Connect Speed.................................... A+ A+ A+ A+ A+ A+
Average Web Throughput................................. A+ A+ A+ A+ A+ A+
</TABLE>
Inverse Technology rates the network performance of all major nationwide
Internet service providers by making more than 250,000 test calls per month.
The national providers compared in the Inverse rating are: AOL, AT&T, Cable &
Wireless, CompuServe, Earthlink, GTE, IBM, Microsoft Network, Mindspring,
NETCOM, Prodigy (Splitrock) and UUNET. In addition to the performance
attributes in the table above, Inverse Technology also rates average time to
login, average domain name system lookup time, average download time, and
average total web failures/timeouts. In our view, however, these attributes
reflect the performance of the Internet service provider and do not reflect the
performance of the underlying network. You should not place undue reliance on
Inverse Technology's reports as a measure of network performance because these
reports do not measure all factors that may affect the quality of our services
and are based on a random sampling of our network's POPs.
41
<PAGE>
Network Infrastructure
We believe that we have provided for future growth by ensuring that our
network is:
. scalable;
. flexible;
. fault tolerant;
. based on open standards and interoperable; and
. manageable from remote locations.
Scalable. Our flexible, multi-layer network architecture utilizes a high-
speed switching fabric that enables us to increase the number of POPs and the
number of users served in an incremental manner that matches investment with
demand. Our network's scalability extends beyond the currently installed base
of POPs to allow for growth without fundamental design changes or loss of
service quality.
Flexible. We believe that our network will enable us to adapt to new
services and manage network resources according to each service's needs,
permitting us to efficiently offer data, video and voice services concurrently.
Fault Tolerant. Redundancy and adaptive technology in our 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 switches, routers and workstations are configured to
search for alternate paths if an individual component or transmission line
fails. We also have an uninterruptible power supply at each POP, limiting the
impact of local power outages on our network.
Open Standards and Interoperable. Our entire network supports various
protocols, including IP, ATM, frame relay, ISDN, video and SS7. This
architecture allows us to interconnect freely with other carrier networks or
customer networks. As a result, we can extend services of another carrier
outside of that carrier's own region. In addition, potential virtual private
network clients that use standards-based protocols can easily access our
network without having to purchase special equipment that would otherwise be
necessary with a proprietary network.
Manageable. From our network operations centers, we are able to monitor our
network remotely, perform network diagnostics and equipment surveillance, and
inform customers when a network problem occurs. Our network operations centers
are open 24-hours a day, seven days a week. As a result of our network
architecture, these tasks may be performed remotely regardless of POP location
or network status. This capability allows us to control costs associated with
on-site network configuration and repair.
Broadband Access Network
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. Practical considerations and
equipment constraints have led 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 and 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, benefit from highly
intelligent terminals at the end-user that 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
communication networks 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 communication service networks often have unpredictable
performance.
42
<PAGE>
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,
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 has been a practical way for older networks to
provide multiple services. 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.
Our network was designed to address constraints facing older networks by not
requiring the separation of bandwidth for different types of services. In the
process of designing our network we sought to create a network infrastructure
which could:
. efficiently offer data, video, and voice services concurrently;
. reduce operating costs by more efficient utilization of network resources;
and
. provide high quality service for all services offered on the network.
We believe that three features distinguish our network from other data
communications networks. First, we use the Lucent AC-120 switch which supports
multiple services at every POP of the network. We believe that this
"intelligent" ATM switch differs from typical ATM backbone switch engines
because it supports many access protocols to the network whereby an array of
data, video and voice services can be sent and/or received, including IP, frame
relay, ATM, Ethernet, T-1, T-3, OC-3 and many other digital as well as analog
interfaces. Also, the Lucent AC-120 is scalable with up to 14 interface module
slots designed to house interface cards supporting these various services. The
Lucent AC-120 translates these native service protocols into standard ATM
format and transports any service as an ATM connection. In addition, the Lucent
AC-120 implements a patented queuing algorithm that eliminates the need for
bandwidth allocation to different kinds of services and simultaneously supports
data, video and voice services on a unified platform without loss of quality of
service even during periods of high network utilization.
Second, to manage the large number of ATM switches in our network, we
organized the network architecture into classes and regions. This architecture
allows us to introduce new services more quickly 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. Our 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 traditional IP-based network. Therefore,
to introduce a new service, we only need 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 permits better management and typically faster throughput than other
networks.
Third, most modern networks achieve transmission efficiencies by deploying
ATM switching engines in three to 20 access sites only in the core backbone of
their network. In contrast, ATM switches are located in all POPs throughout the
network. At the completion of our network construction and installation, we
expect to have approximately 370 ATM switches deployed in our network. The ATM-
to-the-Edge(TM) network forms the basic platform for us to offer multiple
services to all users on the network.
43
<PAGE>
Network Organization
Our 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 site. The core sites
form the backbone of the network, with the hub and remote access sites
extending the reach of the backbone.
Our 21 core sites are logically and fully meshed to allow 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. We can
purchase bandwidth on an actual need basis between each site and upgrade these
links as the bandwidth demand increases because the Lucent AC-120 conforms to
standard transmission specifications.
In addition, each core site is equipped with special protocol processors to
enable our network to accommodate demand for a wide variety of services. IP
protocol, for instance is supported by routers at each core site as compared to
other networks that must install routers at each POP. As a result of our
design, each of our routers is directly connected to every other router in the
network and can forward packets from region to region efficiently via simple
routing tables.
Hub sites service the major cities within a region and 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 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.
Our network has a large number of remote sites to reach the smaller cities
within a region. These sites 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 can also be protected from transmission
failures by being connected redundantly to other access sites in the region.
Fiber Optic Backbone
As part of our ongoing efforts to further expand and enhance our network, we
recently entered into an agreement to acquire long-term indefeasible rights to
use four dark fiber strands, with an option to use up to 12 additional fibers,
in the nationwide fiber optic network currently under construction by Level 3
Communications.
Fiber optic technology uses light to transport information from one point to
another. Fiber optic strands are thin filaments of glass through which light
beams are transmitted over long distances carrying large amounts of data.
Modulating light on thin strands of glass produces major benefits including
high bandwidth, relatively low cost, low power consumption, small space needs
and total insensitivity to electromagnetic interference.
The optical fiber strands that will comprise our fiber backbone network are
designed to accommodate dense wave division multiplexing transmission
technology. As a result, we can deploy equipment which transmits signals on 32
or more individual wavelengths of light per strand. This capability will
significantly increase the potential capacity of our fiber backbone relative to
older networks which generally use fiber optic strands that transmit fewer
wavelengths per strand. In addition, we believe that the installation of newer
optical fibers will allow a combination of greater wavelengths of light per
strand, higher digital transmission speeds, and greater spacing of network
electronics.
Network Management and Customer Service
We believe that superior customer service is a critical element in
attracting and retaining new customers and expanding value-added services to
existing customers. In particular, we believe that it is critical to maintain
two geographically dispersed network operations centers, each of which enables
us to monitor our entire network and provide rapid problem resolution. We have
established two 24-hours per day, seven days per week network operations center
facilities located in The Woodlands, Texas and Yorktown Heights, New York. Each
of these network operations centers permits us to manage traffic, monitor
system status and remotely implement solutions to system interruptions.
44
<PAGE>
In the first half of 1998, we implemented a number of new systems and
procedures to provide superior customer service. We have installed a leading
customer support trouble ticketing and workflow management system to track,
route and report on customer service issues. We also implemented new industry-
standard billing systems in late 1998. We expect to offer wholesale customers a
system that generates invoices tailored to the client's service mix and use a
second billing system for retail customers that authenticates and bills through
credit cards. To support anticipated growth in customers on our network, we
have established a customer call center to provide customer support 24 hours
per day, seven days a week.
Through the development of scalable operating support systems, we believe
that we have the opportunity to establish a competitive advantage relative to
traditional network service providers. Traditional network service providers
typically operate extensive legacy operating support systems with
compartmentalized architectures that limit their ability to scale rapidly and
introduce enhanced services and features. In connection with the expansion of
our network, we are creating operating support systems with an architecture
designed to maximize both reliability and scalability. Furthermore, in
establishing our operating support systems, we have 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. Operating support systems are, or will be, distributed
throughout our network, which improves network performance, recovery and
reliability, while also providing real-time capture of statistical and
accounting data. We utilize, when available, industry-standard software systems
developed and maintained by third party vendors but customized for our specific
needs.
We believe that an up-to-date management platform is critical for us to be
competitive and provide customers with quality services. We have put in place a
modern management platform to manage our extensive network. The new management
platform performs operations, administration and management tasks. We have
customized most of these platforms to ensure maximum network flexibility and
efficiency.
Peering and Interconnection
Peering and interconnection agreements with other carriers enable us to
exchange traffic destined for other networks and allow external traffic access
to our network. With Prodigy as a customer, we carry a significant amount of
Internet traffic. Currently, we have direct connection with all major carriers,
including Cable & Wireless, MCI WorldCom, PSINet, Sprint, UUNET and others, and
we are currently in discussions with other Internet service providers in order
to broaden our interconnection capabilities. We interconnect with other
networks from a core site through an industry standard Cisco router, which
promotes proper protocol exchange between us and other Internet service
providers.
Transmission Services
We lease long distance connections of various bandwidths to connect sites in
our network. The choice of long distance carriers is based on their network
reliability, bandwidth availability, responsiveness and pricing. We currently
lease a majority of our long distance connections from MCI WorldCom and
periodically review the capability and costs of these services by other
suppliers, such as Sprint and Qwest. Prior to the completion of our fiber
network, we expect to receive interim backbone transmission services from Level
3 beginning in the third quarter of 1999. As these services become available,
they will replace backbone transmission services we currently receive from
third parties. As segments of our fiber optic backbone network are constructed,
we will use this bandwidth in lieu of existing leased circuit arrangements.
We lease 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, we have existing relationships with many
competitive local exchange carriers and all major incumbent local exchange
carriers in the country.
Sales and Marketing
We are deploying multiple distribution sales channels to rapidly increase
our market penetration and customer base. The primary sales distribution
channel will be a direct sales force. Additional channels will include agents,
wholesalers and resellers.
45
<PAGE>
Our focus on multiple, leading-edge offerings makes it essential to create a
sophisticated sales organization. We began developing our direct sales force in
the first quarter of 1999 and are actively recruiting highly experienced data
communications sales professionals. This sales force will have a nationwide
presence, and will market our services directly to Internet service providers,
telecommunications carriers, value-added service providers, and medium and
large businesses. To support our direct sales force, we are developing web-
based tools, such as sales automation and sales tracking systems, that will
integrate pricing, order management, provisioning and billing systems.
Additionally, the salesforce will be equipped with customer-tailored marketing
material.
We also intend to utilize alternate distribution channels, which include
agents, resellers and wholesalers, to market our products and services to
medium and small businesses. As independent entities, agents sell our services
under the Splitrock brand name to end-users in exchange for revenue based
commissions. We intend to identify agents that generally focus on specific
market segments, such as medium and small businesses, and have existing
customer bases. Resellers are independent companies that would purchase our
services and then "repackage" under their own brand name these services for
sale to their customers. Finally, wholesalers are independent companies that
will purchase network service capabilities in large quantities from us in order
to market their own services under a brand name other than Splitrock. These
alternative channels are expected to optimize revenue growth and market
penetration.
We are creating a marketing infrastructure with three primary areas of
responsibility: marketing communications, marketing management and product
development.
Marketing communications builds Splitrock's image and provides
communications interface to customers on services. Marketing communications
will also promote Splitrock's services at industry conferences, trade shows
and other events.
Marketing management develops service literature, price positioning,
sales support materials, service revenue forecasts, competitive industry
and service analysis for our suite of service offerings.
Product development will work with internal organizations such as
information technology, engineering, operations and billing to develop and
enhance our services.
Relationship with Level 3 Communications
On April 26, 1999, we entered into a Cost Sharing National IRU Agreement
with Level 3 Communications, LLC, a subsidiary of Level 3 Communications, Inc.
Under this agreement, Level 3 has granted to us indefeasible rights to use four
dark fibers, with an option to use up to 12 additional fibers, in the
nationwide multiconduit fiber optic communications system currently under
construction by Level 3. The fiber will be delivered in segments that are
expected to become available from the end of 1999 through the first quarter of
2001. When completed, the fiber network will cover approximately 15,000 route
miles. If Level 3 expands its nationwide fiber optic network by adding
additional routes or otherwise enhances its network, Level 3 has agreed to give
us the opportunity to participate in that expansion or enhancement, subject to
Level 3's own business needs and subject to our agreeing on the allocation of
costs in the expansion or enhancement. Our agreement with Level 3 relates to
dark fiber only and does not include the electronic equipment necessary to
allow the fiber to transmit communications.
Under our agreement, we have made a down payment of $11.2 million to Level 3
and we are required to make additional payments as we accept delivery of
segments of the dark fiber. The total amount we will be required to pay Level 3
is dependent on the number of fibers we acquire and the number of actual route
miles. In addition to IRU payments, we are required to make payments to Level 3
for facilities, maintenance and utilities charges.
We anticipate that the acquisition of the right to use the four dark fiber
strands and the related electronics equipment, will require capital
expenditures of approximately $34 million, $89 million, and $27 million in
1999, 2000 and 2001, respectively.
46
<PAGE>
We have agreed that prior to the fourth anniversary of the agreement, we
will not grant any dark fiber IRU or assign or transfer any IRU or other
similar right or interest in any IRU to anyone other than an affiliate of ours.
However, the agreement allows us to sell or lease capacity over the fibers.
Our agreement with Level 3 has an initial term of 20 years and may be
extended. If we default in any payments due to Level 3 under the agreement,
Level 3 may terminate the agreement, provided that Level 3 may not terminate
the agreement or our rights to use fiber in segments for which we have paid in
full. We have the right to terminate the agreement prior to October 31, 1999,
under certain circumstances, but we would forfeit up to 80% of our down payment
if we exercise that right.
Level 3 has agreed to provide interim backbone transmission services at
capacities ranging from DS-3 to OC-48 for a monthly charge per DS-0 mile,
subject to an aggregate monthly minimum of $0.5 million. We expect to receive
these services beginning in the third quarter of 1999. As these services become
available, they will replace backbone transmission services we currently
receive from other third parties.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, we may be
required to notify the Federal Trade Commission of the transactions
contemplated by our agreement with Level 3. If this notification is required,
we will not be able to consummate the transactions contemplated by the Level 3
agreement until the requirements of the Hart-Scott-Rodino Act have been
satisfied and any applicable waiting period has expired to terminated.
Suppliers
We depend on third parties for key components of our network infrastructure,
including leased lines, transmission services and networking equipment, such as
routers, switches and modems. The quantities and quality of such networking
equipment that we require are available only from limited sources. We currently
utilize Lucent for ATM switching products, Bay Networks for our Internet dial
access platform, Cisco for routers and Sun Microsystems and Compaq for servers.
We also depend upon a variety of local exchange carriers and interexchange
carriers to provide telecommunication services, including leased line and
colocation facilities. For long distance connections and backbone long distance
transmission facilities, we currently use MCI WorldCom. In addition, we obtain
bandwidth capacity under leased line connection agreements with local exchange
carriers, including regional Bell operating companies. We also obtain
telecommunications services and lease physical space under local
access/colocation agreements with various competitive local exchange carriers.
We continue to monitor our needs for greater bandwidth and may enter into
agreements to enlarge our bandwidth capability.
We have entered into an agreement with IBM to use the IBM network to cover
market areas that are not served by our network or the Prodigy network. Under
this agreement, either party may terminate its obligations under the contract
for the remaining POP sites, upon 60 days prior notice. During March 1999, we
entered into an agreement with Lucent to provide us with maintenance on our
broadband access network in order to maintain the quality and reliability of
our network performance. Prior to entering into this maintenance arrangement
with Lucent, we had performed our own maintenance of equipment and have relied
on warranties from our vendors.
We rely upon third parties to provide equipment and services to assist in
the construction and installation of our broadband access network. As of June
30, 1999, we had 324 installed POPs, 270 of which were operational, and we
expect to have approximately 370 operational POPs when our construction is
completed later this year.
As previously disclosed in our annual report on Form 10-K for 1998, we
entered into an agreement with a contractor to construct 99 POP sites on a
turnkey basis. By November 1998, the contractor had failed to meet construction
milestones under our agreement. As a result, we had to hire other service
providers and suppliers in addition to supervisory field and office personnel
to complete the network on schedule. We also incurred additional expenses to
maintain POP sites on our legacy network. We have received invoices totaling
$9.1 million from the contractor and we are disputing the amount due. The
contractor has indicated that it will
47
<PAGE>
seek to secure payment of these invoices. We believe that the amounts the
contractor has claimed are not owed because of the contractor's failure to
perform under the terms of our agreement and the offsetting expenses we
incurred to complete the work. We also believe that resolution of this matter
will not have a material adverse effect on our business.
Competition
The data communications service industry is highly competitive. We expect
that competition will continue to intensify as customers seek additional
capacity to satisfy the continued growth of the Internet. In addition, numerous
competitors, including major telecommunications carriers such as AT&T, MCI
WorldCom, Sprint and Cable & Wireless, are rapidly expanding their data network
capabilities. We believe that the primary competitive factors for the provision
of data network services are quality of service, network coverage, reliability,
price, and service innovation.
Our current and prospective competitors generally may be divided into three
groups:
. companies that provide access services to Internet service providers
with both residential and small business customers, including UUNET
Technologies, Verio, Concentric Network, PSINet, and Netcom On-Line
Communications Services;
. companies that provide access, virtual private network and other value-
added services to medium and large businesses, including Concentric,
UUNET, GTE Internetworking, and DIGEX, as well as most major long
distance telephone companies; and
. companies with high-speed networks that provide bandwidth capacity and
other network services, including IXC Communications, Qwest and Level 3.
Internet Service Providers
According to International Data Corporation, there are over 4,000 Internet
service providers in the United States, consisting of national, regional and
local providers. We intend to market Internet dial access services to these
Internet service providers. Our competitors in this market will be other
companies that provide Internet access service to Internet service providers as
well as Internet service providers which possess backbone networks enabling
them to provide capacity to other Internet service providers. While we believe
that our status as an independent service provider distinguishes us from many
of these competitors, some of these competitors have significantly greater
market presence, brand recognition and financial, technical and personnel
resources than we do.
Corporate Internet Access and Virtual Private Networks
In the corporate Internet access and virtual private network markets, the
competitors include Internet service providers as well as traditional
telecommunications carriers. 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 dial access and
virtual private network services with other services such as web hosting or
long distance services. This bundling of services may have a material adverse
effect on our ability to compete effectively and thus could have an adverse
effect on our business, financial condition and results of operations.
Other Network Services
We believe that significant new competitors will enter the data network
services market. Other companies are in the process of building or expanding
networks that will have the ability to provide services comparable to ours. In
addition, many of our competitors have the financial and operational resources
to construct networks similar to our own. For example, Sprint is in the process
of designing a network which will contain ATM switches at every core, hub and
remote site. We cannot assure you that we will be able to compete effectively
with these companies. The market for the colocation of web-servers is extremely
competitive. In this market, we would compete with Internet service providers
and network providers as well as others, including inter exchange carriers,
companies that provide only web hosting and IP colocation services and a number
of companies in the computer industry.
48
<PAGE>
There are currently three principal facilities-based long distance fiber
optic networks, as well as numerous incumbent local exchange carrier and
competitive local exchange carrier networks. Others, including Qwest, IXC and
Williams, are building additional networks that employ advanced technology
similar to that of the Level 3 network and offer significantly more capacity to
the marketplace. The additional capacity that is expected to become available
in the next several years may cause significant decreases in the prices for
services. Our ability to compete effectively in this market will depend upon
our ability to maintain high quality services at prices equal to or below those
charged by our competitors. Interexchange carriers and competitive local
exchange carriers with excess fiber optic strands may be competitors in the
dark fiber business.
Recent reforms in the federal regulation of the telecommunications industry
have also created greater opportunities for local exchange carriers, including
the regional Bell operating companies, to enter the Internet network services
market and therefore compete with us. This increased competition could have a
material adverse effect on our business. We believe that there is a trend
toward horizontal integration through acquisitions of, joint ventures with, and
the wholesale purchase of connectivity from, Internet service providers. The
WorldCom/MFS/UUNET/MCI consolidation, the Netcom/ICG Communications merger, the
Intermedia/DIGEX merger and GTE's acquisition of BBN are indicative of this
trend. These consolidations may increase competition.
Regulation
Overview
Although we are not currently subject to direct regulation by the FCC, the
telecommunications industry is highly regulated. As a result, changes in the
regulatory environment relating to the Internet and telecommunications
services, including regulatory changes which directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from regional Bell operating companies or other telecommunication companies,
could have a material adverse effect on our financial position or results of
operations.
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. We
cannot predict the outcome of these proceedings, or the impact they may have on
the telecommunications or Internet services industries generally, or on us
particularly. In addition, over the past several years both the federal and
state governments have adopted new legislation and rules profoundly affecting
the telecommunications and Internet services industries. We cannot assure you
that the changes in current legislation or new legislation, and the regulations
adopted by the FCC or state regulators pursuant to that legislation, would not
have a material adverse impact on our business.
Regulation of Internet Communications
In 1980, the FCC created a distinction between "basic" services, which it
regulated as common carrier services, and "enhanced services," which it
deregulated. The FCC exempted enhanced service providers from federal
regulations governing common carriers, including the obligation to pay access
charges and contribute to universal services.
The Federal Telecommunications Act of 1996 established a similar distinction
between "telecommunications services" and "information services," but a
combination of changing technology and other provisions of the Federal
Telecommunications Act have made it increasingly difficult to discern the
boundary between unregulated and regulated services. The act directs the FCC to
adopt regulations requiring all telecommunications service providers to
contribute to the federal Universal Service Fund. When fully implemented, that
fund will be greatly enlarged. This distinction greatly magnifies the
significance of the boundary between regulated and unregulated services.
49
<PAGE>
Since the Federal Telecommunications Act was adopted, several companies have
begun providing voice telephony services over Internet-style packet-switched
networks, and traditional long distance telephone companies have announced
plans to migrate their services to packet-switched networks. As a consequence,
the regulatory status of communications services over Internet-style packet-
switched networks is presently uncertain. In an April 10, 1998 Report to
Congress regarding Universal Service, the FCC concluded that the provision of
underlying transmission capacity to Internet service providers constitutes
"telecommunications" under the Federal Telecommunications Act. The FCC has also
indicated in the report that it would consider, in an upcoming proceeding,
issues related to whether Internet service providers 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 universal service. 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 Internet service providers and
carriers providing service to Internet service providers must make universal
service contributions could increase our cost of doing business and have a
material adverse effect on our business.
On April 5, 1999, US WEST, Inc. filed a petition asking the FCC to rule that
providers of certain forms of IP telephony services must pay the same charges
that traditional interexchange carriers pay for access to local telephone
exchanges. If US WEST's request is granted, we could be subjected to regulation
that would have the practical effect of forcing us to differentiate data
transmission provided in support of black phone to black phone IP telephony
from data transmission provided in support of other services. This type of
regulation could impose substantial operational inefficiencies and attendant
costs upon us depending upon the method of implementation required. We cannot
predict how or when the FCC will respond to the US WEST petition.
We operate as an Information Services Provider
We operate as an unregulated provider of information services, as that term
is defined in the Federal Telecommunications Act, and as an enhanced service
provider, as that term is defined in FCC rules. Because the regulatory
boundaries in this area are unclear and subject to dispute, however, the FCC
could seek to characterize some or all of our services as "telecommunications
services." If that happens, we will be required to contribute directly to
universal service.
Our status as a reseller of underlying telecommunications services provided
by others has reinforced our status as an unregulated information service
provider. A longstanding FCC policy holds that, when a reseller enhances some
of the transmission capacity that it obtains from an unaffiliated facilities-
based common carrier by modifying or adding content to transmitted messages,
the entire package of resold services will be classified as an unregulated
enhanced service, even if much of the resold transmission capacity is not being
modified by the reseller. By contrast, the FCC has required some enhanced
service providers that use their own facilities to segregate those facilities
and subscribe to them as regulated common carrier offerings. To the extent that
we begin to provide our own transmission facilities, parts of our company could
thus become exposed to common carrier regulation.
Recently, we obtained rights to use several strands of unlit fiber, referred
to as "dark fiber," on another company's nationwide fiber network. The FCC and
at least one federal district court have taken the position that provision of
dark fiber is a form of "wire communications," not a sale of facilities. On
that basis, we believe that our acquisition of previously installed dark fiber
capacity does not transform us into a facilities-based provider of
telecommunications, and that we remain a reseller and provider of unregulated,
enhanced services. The treatment of dark fiber under these circumstances is an
unsettled area of the law, however, and we cannot predict with certainty
whether the FCC, or state regulatory commissions, will regulate this kind of
service.
50
<PAGE>
Under current FCC policy, enhanced service providers are exempted from
having to pay access charges to local telephone companies. Without this
exemption, the local telephone companies could charge enhanced service
providers for connecting the customer to the enhanced service provider.
Recently, the FCC has determined that both dedicated access and dial-up calls
from a customer to an Internet service provider are interstate, not local,
calls, and, therefore, are subject to the FCC's jurisdiction. The FCC
determined that, for the time being, it will allow states to continue tariffing
dial-up Internet access as a local business line service. However, it did not
require states to do so. If the access charge exemption for enhanced service
providers is eliminated, our costs of providing service may increase
substantially, which could have a detrimental effect on our business.
Universal Service Proceeding
If we maintain our current unregulated status, we may contribute indirectly
to universal service to the extent that we are billed by telecommunications
providers for the underlying service. Beginning on January 1, 2000, the federal
universal service program is scheduled to provide subsidy support for service
to high-cost areas served by so-called "non-rural" incumbent local exchange
carriers. We cannot predict the potential impact of these universal service
funding reforms on the rates that we are charged for the underlying
telecommunications services we receive from our telecommunications providers.
Regulatory Safeguards Affecting Underlying Service Providers
We are heavily dependent upon telecommunications carriers for the
transmission capacity that underlies our enhanced network. Some of these
carriers are considered dominant in their geographic markets and may compete
with us in providing enhanced services. This creates an incentive and potential
means for those carriers to discriminate against us. At present, the regional
Bell operating companies are allowed to provide information services within
local access and transport areas (LATAs) but they are restricted from providing
information services on an inter-LATA basis.
Under Section 271 of the Federal Telecommunications Act, the regional Bell
operating companies will be allowed to provide inter-LATA service, including
inter-LATA information services, when the FCC determines that they satisfy a
regulatory checklist of local competition requirements. No regional Bell
operating company has yet obtained a determination by the FCC that it has
satisfied the checklist of local competition requirements, but it is likely
that such determinations will eventually be issued. We cannot assure you that
we will be able to compete effectively with the regional Bell operating
companies once they are permitted to provide inter-LATA services.
Potential Liability of Internet Service Providers
Because we do not hold ourselves out as editing or otherwise controlling the
content of communications that traverse our network, we are generally
unaffected by government content regulation. However, the law in the United
States relating to the liability of Internet service providers and providers of
transmission capacity for information carried on, disseminated through or
hosted on their systems is currently unsettled. Congress and several states
have enacted or are considering measures that would, under some circumstances,
impose civil and criminal liability upon Internet service providers, or
providers of transmission capacity to Internet service providers, for the
transmission or dissemination of information and materials. The imposition of
this type of liability, if upheld by the courts, may require us to implement
measures to reduce our exposure to this liability, which may require us to
expend substantial resources and could affect the demand for our services.
Trademarks and Trade Names
We filed federal trademark applications for the marks "Splitrock" and "A
Carrier of Wisdom" on September 18, 1997, and "splitrock.net" on March 6, 1998.
We also filed separate federal trademark applications for logos on the above
dates, for the Splitrock with triangle design on June 16, 1998, for the mark
"splitrock.com" on July 27, 1998, and for the mark "ATM-to-the-Edge" in March,
1999. We have also filed
51
<PAGE>
trademark applications for the marks "Splitrock", "A Carrier of Wisdom" and the
Splitrock with triangle design in numerous foreign countries. These
applications are pending and we cannot assure you that they will be granted.
"Splitrock Services, Inc." is a trade name of our company.
Insurance
We have insurance coverage that we believe to be adequate for the risks of
our business. We carry property, general liability and directors and officers
liability insurance. In addition, we have an umbrella policy applicable to
general liability, auto liability, and employer's liability. Our insurance
coverage may not be adequate or available to compensate us for all losses that
may occur. The occurrence of a significant loss not fully covered by insurance
could have a material adverse effect on our company.
Employees
As of June 30, 1999, we had 307 full-time employees and 20 independent
contract workers. None of our employees is represented by a union, and we have
experienced no strikes or work stoppages. Our management believes that we have
good relations with our employees.
Properties
We are headquartered in The Woodlands, Texas in a leased facility consisting
of approximately 25,000 square feet. This facility houses our principal
executive and administrative offices as well as one of our network operations
centers. The lease on this facility expires in 2003. In March 1999, we entered
into a long-term lease agreement for approximately 69,000 square feet in The
Woodlands, Texas and expect the new facility will be ready for occupancy not
later than August 1999. The new facility will become our headquarters, and the
existing space will continue to be utilized as a network operations center and
customer care center.
We also sublease from Prodigy a facility of approximately 12,500 square feet
in Yorktown Heights, New York for our Yorktown Heights office and network
operations center. This lease expires on February 28, 2001 but is subject to
early termination on December 31, 1999 upon three months written notice. We
intend to exercise the early termination provision, and currently plan to move
our Yorktown Heights, New York facility to another location in the New York
metropolitan area.
In connection with our network operations, we lease commercial space or have
colocation agreements for our installed communications equipment throughout the
United States.
We believe that our facilities are adequate for our present purposes and
that suitable additional facilities will be available as needed.
Legal Proceedings
We are not currently a party to any material legal proceedings.
52
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Kwok L. Li ............. 42 Chairman of the Board of Directors and Chief Technical Officer
William R. Wilson ...... 51 President, Chief Executive Officer and Director
J. Robert Fugate ....... 38 Executive Vice President and Chief Financial Officer
David M. Boatner ....... 51 Executive Vice President and Chief Marketing Officer
Larry A. Walberg ....... 50 Senior Vice President of Network Operations
Todd W. Wilkens ........ 32 Senior Vice President of Engineering
Patrick J. McGettigan,
Jr. ................... 46 Senior Vice President, Secretary and General Counsel
Roy A. Wilkens ......... 56 Director
Marshall C. Turner ..... 57 Director
James M. Nakfoor ....... 35 Director
</TABLE>
Kwok L. Li has served as Chairman of the Board since July 1997 and has
served as Chief Technical Officer of Splitrock since April 1998. Mr. Li is a
co-founder of Splitrock. 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 Systems from
1995 until the consummation of the sale of Yurie to Lucent in 1998. Mr. Li also
served as Vice Chairman of Yurie from June 1997 until the sale, 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. Mr. Li is the primary technical architect of the Lucent AC-
120 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 Splitrock since its inception
and as Chief Executive Officer since April 1997. Mr. Wilson is a co-founder of
Splitrock. Prior to joining Splitrock, 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 Global and Telmex on strategic matters. From
1989 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 M.B.A. from The University of
Texas at Austin.
J. Robert Fugate joined Splitrock as Executive Vice President and Chief
Financial Officer in March 1999. From 1997 to 1999, Mr. Fugate served as
Executive Vice President and Chief Financial Officer of Fuego Technology
Corporation, a privately held software development company based in Dallas,
Texas. From 1996 to 1997 Mr. Fugate was Vice President, Corporate Development
for General Wireless Inc., a private Dallas-based company with licenses to
develop personal communications services. In addition, Mr. Fugate served as
Senior Vice President, Finance and Chief Financial Officer of Mobile
Telecommunication Technologies Corp. (since renamed SkyTel Communications,
Inc.) from 1988 to 1996, a publicly traded nationwide and international
provider of personal messaging services. Mr. Fugate received an M.B.A. from
Harvard University and a B.B.A. from The University of Mississippi.
David M. Boatner joined Splitrock in March 1999 as Executive Vice President
and Chief Marketing Officer. Prior to joining Splitrock, Mr. Boatner was the
President of Business Services for McLeodUSA, an integrated telecommunications
provider in the Midwest, where he was responsible for sales, marketing and
53
<PAGE>
customer support for business subscribers. From January 1995 to February 1996,
Mr. Boatner served as Regional Vice President of Sales for LDDS-WorldCom, where
he was responsible for business telecommunications sales in the central,
southwest and western United States. Mr. Boatner was employed as Vice President
of Sales for WilTel from 1985 until WilTel was acquired by LDDS-WorldCom in
1995. In this capacity he managed the nationwide data and long distance sales
for WilTel. Prior to joining WilTel, Mr. Boatner held numerous sales and
marketing positions at Southwestern Bell and AT&T.
Larry A. Walberg joined Splitrock as Senior Vice President of Network
Operations in April 1999. Prior to joining us, Mr. Walberg was Vice President,
Global Data Network Operations, at MCI WorldCom, where he managed the
operational expansion of a data network from North America into five
continents, directed the merger of operations of local and long-distance data
network platforms and integrated and migrated the data network platforms of
WorldCom, MCI, MFS and BrooksFiber into a single network architecture.
Previously, Mr. Walberg served as Director/Manager of Advanced Product Support
for WilTel and successor entities from May 1992 to May 1997 where he
established the operational model for the first public frame relay offering.
Todd W. Wilkens has served as Vice President of Engineering of Splitrock
since July 1997 and as Senior Vice President since April 1999. 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 1994 to 1996, Mr. Wilkens
was Manager, Advanced Products Support, at WorldCom where he helped build the
Internet Support Organization which specialized in building and operating
Internet service provider backbones. Prior to that, Mr. Wilkens supported
offshore communications in the Gulf of Mexico for Conoco/Dupont. Mr. Wilkens
holds a B.S.E.E. from Oklahoma State University. Mr. Wilkens is the son of
Roy A. Wilkens, a director of Splitrock.
Patrick J. McGettigan, Jr., has served as General Counsel of Splitrock since
September 1997, as Secretary since March 1998, and as Senior Vice President
since April 1998. Prior to joining Splitrock, 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 Splitrock when it was formed
in March 1997. Mr. McGettigan received a B.A. degree from The University of
Texas and his J.D. degree from South Texas College of Law, and is a member of
the State Bar of Texas.
Roy A. Wilkens has served as a director of Splitrock since April 1998. Mr.
Wilkens was President of The Williams Pipeline Company when he founded WilTel
in 1985. He was Founder/Chief Executive Officer of WilTel Network Services from
1985 to 1995. 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 McLeodUSA, Paging Network, Inc., UniDial Inc., Invensys Corporation Inc. and
Williams Communications. Mr. Wilkens is the father of Todd Wilkens, Splitrock's
Vice President of Engineering.
Marshall C. Turner joined our board of directors in April 1999. Since 1990
Mr. Turner has been an independent consultant and technology venture investor.
From 1981 through 1998, Mr. Turner was General Partner of Taylor & Turner
Associates, Ltd., which itself was a general partner of several venture capital
partnerships. Mr. Turner has been a venture capital principal or operating
executive in technology industries for 25 years. He is a director of the
Alliance Technology Fund, Inc., DuPont Photomasks, Inc., and four privately-
held companies, including Linsang Partners, LLC, one of our largest
shareholders. In June 1999, Mr. Turner was appointed as acting Chief Executive
Officer and Chairman of the Board of DuPont Photomasks, Inc. Mr. Turner is also
a Vice Chairman of the board of the Public Broadcasting Service, of the
Smithsonian Museum of Natural History, and director of the George Lucas
Educational Foundation. Mr. Turner received B.S. and M.S. degrees in Mechanical
Engineering and Product Design from Stanford University and an M.B.A. from
Harvard University.
54
<PAGE>
James M. Nakfoor joined our board of directors in April 1999. Since 1991,
Mr. Nakfoor has served as Vice President of Securities Trading for Inversora
Bursatil, S.A. de C.V., a wholly-owned subsidiary of Grupo Financiero Inbursa,
S.A. de C.V., which is engaged in the securities brokerage, investment banking
and money management business in Mexico. Grupo Financiero, which is affiliated
with Carso Global Telecom, is a Mexican financial group whose businesses
include banking, brokerage, insurance, leasing, factoring and other financial
services. Since September 1997, Mr. Nakfoor has been a member of the Board of
Directors of Prodigy Communication Corporation. Mr. Nakfoor holds a B.A. degree
in Economics and an M.B.A. degree from The University of Texas at Austin.
Other Significant Employees
Tracy Hammond joined Splitrock as Controller in September 1997. In October
of 1998, Ms. Hammond was named Vice-President and Controller. 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 B.S. in
Accountancy from The University of Missouri.
Frank W. Williams joined Splitrock in December of 1998 as Vice President of
Operations. Prior to joining Splitrock, Mr. Williams held several management
and senior executive positions with WilTel. His most recent position was as
Senior Operations Executive where he directed and developed the National
Technical Resource Center. This center supported 2,500 field technicians
servicing digital communications products manufactured by Nortel, NEC, Octel,
Cisco, Bay Networks and 3Com. Mr. Williams received a B.A. in Business from
Trinity University and an Associate of Arts from the Marion Institute in
Marion, Alabama.
Ralph Freeman joined Splitrock as Vice President of Information Services in
February 1999. From 1996 to June 1998, Dr. Freeman was Chief Information
Officer at American Telco. In June 1998, he became Vice President of
Information Systems at Logix Communications Enterprises, one of the largest
competitive local exchange carriers in the country, which acquired American
Telco. During this tenure, he helped build a new multi-state network
architecture. From 1991 to 1994, Dr. Freeman was the manager in the electronics
and software departments of Walt Disney Imagineering. Dr. Freeman holds a B.S.
in Engineering Management from the Air Force Academy; a M.S. in Business
Administration, Computer Methods from The University of California at Los
Angeles; and a Ph.D. in Information Technology from George Mason University.
Board of Directors
Our board of directors is divided into three classes. Each class consists of
up to two directors elected for staggered, three-year terms.
<TABLE>
<CAPTION>
Directors whose Directors Directors whose
terms expire in 2000 whose terms expire in 2001 terms expire in 2002
-------------------- -------------------------- --------------------
<S> <C> <C>
Marshall C. Turner William R. Wilson Kwok L. Li
Roy A. Wilkens James M. Nakfoor
</TABLE>
Committees of the Board of Directors
Our board has standing audit and compensation committees. The compensation
committee currently consists of Kwok L. Li, William R. Wilson and Roy A.
Wilkens, although membership may be changed to consist solely of non-employee
directors. The audit committee members are Roy A. Wilkens, Marshall C. Turner
and James M. Nakfoor.
55
<PAGE>
Director Compensation
Directors who are employed by our company are not entitled to receive any
additional compensation for serving on our board of directors. We pay each of
our non-employee directors 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. We also reimburse directors for reasonable expenses incurred in
conjunction with attending meetings. We did not make any cash compensation
payments to our directors in 1998, except for the reimbursement of expenses.
Each of our non-employee directors waived all cash compensation for 1998.
Directors are also eligible for grants of awards under our stock option plan.
On May 28, 1998, we granted our outside directors --Messrs. Salameh and
Wilkens-- options to purchase 45,040 shares of common stock at $1.95 per share,
with options to purchase 11,260 shares vesting on each of the first four
anniversaries of the date of grant. On April 22, 1999, our board accelerated
the vesting of 11,260 of Mr. Salameh's options otherwise due to vest on May 28,
1999 as a result of his service on the board. On April 22, 1999, we granted
each of our new outside directors --Messrs. Turner and Nakfoor-- options to
purchase 45,040 shares of common stock at $9.77 per share, with options to
purchase 11,260 shares vesting on each of the first four anniversaries of the
date of grant.
Executive Compensation
The following table sets forth certain information regarding the
compensation earned by or awarded to our Chief Executive Officer and each
executive officer whose compensation exceeded $100,000 for the year ended
December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation Awards
------------------------------- ------------
Securities
Other Annual Underlying
Year Salary ($) Compensation ($) Options(#)
---- --------- --------------- ------------
<S> <C> <C> <C> <C>
Kwok L. Li, Chairman of the Board
and Chief Technical Officer..... 1998 -- -- --
1997 -- $10,600 --
William R. Wilson, President and
Chief Executive Officer......... 1998 $151,440 -- --
1997 62,980 $16,400
Patrick J. McGettigan, Jr.,
Senior
Vice President, Secretary and
General Counsel................. 1998 $150,833 -- --
1997 46,933 $65,000 140,750
</TABLE>
The other annual compensation for services rendered by Mr. Li and Mr. Wilson
was paid in the form of shares of common stock in May 1997. Mr. McGettigan
became an employee of Splitrock in September 1997. Prior to being employed by
Splitrock, Mr. McGettigan performed legal services on behalf of Splitrock and
his former law firm received approximately $18,000 from Splitrock in 1997. The
other annual compensation for Mr. McGettigan was granted to him as a bonus upon
becoming an employee of Splitrock. In 1997 Mr. McGettigan also received options
to acquire 140,750 shares of our common stock with an exercise price of $1.11,
of which 45,040 vested immediately and the balance vests over four years in
equal installments.
Option Grants in Fiscal Year 1998
We did not grant any stock options to the executive officers named in the
Summary Compensation Table during 1998.
56
<PAGE>
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, 1998. No stock options were exercised by any executive officers
during the year ended December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1998 at December 31, 1998
------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kwok L. Li................ -- -- -- --
William R. Wilson......... -- -- -- --
Patrick J. McGettigan,
Jr....................... 68,967 71,783 $333,813 $347,438
</TABLE>
Options are "in-the-money" if the value of our common stock exceeds the
exercise price of the options. There was no public market for our common stock
as of December 31, 1998. Accordingly, we have calculated these values on the
basis of a valuation of our common stock made by an independent firm and which
was determined to be $5.95 per share.
Employment Agreements
We have entered into employment agreements with Messrs. Wilson, McGettigan,
Boatner and Fugate.
Under Mr. Wilson's employment agreement, which terminates on March 15, 2002,
he is entitled to receive an annual base salary of $150,000, subject to
adjustment by the board of directors or the Compensation Committee. The board
adjusted Mr. Wilson's annual salary to $200,000 as of January 1, 1999. If Mr.
Wilson's employment is terminated upon his death or disability or by us without
cause, then he is entitled to continue to receive his base salary through the
remaining term of the agreement. The agreement further provides that Mr. Wilson
may engage in other business endeavors without violating any of provisions of
the agreement.
Under Mr. McGettigan's employment agreement, which terminates on August 31,
1999, he is entitled to receive an annual base salary of $140,000, subject to
adjustment by the board of directors or the Compensation Committee. We adjusted
Mr. McGettigan's annual salary to $180,000 as of January 1, 1999. If we
terminate Mr. McGettigan's employment without cause, then he is entitled to
continue to receive his base salary through the remaining term of the
agreement. Under his employment agreement, Mr. McGettigan received a signing
bonus of $65,000 and was granted options to purchase 140,750 shares of our
common stock at an exercise price of $1.11 per share. 45,040 shares of these
options vested immediately and the remaining 95,710 shares will vest in four
equal annual installments.
Under Mr. Boatner's employment agreement, which terminates on February 28,
2001, he is entitled to receive an annual base salary of $175,000. Mr. Boatner
also received a signing bonus of $75,000 and was granted options to acquire
225,200 shares of our common stock at an exercise price of $9.77 per share.
These options vest in four equal annual installments beginning on March 1,
2000. If we terminate Mr. Boatner's employment without cause, then he is
entitled to continue to receive his base salary through the remaining term of
his agreement.
Under Mr. Fugate's employment agreement, which terminates on March 21, 2001,
he is entitled to an annual base salary of $185,000. Mr. Fugate also received a
signing bonus of $50,000 and was granted options to purchase 197,050 shares of
our common stock at an exercise price of $9.77 per share. These options vest in
four equal annual installments beginning on March 21, 2000. If we terminate Mr.
Fugate's employment without cause, then he is entitled to continue to receive
his base salary for 12 months following termination, if his employment is
terminated before March 21, 2000, or for six months following termination, if
his employment is terminated after March 21, 2000.
57
<PAGE>
Stock Incentive Plans
1997 Incentive Share Plan
Our 1997 incentive share plan became effective on June 16, 1997. On April 1,
1998, our board of directors approved and adopted an amendment and restatement
of the plan which was subsequently approved and adopted by our stockholders on
April 27, 1998. The purpose of the plan is to provide employees, and non-
employee directors, and consultants with additional incentives by increasing
their ownership interests in our company.
Individual awards under the plan may take the form of one or more of :
. either incentive or non-qualified stock options;
. stock appreciation rights;
. restricted stock; and
. other awards, the value of which is based in whole or in part upon the
value of our common stock.
Options under the 1997 plan have a term of ten years and are generally
granted with an exercise price equivalent to fair market value at the date of
grant. Individual option grants vest over time, based upon a schedule approved
by our board of directors, which is generally four years. All of our common
stock options vest automatically upon a change in control, as defined in the
1997 plan.
Our compensation committee administers the 1997 plan, determines the persons
who will receive awards and establishes the terms and conditions of those
awards. Our President is also authorized to grant awards to other employees who
are not executive officers. The maximum number of shares of common stock that
may be subject to outstanding awards is 11,260,000. As of June 30, 1999,
options for 3,702,908 shares had been granted, of which:
. options to purchase 628,027 shares had been exercised, including an
option to purchase 563,000 shares granted to a former director of our
company;
. options to purchase 2,896,128 shares were outstanding; and
. options to purchase 178,753 shares, which were previously granted, had
been canceled or forfeited.
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.
1999 Stock Incentive Plan
Our 1999 stock incentive plan became effective on July 1, 1999. The purpose
of the 1999 stock incentive plan is to strengthen our company by providing an
incentive to our employees, officers, consultants, directors and advisors
through the granting or awarding of incentive and nonqualified stock options,
stock appreciation and dividend equivalent rights, restricted stock,
performance units, performance shares, share awards and phantom stock awards,
thereby encouraging these individuals to devote their abilities and energies to
our success.
The 1999 stock incentive plan will be administered by our board of directors
or a committee of the board consisting of non-employee directors, although our
President may be authorized to grant options or awards to eligible persons who
are not executive officers. Under the 1999 stock incentive plan, the board or
the committee administering the plan will have the authority to, among other
things:
. select the employees to whom stock options and other incentive awards
will be granted;
58
<PAGE>
. determine the type, size and the terms and conditions of stock options
and other incentive awards; and
. establish the terms for treatment of stock options and other incentive
awards upon a termination of employment.
The 1999 stock incentive plan will replace the 1997 plan on a going-forward
basis, but the adoption of the 1999 plan will not increase the total number of
shares available for the grant of options or awards. Upon the effective date of
the 1999 plan:
. no further options will be granted under the 1997 plan;
. each option outstanding under the 1997 plan will remain outstanding and
continue to be subject to the terms of the 1997 plan and the agreement
under which it was granted;
. the shares initially available for options or awards under the 1999 plan
will be equal to the approximately 7.7 million shares available for
option grants under the 1997 plan as of July 1, 1999, including options
to purchase 1,233,711 shares exercisable at the initial public offering
price which we expect to grant when the initial public offering price is
determined; and
. any shares that are the subject of an option granted under the 1997
plan, but not exercised prior to the time the option expires or is
otherwise terminated, will become available for the granting of
additional options or awards under the 1999 plan.
We will authorize shares of common stock for issuance under the 1999 stock
incentive plan for the grant of stock options and other incentive awards to
eligible individuals. The 1999 stock incentive plan will terminate on June 30,
2009. The board of directors will be able to at any time and from time to time
amend or terminate the 1999 stock incentive plan; provided, however, that, to
the extent necessary under applicable law, no such change will be effective
without the requisite approval of our stockholders. In addition, no such change
will alter or adversely impair any rights or obligations under any stock
options and other incentive awards previously granted, except with the written
consent of the grantee.
Compensation Committee Interlocks and Insider Participation
In 1997, the compensation of our executive officers was determined by our
board of directors. In April 1998, the board of directors appointed a
compensation committee that now consists of Kwok L. Li, William R. Wilson, and
Roy A. Wilkens, who will determine the compensation of our executive officers
consistent with guidelines established by the board of directors. Mr. Li and
Mr. Wilson are executive officers of Splitrock.
Kwok L. Li, our Chairman and Chief Technical Officer, was also the Vice
Chairman and a director of Yurie, one of our principal suppliers, until its
acquisition by Lucent. Mr. Li acts as a consultant to Lucent. As of June 30,
1999, we had purchased approximately $12.7 million of products and $1.5 million
of services from Yurie and Lucent.
Samer Salameh, a member of our board of directors until April 1999, is
chairman of the board of directors and Chief Executive Officer of Prodigy, our
principal customer, and James M. Nakfoor, a current member of our board of
directors, has been a member of Prodigy's board of directors and its
compensation committee since September 1997. We have entered into an agreement
to provide network services to Prodigy for its subscribers in exchange for a
monthly service charge. During the fiscal year ended December 31, 1998, we
received approximately $63.6 million in revenues from Prodigy.
59
<PAGE>
CERTAIN TRANSACTIONS
Financings
In March 1997, we issued to our founders, Kwok L. Li and William R. Wilson,
225,200 and 337,800 shares, respectively, of our common stock for $0.00297 per
share. In May 1997, we issued 6.0 million and 9.2 million shares of our common
stock, respectively, to Mr. Li and Mr. Wilson in consideration of services
performed since March 1997.
In June 1997, Mr. Li advanced $10.0 million to us, evidenced by a $10.0
million convertible note. Mr. Li subsequently assigned the convertible note to
Linsang, which converted it into 9.0 million shares of common stock on August
9, 1997.
In August 1997, Linsang acquired 6.8 million shares in a private transaction
for $7.5 million. In December 1997, we borrowed $1.0 million from Linsang. This
loan was repayable 30 days after written demand or, if no demand was made, on
December 1, 2002 and bore interest at the rate of 9.75% per annum beginning in
February 1998. In January, March and June 1998, we borrowed an additional $3.0
million, $2.0 million and $5.0 million, respectively, from Linsang on similar
terms. In July 1998, outstanding indebtedness was refinanced in connection with
our senior notes offering. In connection with this refinancing, Linsang
purchased 11,000 units in the senior notes offering.
In August 1997, Roy Wilkens and Sandra Wilkens purchased 450,400 shares of
our common stock for $0.5 million. Mr. Wilkens became a member of our board of
directors in April 1998.
In September 1997, Orient Star, a wholly owned subsidiary of Carso Global,
purchased 11.3 million shares of our common stock for $12.5 million. Orient
Star subsequently acquired, pursuant to an option, an additional 2.8 million
shares for $3.1 million and merged into Carso Global. Carso Global currently
holds approximately 30.2% of our outstanding common stock at April 30, 1999.
Samer Salameh, the Chairman of Prodigy, an affiliate of Carso Global, was a
member of our board of directors from April 1998 to April 1999, when he was
succeeded on the board of directors by James Nakfoor, another director of
Prodigy. Mr. Nakfoor is Vice President of another Carso Global affiliate,
Inversora Bursatil, S.A. de C.V., a wholly-owned subsidiary of Grupo Financiera
Inbursa, S.A. de C.V. Carso Global is a controlling stockholder of Prodigy and
an affiliate of Telefonos de Mexico. We are currently testing connectivity
between our network and Telmex's network in anticipation of possible future
business relationships. As a result of Mr. Nakfoor's relationships with Carso
Global and Prodigy, conflicts of interest may arise, including conflicts
relating to potential corporate opportunities. If any conflict arises, we
anticipate that the non-interested members of the board of directors will pass
on the appropriateness of any particular matter.
In June 1998, Clark McLeod, Chief Executive Officer of McLeodUSA, then one
of our directors, exercised in full a stock option previously granted to him
and purchased 563,000 shares of our common stock for $1.1 million. Mr. McLeod
was a member of our board of directors from May 1998 to May 1999.
On July 24, 1998, we offered and sold 261,000 units pursuant to the senior
notes offering, of which 250,000 units were resold to "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act) and 11,000 units to
Linsang, as stated above. Each unit consisted of a senior note and a warrant to
purchase approximately 5.7 shares of our common stock at an exercise price of
$0.02 per share. We received gross proceeds of $261.0 million from the senior
notes offering.
Other
Kwok L. Li, our Chairman and Chief Technical Officer, was also the Vice
Chairman and a director of Yurie, one of our principal suppliers, until its
acquisition by Lucent. Mr. Li acts as a consultant to Lucent. As of June 30,
1999, we had purchased approximately $12.7 million of products and $1.5 million
of services from Yurie and Lucent. As a result of Mr. Li's relationship with
Lucent and with Linsang, each of which has
60
<PAGE>
business relationships with us, there may be conflicts of interest that arise
including conflicts relating to potential corporate opportunities. If any
conflict arises we anticipate that the non-interested members of our board of
directors will pass on the appropriateness of any particular matter.
In March and April 1999, we granted executive officers options to purchase a
total of 506,700 shares of our common stock as follows: David Boatner, 225,200
shares; Robert Fugate, 197,050 shares; and Larry Walberg, 84,450 shares. These
options were granted under our 1997 incentive plan, are exercisable at a price
of $9.77 per share, and vest in four equal annual installments beginning on the
first anniversary of the grant date. At the time of the initial public offering
we plan to grant to our executive officers additional options to purchase a
total of 464,550 shares of our common stock as follows: David Boatner, 99,800
shares; Robert Fugate, 52,950 shares; Larry Walberg, 165,550 shares; Todd
Wilkens, 37,000 shares; and Patrick McGettigan, 109,250 shares. These options
will be exercisable at a price per share equal to the initial public offering
price and will vest in four equal annual installments beginning on the first
anniversary of the grant date.
61
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information regarding the beneficial ownership
of our common stock as of June 30, 1999 by:
. each stockholder known by us to own beneficially 5% or more of our
outstanding common stock;
. each of our current directors;
. our Chief Executive Officer and each executive officer whose
compensation exceeded $100,000 during 1998; and
. all of our directors and executive officers as a group.
As of June 30, 1999, there were 46,681,424 shares of our common stock
outstanding. Following this offering, there will be 57,381,424 shares of our
common stock outstanding. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options and warrants held by that
person that are currently exercisable or exercisable with 60 days of June 30,
1999, are treated as outstanding. However, these shares are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person.
<TABLE>
<CAPTION>
Beneficially Owned Securities
Number of Shares Beneficially Percentage of Shares
Owned Includes Beneficially Owned
-------------------------------- ------------------------
Total Number
of shares Securities Securities
Beneficially Underlying Underlying Before After
Owned Warrants Options Offering Offering
------------ -------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Kwok L. Li.............. 21,599,143 62,704 -- 46.2% 37.6%
Linsang Partners,
L.L.C.................. 15,425,848 62,704 -- 32.9% 26.9%
8301 Professional Drive
Landover, MD 20785
William R. Wilson....... 9,571,000 -- -- 20.5% 16.7%
Roy A. Wilkens.......... 309,650 -- 11,260 * *
Marshall C. Turner...... 28,150 -- -- * *
Patrick J. McGettigan,
Jr..................... 92,895 92,895 * *
James M. Nakfoor........ -- -- -- -- --
Carso Global Telecom,
S.A. de C.V............ 14,075,000 -- -- 30.2% 24.5%
Insurgentes Sur #3500
Col. Pena Pobre
Mexico, D.F. 14060
Directors and executive
officers
as a group (10 people)
....................... 31,882,338 62,704 385,655 67.4% 55.1%
</TABLE>
- --------
* Less than 1%.
The shares beneficially owned by Mr. Li include 1,182,300 shares owned by
his spouse, 30,402 shares owned by his minor children, and 15,425,848 shares
owned beneficially and of record by Linsang, a limited liability company
controlled by Mr. Li, and members of his family.
The shares beneficially owned by Linsang include 62,704 shares issuable upon
exercise of warrants included as part of the units purchased by Linsang in the
senior notes offering.
The shares beneficially owned by Mr. Nakfoor exclude stock owned by Carso
Global Telecom, S.A. de C.V. Carso Global is an affiliate of Grupo Financiera
Inbursa, S.A. de C.V. and Mr. Nakfoor is a Vice President of Inbursa. Mr.
Carlos Slim Helu, a Mexican citizen, and members of his immediate family,
directly and through their ownership of a majority of the voting and economic
interests in two trusts, own a majority of the outstanding voting equity
securities of Carso Global.
62
<PAGE>
The shares beneficially owned by Mr. Wilkens are held by Mr. Wilkens and
Sandra L. Wilkens jointly. These shares exclude 281,500 shares attributable to
vested options beneficially owned by Mr. Wilkens' son and 152,010 shares owned
by other family members of Mr. Wilkens.
The shares beneficially owned by Mr. Turner do not include shares
beneficially owned by Linsang, of which Mr. Turner is a director.
Messrs. William R. Wilson, Patrick J. McGettigan, Jr., and six other selling
stockholders have granted the underwriters an option to purchase up to 100,000,
25,000 and 32,372 shares of common stock, respectively, at the initial public
offering price less the underwriting discount, as part of the underwriters'
over-allotment option. The six stockholders other than Messrs. Wilson and
McGettigan are partners or advisors of Linsang Partners, L.L.C. but otherwise
have no relationship to us. If the underwriters' over-allotment is exercised in
full, after the offering Mr. Wilson will beneficially own 9,471,000 shares, or
16.1% of our outstanding common stock, and Mr. McGettigan will own 67,895
shares, or less than 1% of our outstanding common stock. The other six selling
stockholders will own 136,528 shares in the aggregate, which is also less than
1% of our outstanding common stock.
63
<PAGE>
DESCRIPTION OF LONG-TERM INDEBTEDNESS
11 3/4% Senior Notes
On July 24, 1998, we issued $261.0 million aggregate principal amount of our
11 3/4% senior notes. The senior notes are due July 15, 2008 and are senior
obligations, ranking pari passu with all of our existing and future senior
indebtedness and senior to all of our future subordinated obligations. The
senior notes bear interest at a rate of 11 3/4% per year, payable semi-annually
on January 15 and July 15 of each year. We have deposited into an escrow
account funds that, together with interest on those funds, will be sufficient
to pay the first four semi-annual interest payments on the senior notes. Except
as described in the preceding sentence, the senior notes are unsecured
obligations.
The senior notes may be redeemed at any time, in whole or in part, on or
after July 15, 2003 at a redemption price equal to 105.875% of the principal
amount of the notes in the first year and declining yearly to par at July 15,
2006, plus accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to July 15, 2001, we may also redeem with the proceeds of
one or more equity offerings up to 35% of the original aggregate principal
amount of the notes originally issued at a redemption price equal to 111.75% of
the aggregate principal amount of the notes plus accrued and unpaid interest,
if any, to the date of redemption; provided that at least 65% of the original
aggregate principal amount of the notes remain outstanding immediately after
each redemption.
Upon the occurrence of a change of control, we will be required to make an
offer to repurchase all notes properly tendered at a price equal to 101% of the
principal amount plus accrued and unpaid interest to the date of repurchase.
The indenture governing the notes contains covenants that limit our ability,
directly or through our subsidiaries, to:
. incur additional indebtedness or liens or enter into sale/leaseback
transactions;
. pay dividends or make other distributions;
. make investments;
. repurchase equity interests or subordinated obligations;
. consummate asset sales;
. enter into transactions with affiliates;
. engage in any business other than a telecommunications business; and
. merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our
assets.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized stock; issued and outstanding shares
Our authorized capital stock consists of 150,000,000 shares of common stock,
par value $0.001 per share, and 25,000,000 shares of preferred stock, par value
$0.001 per share.
Common Stock
Following this offering 57,381,424 shares of our common stock will be
outstanding. All of the issued and outstanding shares of common stock are and,
upon the completion of this offering, the shares of common stock offered in
this offering will be, fully paid, validly issued and non-assessable.
The following summarizes the rights of holders of our common stock:
. each holder of shares of common stock is entitled to one vote per share
on all matters to be voted on by stockholders generally, including the
election of directors;
. there are no cumulative voting rights;
. the holders of our common stock are entitled to dividends and other
distributions as may be declared from time to time by the board of
directors out of funds legally available for that purpose, if any;
. upon our liquidation, dissolution or winding up, the holders of shares
of common stock will be entitled to share ratably in the distribution of
all of our assets remaining available for distribution after
satisfaction of all our liabilities and the payment of the liquidation
preference of any outstanding preferred stock; and
. the holders of common stock have no preemptive or other subscription
rights to purchase shares of our stock, nor will holders be entitled to
the benefits of any redemption or sinking fund provisions.
As of June 30, 1999, there were 46,681,424 shares of our common stock
outstanding, held of record by 52 persons.
Preferred Stock
Our certificate of incorporation authorizes our board of directors to create
and issue one or more series of preferred stock and determine the rights and
preferences of each series within the limits set forth in our certificate of
incorporation and applicable law. Among other rights, the board of directors
may determine, without further vote or action by our stockholders:
. the number of shares constituting the series and the distinctive
designation of the series;
. the dividend rate on the shares of the series, whether dividends will be
cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series;
. whether the series will have voting rights in addition to the voting
rights provided by law and, if so, the terms of the voting rights;
. whether the series will have conversion privileges and, if so, the terms
and conditions of conversion;
. whether or not the shares of the series will be redeemable or
exchangeable, and, if so, the dates, terms and conditions of redemption
or exchange, as the case may be;
. whether the series will have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of
the sinking fund; and
. the rights of the shares of the series in the event of our voluntary or
involuntary liquidation, dissolution or winding up and the relative
rights or priority, if any, of payment of shares of the series.
65
<PAGE>
Unless otherwise provided by our board of directors, the shares of all
series of preferred stock will rank on a parity with respect to the payment of
dividends and to the distribution of assets upon liquidation. Although we have
no present plans to issue any shares of preferred stock, any future issuance of
shares of preferred stock, or the issuance of rights to purchase preferred
shares, may have the effect of delaying, deferring or preventing a change of
control in our company or an unsolicited acquisition proposal. The issuance of
preferred stock also could decrease the amount of earnings and assets available
for distribution to the holders of common stock or could adversely affect the
rights and powers, including voting rights, of the holders of the common stock.
Warrants
As part of the senior notes offering, we have issued warrants to purchase
1,487,791 shares of our common stock at an exercise price of $.02 per share.
The warrants become exercisable on July 26, 1999 and expire on July 15, 2008.
Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and
Bylaws
Section 203 of the Delaware General Corporation Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Under Section 203, business combinations between a Delaware
corporation whose stock generally is publicly traded or held of record by more
than 2,000 stockholders and an interested stockholder are generally prohibited
for a three-year period following the date that such a stockholder became an
interested stockholder, unless:
. the corporation has elected in its original certificate of incorporation
not to be governed by Section 203. We did not make this election;
. the business combination was approved by the board of directors of the
corporation before the other party to the business combination became an
interested stockholder;
. upon consummation of the transaction that made it an interested
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the commencement of the
transaction, excluding voting stock owned by directors who are also
officers or held in employee benefit plans in which the employees do not
have a confidential right to tender or vote stock held by the plan; or
. the business combination was approved by the board of directors of the
corporation and ratified by two-thirds of the voting stock not owned by
the interested stockholder.
The three-year prohibition also does not apply to some business combinations
proposed by an interested stockholder following the announcement or
notification of an extraordinary transaction involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of the majority
of the corporation's directors. The term "business combination" is defined
generally under Section 203 to include mergers or consolidations between a
Delaware corporation and an interested stockholder, transactions with an
interested stockholder involving the assets or stock of the corporation or its
majority-owned subsidiaries and transactions which increase an interested
stockholder's percentage ownership of stock. The term "interested stockholder"
is defined generally under Section 203 as a stockholder who, together with
affiliates and associates, owns or within three years prior did own 15% or more
of a Delaware corporation's voting stock. Section 203 could prohibit or delay a
merger, takeover or other change in control of Splitrock and therefore could
discourage attempts to acquire us.
Board of Directors Vacancies. Our certificate of incorporation authorizes
the board of directors to fill vacant directorships or increase the size of the
board of directors. This may deter a stockholder from removing incumbent
directors and simultaneously gaining control of the board of directors by
filling the vacancies created by this removal with its own nominees.
66
<PAGE>
Special Meeting of Stockholders. Our bylaws provide that special meetings of
our stockholders may be called only by the board of directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at our principal executive offices not less than 90 days
prior to the anniversary of the previous year's annual meeting of stockholders.
If no annual meeting of stockholders was held in the previous year or the date
of the annual meeting of stockholders has been changed to be more than 30
calendar days earlier than or 60 calendar days after this anniversary, notice
by the stockholder, to be timely, must be received not later than the later of:
. 90 days prior to the annual meeting of stockholders or
. the close of business on the 10th day following the date on which notice
of the date of the meeting is mailed to stockholders or made public,
whichever occurs first.
According to our bylaws, stockholders seeking to nominate candidates for
election as directors at special meetings of stockholders must also provide
timely notice in writing in accordance with restrictions similar to those for
annual meetings.
Our bylaws also specify certain requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations for
directors at an annual meeting of stockholders.
Authorized But Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval, subject to various limitations imposed by the Nasdaq National Market.
These additional shares may be utilized for a variety of corporate purposes,
including future public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of authorized but
unissued and unreserved common stock and preferred stock could make more
difficult or discourage an attempt to obtain control of us by means of a proxy
contest, tender offer, merger or otherwise.
Delaware law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that the liability of our
directors shall be eliminated or limited to the fullest extent permitted by
Delaware law. Under Delaware law, the directors have a fiduciary duty to us
that is not eliminated by this provision of our certificate of incorporation
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available. In addition, each
director will continue to be subject to liability under Delaware law for:
. breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions which are found by a court of competent jurisdiction
to be not in good faith or which involve intentional misconduct, or
knowing violations of law;
. actions leading to improper personal benefit to the director; and
. payment of dividends or approval of stock repurchases or redemptions
that are prohibited by the Delaware law.
This provision also does not affect the directors' responsibilities under any
other laws, such as the federal securities laws.
67
<PAGE>
Our certificate of incorporation also generally provides that we are
required to fully 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 that person is or was a director or officer of
Splitrock, or is or was serving at our request as a director or officer of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise. This indemnification covers expenses including attorney's
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by the indemnitee in connection with such action, suit or proceeding.
Transfer agent and registrar
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company.
68
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately following this offering, there will be 57,381,424 shares of our
common stock issued and outstanding. Of these shares, the 10,700,000 shares of
common stock to be sold in this offering will be immediately eligible for sale
in the public market, except for shares owned at any time by our affiliates
within the meaning of Rule 144 under the Securities Act. The remaining
46,681,424 issued and outstanding shares are restricted securities within the
meaning of Rule 144 and may not be publicly resold, except in compliance with
the registration requirements of the Securities Act or pursuant to an exemption
from registration, including that provided by Rule 144.
Outstanding warrants to purchase 1,487,791 shares of common stock at a
purchase price of $.02 per share become exercisable on July 26, 1999. Shares
issued upon the cashless exercise of these warrants will be immediately
eligible for sale in the public market, except for shares owned at any time by
our affiliates.
Rule 144
In general, under Rule 144, a person, or persons whose shares are
aggregated, who has beneficially owned restricted securities for at least one
year, including a person who may be deemed affiliate, is entitled to sell
within any three month period a number of our shares of common stock that does
not exceed the greater of:
. 1% of the then-outstanding shares of our common stock; or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us. A person
who is not our affiliate at any time during the 90 days preceding a sale and
who has beneficially owned shares for at least two years would be entitled to
sell shares following this offering under Rule 144(k) without regard to the
volume limitations, manner of sale provisions or notice requirements of Rule
144.
Rule 701
Our employees, directors, officers or consultants who purchased our shares
in connection with a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 permits non-affiliates to
sell their Rule 701 shares without having to comply with the public
information, holding period, volume limitation or notice provisions of Rule
144. Affiliates may sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions.
Lock-up agreements
Our directors, executive officers, and our two largest shareholders, Linsang
and Carso Global, who collectively hold 45,508,979 outstanding shares of our
common stock, have agreed, subject to limited exceptions, not to sell, offer to
sell or otherwise dispose of our common stock or securities convertible into or
exercisable or exchangeable for our common stock for a period of 180 days after
the date of this prospectus without the prior written consent of Bear, Stearns
& Co. Inc., on behalf of the underwriters.
Registration Statement on Form S-8
We have filed a registration statement on Form S-8 under the Securities Act
to register the shares of common stock reserved for issuance under our employee
benefit plans. The stock registered under that registration statement will
thereafter be available for sale in the public market, subject to the resale
limitations of Rule 144 applicable to our affiliates.
69
<PAGE>
Prior to the date of this prospectus, no public market has existed for our
common stock. We expect that trading of our common stock on the Nasdaq National
Market will commence on the date of this prospectus. We do not make any
prediction regarding the effect, if any, that future sales of shares, or the
availability of our shares for future sale, will have on the market price of
our common stock. The market price of our common stock can be adversely
affected by sales of substantial amounts of common stock or by the perception
that these sales could occur.
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of common
stock by a Non-U.S. Holder, as defined below. As used herein, the term "Non-
U.S. Holder" means a holder that for United States federal income tax purposes
is an individual or entity other than:
. a citizen or individual resident of the United States,
. a corporation or partnership created or organized in or under the laws
of the United States or of any state thereof, unless in the case of a
partnership or in the District of Columbia, U.S. Treasury regulations
provide otherwise,
. an estate the income of which is subject to U.S. federal income taxation
regardless of its source or
. a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust.
In general, an individual may be deemed to be a resident alien, as opposed
to a nonresident alien, by virtue of being present in the United States for at
least 31 days in the calendar year and for an aggregate of at least 183 days
during a three-year period ending in the current calendar year, counting for
these purposes all of the days present in the current year, one-third of the
days present in the immediately preceding year and one-sixth of the days
present in the second preceding year. Resident aliens are subject to U.S.
federal tax as if they were U.S. citizens.
This discussion does not address all aspects of United States federal income
and estate taxes that may be relevant to Non-U.S. Holders in light of their
personal circumstances, including the fact that in the case of a Non-U.S.
Holder that is a partnership, the U.S. tax consequences of holding and
disposing of shares of common stock may be affected by determinations made at
the partner level, or that may be relevant to various types of Non-U.S. Holders
which may be subject to special treatment under United States federal income
tax laws, including, for example, insurance companies, tax-exempt
organizations, financial institutions, dealers in securities and holders of
securities held as part of a "straddle," "hedge," or "conversion transaction,"
and does not address U.S. state or local or foreign tax consequences.
Furthermore, this discussion is based on provisions of the Internal Revenue
Code of 1986, as amended, existing and proposed regulations promulgated
thereunder and administrative and judicial interpretations thereof, all as of
the date of this prospectus, and all of which are subject to change, possibly
with retroactive effect. The following summary is included herein for general
information. Accordingly, prospective investors may wish to consult their tax
advisers regarding the United States federal, state, local and non-U.S. income
and other tax consequences of acquiring, holding and disposing of shares of
common stock.
Dividends
We do not anticipate declaring or paying cash dividends on our common stock
in the near future. However, if dividends are paid on shares of our common
stock, dividends paid to a Non-U.S. Holder of common stock generally will be
subject to withholding of United States federal income tax at a 30% rate, or
the lower rate provided by the income tax treaty between the United States and
a foreign country if the Non-U.S. Holder is treated as a resident of that
foreign country within the meaning of the applicable treaty. Non-U.S. Holders
should consult their tax advisors regarding their entitlement to benefits under
a relevant income tax treaty.
70
<PAGE>
Dividends that are effectively connected with a Non-U.S. Holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are generally
subject to U.S. federal income tax on a net income basis at regular graduated
rates, but are not generally subject to the 30% withholding tax if the Non-U.S.
Holder files the appropriate U.S. Internal Revenue Service form with the payor,
which form under U.S. Treasury regulations generally requires the Non-U.S.
Holder to provide a U.S. taxpayer identification number. Any U.S. trade or
business income received by a Non-U.S. Holder that is a corporation may also be
subject to an additional "branch profits tax" at a 30% rate or the lower rate
specified by an applicable income tax treaty.
Under currently applicable U.S. Treasury regulations, dividends paid to an
address in a foreign country are presumed, absent actual knowledge to the
contrary, to be paid to a resident of that country for purposes of the
withholding discussed above and for purposes of determining the applicability
of a tax treaty rate. Under U.S. Treasury regulations generally effective for
payments made after December 31, 2000 (the Final Regulations), however, a Non-
U.S. Holder of our common stock who wishes to claim the benefit of an
applicable treaty rate generally will be required to satisfy applicable
certification and other requirements. In addition, under the Final Regulations,
in the case of our common stock held by a foreign partnership, (1) the
certification requirement will generally be applied to the partners of the
partnership and (2) the partnership will be required to provide certain
information, including a United States taxpayer identification number. The
Final Regulations also provide look-through rules for tiered partnerships.
Further, the Internal Revenue Service intends to issue regulations under which
a foreign trustee or foreign executor of a U.S. or foreign trust or estate,
depending on the circumstances, will be required to furnish the appropriate
withholding certificate on behalf of the beneficiaries, grantor trust or
estate, as the case may be.
A Non-U.S. Holder of our common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for a refund with the
Internal Revenue Service.
The Final Regulations also provide special rules for dividend payments made
to foreign intermediaries, U.S. or foreign wholly owned entities that are
disregarded for U.S. federal income tax purposes and entities that are treated
as fiscally transparent in the United States, the applicable income tax treaty
jurisdiction, or both. In addition, recently enacted legislation, effective
August 5, 1997, denies income tax treaty benefits to foreigners receiving
income derived through a partnership, or another otherwise fiscally transparent
entity, in certain circumstances. Prospective investors should consult with
their own tax advisers concerning the effect, if any, of Final Regulations and
this recent legislation on an investment in our common stock.
Gain on disposition of common stock
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of our common stock unless:
(a) the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate Non-U.S.
Holder,
(b) the Non-U.S. Holder is an individual who holds our common stock as a
capital asset within the meaning of Section 1221 of the Internal
Revenue Code, is present in the United States for 183 or more days in
the taxable year of the disposition and meets other requirements,
(c) the Non-U.S. Holder is subject to tax under the provisions of the U.S.
tax law applicable to United States expatriates or
(d) we are or have been a "U.S. real property holding corporation" for
federal income tax purposes at any time during the shorter of the five-
year period preceding the disposition or the period that the Non-U.S.
Holder held our common stock.
Generally, a corporation is a "U.S. real property holding corporation" if the
fair market value of its "U.S. real property interests" equals or exceeds 50%
of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business. We believe
that we have not
71
<PAGE>
been, are not currently, and do not anticipate becoming, a "U.S. real property
holding corporation" for U.S. federal income tax purposes. The tax with
respect to stock in a "U.S. real property holding corporation" does not apply
to a Non-U.S. Holder whose holdings, direct and indirect, at all times during
the applicable period, constituted 5% or less of our common stock, provided
that our common stock was regularly traded on an established securities
market. If we were, or were to become, a U.S. real property holding
corporation, we believe that our common stock would be treated as "regularly
traded."
If a Non-U.S. Holder who is an individual is subject to tax under clause
(a) above, the individual generally will be taxed on the net gain derived from
a sale of common stock under regular graduated United States federal income
tax rates. If an individual Non-U.S. Holder is subject to tax under clause (b)
above, the individual generally will be subject to a flat 30% tax on the gain
derived from a sale, which may be offset by particular United States capital
losses, notwithstanding the fact that the individual is not considered a
resident alien of the United States. Thus, individual Non-U.S. Holders who
have spent, or expect to spend, more than a de minimis period of time in the
United States in the taxable year in which they contemplate a sale of common
stock are urged to consult their tax advisers prior to the sale concerning the
U.S. tax consequences of that sale.
If a Non-U.S. Holder that is a foreign corporation is subject to tax under
clause (a) above, it generally will be taxed on its net gain under regular
graduated United States federal income tax rates and, in addition, will be
subject to the branch profits tax equal to 30% of its "effectively connected
earnings and profits," within the meaning of the Internal Revenue Code for the
taxable year, as adjusted for certain items, unless it qualifies for a lower
rate under an applicable tax treaty.
Federal estate tax
Common stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident, as defined for United
States federal estate tax purposes, at the time of death will be included in
the individual's gross estate for United States federal estate tax purposes,
unless an applicable estate tax or other treaty provides otherwise and,
therefore, maybe subject to United States federal estate tax.
Information reporting and backup withholding tax
Under United States Treasury regulations, we must report annually to the
Internal Revenue Service and to each Non-U.S. Holder the amount of dividends
paid to that holder and the tax withheld with respect to those dividends.
Copies of the information returns reporting dividends and withholding may also
be made available to the tax authorities in the country in which the Non-U.S.
Holder is a resident under the provisions of an applicable income tax treaty
or agreement.
United States backup withholding, which generally is a withholding tax
imposed at the rate of 31% on payments to persons that fail to furnish
information under the United States information reporting requirements,
generally will not apply:
. to dividends paid to Non-U.S. Holders that are subject to the 30%
withholding discussed above or that are not so subject because a tax
treaty applies that reduces or eliminates such 30% withholding or
. before January 1, 2001, to dividends paid to a Non-U.S. Holder at an
address outside of the United States unless the payor has actual
knowledge that the payee is a U.S. Holder.
Backup withholding and information reporting generally will apply to dividends
paid to addresses inside the United States on shares of our common stock to
beneficial owners that are not "exempt recipients" and that fail to provide
identifying information in the manner required.
The payment of the proceeds of the disposition of our common stock by a
holder to or through the U.S. office of a broker or through a non-U.S. branch
of a U.S. broker generally will be subject to information reporting and backup
withholding at a rate of 31% unless the holder either certifies its status as
a Non-U.S.
72
<PAGE>
Holder under penalties of perjury or otherwise establishes an exemption. The
payment of the proceeds of the disposition by a Non-U.S. Holder of common stock
to or through a non-U.S. office of a non-U.S. broker will not be subject to
backup withholding or information reporting unless the non-U.S. broker has
particular types of U.S. relationships. In the case of the payment of proceeds
from the disposition of our common stock effected by a foreign office of a
broker that is a U.S. person or a "U.S. related person," existing regulations
require information reporting on the payment unless the broker receives a
statement from the owner, signed under penalty of perjury, certifying its non-
U.S. status or the broker has documentary evidence in its files as to the Non-
U.S. Holder's foreign status and the broker has no actual knowledge to the
contrary. For this purpose, a "U.S. related person" is:
. a "controlled foreign corporation" for U.S. federal income tax purposes;
or
. a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment or for such part of the period that the broker has
been in existence is derived from activities that are effectively
connected with the conduct of a U.S. trade or business.
The Final Regulations alter the foregoing rules in certain respects. Among
other things, these regulations provide presumptions under which a Non-U.S.
Holder is subject to backup withholding at the rate of 31% and information
reporting unless we receive certification from the holder of non-U.S. status.
Depending on the circumstances, this certification will need to be provided:
. directly by the Non-U.S. Holder;
. in the case of a Non-U.S. Holder that is treated as a partnership or
other fiscally transparent entity, by the partners, stockholders or
other beneficiaries of that entity; or
. by particular qualified financial institutions or other qualified
entities on behalf of the Non-U.S. Holder.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the Internal Revenue Service.
73
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
dated , 1999, each of the underwriters named below, through their
representatives Bear, Stearns & Co. Inc., Credit Suisse First Boston
Corporation, and Prudential Securities Incorporated, has severally agreed to
purchase from us the aggregate number of shares of common stock set forth
opposite its name below at the public offering price less the underwriting
discount set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
Underwriters Number of Shares
- ------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc........................................
Credit Suisse First Boston Corporation.........................
Prudential Securities Incorporated ............................
----------
Total...................................................... 10,700,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of legal matters by their counsel and to
various other conditions. Under the underwriting agreement, the underwriters
are obligated to purchase and pay for all of the above shares of common stock,
other than those covered by the over-allotment option described below, if they
purchase any of the shares.
The underwriters propose to initially offer some of the shares directly to
the public at the offering price set forth on the cover page of this prospectus
and some of the shares to dealers at this price less a concession not in excess
of $ per share. The underwriters may allow, and dealers may re-allow,
concessions not in excess of $ per share on sales to other dealers. After the
initial offering of the shares to the public, the underwriters may change the
offering price, concessions and other selling terms. The underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
We and some of our stockholders have granted the underwriters an option
exercisable for 30 days from the date of the underwriting agreement to purchase
up to 1,447,628 and 157,372 additional shares, respectively, at the offering
price less the underwriting discount. The underwriters may exercise this option
solely to cover over-allotments, if any, made in connection with this offering.
To the extent underwriters exercise this option in whole or in part then each
of the underwriters will become obligated, subject to conditions, to purchase a
number of additional shares approximately proportionate to each underwriter's
initial purchase commitment as indicated in the preceding table.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
Our directors and executive officers and Linsang and Carso Global, who
collectively hold a total of 45,508,979 outstanding shares of common stock,
have agreed, subject to limited exceptions, not to sell or offer to sell or
otherwise dispose of any shares of common stock or securities convertible into
or exercisable or exchangeable for our common stock, for a period of 180 days
after the date of this prospectus without the prior written consent of Bear,
Stearns & Co. Inc., on behalf of the underwriters.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus we will not offer, sell or otherwise dispose of any shares of
common stock except for the shares offered in this offering and any shares
offered in connection with employee benefit plans, without the consent of Bear,
Stearns & Co. Inc., on behalf of the underwriters.
Prior to the offering, there has been no public market for our common stock.
Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in these negotiations will be:
74
<PAGE>
. our results of operations in recent periods;
. estimates of our business potential;
. an assessment of our management;
. prevailing market conditions; and
. the prices of similar securities of generally comparable companies.
Our common stock has been approved for listing on the Nasdaq National Market
under the symbol "SPLT." We cannot assure you, however, that an active or
orderly trading market will develop for the common stock or that our common
stock will trade in the public markets subsequent to the offering at or above
the initial offering price.
In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock during and after the offering. Specifically, the underwriters may
over-allot or otherwise create a short position in the common stock for their
own account by selling more shares of common stock than we have actually sold
to them. The underwriters may elect to cover any short position by purchasing
shares of common stock in the open market or by exercising the over-allotment
option granted to the underwriters. In addition, the underwriters may stabilize
or maintain the price of the common stock by bidding for or purchasing shares
of common stock in the open market and may impose penalty bids, under which
selling concessions allowed to syndicate members or other broker-dealers
participating in the offering are reclaimed if shares of common stock
previously distributed in the offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may
be to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the common stock to the extent that it discourages resales.
No representation is made as to the magnitude or effect of these activities.
The underwriters have reserved for sale, at the initial public offering
price, up to 535,000 shares of common stock for employees, directors and other
persons associated with us who express an interest in purchasing these shares
of common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase reserved shares. Any reserved shares not purchased by these persons
will be offered by the underwriters to the general public on the same terms as
the other shares offered in this offering.
The underwriters may, from time to time, engage in transactions with, and
perform services for, us in the ordinary course of their business. Prudential
Securities acted as our financial advisor in connection with our agreement to
acquire rights to use dark fiber from Level 3, for which Prudential Securities
will be entitled to receive customary compensation.
The following table shows the underwriting discount to be paid to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares of common stock.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per share.................................................. $ $
Total...................................................... $ $
</TABLE>
Other expenses of this offering (including the registration fees and the
fees of financial printers, counsel and accountants) payable by us are expected
to be approximately $1.1 million.
75
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Fried, Frank, Harris, Shriver & Jacobson, a
partnership including professional corporations, Washington, D.C., and for the
underwriters by Latham & Watkins, Washington, D.C.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for the year
ended December 31, 1998 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.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
shares of common stock offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and its
exhibits and schedules. Particular items are omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. For further
information about our company and the common stock offered by this prospectus,
we refer you to the registration statement, including its exhibits and
schedules. You may read and copy the registration statement at the Securities
and Exchange Commission's following locations:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
Room 1024 Seven World Trade Center Citicorp Center
450 Fifth Street, N.W. Suite 1300 500 West Madison Street
Washington, DC 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of the registration statement by mail from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 or by telephone at 1-800-
SEC-0330. The registration statement is also available to the public from
commercial document retrieval services and at the Securities and Exchange
Commission's World Wide Web site located at http://www.sec.gov. Upon approval
of our common stock for quotation on The Nasdaq Stock Market's National Market,
you will be able to read our filings with the Securities and Exchange
Commission at the office of Nasdaq Operations, 1734 K Street, N.W. Washington,
DC 20006.
Statements in this prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance we refer you to the
full text of such contract or document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and make
available to our stockholders quarterly reports for the first three quarters of
each fiscal year containing interim unaudited financial information.
76
<PAGE>
SPLITROCK SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements:
Report of Independent Accountants....................................... F-2
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(unaudited)............................................................ F-3
Statements of Operations and Comprehensive Loss for the Period from
Inception (March 5, 1997) Through December 31, 1997, the year ended
December 31, 1998 and the six months ended June 30, 1998 and 1999
(unaudited)............................................................ F-4
Statements of Stockholders' Equity (Deficit) for the Period from
Inception (March 5, 1997) Through December 31, 1998 and the six months
ended June 30, 1999 (unaudited)........................................ F-5
Statements of Cash Flows for the Period from Inception (March 5, 1997)
Through December 31, 1997, the year ended December 31, 1998 and the six
months ended June 30, 1998 and 1999 (unaudited)........................ F-6
Notes to Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Splitrock Services, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations and comprehensive loss, of cash flows and of changes in
stockholders' equity, present fairly, in all material respects, the financial
position of Splitrock Services, Inc. at December 31, 1997 and 1998, and the
results of its operations and its cash flows for the period from inception
(March 5, 1997) to December 31, 1997 and the year ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
March 24, 1999, except as to Note 12 which is as of July 12, 1999.
F-2
<PAGE>
SPLITROCK SERVICES, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 7,710 $ 28,330 $ 8,327
Unrestricted investments--short term......... -- 120,475 56,166
Restricted investments--short term........... 3,472 39,476 21,597
Accounts receivable, net of $0, $537 and
$459, respectively.......................... 4,252 3,205 3,919
Prepaid expenses and other current assets.... 221 480 948
-------- -------- --------
Total current assets....................... 15,655 191,966 90,957
Property and equipment, net.................... 38,504 73,899 88,721
Restricted investments--long term.............. -- 19,001 23,243
Other assets, net.............................. 229 11,275 29,808
-------- -------- --------
$ 54,388 $296,141 $232,729
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of capital lease
obligations................................. $ 11,010 $ 9,121 $ 9,088
Accounts payable............................. 3,086 21,582 11,533
Accrued interest payable..................... -- 13,375 14,141
Accrued liabilities and other current
liabilities................................. 5,775 15,894 18,211
-------- -------- --------
Total current liabilities.................. 19,871 59,972 52,973
Senior notes payable ($261,000 face value net
of $2,783 and $2,702 unamortized discount,
respectively (Note 5))........................ -- 258,217 258,298
Capital lease obligations...................... 13,110 8,243 3,383
Note payable to stockholder.................... 1,000 -- --
-------- -------- --------
Total liabilities.......................... 33,981 326,432 314,654
Commitments and contingencies (Note 7)
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 25,000,000
shares authorized, no shares issued......... -- -- --
Common stock, $.001 par value, 150,000,000
shares authorized, 43,238,400, 46,624,845,
and 46,681,424 shares issued and outstanding
as of December 31, 1997, 1998, and June 30,
1999, respectively.......................... 43 47 47
Additional paid-in capital................... 30,485 34,717 34,831
Common stock warrants........................ -- 2,849 2,849
Accumulated other comprehensive income
(loss)...................................... -- 47 (335)
Accumulated deficit.......................... (10,121) (67,951) (119,317)
-------- -------- --------
Total stockholders' equity (deficit)....... 20,407 (30,291) (81,925)
-------- -------- --------
$ 54,388 $296,141 $232,729
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SPLITROCK SERVICES, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Period from Six Months Six Months
Inception Ended Ended
(March 5, 1997) to Year Ended June June
December 31, 1997) December 31, 1998 30, 1998 30, 1999
------------------ ----------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue................. $ 22,708 $ 63,611 $ 32,214 $ 34,241
Operating expenses:
Splitrock network
costs................ 2,362 32,912 10,724 34,150
Legacy network costs.. 25,804 58,292 27,111 21,871
Selling, general and
administrative....... 1,276 6,390 2,441 6,338
Depreciation and
amortization......... 3,500 13,850 4,907 11,237
---------- ---------- ---------- ----------
32,942 111,444 45,183 73,596
---------- ---------- ---------- ----------
Loss from operations.... (10,234) (47,833) (12,969) (39,355)
Other income (expense):
Interest income....... 348 5,393 183 4,335
Interest expense...... (235) (15,390) (842) (16,346)
---------- ---------- ---------- ----------
Loss before income
taxes.................. (10,121) (57,830) (13,628) (51,366)
Provision for income
taxes.................. -- -- -- --
---------- ---------- ---------- ----------
Net loss................ (10,121) (57,830) (13,628) (51,366)
Other comprehensive
income (loss):
Unrealized gain (loss)
on securities........ -- 47 -- (382)
---------- ---------- ---------- ----------
Comprehensive loss...... $ (10,121) $ (57,783) $ (13,628) $ (51,748)
========== ========== ========== ==========
Net loss per share--
basic and diluted...... $ (0.42) $ (1.30) $ (0.31) $ (1.10)
========== ========== ========== ==========
Weighted average
shares--basic and
diluted................ 24,109,823 44,388,948 43,288,168 46,668,728
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SPLITROCK SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period From Inception (March 5, 1997) Through June 30, 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Common Stock Accumulated
---------------- Additional Common Other
Par Paid-in Stock Comprehensive Accumulated
Shares Value Capital Warrants Income Deficit Total
---------- ----- ---------- -------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization.. 15,764,000 $16 $12 -- -- -- $ 28
Issuances of Common
Stock for cash of
$1.11 per share and
warrant............... 18,466,400 18 $20,482 -- -- -- 20,500
Conversion of note
payable to Common
Stock at $1.11 per
share................. 9,008,000 9 9,991 -- -- -- 10,000
Net loss............... -- -- -- -- -- $ (10,121) (10,121)
---------- --- ------- ------ ----- --------- --------
Balance at December 31,
1997................... 43,238,400 43 30,485 -- -- (10,121) 20,407
Unrealized gain on
securities............ -- -- -- -- $ 47 -- 47
Issuance of warrants to
purchase 1,487,791
shares of Common Stock
in connection with
Senior Notes (Note
5).................... -- -- -- $2,849 -- -- 2,849
Exercise of stock
options and Warrant... 3,386,445 4 4,232 -- -- -- 4,236
Net loss............... -- -- -- -- -- (57,830) (57,830)
---------- --- ------- ------ ----- --------- --------
Balance at December 31,
1998................... 46,624,845 $47 $34,717 $2,849 $ 47 $ (67,951) $(30,291)
Net loss (unaudited)... -- -- -- -- -- (51,366) (51,366)
Unrealized loss on
securities
(unaudited)........... -- -- -- -- (382) -- (382)
Exercise of stock
options (unaudited)... 56,579 -- 114 -- -- -- 114
---------- --- ------- ------ ----- --------- --------
Balance at June 30, 1999
(unaudited)............ 46,681,424 $47 $34,831 $2,849 $(335) $(119,317) $(81,925)
========== === ======= ====== ===== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SPLITROCK SERVICES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
Inception (March Six Months Six Months
5, 1997) through Year Ended Ended Ended
December 31, 1997 December 31, 1998 June 30, 1998 June 30, 1999
----------------- ----------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(10,121) $(57,830) $(13,628) $(51,366)
Adjustments to
reconcile net loss to
net cash used by
operating activities:
Depreciation and
amortization.......... 3,500 13,850 4,907 11,237
Amortization of debt
discount and deferred
financing costs....... -- 467 -- 554
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable,
net................... (4,252) 1,047 (1,986) (714)
(Increase) decrease in
prepaid and other
current assets........ (221) (259) (199) (468)
Increase (decrease) in
accounts payable and
accrued liabilities... 8,861 28,615 7,194 (7,732)
Increase (decrease) in
accrued interest
payable............... -- 13,375 -- 766
-------- -------- -------- --------
Net cash used in
operating activities.. (2,233) (735) (3,712) (47,723)
-------- -------- -------- --------
Cash flows from
investing activities:
Purchase of equipment.. (16,969) (45,261) (5,548) (25,311)
Increase in
unrestricted
investments........... -- (119,462) -- --
Use of unrestricted
investments........... -- -- -- 64,255
Use of restricted
investments........... -- -- -- 13,309
Reinvestment of
interest earned on
unrestricted
investments........... -- (966) -- --
Reinvestment of
interest earned on
restricted
investments........... -- (1,725) -- --
Increase in other
assets................ (229) (2,098) (2,166) (19,189)
-------- -------- -------- --------
Net cash used by
investing activities.. (17,198) (169,512) (7,714) 33,064
-------- -------- -------- --------
Cash flows from
financing activities:
Proceeds from senior
notes payable and
warrants issued....... -- 261,000 -- --
Proceeds from notes
payable to
stockholder........... 11,750 10,000 10,000 --
Repayments of notes
payable to
stockholder........... (750) (11,000) -- --
Proceeds from notes
payable............... -- 1,477 1,477 --
Repayments of notes
payable............... -- (1,477) -- --
Financing costs
incurred.............. -- (9,501) (424) (565)
Restriction of cash
under senior note
agreement............. -- (56,752) -- --
Sale of common stock
and exercise of stock
options and warrant... 20,528 4,236 1,100 114
Proceeds from sale-
leaseback of
equipment............. 1,152 960 440 --
Principal payments on
capital lease
obligations........... (2,067) (11,548) (7,172) (4,893)
Restriction of cash
under credit
agreement............. (3,472) 3,472 3,472 --
-------- -------- -------- --------
Net cash provided by
financing activities.. 27,141 190,867 8,893 (5,344)
-------- -------- -------- --------
Increase (decrease) in
cash and cash
equivalents............ 7,710 20,620 (2,533) (20,003)
Cash and cash
equivalents:
Beginning of period.... -- 7,710 7,710 28,330
-------- -------- -------- --------
End of period.......... $ 7,710 $ 28,330 $ 5,177 $ 8,327
======== ======== ======== ========
Supplemental cash flow
information:
Cash paid for
interest.............. $ 235 $ 1,536 $ 631 $ 15,025
======== ======== ======== ========
Approximately $18,400
of the increase in
accounts payable and
accrued liabilities at
December 31, 1998, was
related to equipment
purchases.............
Noncash investing and
financing activities:
Assumption of capital
lease obligations and
other liabilities
(Note 2).............. $ 5,900 $ -- $ -- $ --
======== ======== ======== ========
Capital lease
obligations incurred.. $ 20,916 $ 4,792 $ 4,055 $ --
======== ======== ======== ========
Conversion of note
payable to stockholder
into common stock..... $ 10,000 $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(amounts in thousands, except share and per share amounts)
1. Organization and Summary of Significant Accounting Policies
Splitrock Services, Inc. (the "Company") was formed on March 5, 1997 as a
Texas corporation and was 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. 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. 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 began building its "ATM-to-the-Edge"(TM) network.
The Company expects to have approximately 370 points of presence operational in
the United States upon completion of its network build by the end of 1999. This
network is currently supported by two network operating centers equipped with
state-of-the-art network management systems. In July 1998 the Company issued
Senior Notes (Note 5) in order to finance the expansion of the network. Upon
completion of the network build, the Company expects to offer value-added data,
video and voice products to business customers.
Interim Financial Information. The accompanying unaudited interim condensed
financial statements, as of June 30, 1999, and for the six months ended June
30, 1999 and 1998, reflect all adjustments (consisting of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. Accordingly,
they do not include all information and notes required by generally accepted
accounting principles for complete financial statements. The results for the
interim period ended June 30, 1999, are not necessarily indicative of results
to be expected for the entire year ending December 31, 1999, or future
operating results. Certain amounts previously reported have been reclassified
in order to ensure comparability among the periods reported.
The following is a summary of the Company's significant accounting policies:
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.
Cash and Cash Equivalents and Investments. 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. Cash and cash
equivalents are stated at cost, which approximates fair value.
Short-term investments have original maturities of more than three months
and a remaining maturity of less than one year at the date of purchase. At
December 31, 1998, cash equivalents and short-term investments consisted
primarily of money market funds and securities of the highest grade. All short-
term investments have been classified as available for sale under the
provisions of Statement of Financial Accounting Standards No. ("SFAS") 115,
Accounting for Certain Investments in Debt and Equity Securities, and have
various maturity dates which do not exceed one year. Available for sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. The cost of
investments sold is determined on the specific identification or the first-in,
first-out method.
F-7
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following is a summary of the investments classified as restricted and
unrestricted as of December 31, 1998:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available for sale securities:
Money market funds.............. $ 23,557 $ -- $ -- $ 23,557
Corporate notes................. 108,496 3 (80) 108,419
Municipal securities............ 12,061 -- (6) 12,055
U.S. Treasury notes............. 34,791 181 (51) 34,921
-------- ----- ----- --------
$178,905 $ 184 $(137) $178,952
======== ===== ===== ========
</TABLE>
The following is a summary of the investments classified as restricted and
unrestricted as of June 30, 1999 (unaudited):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available for sale securities:
Money market funds.............. $ 491 $ -- $ -- $ 491
Corporate notes................. 56,325 -- (159) 56,166
U.S. Treasury notes............. 44,525 -- (176) 44,349
-------- ----- ----- --------
$101,341 $ -- $(335) $101,006
======== ===== ===== ========
</TABLE>
The restricted investment at December 31, 1997 was a three-month time
deposit held as collateral on a letter of credit. In the first quarter of 1998,
the letter of credit was retired with the Company's exercise of its early
purchase option with regard to the related capital lease. The restricted
investments at December 31, 1998 and June 30, 1999, relate to funds held in
escrow to pay future semi-annual interest payments due under the terms of the
Senior Note obligation (Note 5).
Concentration of Credit Risk. Financial instruments which potentially
subject the Company to concentration of credit risk are primarily cash and cash
equivalents, investments 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
balances for the periods ended December 31, 1997 and 1998, were derived
primarily from services provided to Prodigy, the Company's major customer
during the periods. Any interruption of this relationship could adversely
affect the Company. Management believes that the risk of incurring material
losses related to credit risk is remote.
Fair Values of Financial Instruments. Due to the short-term nature of the
Company's financial instruments, management believes the carrying values of the
Company's assets, short-term liabilities and lease obligations approximate
their fair values. The fair value of the Company's Senior Notes (Note 5) at
December 31, 1998 and June 30, 1999, approximated $227,000 and $244,035,
respectively, based upon quoted market prices.
Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization of telecommunications network equipment,
including assets under capital leases, is provided when placed into service
using the straight-line method over the estimated useful lives of three years
from the date of installation. Shelters are depreciated using the straight-line
method over its estimated useful life of twenty
F-8
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
years. Software, furniture, fixtures and office equipment is depreciated using
the straight-line method over the useful lives of the assets, which range from
three to ten years. Equipment acquired from Prodigy is depreciated over its
estimated useful life of nine months to three years.
Other Assets. Other assets consist primarily of deposits, debt issuance
costs, and other intangible assets such as capitalized circuit charges and
trademarks. Debt issuance costs are amortized using the effective interest rate
method. All other assets, except for deposits, are amortized by use of the
straight-line method over their estimated lives, which are generally two to
five years. At December 31, 1998 and June 30, 1999, debt issuance costs, net of
accumulated amortization, were $9,027 and $9,188 (unaudited). At June 30, 1999,
deposits were $12,044 (unaudited--See Note 11).
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, 1998.
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
future tax consequences, all expected future events are considered with the
exception of enacted changes in the tax law or rates.
Stock-Based Compensation. The Company has adopted SFAS No. 123, Accounting
for Stock-Based Compensation, for disclosure purposes. Under SFAS No. 123, the
Company measures compensation expense for its stock-based employee compensation
plan using the intrinsic value method prescribed in Accounting Principles Board
("APB") No. 25, Accounting for Stock Issued to Employees. The Company provides
disclosure of the effect on net loss as if the fair value-based method
prescribed in SFAS No. 123 has been applied in measuring compensation expense.
Revenue Recognition. The Company recognizes revenue when services are
provided and collectibility is deemed probable under its agreement with the
customer. Prodigy was the Company's only customer through December 31, 1997 and
the Company's major customer thereafter (99% of revenue through December 31,
1998 and 93% of revenue for the six months ended June 30, 1999 (unaudited)).
Legacy Network Costs. Legacy network costs contain all expenses incurred in
connection with operating and decommissioning legacy networks. These costs
primarily refer to the operations related 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 deployed (Note 2). This includes facility fees, line charges
for legacy network POPs, certain personnel costs, occupancy costs, equipment
maintenance costs and access fees for the IBM Global Services Network.
Comprehensive Income. Effective January 1, 1998, the Company adopted SFAS
No. 130, Reporting Comprehensive Income, as displayed in its Statements of
Operations for all periods presented. This SFAS establishes standards for
reporting and display of comprehensive income and its components. The Company's
comprehensive income is comprised of net loss and unrealized gains and losses
on available for sale securities.
Net Loss Per Share. Basic and diluted net loss per share have been computed
in accordance with SFAS No. 128, Earnings Per Share. SFAS No. 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,
F-9
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 1,058,440 shares of Common Stock at the weighted-average exercise
price of $1.11 and a warrant to purchase 2,815,000 shares of Common Stock at
$1.11 and at December 31, 1998, options to acquire 1,801,882 shares of Common
Stock at the weighted-average exercise price of $2.31 and warrants to acquire
1,487,791 shares of Common Stock at an exercise price of $0.02 were not
included in the computation of diluted earnings per share because their effect
is anti-dilutive. At June 30, 1998, options to acquire 1,351,482 shares of
Common Stock at the weighted-average exercise price of $1.11 and a warrant to
acquire 2,815,000 shares of Common Stock at an exercise price of $1.11 were not
included in the computation of diluted earnings per share because their effect
is anti-dilutive (unaudited). At June 30, 1999, options to acquire 2,896,128
shares of Common Stock at the weighted average exercise price of $5.10 and
warrants to acquire 1,487,791 shares of Common Stock at an exercise price of
$0.02, were not included in the computation of diluted earnings per share
because their effect is anti-dilutive.
Segment Reporting. The Company conducts its business within one industry
segment. The Company presents its financial statements to reflect how the "key
operating decision maker" views the business and has made the appropriate
enterprise-wide disclosures in accordance with SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information.
New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), which is effective for
fiscal years beginning after June 15, 1999, and establishing accounting and
reporting standards for derivative instruments. In June 1999, the FASB issued
SFAS No. 137, which deferred the effective date of FSAS No. 133 to June 15,
2000. The Company has historically not engaged in derivative instrument
activity. The adoption of this standard is not expected to have a material
effect on the Company's financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. This standard
requires that certain costs related to the development or purchase of internal-
use software be capitalized and amortized over the estimated useful life of the
software. This SOP also requires that costs related to the preliminary project
stage, data conversion and the post-implementation/operation stage of an
internal-use computer software development project be expensed as incurred. SOP
98-1 is effective for financial statements issued for fiscal years beginning
after December 15, 1998. The adoption of this Statement did not have a material
effect on the Company's financial position or results of operations.
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 the lower of a price per
hour of usage or a price per subscriber as stipulated. Monthly minimum service
charges under this contract have increased from $3,500 to $4,000 and will
increase to $4,500 on July 1, 2000. Monthly maximum service charges are based
on average usage per subscriber and the number of subscribers. Prodigy may
terminate the Full Service Agreement without termination charges in an event of
default by the Company; such defaults include documented failures (without
cure) to meet certain network performance standards. The agreement also allows
Prodigy to terminate its arrangement with the Company at any time upon the
payment of a termination charge.
The Company also entered into a transition 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
infrastructure support 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
F-10
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
reasonable and customary charges incurred by Prodigy in connection with the
continued operations of the network during this transition period are included
in Legacy Network costs. The Company assumed no contractual liabilities of any
services related to Prodigy's existing network infrastructure as part of the
transition agreement.
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.
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------- June 30,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Telecommunications network equipment and
shelters.................................... $ 3,464 $43,275 $68,776
Software..................................... 94 2,186 4,123
Furniture, fixtures and office equipment..... -- 1,749 2,193
Telecommunications network equipment under
construction................................ 12,248 13,289 10,599
------- ------- -------
15,806 60,499 85,691
Less--accumulated depreciation............... (103) (10,392) (16,658)
------- ------- -------
Purchased property and equipment, net...... 15,703 50,107 69,033
------- ------- -------
Leased telecommunications network equipment.. 13,648 29,102 29,102
Leased office equipment...................... 388 1,496 1,496
Leased telecommunications network equipment
under construction.......................... 12,162 -- --
------- ------- -------
26,198 30,598 30,598
Less--accumulated amortization............... (3,397) (6,806) (10,910)
------- ------- -------
Leased property and equipment, net......... 22,801 23,792 19,688
------- ------- -------
Property and equipment, net.................. $38,504 $73,899 $88,721
======= ======= =======
4. Accrued Liabilities
Accrued liabilities consisted of the following:
<CAPTION>
December 31,
---------------- June 30,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Telecommunications network equipment and
shelters.................................... $ -- $ 9,900 $ 7,901
Access and transmission telecommunications
line costs (Note 7)......................... 41 3,172 3,181
Other........................................ 5,734 2,822 7,129
------- ------- -------
Accrued liabilities........................ $ 5,775 $15,894 $18,211
======= ======= =======
</TABLE>
F-11
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Indebtedness
The components of indebtedness are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------- June 30,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Senior Notes.................................. $ -- $258,217 $258,298
Capital lease obligations..................... 24,120 17,364 12,471
Note payable to stockholder................... 1,000 -- --
------- -------- --------
25,120 275,581 270,769
Less--current maturities...................... (11,010) (9,121) (9,088)
------- -------- --------
$14,110 $266,460 $261,681
======= ======== ========
</TABLE>
On July 24, 1998, the Company sold 261,000 units consisting of $261,000
principal amount of 11 3/4% Senior Notes due 2008 ("Senior Notes") and warrants
to purchase 1,487,791 shares of common stock ("the Senior Notes Offering").
Upon issuance, the Senior Notes were recorded in the Company's financial
statements net of a $2,849 discount. The discount was attributable to the
Company's estimate of the value of the warrants based on an independent third
party valuation. The discount is amortized as a component of interest expense
over the life of the Senior Notes using the effective interest rate method.
This amortization will result in an increase in the financial statement balance
of the Senior Notes to a $261,000 face value by 2008.
Upon the occurrence of a change of control (as defined in the Indenture for
the Senior Notes) the Company will be required to make an offer to repurchase
all Senior Notes properly tendered at a price equal to 101% of the principal
amount plus accrued and unpaid interest to the date of repurchase. The
indenture also provides for redemption of the Senior Notes at any time, in
whole or in part, on or after July 15, 2003 at a premium through July 15, 2005.
In addition, on or prior to July 15, 2001, the Company may redeem up to 35% of
the original aggregate principal amount of the Senior Notes at a premium with
the proceeds of one or more equity offerings.
The Senior Note indenture also restricts the Company's ability to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments, investments, loans and guarantees and to sell or otherwise dispose of
a substantial portion of assets to, or merge or consolidate with, an
unaffiliated entity.
In connection with the Senior Notes Offering, the Company repaid $1,477
outstanding under a credit facility and refinanced $11,000 of indebtedness owed
to Linsang Partners L.L.C. ("Linsang"), a stockholder of the Company. In
connection with the refinancing, Linsang acquired 11,000 units in the Senior
Notes Offering. The net proceeds to the Company, after the Senior Notes
Offering expenses and retirement and refinancing of debt, approximated
$239,000.
In November 1998, the Senior Notes were exchanged in an offering registered
under the Securities Act of 1933 for $261,000 in principal amount of Series B
Senior Notes, which have substantially the same terms as the Senior Notes,
except that there is no restriction on transferability.
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 Linsang. The unsecured
note had a stated rate of interest of 9.75% and provided for monthly interest
payments beginning February 1, 1998, with the principal due on demand after
December 31, 1998, and maturing December 31, 2002. During 1998, the Company
F-12
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
borrowed $10,000 from Linsang on terms substantially the same as the previous
note. The Linsang notes were refinanced in July 1998, in connection with the
Senior Notes Offering, as stated above.
6. Income Taxes
A provision for income taxes for the periods ended December 31, 1997 and
1998 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 net deferred tax asset.
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Net operating loss carryforward........................... $ 3,248 $ 22,465
Depreciation.............................................. 167 3,325
Other..................................................... 21 429
------- --------
Deferred tax assets..................................... 3,436 26,219
------- --------
Leases.................................................... -- (474)
------- --------
Deferred tax liabilities................................ -- (474)
------- --------
Net deferred tax assets................................... 3,436 25,745
Valuation allowance....................................... (3,436) (25,745)
------- --------
Net deferred tax assets................................... $ -- $ --
======= ========
</TABLE>
The Company's net operating loss carryforward totaled approximately $59,000
at December 31, 1998 ($110,000 at June 30, 1999--unaudited), of which
approximately $9,500 expires in 2012 and the remainder expires in 2018. Certain
changes in ownership of the Company could result in limitations on the
Company's ability to utilize the losses.
7. Commitments and Contingencies
The Company leases office space, equipment facilities and equipment under
noncancelable operating and capital leases expiring through the year 2003. Rent
expense for noncancelable operating leases amounted to $218 in 1997 and $663 in
1998.
Future minimum payments by year and in the aggregate related to
noncancelable operating and capital leases at December 31, 1998 are:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
------- --------- -------
<S> <C> <C> <C>
1999............................................ $10,576 $1,049 $11,625
2000............................................ 7,101 903 8,004
2001............................................ 746 801 1,547
2002............................................ 37 422 459
2003............................................ -- 265 265
------- ------ -------
Total minimum lease payments.................. 18,460 $3,440 $21,900
====== =======
Less amount representing interest............. (1,096)
-------
Present value of minimum capital lease
payments....................................... $17,364
=======
</TABLE>
F-13
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In March 1999, the Company signed a lease for sixty-nine thousand square
feet of additional office space, which the Company expects to be available for
occupancy in August 1999. In connection with this lease, the Company issued a
$850 letter of credit.
The Company leases telephone lines from competitive local exchange
suppliers, interexchange carriers and long distance telephone companies
primarily for access and transport purposes ("line costs"). These line costs
are leased under both cancelable and noncancelable operating leases over
periods ranging from month-to-month to five years and are included in Splitrock
network costs on the statement of operations. The Company has commitments to
certain of these telecommunication vendors to meet minimum usage volumes.
Additionally, the Company is subject to cancellation penalties which could
become applicable upon termination of a number of these agreements. The
cancellation penalties typically require a payment of a percentage of the
remaining amounts due under the contract, depending on the year in which
cancellation may occur.
Line costs included in the Splitrock network costs were $547 and $22,617
during the period from inception (March 5, 1997) to December 31, 1997 and the
year ended December 31, 1998, respectively. Line costs incurred during the
period from inception (March 5, 1997) to December 31, 1997 and the year ended
December 31, 1998, comprise a substantial portion of the Legacy network costs.
The Company is in the process of resolving certain issues related to the
collection and remittance of certain taxes. The Company believes resolution of
these issues will not have a material adverse effect on the Company's financial
condition or results of operations.
The Company had an outstanding letter of credit in the amount of $3,472 as
of December 31, 1997. This letter of credit was maintained as security for
performance under a certain capital lease obligation and was retired in the
first quarter of 1998 with the Company's exercise of its early purchase option
on the related capital lease.
The Company has an agreement with a telecommunication supplier to provide
certain installation services for the Company. The minimum amount of services
for which the Company is required to pay is approximately $1,300. As of
December 31, 1998, the Company has incurred approximately $700 of such amount
in connection with this agreement.
8. Equity Transactions
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 these financial
statements have been adjusted to reflect the effect of the stock splits.
Warrants issued in connection with the Company's Senior Note Offering are
exercisable at $.02 per share at any time on or after July 26, 1999 through
July 15, 2008 for 1,487,791 shares of Common Stock.
9. Stock Options
The Company's 1997 Incentive Share Plan (the "Plan") provides that options
to purchase up to 11,260,000 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
estimated fair market value at the date of grant which has been determined by
the Board of Directors for periodic intervals based upon actual issuances of
shares in exchange for cash, third party appraisals and significant events
effecting the value of the Company. 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 in the Plan.
F-14
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following summarizes the activity for the Plan:
<TABLE>
<CAPTION>
1997 1998 June 30, 1999
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of fiscal pe-
riod................... -- -- 1,058,440 $1.11 1,801,882 $2.31
Granted............... 1,058,440 $1.11 1,443,251 $2.97 1,201,214 $8.61
Exercised............. -- -- 571,445 $1.94 56,579 $1.88
Canceled.............. -- -- 128,364 $1.49 50,389 $3.38
--------- --------- ---------
Options outstanding at
end of period.......... 1,058,440 $1.11 1,801,882 $2.31 2,896,128 $5.10
</TABLE>
The following table summarizes information about the Company's stock options
outstanding at December 31, 1998:
<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 1998 Life (Years) Price 1998 Price
-------- ------------ ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$1.11.............. 1,193,842 8.71 $1.11 446,670 $1.11
$1.95.............. 197,050 9.37 $1.95 704 $1.95
$5.95.............. 410,990 9.75 $5.95 -- $ --
--------- -------
$1.11--$5.95....... 1,801,882 9.02 $2.31 447,374 $1.11
</TABLE>
In October 1996, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which allows the Company to account for its employee stock-based
compensation plans under APB No. 25 and the related interpretations. According
to APB No. 25, deferred compensation is recorded for stock-based compensation
grants based on the excess of the market value of the common stock on the
measurement date over the exercise price. The deferred compensation is
amortized over the vesting period of each unit of stock-based compensation
grant. If the exercise of the stock-based compensation grants is equal to the
market price of the Company's stock on the date of grant, no compensation
expense is recorded.
During the year ended December 31, 1998, the Company recognized compensation
expense of $46 for options granted at a discount from the then estimated fair
market value of the Company's Common Stock.
Had compensation cost for the Company's stock option plan been determined
based on the estimated fair market value at the grant date, consistent with the
provisions of SFAS No. 123, the Company's pro forma net loss would have been as
follows:
<TABLE>
<CAPTION>
Pro forma
Period from
Inception
(March 5,
1997) Pro forma
through Year ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Net loss........................................... $(10,141) $(58,254)
Net loss per share--basic and diluted.............. (0.42) (1.31)
</TABLE>
F-15
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Options granted in 1997 and 1998 had weighted-average fair values of $0.14
and $1.78, respectively. For purposes of estimating the fair value of options
granted, the Company used no future dividends, used average U.S. government
security interest rates for its risk-free interest rates of 5.80% and 4.39%,
assumed no volatility and 70.5% volatility, and assumed expected life of the
options of five and four years in 1997 and 1998, respectively.
10. Related Party Transactions
The Company's chairman of the Board of Directors (the "Chairman") was also
the Vice Chairman and a director of Yurie Systems, Inc. ("Yurie"), a principal
supplier of the Company until its acquisition by Lucent Technologies. The
Company purchased from Yurie approximately $11,000 in equipment through
December 31, 1997 and approximately $1,400 during the year ended December 31,
1998.
The Company also retained Yurie to perform assembly services related to the
deployment of network equipment to the field during 1997. The Company incurred
approximately $1,500 for these services of which approximately $990 were
expensed in 1997. As of December 31, 1997 and 1998, the Company owed $1,461 and
$0 to Yurie, respectively.
Linsang, an affiliate of the Chairman, loaned $1,000 to the Company for the
purchase of certain network equipment in December 31, 1997. During 1998, the
affiliate made further advances of $10,000 under this agreement. The unsecured
notes had a stated rate of interest of 9.75% and provided for monthly interest
payments beginning February 1, 1998, with the principal due on demand after
December 31, 1998, and maturing December 31, 2002. The Notes were refinanced in
July 1998, in connection with the Senior Notes Offering (Note 5).
A director of the Company exercised an option to purchase 563,000 shares of
the Company Common Stock for $1,100 in June 1998.
In September 1997, Orient Star Holdings, a wholly-owned subsidiary of Carso
Global Telecom, S.A. de C.V. (the controlling stockholder of Prodigy),
purchased 11,260,000 shares of the Company for $1.11 per share and paid $0.10,
for a warrant to purchase an additional 2,815,000 shares of the Company through
September 18, 1998 for $1.11 per share. The warrants were exercised in
September 1998 (Note 8).
11. Subsequent Event (Unaudited)
In April 1999, the Company entered into a cost sharing agreement with a
national telecommunications provider (the Provider). The agreement grants the
Company an exclusive indefeasible right of use (IRU) in 4 dark fibers in the
nationwide fiber optic communication system currently under construction by the
Provider with an option to acquire the indefeasible rights to use an additional
12 dark fibers. The Company made an initial payment of $11,200 to the Provider
and is required to make additional payments as dark fiber segments are
accepted, which is expected to occur from the end of 1999 through the first
quarter of 2001. The Company expects to incur approximately $150,000 in capital
expenditures over the next three years related to its current network fiber
optic deployment plans, including the electronic equipment necessary to operate
its fiber optic network. The Company may terminate the agreement prior to
October 31, 1999, under certain circumstances, but the Company would forfeit up
to 80% of its initial payment to the Provider if it exercises that termination
right.
12. Subsequent Event--Reverse Stock Split
All share and per share amounts included in these financial statements have
been retroactively adjusted to give effect to the 0.563-for-1 reverse stock
split of the Common Stock of the Company effected on July 12, 1999.
F-16
<PAGE>
GLOSSARY OF TERMS
Set forth below are definitions of some of the technical terms used in this
prospectus.
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.................... 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.
competitive local exchange
carrier...................... A category of telephone service provider that
offers services similar to the former monopoly
local telephone company and other types of
telecommunications.
dark fiber................... Fiber which does not have connected to it the
electronics required to transmit data on that
fiber.
DSL.......................... Digital Subscriber Line. A high-speed data
delivery technology that uses standard copper
wires and is the main broadband alternative to
cable modems.
DS-3 or T-3.................. A data communications line capable of
transmitting data at 45 Mbps
Ethernet..................... A local area network 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.
incumbent local exchange
carrier...................... The local carrier exchange that was the
monopoly carrier, prior to the opening of local
exchange services to competition.
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.
G-1
<PAGE>
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.
Internet service
providers................... Companies formed to provide access to the
Internet to consumers and business customers
via local networks.
interexchange carrier....... A telecommunications company that provides
telecommunications services between local
exchanges on an interstate or intrastate basis.
IRUs........................ Indefeasible rights of use in network bandwidth
capacity.
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.
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.
local exchange carrier...... A telecommunications company that provides
telecommunications services in a geographic
area in which calls generally are transmitted
without toll charges. Local exchange carriers
include both regional Bell operating companies
and competitive local exchange carriers.
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
telephone circuit.
network..................... A collection of distributed computers which
share data and information through inter-
connected lines of communication.
OC-3........................ A high capacity optical data communications
line capable of transmitting data at 155 Mbps.
OC-48....................... A high capacity optical data communications
line capable of transmitting data at 2488 Mbps.
peering..................... The commercial practice under which nationwide
Internet service providers 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.
G-2
<PAGE>
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.
regional Bell operating
company...................... One of the local exchange carriers created by
the divestiture of the local exchange business
by AT&T. These include BellSouth, Bell
Atlantic, Ameritech, US West, SBC, and PacTel.
route mile................... One mile of actual geographic length of the
high capacity telecommunications fiber route.
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.
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.
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.
virtual private network...... A network providing secure transmission of IP
traffic through the Internet.
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.
G-3
<PAGE>
(This page has been left blank intentionally)
<PAGE>
NEXT-GENERATION DATA COMMUNICATIONS COMPANY
[LOGO OF SPLITROCK APPEARS HERE]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this
prospectus. Neither Splitrock Services, Inc. nor any underwriter has authorized
anyone to provide prospective investors different or additional information.
This prospectus is not an offer to sell nor is it seeking an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of these securities.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to in-
form themselves about and to observe the restrictions of that jurisdiction re-
lated to this offering and the distribution of this prospectus.
----------------
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 1
Risk Factors............................................................... 7
Use of Proceeds............................................................ 20
Dividend Policy............................................................ 20
Capitalization............................................................. 21
Dilution................................................................... 22
Selected Financial Data.................................................... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................. 25
Business................................................................... 35
Management................................................................. 53
Certain Transactions....................................................... 60
Principal Stockholders..................................................... 62
Description of Long-Term Indebtedness...................................... 64
Description of Capital Stock............................................... 65
Shares Eligible for Future Sale............................................ 69
U.S. Federal Tax Considerations for
Non-U.S. Holders.......................................................... 70
Underwriting............................................................... 74
Legal Matters.............................................................. 76
Experts.................................................................... 76
Where You Can Find More Information........................................ 76
Index to Financial Statements.............................................. F-1
Glossary of Terms.......................................................... G-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO OF SPLITROCK APPEARS HERE]
10,700,000 Shares
Common Stock
----------------
PROSPECTUS
----------------
Bear, Stearns & Co. Inc.
Credit Suisse First Boston
Prudential Securities
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth expenses and costs payable by Splitrock
(other than underwriting discounts and commissions) expected to be incurred in
connection with the issuance and distribution of the securities described in
this registration statement. All amounts are estimated except for the
Securities and Exchange Commission's registration fee and the National
Association of Securities Dealers' filing fee.
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Registration fee under Securities Act......................... $ 51,312
NASD filing fee............................................... 17,750
The Nasdaq National Market fees............................... 95,000
Legal fees and expenses....................................... 450,000
Accounting fees and expenses.................................. 150,000
Printing and engraving expenses............................... 280,000
Registrar and transfer agent fees............................. 10,000
Miscellaneous expenses........................................ 45,938
----------
Total......................................................... $1,100,000
==========
</TABLE>
Item 14. 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, such as
attorneys' fees, as well as judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding. 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
further provides that a corporation may purchase and maintain liability
insurance covering 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
II-1
<PAGE>
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 VI of Splitrock's Amended and Restated 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.
Article VII of Splitrock's Amended and Restated Certificate of Incorporation
requires Splitrock to indemnify Splitrock's directors and officers to the
extent permitted under Section 145.
Article VII of Splitrock's Amended and Restated Certificate of Incorporation
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 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.
Splitrock's Amended and Restated Certificate of Incorporation 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 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 Amended and Restated Certificate of Incorporation 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 Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws is not intended to
be exhaustive and is respectively qualified in its entirety by such statute,
the Amended and Restated Certificate of Incorporation and the Amended and
Restated Bylaws.
Splitrock intends to obtain primary and excess insurance policies insuring
its directors and officers against certain liabilities they may incur in their
capacity as directors and officers. Under such policies, the insurer, on behalf
of Splitrock, may also pay amounts for which Splitrock has granted
indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
Splitrock, its directors and officers who sign the registration statement and
persons who control Splitrock, under certain circumstances.
Item 15. Recent Sales of Unregistered Securities.
Splitrock has issued securities in the following transactions, each of
which, unless otherwise indicated, was intended to be exempt from the
registration requirements of the Securities Act by virtue of Section 4(2) or
Regulation D thereunder.
II-2
<PAGE>
In March 1997, the Company issued shares to its founders, William R. Wilson
and Kwok L. Li, in the amounts of 600 and 400 shares of common stock,
respectively (337,800 and 225,200 shares following three subsequent stock
splits). In June of 1997 Mr. Wilson and Mr. Li were each granted additional
shares for services rendered in the amounts of 1,640,000 shares and 1,060,000
shares, respectively (9,233,200 and 5,967,800 on a post-split basis).
In August 1997, Linsang acquired 6,756,000 shares in a private transaction
for $7,500,000 and converted a $10,000,000 note into an additional 9,008,000
shares. In that same month, Roy Wilkens purchased 450,400 shares in a private
transaction for $500,000.
In September 1997, Orient Star acquired 11,260,000 shares and a warrant to
acquire an additional 2,815,000 shares exercisable on or before September 18,
1998 in a private transaction for $12,500,100.
In June 1998, Clark McLeod acquired 563,000 shares pursuant to the exercise
of an option issued in a private offering at an aggregate exercise price of
$1,100,000.
On July 24, 1998, the Company offered and sold 261,000 Units to a broker-
dealer, of which 250,000 Units were resold to "qualified institutional buyers"
(as defined in Rule 144A under the Securities Act) and 11,000 Units to Linsang,
a stockholder of the Company. Each Unit consisted of an 11 3/4% Senior Note due
2008 ("Senior Notes") in the principal amount of $1,000 and a Warrant to
purchase 5.7 shares of Common Stock of the Company. On August 12, 1998, the
Company filed an exchange offer registration statement offering to exchange a
substantially similar 11 3/4% Series B Senior Note due 2008 ("Series B Notes")
for each outstanding 11 3/4% Senior Note due 2008 held by a qualified
institutional buyer. In October 1998, Linsang exchanged its Senior Notes for
Series B Notes in a private offering.
From July 1997 through June 30, 1999, the Company granted options under its
1997 stock option plan to purchase an aggregate of 3,702,908 shares of Common
Stock at exercise prices ranging from $1.11 per share to $9.77 per share to
employees and officers and directors. The Company issued an aggregate of
628,027 shares of Common Stock pursuant to option exercises under the 1997 Plan
at exercise prices ranging from $1.11 to $1.95 per share through June 30, 1999.
In addition, each non-employee director as of April 1998 was granted an option
to purchase 45,040 common shares under the 1997 Incentive Share Plan, to vest
in installments of 11,260 shares per year beginning one year from the date of
grant, May 28, 1998, at an exercise price of $1.95 per share. On April 22,
1999, the Company granted each of the two new non-employee directors options to
purchase 45,040 shares of Common Stock pursuant to the 1997 stock option plan
at an exercise price of $9.77 per share. The options vest at a rate of 11,260
upon each anniversary of the grant date. The Company accelerated the vesting of
11,260 of Mr. Salameh's options on April 22, 1999 when his term as a director
expired; those options were scheduled to vest on May 28, 1999.
Item 16. Exhibits and Financial Statement Schedules.
a. The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Company.
3.2 Restated By-laws of the Company. (2)
4.1 Form of certificate of common stock.
4.2 Indenture dated as of July 24, 1998, by and between Bank of Montreal
Trust Company (as trustee) and the Company. (1)
4.3 Specimen 11 3/4% Series B Senior Note due 2008. (1)
4.4 Escrow and Disbursement Agreement dated as of July 24, 1998, among the
Chase Manhattan Bank (as escrow agent), the Bank of Montreal Trust
Company, and the Company. (1)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
4.5 Exchange and Registration Rights Agreement dated as of July 24, 1998, by
and between Chase Securities, Inc. and the Company. (1)
4.6 Warrant Agreement dated as of July 29, 1998, by and between the Company
and Bank of Montreal Trust Company. (1)
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.
10.1 Purchase Agreement dated as of July 21, 1998, by and between the Company
and Chase Securities, Inc. (1)
10.2 Plan of Merger dated as of May 7, 1998, by and between Splitrock
Services, Inc. (a Texas Corporation) and Splitrock Services, Inc. (a
Delaware Corporation). (1)
10.3 Splitrock Full Service Agreement dated as of June 24, 1997, by and
between the Company and Prodigy Services Corporation (certain portions
omitted based on grant of confidential treatment and filed separately
with the Commission). (1)
10.4 Amendment to Full Service Agreement between the Company and Prodigy
Communications Corporation dated May 18, 1999. (2) (3)
10.5 Definitive Agreement dated as of June 24, 1997, by and between Prodigy
Services Corporation and the Company. (1)
10.6 Transition Services Agreement dated as of June 24, 1997, by and between
Prodigy Services Corporation and the Company. (1)
10.7 Network Implementation Agreement effective as of April 23, 1998, by and
between the Company and Ericsson, Inc. (1)
10.8 Purchase Agreement effective July 1, 1997, by and between the Company
and Yurie Systems, Inc.(1)
10.9 Customer Service Agreement effective April 1, 1998, by and between the
Company and International Business Machines Corporation ("IBM"). (1)
10.10 IBM Customer Agreement effective April 1, 1998, by and between the
Company and IBM. (1)
10.11 Product Support Services Agreement dated February 27, 1998, together
with Addendum effective March 1, 1998. (1)
10.12 Splitrock Services, Inc. 1997 Incentive Share Plan. (1)
10.13 Employment Agreement effective March 15, 1997, between William R. Wilson
and the Company. (1)
10.14 Employment Agreement effective September 1, 1998, between Patrick J.
McGettigan, Jr. and the Company. (1)
10.15 Employment Contract, effective March 1, 1999, between the Company and
David M. Boatner. (2)
10.16 Employment Contract, effective March 22, 1999, between the Company and
J. Robert Fugate. (2)
10.17 Cost Sharing National IRU Agreement effective April 26, 1999 by and
between Level 3 Communications, LLC and the Company. (2) (3)
10.18 First Amendment to Cost Sharing National IRU Agreement by and between
Level 3 Communications, LLC and the Company. (2) (3)
10.19 Splitrock Services, Inc. 1999 Stock Incentive Plan.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit
5.1 above).
24.1 Power of Attorney. (2)
27.1 Financial data schedule (2)
99.1 Schedule II: Valuation and Qualifying Accounts (2)
99.2 Report of Independent Accountants on Financial Statement Schedule (2)
</TABLE>
- --------
(1) Incorporated by reference to our Registration Statement on Form S-4, File
No. 333-61293.
(2) Previously filed.
(3) Portions of this exhibit have been redacted and are subject to a request
for confidential treatment that has been or will be filed with the
Securities and Exchange Commission.
II-4
<PAGE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual reports pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit
proper delivery to each purchaser.
(2) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424b(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(3) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of The
Woodlands, State of Texas, on July 26, 1999.
SPLITROCK SERVICES, INC.
By: /s/ William R. Wilson
------------------------------
William R. Wilson
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of Directors July 26, 1999
- ------------------------------- and Chief Technical Officer
Kwok L. Li
/s/ William R. Wilson President, Chief Executive Officer July 26, 1999
- ------------------------------- and Director (Principal Executive
William R. Wilson Officer)
* Executive Vice President and July 26, 1999
- ------------------------------- Chief Financial Officer (Principal
J. Robert Fugate Financial and Accounting Officer)
*
- -------------------------------
James M. Nakfoor Director July 26, 1999
*
- -------------------------------
Marshall C. Turner Director July 26, 1999
*
- -------------------------------
Roy A. Wilkens Director July 26, 1999
*By: /s/ William R. Wilson Attorney-in-fact July 26, 1999
-------------------------
William R. Wilson
</TABLE>
II-6
<PAGE>
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Company.
3.2 Restated By-laws of the Company. (2)
4.1 Form of certificate of common stock.
4.2 Indenture dated as of July 24, 1998, by and between Bank of Montreal
Trust Company (as trustee) and the Company. (1)
4.3 Specimen 11 3/4% Series B Senior Note due 2008. (1)
4.4 Escrow and Disbursement Agreement dated as of July 24, 1998, among the
Chase Manhattan Bank (as escrow agent), the Bank of Montreal Trust
Company, and the Company. (1)
4.5 Exchange and Registration Rights Agreement dated as of July 24, 1998,
by and between Chase Securities, Inc. and the Company. (1)
4.6 Warrant Agreement dated as of July 29, 1998, by and between the
Company and Bank of Montreal Trust Company. (1)
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.
10.1 Purchase Agreement dated as of July 21, 1998, by and between the
Company and Chase Securities, Inc. (1)
10.2 Plan of Merger dated as of May 7, 1998, by and between Splitrock
Services, Inc. (a Texas Corporation) and Splitrock Services, Inc. (a
Delaware Corporation). (1)
10.3 Splitrock Full Service Agreement dated as of June 24, 1997, by and
between the Company and Prodigy Services Corporation (certain portions
omitted based on grant of confidential treatment and filed separately
with the Commission). (1)
10.4 Amendment to Full Service Agreement between the Company and Prodigy
Communications Corporation dated May 18, 1999. (2) (3)
10.5 Definitive Agreement dated as of June 24, 1997, by and between Prodigy
Services Corporation and the Company. (1)
10.6 Transition Services Agreement dated as of June 24, 1997, by and
between Prodigy Services Corporation and the Company. (1)
10.7 Network Implementation Agreement effective as of April 23, 1998, by
and between the Company and Ericsson, Inc. (1)
10.8 Purchase Agreement effective July 1, 1997, by and between the Company
and Yurie Systems, Inc. (1)
10.9 Customer Service Agreement effective April 1, 1998, by and between the
Company and International Business Machines Corporation ("IBM"). (1)
10.10 IBM Customer Agreement effective April 1, 1998, by and between the
Company and IBM. (1)
10.11 Product Support Services Agreement dated February 27, 1998, together
with Addendum effective March 1, 1998. (1)
10.12 Splitrock Services, Inc. 1997 Incentive Share Plan. (1)
10.13 Employment Agreement effective March 15, 1997, between William R.
Wilson and the Company. (1)
10.14 Employment Agreement effective September 1, 1998, between Patrick J.
McGettigan, Jr. and the Company. (1)
10.15 Employment Contract, effective March 1, 1999, between the Company and
David M. Boatner. (2)
10.16 Employment Contract, effective March 22, 1999, between the Company and
J. Robert Fugate. (2)
10.17 Cost Sharing National IRU Agreement effective April 26, 1999 by and
between Level 3 Communications, LLC and the Company. (2) (3)
10.18 First Amendment to Cost Sharing National IRU Agreement by and between
Level 3 Communications, LLC and the Company. (2) (3)
10.19 Splitrock Services, Inc. 1999 Stock Incentive Plan.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1 above).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
24.1 Power of Attorney. (2)
27.1 Financial data schedule. (2)
99.1 Schedule II: Valuation and Qualifying Accounts. (2)
99.2 Report of Independent Accountants on Financial Statement Schedule. (2)
</TABLE>
- --------
(1) Incorporated by reference to our Registration Statement on Form S-4, File
No. 333-61293.
(2) Previously filed.
(3) To be filed by amendment.
(4) Portions of this exhibit have been redacted and are subject to a request
for confidential treatment that has been filed with the Securities and
Exchange Commission.
<PAGE>
10,700,000 Shares of Common Stock
SPLITROCK SERVICES, INC.
UNDERWRITING AGREEMENT
----------------------
July __, 1999
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
Splitrock Services, Inc., a corporation organized and existing under
the laws of Delaware (the "Company"), proposes, subject to the terms and
conditions stated herein, to issue and sell to the several underwriters named in
Schedule I hereto (the "Underwriters") an aggregate of 10,700,000 shares (the
"Firm Shares") of its common stock, par value $.001 per share (the "Common
Stock"). In addition, for the sole purpose of covering over-allotments in
connection with the sale of the Firm Shares, the Company and certain selling
shareholders named in Schedule III hereto (the "Selling Stockholders") have
granted to the Underwriters an option, exercisable by the Underwriters as
provided in Section 2(c) hereof, to purchase up to an additional 1,472,628 and
157, 372 shares, respectively, (the "Additional Shares") of Common Stock. The
Firm Shares and any Additional Shares purchased by the Underwriters are referred
to herein as the "Shares." The Shares are more fully described in the
Registration Statement referred to below.
1. Representations and Warranties of the Company and the Selling
-------------------------------------------------------------
Stockholders.
- ------------
(a) The Company represents and warrants to, and agrees with, the
Underwriters that:
(i) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have filed
an amendment or amendments thereto, on Form S-1 (No. 333-79909), for the
registration of
<PAGE>
the Shares under the Securities Act of 1933, as amended (the "Act"). Such
registration statement, including the prospectus, financial statements and
schedules, exhibits and all other documents filed as a part thereof, as
amended at the time of effectiveness of the registration statement,
including any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the
Rules and Regulations of the Commission under the Act (the "Regulations"),
is herein called the "Registration Statement" and the prospectus, in the
form first filed with the Commission pursuant to Rule 424(b) of the
Regulations or filed as part of the Registration Statement at the time of
effectiveness if no Rule 424(b) or Rule 434 filing is required, is herein
called the "Prospectus." The term "preliminary prospectus" as used herein
means a preliminary prospectus as described in Rule 430 of the Regulations.
(ii) At the time of the effectiveness of the Registration
Statement or the effectiveness of any post-effective amendment to the
Registration Statement, when the Prospectus is first filed with the
Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when any
supplement to or amendment of the Prospectus is filed with the Commission,
when any document filed under the Exchange Act is filed and at the Closing
Date and the Additional Closing Date, if any, (as hereinafter respectively
defined), the Registration Statement and the Prospectus and any amendments
thereof and supplements thereto complied or will comply in all material
respects with the applicable provisions of the Act and the Regulations and
does not or will not contain an untrue statement of a material fact and
does not or will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein (i) in the
case of the Registration Statement, not misleading and (ii) in the case of
the Prospectus, in light of the circumstances under which they were made,
not misleading. When any related preliminary prospectus was first filed
with the Commission (whether filed as part of the registration statement
for the registration of the Shares or any amendment thereto or pursuant to
Rule 424(a) of the Regulations) and when any amendment thereof or
supplement thereto was first filed with the Commission, such preliminary
prospectus and any amendments thereof and supplements thereto complied in
all material respects with the applicable provisions of the Act and the
Regulations and did not contain an untrue statement of a material fact and
did not omit to state any 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. No representation
and warranty is made in this subsection (b), however, with respect to any
information contained in or omitted from the Registration Statement or the
Prospectus or any related preliminary prospectus or any amendment thereof
or supplement thereto in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Underwriter
through you as herein stated or by or on behalf of any Selling Stockholder
insofar as it relates to such Selling Stockholder, in each case expressly
for use in connection with the preparation thereof. If Rule 434 is used,
the Company will comply with the requirements of Rule 434.
2
<PAGE>
(iii) PricewaterhouseCoopers LLP, who have certified the
financial statements and supporting schedules included in the Registration
Statement, are independent public accountants as required by the Act and
the Regulations.
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
except as set forth in the Registration Statement and the Prospectus, there
has been no material adverse change or any development involving a
prospective material adverse change in the business, prospects, properties,
operations, condition (financial or other) or results of operations of the
Company whether or not arising from transactions in the ordinary course of
business. Since the date of the latest balance sheet presented in the
Registration Statement and the Prospectus, the Company has not incurred or
undertaken any liabilities or obligations, direct or contingent, which are
material to the Company taken as a whole, except for liabilities or
obligations which are reflected in the Registration Statement and the
Prospectus.
(v) This Agreement and the transactions contemplated herein
have been duly and validly authorized by the Company and this Agreement has
been duly and validly executed and delivered by the Company.
(vi) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby do
not and will not (i) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would 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 agreement,
instrument, franchise, license or permit to which the Company is a party or
by which any of such corporations or their respective properties or assets
may be bound or (ii) violate or conflict with any provision of the
certificate of incorporation or by-laws of the Company or any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company or any of its properties or assets. No consent, approval,
authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental or regulatory
agency or body having jurisdiction over the Company or any of its
properties or assets is required for the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby, including the issuance, sale and delivery of the
Shares to be issued, sold and delivered by the Company hereunder, except
the registration under the Act of the Shares and such consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses
and permits as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters.
3
<PAGE>
(vii) All of the outstanding shares of Common Stock are duly
and validly authorized and issued, fully paid and nonassessable and were
not issued and are not now in violation of or subject to any preemptive
rights. The Shares, when issued, delivered and sold in accordance with this
Agreement, will be duly and validly issued and outstanding, fully paid and
nonassessable, and will not have been issued in violation of or be subject
to any preemptive rights. The Company had, at June 30, 1999, an authorized
and outstanding capitalization as set forth in the Registration Statement
and the Prospectus. The Common Stock, the Firm Shares and the Additional
Shares conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(viii) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. The Company is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the
character or location of its properties (owned, leased or licensed) or the
nature or conduct of its business makes such qualification necessary,
except for those failures to be so qualified or in good standing which will
not in the aggregate have a material adverse effect on the Company. The
Company has all requisite power and authority, and all necessary consents,
approvals, authorizations, orders, registrations, qualifications, licenses
and permits of and from all public, regulatory or governmental agencies and
bodies, to own, lease and operate its properties and conduct its business
as now being conducted and as described in the Registration Statement and
the Prospectus except as would not have a material adverse effect on the
Company, and no such consent, approval, authorization, order, registration,
qualification, license or permit contains a materially burdensome
restriction not adequately disclosed in the Registration Statement and the
Prospectus. The Company has no subsidiary or subsidiaries which,
individually or in the aggregate, as of the date hereof have more than
$100,000 in assets (measured at the lower of book or fair market value) or
$100,000 in liabilities (whether direct or contingent).
(ix) Except as described in the Prospectus, there is no
litigation or governmental proceeding to which the Company is a party or to
which any property of the Company is subject or which is pending or, to the
knowledge of the Company, contemplated against the Company which might
result in any material adverse change or any development involving a
material adverse change in the business, prospects, properties, operations,
condition (financial or other) or, results of operations of the Company or
which is required to be disclosed in the Registration Statement and the
Prospectus.
(x) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the
sale or resale of the Shares.
4
<PAGE>
(xi) The financial statements, including the notes thereto,
and supporting schedules included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the
dates indicated and the results of its operations for the periods
specified; except as otherwise stated in the Registration Statement, said
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis; and the
supporting schedules included in the Registration Statement present fairly
the information required to be stated therein.
(xii) Except as described in the Prospectus, no holder of
securities of the Company has any rights to the registration of securities
of the Company because of the filing of the Registration Statement or
otherwise in connection with the sale of the Shares contemplated hereby.
(xiii) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as an
"investment company" under the Investment Company Act of 1940.
(b) Each Selling Stockholder severally represents and warrants
to, and agrees with, the several Underwriters that:
(i) Each Selling Stockholder has (i) caused a certificate or
certificates for the number of Shares to be sold by each Selling
Stockholder hereunder to be delivered to Patrick J. McGettigan, Jr., Esq.
in his capacity as custodian (the "Custodian") under the Custody Agreement
(as defined below), endorsed in blank or with blank stock powers duly
executed and with signatures appropriately guaranteed by a member firm of
the New York Stock Exchange or commercial bank, such certificate or
certificates to be held in the custody of the Custodian in accordance with
the terms of the Custody Agreement for delivery pursuant to the provisions
hereof on the Closing Date or the Additional Closing Date, if any, as the
case may be, and (ii) granted an irrevocable power of attorney to William
R. Wilson and Patrick J. McGettigan, Jr., as such Selling Stockholder's
attorneys-in-fact (the "Attorneys-In-Fact") in the form attached hereto as
Exhibit A (the "Power of Attorney", and together with the Power of Attorney
executed by each other Selling Stockholder and the Custody Agreement in the
form attached hereto as Exhibit B, the "Custody Agreement").
(ii) The execution, delivery and performance of this
Agreement and the Custody Agreement on behalf of each Selling Stockholder
and the consummation of the transactions contemplated hereby and thereby
will not (i) conflict with or result in the breach of any of the terms and
provisions of, or constitute a default (or an event which with notice or
lapse of time, or both, would constitute a default) or require consent
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of such Selling Stockholder
pursuant to the terms of, any agreement,
5
<PAGE>
instrument, franchise, license or permit to which such Selling Stockholder
is a party or by which such Selling Stockholder or any of such Selling
Stockholder's property or assets may be bound, including, without
limitation, the terms of any trust or similar agreement under which any
such Selling Stockholder was formed, or (ii) violate or conflict with any
judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over
such Selling Stockholder or such Selling Stockholder's properties or
assets.
(iii) Each Selling Stockholder has, and at the time of
delivery of the Shares to be sold by such Selling Stockholder such Selling
Stockholder will have, full legal right, power, authority and capacity,
and, except as required under the Act and state securities and Blue Sky
laws, all necessary consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits of and from
all public, regulatory or governmental agencies and bodies, as are required
for the execution, delivery and performance of this Agreement, the Custody
Agreement, and the consummation of the transactions contemplated hereby and
thereby, including the sale, assignment, transfer and delivery of the
Shares to be sold, assigned, transferred and delivered by such Selling
Stockholder hereunder.
(iv) This Agreement and the Custody Agreement have been duly
and validly authorized, executed and delivered by such Selling Stockholder
and, assuming the execution and delivery by the other parties hereto and
thereto, are valid and binding obligations of such Selling Stockholder,
enforceable against such Selling Stockholder in accordance with its
respective terms except to the extent that (a) the enforceability hereof
and thereof may be subject to applicable bankruptcy, insolvency, fraudulent
conveyance, fraudulent transfer, reorganization, moratorium, liquidation,
conservatorship and other laws affecting creditors' rights generally, (b)
equitable principles may limit the availability of equitable relief in the
case of a breach hereof (regardless of whether such remedies are sought in
a proceeding at law or in equity), and (c) federal securities laws may
limit the enforceability of the indemnification provisions hereof and
thereof.
(v) Each Selling Stockholder has good, valid and marketable
title to the Shares to be sold by such Selling Stockholder pursuant to this
Agreement, free and clear of all liens, encumbrances, adverse claims,
security interests, restrictions on transfer, shareholders' agreements,
voting trusts, options and other defects in title whatsoever, with full
power to deliver such Shares hereunder, and, upon the delivery of and
payment for such Shares as herein contemplated, each of the Underwriters
will receive good, valid and marketable title to the Shares purchased by it
from such Selling Stockholder, free and clear of all liens, encumbrances,
adverse claims, security interests, restrictions on transfer, shareholders'
agreements, voting trusts, options and other defects in title whatsoever.
6
<PAGE>
(vi) Each Selling Stockholder has not taken and will not
take, directly or indirectly, any action which has constituted or which was
designed to constitute or which might be reasonably expected to cause or
result in stabilization or manipulation (in each case as such terms are
defined in the Exchange Act and the rules and regulations promulgated
thereunder) of the price of the shares of Common Stock.
(vii) When the Registration Statement shall become effective,
when any amendment to the Registration Statement becomes effective, when
the Prospectus is first filed with the Commission pursuant to Rule 424(b)
of the Regulations, when any supplement to or amendment of the Prospectus
is filed with the Commission, and at the Closing Date or the Additional
Closing Date, if any, such parts of the Registration Statement and the
Prospectus and any amendments thereof and supplements thereto as relate to
such Selling Stockholder and are based upon information furnished in
writing to the Company by or on behalf of such Selling Stockholder
expressly for use therein will not contain an untrue statement of a
material fact and will not omit to state any material fact required to be
stated therein or necessary in order to make the statements therein: (i) in
the case of the Registration Statement, not misleading, and (ii) in the
case of the Prospectus, in light of the circumstances under which they were
made, not misleading. When any related preliminary prospectus was first
filed with the Commission (whether filed as part of the Registration
Statement for the registration of the Shares or any amendment thereto or
pursuant to Rule 424(a) of the Regulations) and when any amendment thereof
or supplement thereto was first filed with the Commission, such parts of
such preliminary prospectus and any amendments thereof and supplements
thereto as relate to such Selling Stockholder and are based on information
furnished in writing to the Company by or on behalf of such Selling
Stockholder expressly for use therein did not contain an untrue statement
of a material fact and did not omit to state any 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.
(viii) Except as described in the Registration Statement and
the Prospectus, each Selling Stockholder (i) does not have any preemptive
right, co-sale right or right of first refusal or other similar right to
purchase any of the Shares that are to be sold by any of the other Selling
Stockholders to the Underwriters pursuant to this Agreement, and (ii) does
not own any warrants, options or similar rights to acquire, and does not
have any right or arrangement to acquire, any capital stock, rights,
warrants, options or other securities from the Company.
(ix) Except as described in the Registration Statement and
the Prospectus, each Selling Stockholder does not possess any registration
rights with respect to any securities of the Company.
7
<PAGE>
(x) Each Selling Stockholder will deliver to Bear Stearns,
attention: Syndicate Department on or prior to the Additional Closing Date
a properly completed and executed United States Treasury Department Form W-
9 (or other applicable form or statement specified by Treasury Department
regulations in lieu thereof.)
The Company and the Selling Stockholders acknowledge that each of the
Underwriters and, for purposes of opinions to be delivered to the Underwriters
pursuant to Section 6 hereof, counsel to the Company, counsel to the Selling
Stockholders and counsel to the Underwriters, will rely upon the accuracy and
truth of the foregoing representations and hereby consents to such reliance.
2. Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of $_______, the number of Firm Shares set forth opposite the
respective names of the Underwriters in Schedule I hereto plus any additional
number of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the office of Latham & Watkins,
1001 Pennsylvania Avenue, N.W., Washington, D.C. 20004 or at such other place as
shall be agreed upon by you and the Company, at 10:00 A.M. on the third or
fourth business day (as permitted under Rule 15c6-1 under the Exchange Act)
(unless postponed in accordance with the provisions of Section 9 hereof)
following the date of the effectiveness of the Registration Statement (or, if
the Company has elected to rely upon Rule 430A of the Regulations, the third or
fourth business day (as permitted under Rule 15c6-1 under the Exchange Act)
after the determination of the initial public offering price of the Shares), or
such other time not later than ten business days after such date as shall be
agreed upon by you and the Company (such time and date of payment and delivery
being herein called the "Closing Date"). Payment shall be made to the Company by
wire transfer of same day funds against delivery to you for the respective
accounts of the Underwriters of certificates for the Shares to be purchased by
them. Certificates for the Shares shall be registered in such name or names and
in such authorized denominations as you may request in writing at least two full
business days prior to the Closing Date. The Company will permit you to examine
and package such certificates for delivery at least one full business day prior
to the Closing Date.
(c) In addition, the Company and the Selling Stockholders hereby
grant to the Underwriters the option to purchase up to 1,472,625 and 157,372
Additional Shares, respectively, at the same purchase price per share to be paid
by the Underwriters to the Company
8
<PAGE>
for the Firm Shares as set forth in this Section 2, for the sole purpose of
covering over-allotments in the sale of Firm Shares by the Underwriters. This
option may be exercised at any time, in whole or in part, on or before the
thirtieth day following the date of the Prospectus, by written notice by you to
the Company and the Custodian. Such notice shall set forth the aggregate number
of Additional Shares as to which the option is being exercised and the date and
time, as reasonably determined by you, when the Additional Shares are to be
delivered (such date and time being herein sometimes referred to as the
"Additional Closing Date"); provided, however, that the Additional Closing Date
-------- -------
shall not be earlier than the Closing Date or earlier than the second full
business day after the date on which the option shall have been exercised nor
later than the eighth full business day after the date on which the option shall
have been exercised (unless such time and date are postponed in accordance with
the provisions of Section 9 hereof). Certificates for the Additional Shares
shall be registered in such name or names and in such authorized denominations
as you may request in writing at least two full business days prior to the
Additional Closing Date. The Company and the Selling Stockholders will permit
you to examine and package such certificates for delivery at least one full
business day prior to the Additional Closing Date.
In the event that the over-allotment option is exercised only in part,
the Underwriters shall purchase the first 157,372 Additional Shares from the
Selling Shareholders on a pro rata basis and the number of Additional Shares
sold by each Selling Stockholder to each Underwriter shall be the number which
bears the same proportion to the total number of Additional Shares being sold by
each Selling Stockholder as set forth on Schedule III hereto, as the same number
of Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto (or such number increased as set forth in Section 9 hereof) bears to the
total number of Firm Shares being purchased from the Company, subject to such
adjustments to eliminate any fractional shares as you in your sole discretion
shall make. Any Additional Shares purchased by the Underwriters pursuant to the
over-allottment option in excess of 157,372 shall be sold by the Company to each
Underwriter in the proportions set forth on Schedule I hereto.
Payment for the Additional Shares shall be made by wire transfer in
same day funds at the offices of Latham & Watkins, or such other location as may
be mutually acceptable, upon delivery of the certificates for the Additional
Shares to you for the respective accounts of the Underwriters.
3. Offering.
--------
(a) Upon your authorization of the release of the Firm Shares, the
Underwriters propose to offer the Shares for sale to the public upon the terms
set forth in the Prospectus.
(b) The Company and the Underwriters hereby agree that 535,000 of
the Firm Shares to be purchased by the Underwriters (the "Directed Shares")
shall be reserved for sale by the Underwriters to certain eligible employees,
directors and certain persons designated by the Company (the "Directed Shares
Purchasers"), as part of the distribution of the Shares by the Underwriters
subject to the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc., and all
9
<PAGE>
other applicable laws, rules and regulations, provided, however, that under no
circumstances will Bear Stearns or any other underwriter be liable to the
Company or to any of the Directed Shares Purchasers for any action taken or
omitted in good faith in connection with the transactions effected with regard
to the Directed Shares Purchasers. To the extent that such Directed Shares are
not orally confirmed for purchase by such persons by the end of the first day
after the date of this Agreement, such Directed Shares will be offered to the
public as part of the offering contemplated hereby.
4. Covenants of the Company. The Company covenants and agrees with
------------------------
the Underwriters that:
(a) If the Registration Statement has not yet been declared
effective the Company will use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
possible, and if Rule 430A is used or the filing of the Prospectus is otherwise
required under Rule 424(b) or Rule 434, the Company will file the Prospectus
(properly completed if Rule 430A has been used) pursuant to Rule 424(b) or Rule
434 within the prescribed time period and will provide evidence satisfactory to
you of such timely filing. If the Company elects to rely on Rule 434, the
Company will prepare and file a term sheet that complies with the requirements
of Rule 434.
The Company will notify you promptly (and, if requested by you, will
confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments from the Commission,
and (vi) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any jurisdiction or
the initiation or threatening of any proceeding for that purpose. If the
Commission shall propose or enter a stop order at any time, the Company will
make every reasonable effort to prevent the issuance of any such stop order and,
if issued, to obtain the lifting of such order as soon as possible. The Company
will not file any amendment to the Registration Statement or any amendment of or
supplement to the Prospectus (including the prospectus required to be filed
pursuant to Rule 424(b)or Rule 434) that differs from the prospectus on file at
the time of the effectiveness of the Registration Statement before or after the
effective date of the Registration Statement to which you shall reasonably
object in writing after being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would, in the judgment
of you or the Company include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it shall be necessary at any time to amend or
supplement the
10
<PAGE>
Prospectus or Registration Statement to comply with the Act or the Regulations,
the Company will notify you promptly and prepare and file with the Commission an
appropriate amendment or supplement (in form and substance satisfactory to you)
which will correct such statement or omission and will use its best efforts to
have any amendment to the Registration Statement declared effective as soon as
possible.
(c) The Company will promptly deliver to you three conformed
copies of the Registration Statement, including exhibits and all amendments
thereto, and the Company will promptly deliver to each of the Underwriters such
number of copies of any preliminary prospectus, the Prospectus, the Registration
Statement, and all amendments of and supplements to such documents, if any, as
you may reasonably request.
(d) The Company will endeavor in good faith, in cooperation with
you, at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification in effect for so long as required for the
distribution thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute a general
consent to service of process.
(e) The Company will make generally available (within the meaning
of Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations), which need not be audited, covering a period of at
least twelve consecutive months beginning after the effective date of the
Registration Statement.
(f) During the period of 180 days from the date of the Prospectus,
the Company will not, without your prior written consent, issue, sell, offer or
agree to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any Common Stock (or any securities convertible into,
exercisable for or exchangeable for Common Stock), , other than the Company's
sale of Shares hereunder and the Company's issuance of Common Stock upon the
exercise of presently outstanding stock options or warrants or the grant by the
Company of additional employee or director stock options pursuant to stock
option plans as in effect on the date hereof and the Company will obtain the
undertaking of each of its officers and directors and such of its shareholders
as have been heretofore designated by you and listed on Schedule II attached
hereto not to engage in any of the aforementioned transactions on their own
behalf, except as permitted by the terms of the lockup agreements agreed to by
you and your counsel.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its shareholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.
(h) The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
11
<PAGE>
(i) The Company will use its best efforts to cause the Shares to
be listed for inclusion in the National Association of Securities Dealers
Automated Quotation National Market System ("Nasdaq").
5. Payment of Expenses. Whether or not the transactions contemplated
-------------------
in this Agreement are consummated or this Agreement is terminated, as between
the Company and the Selling Stockholders, on the one hand, and the Underwriters
on the other hand, the Company hereby agrees to pay all costs and expenses
incident to the performance of the obligations of the Company and the Selling
Stockholders hereunder, including those in connection with (i) preparing,
printing, duplicating, filing and distributing the Registration Statement, as
originally filed and all amendments thereof (including all exhibits thereto),
any preliminary prospectus, the Prospectus and any amendments or supplements
thereto (including, without limitation, fees and expenses of the Company's
accountants and counsel and separate counsel to the Selling Shareholders, if
any), the underwriting documents (including this Agreement) and all other
documents related to the public offering of the Shares (including those supplied
to the Underwriters in quantities as hereinabove stated), (ii) the issuance,
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the qualification of the Shares under
state or foreign securities or Blue Sky laws, including the costs of printing
and mailing a preliminary and final "Blue Sky Survey," (iv) the fees of counsel
for the Underwriters in connection with the qualifications of the shares under
state foreign securities of Blue Sky Laws and such counsel's disbursements in
relation thereto, (v) the fees of counsel for the Underwriters in connection
with the matters relating to the Directed Shares which are designated by the
Company for sale to certain employees and directors of and certain persons
designated by the Company and (vi) filing fees of the Commission and the
National Association of Securities Dealers, Inc. The purpose of this Section 5
is to allocate responsibility for expenses arising from the offer and sale of
the Shares between the Company and the Selling Stockholders, on the one hand,
and the Underwriters, on the other hand, and nothing herein shall be deemed to
override, or be in conflict with, any agreement on the allocation of such
expenses as may be made from time to time between the Company and the Selling
Stockholders.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company and the Selling Stockholders herein contained, as of
the date hereof and as of the Closing Date (for purposes of this Section 6
"Closing Date" shall refer to the Closing Date for the Firm Shares and any
Additional Closing Date, if different, for the Additional Shares), to the
absence from any certificates, opinions, written statements or letters furnished
to you or to Latham & Watkins ("Underwriters' Counsel") pursuant to this Section
6 of any misstatement or omission, to the performance by the Company of its
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than [if pricing pursuant to Rule 430A, 5:30 P.M., New York time, on the
date of this
12
<PAGE>
Agreement] [if pricing pursuant to a pricing amendment -- 12:00 P.M., New
York time on the date an amendment to the Registration Statement containing the
public offering price has been filed with the Commission], or at such later time
and date as shall have been consented to in writing by you; if the Company shall
have elected to rely upon Rule 430A or Rule 434 of the Regulations, the
Prospectus shall have been filed with the Commission in a timely fashion in
accordance with Section 4(a) hereof; and, at or prior to the Closing Date no
stop order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereof shall have been issued and no proceedings
therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of
Fried, Frank, Harris, Shriver & Jacobson, counsel for the Company, dated the
Closing Date addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware. The Company is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its
business makes such qualification necessary, except for those failures to
be so qualified or in good standing which will not in the aggregate have a
material adverse effect on the Company. The Company has all requisite
corporate authority to own, lease and license its respective properties and
conduct its business as now being conducted and as described in the
Registration Statement and the Prospectus.
(ii) The Company has an authorized capital stock as set forth
in the Registration Statement and the Prospectus. All of the outstanding
shares of Common Stock are duly and validly authorized and issued, are
fully paid and nonassessable and were not issued in violation of or subject
to any preemptive rights created under Delaware General Corporation Law,
the Company's Certificate of Incorporation, its Bylaws, or, to the best of
our knowledge, any other contractual arrangement. The Shares to be
delivered on the Closing Date have been duly and validly authorized and,
when delivered by the Company in accordance with this Agreement, will be
duly and validly issued, fully paid and nonassessable and will not have
been issued in violation of or subject to any preemptive rights. The Common
Stock, the Firm Shares and the Additional Shares conform as to legal
matters to the descriptions thereof contained in the Registration Statement
and the Prospectus.
(iii) This Agreement has been duly and validly authorized,
executed and delivered by the Company.
(iv) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby by
the Company do not and will not (A) conflict with or result in a breach of
any of the terms and provisions of, or constitute a default (or an event
which with notice or lapse of time, or both, would constitute a default)
under, or result in the creation or imposition of any
13
<PAGE>
lien, charge or encumbrance upon any property or assets of the Company
pursuant to, any agreement or instrument filed as an exhibit to the
Registration Statement (except that such counsel shall express no opinion
with respect to any violation not readily ascertainable from the face of
the agreement or based upon any cross-default provision to the extent
arising out of, or based upon, any covenant of a financial or numerical
nature or requiring computation) or (B) violate or conflict with (1) any
provision of the certificate of incorporation or by-laws of the Company,
or, (2) to the best knowledge of such counsel, any judgment, decree or
order binding on the Company or its properties or assets or, any present
statute, rule or regulation of any governmental agency or authority of the
State of New York or Delaware or the United States applicable to the
Company or any of its respective properties or assets (It being understood
that such counsel shall express no opinion regarding telecommunications law
or regulations.) No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any
public, governmental, or regulatory agency or body having jurisdiction over
the Company or any of its respective properties or assets is required for
the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby, except for (1) such
as may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters (as to
which such counsel need express no opinion), (2) such as may be required by
telecommunications law and regulation, and (3) such as have been made or
obtained under the Act.
(v) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, required to register as an
"investment company" under the Investment Company Act of 1940.
(vi) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data included therein, as to
which no opinion need be rendered) comply as to form in all material
respects with the requirements of the Act and the Regulations.
(vii) The description contained in the section of the
Prospectus entitle, "U.S. Tax Considerations for Non-U.S. Holders" is
complete and correct in all material respects.
(viii) The Registration Statement is effective under the Act,
and, to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof has been issued and no proceedings therefor have been initiated or
threatened by the Commission and all filings required by Rule 424(b) of the
Regulations have been made.
(ix) In the course of the preparation by the Company of the
Registration Statement and Prospectus, we participated in conferences with
certain of the officers and representatives of, and the independent public
accountants for, the Company.
14
<PAGE>
Between the date of the Registration Statement and the time of delivery of
this letter we participated in additional conferences with certain officers
and representatives of the Company at which the contents of the
Registration Statement and the Prospectus were discussed to a limited
extent. Given the limitations inherent in the independent verification of
factual matters and the character of determinations involved in the
registration process, we are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus and have made no
independent check or verification thereof. Subject to the foregoing and on
the basis of the information we gained in the course of the performance of
the services referred to above, including information obtained from
officers and representatives of the Company, no facts have come to our
attention that cause us to believe that the Registration Statement, at the
time the Registration Statement became effective, contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus as of its date contained any untrue
statement of a material fact or omitted 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.
Also, subject to the foregoing, no facts have come to our attention in the
course of the proceedings described in the second sentence of this
paragraph that cause us to believe that the Prospectus as of the date and
time of delivery of this letter contains any untrue statement of a material
fact or omits 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. In each case,
however, we express no view or belief with respect to financial statements,
notes, schedules and other financial data included in, or omitted from the
Registration Statement or Prospectus.
In rendering such opinion, such counsel may (A) state that they
express no opinion as to the laws of any jurisdiction other than the Federal law
of the United States, the New York Commercial Code and the General Corporation
Law of the State of Delaware; and (B) rely as to matters of fact, to the extent
they deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel.
(c) At the Closing Date you shall have received the opinion of
Patrick J. McGettigan Senior Vice President, Secretary and General Counsel for
the Company, dated the Closing Date addressed to the Underwriters and in form
and substance satisfactory to Underwriters' Counsel, to the effect there is no
litigation or governmental or other action, suit, proceeding or investigation
before any court or before or by any public, regulatory or governmental agency
or body pending or, to the best knowledge of such General Counsel, threatened
against, or involving the properties or business of, the Company or any of its
subsidiaries, which is of a character required to be disclosed in the
Registration Statement and the Prospectus which has not been properly disclosed
therein and there is not contract or other
15
<PAGE>
document which is required to be described in the Registration Statement or the
Prospectus or is required to be filed as an exhibit to the Registration
Statement which is not described or filed as required.
(d) At the Closing Date you shall have received the opinion of
Kelly, Drye & Warren, LLP, regulatory counsel for the Company, dated the Closing
Date addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that such counsel has reviewed the
descriptions in the Registration Statement under the caption "Business--
Regulation" and to the best knowledge of such counsel, such descriptions are
true and correct in all material respects and that , to the best knowledge of
such counsel, the execution, delivery, and performance of this Agreement and the
consummation of the transactions contemplated hereby by the Company do not and
will not violate or conflict with any judgment, decree, order, statute rule or
regulation of any public, governmental or regulatory agency or body having
jurisdiction over telecommunications law or regulation.
(e) You shall have received, with respect to the Selling
Stockholders, at the Closing Date or the Additional Closing Date, if any, as the
case may be, the opinion of [__________], counsel for the Selling Stockholders,
dated the Closing Date or the Additional Closing Date, as the case may be,
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) This Agreement and the Custody Agreement have been duly
and validly authorized, executed and delivered by or on behalf of each
Selling Stockholder and is a valid and binding obligation of each Selling
Stockholder enforceable against such Selling Stockholder in accordance with
its terms except to the extent that (a) the enforceability hereof may be
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
fraudulent transfer, reorganization, moratorium, liquidation,
conservatorship and other laws affecting creditors' rights generally, (b)
equitable principles may limit the availability of equitable relief in the
case of a breach hereof (regardless of whether such remedies are sought in
a proceeding at law or in equity), and (c) federal securities laws may
limit the enforceability of the indemnification provisions hereof.
(ii) To the knowledge of such counsel, each Selling
Stockholder has all requisite power and authority, and all necessary
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits of and from all courts and all public,
governmental or regulatory agencies and bodies as are required for the
execution, delivery and performance of this Agreement and the Custody
Agreement and the consummation of the transactions contemplated hereby and
thereby, except for (1) such as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters (as to which such counsel need express no
opinion) and (2) such as have been made or obtained under the Act.
(iii) To the knowledge of such counsel, upon the delivery of
and payment for the Shares to be sold by the Selling Stockholders pursuant
to this Agreement as herein contemplated, assuming that the Underwriters
purchase the Additional Shares to
16
<PAGE>
be delivered at the Closing for value in good faith and without notice of
any adverse claim as such term is used in Article 8 of the New York Uniform
Commercial Code as currently in effect, the delivery of certificates
representing such Additional Shares either registered in the name of the
Underwriters or effectively endorsed to the Underwriters or in blank will
pass to the Underwriters all rights that the Selling Stockholders had in
such Additional Shares, free and clear of all adverse claims.
(iv) The execution, delivery and performance of this
Agreement and the Custody Agreement by the Selling Stockholders and the
consummation of the transactions contemplated hereby and thereby will not
violate or conflict with, to the knowledge of such counsel, any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over any of
the Selling Stockholders or any of their respective properties or assets.
In rendering such opinion, such counsel may (A) state that they
express no opinion as to the laws of any jurisdiction other than the Federal law
of the United States, the New York Commercial Code and the General Corporation
Law of the State of Delaware; and (B) rely as to matters of fact, to the extent
they deem proper, on certificates of, or certificates of responsible officers
of, the Selling Stockholders, provided, that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel. The opinions of such
counsel for the Selling Stockholders or Principal Selling Stockholders, as the
case may be, shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and, in their opinion, you and they are justified
in relying thereon.
(f) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to you and to Underwriters' Counsel, and the Underwriters
shall have received from said Underwriters' Counsel a favorable opinion, dated
as of the Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(g) At the Closing Date you shall have received a certificate of
the Chief Executive Officer and Chief Financial Officer of the Company, dated
the Closing Date to the effect that (i) the condition set forth in subsection
(a) of this Section 6 has been satisfied, (ii) as of the date hereof and as of
the Closing Date the representations and warranties of the Company set forth in
Section 1 hereof are accurate, (iii) as of the Closing Date the obligations of
the Company to be performed hereunder on or prior thereto have been duly
performed and (iv) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company has not
sustained any material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any material adverse change, or any
development involving a material adverse change, in the business prospects,
properties, operations, condition (financial or
17
<PAGE>
otherwise), or results of operations of the Company and its subsidiaries taken
as a whole, except in each case as described in or contemplated by the
Prospectus.
(h) At the Closing Date you shall have received certificates
executed by each of the Selling Shareholders (or by the Attorneys-in-Fact on
behalf of any such Selling Shareholder), dated the Closing Date to the effect
that (i) if such certificate is executed by the Selling Shareholder, the
representations and warranties of such Selling Shareholder set forth in Section
1 hereof are accurate, and that as of the Closing Date the obligations of such
Selling Shareholder to be performed hereunder on or prior thereto have been duly
performed and (ii) if such certificate is executed by the Attorney-in-Fact, the
best knowledge of the Attorney-in-Fact, the representations and warranties of
such Selling Shareholder set forth in Section 1 hereof are accurate, and that as
of the Closing Date, the obligations of such Selling Shareholder to be performed
hereunder on or prior thereto have been duly performed.
(i) At the time this Agreement is executed and at the Closing
Date, you shall have received a letter, from PricewaterhouseCoopers, LLP,
independent public accountants for the Company, dated, respectively, as of the
date of this Agreement and as of the Closing Date addressed to the Underwriters
and in form and substance satisfactory to you, to the effect that: (i) they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the Regulations and stating that the answer to Item 10 of
the Registration Statement is correct insofar as it relates to them; (ii)
stating that, in their opinion, the financial statements and schedules of the
Company included in the Registration Statement and the Prospectus and covered by
their opinion therein comply as to form in all material respects with the
applicable accounting requirements of the Act and the applicable published rules
and regulations of the Commission thereunder; (iii) on the basis of procedures
consisting of a reading of the latest available unaudited interim consolidated
financial statements of the Company, a reading of the minutes of meetings and
consents of the shareholders and boards of directors of the Company and the
committees of its board subsequent to December 31, 1998, inquiries of officers
and other employees of the Company who have responsibility for financial and
accounting matters of the Company with respect to transactions and events
subsequent to December 31, 1998 and other specified procedures and inquiries to
a date not more than five days prior to the date of such letter, nothing has
come to their attention that would cause them to believe that: (A) the unaudited
consolidated financial statements and schedules of the Company presented in the
Registration Statement and the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act and, if
applicable, the Exchange Act and the applicable published rules and regulations
of the Commission thereunder or that such unaudited consolidated financial
statements are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited consolidated financial statements included in the Registration
Statement and the Prospectus; (B) with respect to the period subsequent to June
30, 1999 there were, as of the date of the most recent available monthly
consolidated financial statements of the Company and its subsidiaries, if any,
and as of a specified date not more than five days prior to the date of such
letter, any changes in the capital stock or long-term indebtedness of the
Company or any decrease in the net current assets or stockholders' equity of the
Company, in each case as compared with the amounts shown in the most recent
balance sheet presented in the Registration
18
<PAGE>
Statement and the Prospectus, except for changes or decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur or
which are set forth in such letter or (C) that during the period from March 31,
1999 to the date of the most recent available monthly consolidated financial
statements of the Company, if any, and to a specified date not more than five
days prior to the date of such letter, there was any decrease, as compared with
the corresponding period in the prior fiscal year, in total revenues, or total
or per share net income, except for decreases which the Registration Statement
and the Prospectus disclose have occurred or may occur or which are set forth in
such letter; and (iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, and other financial
information pertaining to the Company set forth in the Registration Statement
and the Prospectus, which have been specified by you prior to the date of this
Agreement, to the extent that such amounts, numbers, percentages, and
information may be derived from the general accounting and financial records of
the Company or from schedules furnished by the Company, and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries, and other
appropriate procedures specified by you set forth in such letter, and found them
to be in agreement.
(j) Prior to the Closing Date and the Additional Closing Date, if
any, as the case may be, the Company and the Selling Stockholders, as the case
may be, shall have furnished to you such further information, certificates and
documents as you may reasonably request.
(k) Prior to the Closing Date the Company and the Selling
Stockholders shall have furnished to you such further information, certificates
and documents as you may reasonably request.
(l) You shall have received from each person who is a director or
officer of the Company or such shareholder as have been heretofore designated by
you and listed on Schedule II hereto an agreement to the effect that such person
will not, directly or indirectly, without your prior written consent, offer,
sell, offer or agree to sell, grant any option to purchase or otherwise dispose
(or announce any offer, sale, grant of an option to purchase or other
disposition) of any shares of Common Stock (or any securities convertible into,
exercisable for or exchangeable or exercisable for shares of Common Stock) for a
period of 180 days after the date of the Prospectus except as permitted by the
terms of the lockup agreements agreed to by you and your counsel.
(m) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional
19
<PAGE>
Shares may be canceled by you at, or at any time prior to, the Additional
Closing Date. Notice of such cancellation shall be given to the Company in
writing, or by telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in the registration statement for the
registration of the Shares, as originally filed or any amendment thereof, or any
related preliminary prospectus or the Prospectus, or in any supplement thereto
or amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (ii) (A) the
violation of any applicable securities laws or regulations of Mexico, to the
extent not arising from gross negligence, willful misconduct, or fraud on the
part of the Underwriters or their agents and (B) any untrue statement or alleged
untrue statement of a material fact included in the supplement or prospectus
wrapper material distributed in connection with the reservation and sale of the
Directed Shares to eligible employees and certain persons designated by the
Company or the omission or alleged omission therefrom of a material fact
necessary to make the statements therein, when considered in conjunction with
the Prospectus of preliminary prospectus, not misleading; provided, however,
-------- -------
that the Company will not be liable in any such case to the extent but only to
the extent that any such loss, liability, claim, damage or expense arises out of
or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of any
Underwriter through you expressly for use therein. This indemnity agreement
will be in addition to any liability which the Company may otherwise have
including under this Agreement.
(b) Each Selling Stockholder agrees to indemnify and hold harmless
each Underwriter, its directors, officers and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
each Underwriter, but only to the extent that any losses, liabilities, claims,
damages and expenses arise out of or relate to information relating to such
Selling Stockholder furnished in writing by or on behalf of such Selling
Stockholder expressly for use in the Registration Statement, the Prospectus and
any Preliminary Prospectus. Notwithstanding the foregoing, the aggregate
liability of each Selling Stockholder pursuant to the provisions of this
paragraph shall be limited to an amount equal to the total
20
<PAGE>
proceeds (before deducting the underwriting discount and expenses) received by
such Selling Stockholder from the sale of its Shares hereunder.
(c) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, each of the directors of the Company,
each of the officers of the Company who shall have signed the Registration
Statement, and each other person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), jointly or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through you
expressly for use therein; provided, however, that in no case shall any
-----------------
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company and
you acknowledge that the statements set forth in the last paragraph of the cover
page and in the thirteen paragraphs under the caption "Underwriting" in the
Prospectus constitute the only information furnished in writing by or on behalf
of any Underwriter expressly for use in the registration statement relating to
the Shares as originally filed or in any amendment thereof, any related
preliminary prospectus or the Prospectus or in any amendment thereof or
supplement thereto, as the case may be.
(d) In connection with the offer and sale of Directed Shares the
Company agrees, promptly upon written notice, to indemnify and hold harmless the
Underwriters from and against any and all losses, liabilities, claims, damages
and expenses incurred by them as a result of the failure of any Directed Shares
Purchaser to pay for and accept delivery of the Directed Shares.
(e) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any
21
<PAGE>
indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.
-------- -------
8. Contribution. In order to provide for contribution in
------------
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Selling Shareholders (the "Sellers"), on the one hand, and each Underwriter,
on the other hand, severally and not jointly, shall contribute to the aggregate
losses, claims, damages, liabilities and expenses of the nature contemplated by
such indemnification provision (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claims asserted, but after deducting in the
case of losses, claims, damages, liabilities and expenses suffered by the
Sellers any contribution received by the Sellers from persons, other than the
Underwriters, who may also be liable for contribution, including persons who
control the Company within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act, officers of the Company who signed the Registration
Statement and directors of the Company) as incurred to which the Sellers and one
or more of the Underwriters may be subject, in such proportions as is
appropriate to reflect the relative benefits received by the Sellers, on the one
hand, and such Underwriter, on the other hand, from the offering of the Shares
or, if such allocation is not permitted by applicable law or indemnification is
not available as a result of the indemnifying party not having received notice
as provided in Section 7 hereof, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Sellers, on the one hand, and each Underwriter, on the other, in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Sellers, on the one hand, and each
Underwriter, on the other hand, shall be deemed to be in the same proportion as
(x) the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page
22
<PAGE>
of the Prospectus. The relative fault of the Sellers, on the one hand, and each
Underwriter, on the other hand, shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Sellers or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Sellers and the Underwriters agree that it would not
be just and equitable if contribution pursuant to this Section 8 were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above. Notwithstanding the
provisions of this Section 8, (i) in no case shall any Underwriter be liable or
responsible for any amount in excess of the underwriting discount applicable to
the Shares purchased by such Underwriter hereunder, (ii) in no case shall any of
the Selling Stockholders be liable or responsible for any amount that exceeds
that person's proceeds from the sale in the offering at the initial price to the
public (as set forth in the table on the cover page of the Prospectus) of the
Additional Shares sold by that Selling Stockholder pursuant to this Agreement,
and (iii) no person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. Notwithstanding the
provisions of this Section 8 and the preceding sentence, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. For purposes of this Section 8, (A)
each person, if any, who controls an Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act and (B) the respective
officers, directors, partners, employees, representatives and agents of each of
the Underwriters shall have the same rights to contribution as such Underwriter,
and (A) each person, if any, who controls the Seller within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act and (B) the
respective officers, directors, partners, employees, representatives and agents
of each of the shall have the same rights to contribution as the Company,
subject in each case to clauses (i) and (ii) of this Section 8. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties, notify each party
or parties from whom contribution may be sought, but the omission to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 8 or otherwise. No party shall be liable for contribution with respect
to any action or claim settled without its consent; provided, however, that such
-------- -------
consent was not unreasonably withheld.
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default relates
do not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, to which the default relates shall be
23
<PAGE>
purchased by the non-defaulting Underwriters in proportion to the respective
proportions which the numbers of Firm Shares set forth opposite their respective
names in Schedule I hereto bear to the aggregate number of Firm Shares set forth
opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of
the Firm Shares or Additional Shares, as the case may be, you may in your
discretion arrange for yourself or for another party or parties (including any
non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within 5 calendar days after
such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to
which the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
you or the Company shall have the right to postpone the Closing Date or
Additional Closing Date, as the case may be for a period, not exceeding five
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the opinion
of Underwriters' Counsel, may thereby be made necessary or advisable. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 9 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Shares and Additional Shares.
10. Survival of Representations and Agreements. All representations
------------------------------------------
and warranties, covenants and agreements of the Underwriters the Selling
Stockholders and the Company contained in this Agreement, including the
agreements contained in Section 5, the indemnity agreements contained in Section
7 and the contribution agreements contained in Section 8, shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any Underwriter or any controlling person thereof or by or on behalf
of the Company, any of its officers and directors or any Selling Stockholder or
any controlling person thereof, and shall survive delivery of and payment for
the Shares to and by the Underwriters. The representations contained in Section
1 and the agreements contained in Sections 5, 7, 8 and 11(d) hereof shall
survive the termination of this Agreement, including termination pursuant to
Section 9 or 11 hereof.
24
<PAGE>
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective, upon the later of when
(i) you and the Company shall have received notification of the effectiveness of
the Registration Statement or (ii) the execution of this Agreement. If either
the initial public offering price or the purchase price per Share has not been
agreed upon prior to 5:00 P.M., New York time, on the fifth full business day
after the Registration Statement shall have become effective, this Agreement
shall thereupon terminate without liability to the Company, the Selling
Stockholders or the Underwriters except as herein expressly provided. Until this
Agreement becomes effective as aforesaid, it may be terminated by the Company by
notifying you and the Selling Shareholders or the Attorney-in-Fact or by you
notifying the Company and the Selling Stockholders or the Attorney-in-fact.
Notwithstanding the foregoing, the provisions of this Section 11 and of Sections
1, 5, 7 and 8 hereof shall at all times be in full force and effect.
(b) You shall have the right to terminate this Agreement at any
time prior to the Closing Date or the obligations of the Underwriters to
purchase the Additional Shares at any time prior to the Additional Closing Date,
as the case may be, if (A) any domestic or international event or act or
occurrence has materially disrupted, or in your opinion will in the immediate
future materially disrupt, the market for the Company's securities or securities
in general; or (B) if trading on the New York or American Stock Exchanges or
Nasdaq shall have been suspended, or minimum or maximum prices for trading shall
have been fixed, or maximum ranges for prices for securities shall have been
required, on the New York or American Stock Exchanges by the New York or
American Stock Exchanges, on Nasdaq by Nasdaq or by order of the Commission or
any other governmental authority having jurisdiction; or (C) if a banking
moratorium has been declared by a state or federal authority or if any new
restriction materially adversely affecting the distribution of the Firm Shares
or the Additional Shares, as the case may be, shall have become effective; or
(D) (i) if the United States becomes engaged in hostilities or there is an
escalation of hostilities involving the United States or there is a declaration
of a national emergency or war by the United States or (ii) if there shall have
been such change in political, financial or economic conditions if the effect of
any such event in (i) or (ii) as in your judgment makes it impracticable or
inadvisable to proceed with the offering, sale and delivery of the Firm Shares
or the Additional Shares, as the case may be, on the terms contemplated by the
Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be
by telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all out-
of-pocket expenses (including the fees and expenses of their counsel), incurred
by the Underwriters in connection herewith.
25
<PAGE>
12. Notices. All communications hereunder, except as may be
-------
otherwise specifically provided herein, shall be in writing and , if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, N.Y. 10167, Attention: Joseph Dempsey; if sent to the Company, shall
be mailed, delivered, or telegraphed and confirmed in writing to the Company,
8665 New Trials Drive, The Woodlands, Texas, 77381 Attention: Patrick J.
McGettigan, Jr., Senior Vice President and General Counsel with a copy to Fried,
Frank, Harris Shriver & Jacobson, Attention: Andrew P. Varney.
13. Parties. This Agreement shall insure solely to the benefit of,
-------
and shall be binding upon, the Underwriters, the Selling Stockholders and the
Company and the controlling persons, directors, officers, employees and agents
referred to in Section 7 and 8, and their respective successors and assigns, and
no other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained. The term "successors and assigns" shall not include
a purchaser, in its capacity as such, of Shares from any of the Underwriters.
14. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
15. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be an original and all of which together shall constitute
one and the same instrument.
26
<PAGE>
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
SPLITROCK SERVICES, INC.
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
THE SELLING SHAREHOLDERS NAMED IN
SCHEDULE III HERETO
By:
---------------------------------------------
Name:
------------------------------------------
Attorney-in-Fact
Accepted as of the date first above written.
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
On behalf of themselves and the other Underwriters
named in schedule I hereto
By: BEAR, STEARNS & CO. INC.
By:
------------------------------------------
Name:
------------------------------------
Managing Director
27
<PAGE>
SCHEDULE I
Number of Firm
Name of Underwriter Shares to be Purchased
- ------------------- ----------------------
Bear, Stearns & Co. Inc.
Credit Suisse First Boston Corporation
Prudential Securities Incorporated
Total..........................
=====================
28
<PAGE>
SCHEDULE II
Kwok Li
Felice Li
Linsang Partners, L.L.C.
William Wilson
Carso Global Telecom, S.A. de C.V.
Robert Fugate
David Boatner
Larry Walberg
Patrick J. McGettigan, Jr.
Todd Wilkens
Roy Wilkens
Clark McLeod
Marshall Turner
James Nakfoor
29
<PAGE>
SCHEDULE III*
<TABLE>
<CAPTION>
Number of Additional
Name of Selling Stockholder Shares to be Sold
- ---------------------------- --------------------
<S> <C>
William R. Wilson 100,000
Patrick J. McGettigan, Jr. 25,000
Barbara D. Abbott 2,815
David J. Katz 5,630
William J. Perry 5,630
Linda G. Schilling 5,630
Mary L. Smallwood 7,037
Christian A. Walkowicz 5,630
Total.......... 152,372
=======
</TABLE>
* The total number of Additional Shares to be sold by the Company is 1,447,628,
and the total number of Additional Shares to be sold by both the Company and the
Selling Stockholders is 1,605,000.
30
<PAGE>
EXHIBIT A
SPLITROCK SERVICES, INC.
POWER OF ATTORNEY
WHEREAS, the Undersigned (the "Undersigned") owns Shares of Common
Stock, $.001 par value (the "Common Stock"), of Splitrock Services, Inc., a
Delaware corporation (the "Company"); and
WHEREAS, the Undersigned, subject to the terms and conditions stated
herein, desires to sell the number of Shares of Common Stock in the over
allotment as set forth below the Undersigned's name on the signature page hereof
(the "Shares"); and
WHEREAS, the Undersigned proposes to sell the Shares in the over
allotment to the several Underwriters (the "Underwriters") named in Schedule I
to the Underwriting Agreement to be entered into by and among the Company, the
Undersigned, the other Selling Shareholders named therein and the Underwriters,
substantially in the form attached hereto as Exhibit A with such changes,
including additions, deletions and amendments thereto, as the Attorneys-in-Fact
(as defined below), or either of them, may deem necessary or advisable (the
"Underwriting Agreement");
NOW, THEREFORE, as an inducement to the Underwriters and the Company
to execute the Underwriting Agreement in such form as may be entered into,
executed and delivered by the Attorneys-in-Fact, or either of them, as
hereinafter provided, and in order to secure the performance of the Underwriting
Agreement upon its execution, the Undersigned agrees, for the benefit of the
Underwriters and the Company as follows:
1. Delivery of Certificates; Appointment of Attorneys-in-Fact; Grant
of Authority. The Undersigned is delivering herewith, for deposit with Patrick
J. McGettigan, Jr., in his capacity as Custodian (the "Custodian"), a
certificate or certificates that represent the number of shares of issued and
outstanding Common Stock set below the Undersigned's signature on the signature
page hereof, that are registered in the name of the Undersigned or in the name
of a nominee which holds such certificates for the account of the Undersigned.
The Undersigned hereby makes, constitutes and appoints, irrevocably, subject to
the terms hereof, William R. Wilson and Patrick J. McGettigan, Jr., and either
of them, as the true and lawful Attorneys-in-Fact (the "Attorneys-in-Fact") of
the Undersigned, each with full power and authority, for and in the name, place
and stead of the Undersigned:
(a) To negotiate and agree with the Underwriters on the per share
price at which the Shares are to be sold by the Undersigned to the Underwriters,
which purchase price shall be the same price per share to be paid by the
Underwriters to the other Selling Shareholders and to sell up to such number of
Shares at such price as shall be determined by the Attorney-in-Fact
31
<PAGE>
executing the Underwriting Agreement, acting in his sole discretion, it being
understood and agreed that:
(i) not more than the aggregate number of Shares set forth below
the Undersigned's name on the signature page hereof shall be sold by the
Undersigned to the Underwriters pursuant to the Underwriting Agreement; and
(ii) The reoccurring of the Shares by the Underwriters shall be
by a public offering registered under the Securities Act of 1933, as amended
(the "Act").
(b) To make the representations and warranties and enter into the
Agreements on behalf of the Undersigned contained in the Underwriting Agreement,
to execute and deliver the Underwriting Agreement on behalf of the Undersigned
with full power to make such changes including additions, deletions and
amendments thereto as the Attorneys-in-Fact, or either of them, shall deem
necessary or advisable, in his sole discretion, and to consummate the
transactions contemplated thereby.
(c) To arrange for, prepare or cause to be prepared a Registration
Statement, and all amendments thereto, under the act covering the offering and
sale of the Shares by the Undersigned and the other Selling Shareholders
(collectively, the "Registration Statement"), and to take all necessary action
with respect to such Registration Statement as the Attorneys-in-Fact, or either
of them, shall deem necessary or advisable, in his sole discretion, subject,
however, to the Undersigned's rights under the Underwriting Agreement.
(d) To take any and all steps that the Attorney-in-Fact, shall deem
necessary or advisable, in his sole discretion, in connection with the
registration of the Shares under the Act and under the securities or Blue Sky
laws of any jurisdiction, including the preparation of the Registration
Statement, the making of any undertakings or representations (but only to the
extent contained in or consistent with the representations of the Selling
Shareholders set forth in the Underwriting Agreement), the execution and filing
of letters and other communications to the Securities and Exchange Commission
(the "Commission") regarding the Registration Statement and the performance of
any such other acts as the Attorneys- in-Fact, shall deem necessary or
advisable, in their sole discretion. To the extent such actions, letters and
communications relate to the Undersigned, they will be based upon written
information furnished and provided by or on behalf of the Undersigned, provided
that the Attorneys-in-Fact, or either or them, reasonably believes that such
information is true and correct.
(e) To execute, acknowledge and deliver the Custody Agreement,
substantially in the form attached hereto as Exhibit B (the "Custody
Agreement"), with full power to make such changes, including additions,
deletions and amendments thereto, as the Attorneys-in-Fact, or either or them,
shall deem necessary or advisable, in his sole discretion, pursuant to which the
certificates representing the Undersigned's Shares will be held by the Custodian
for sale as contemplated by the Underwriting Agreement, to deliver the
certificate or certificates representing the Shares to the Custodian, to
instruct the Custodian with respect to the
32
<PAGE>
number of Shares to be sold, and to consummate the transactions contemplated by
the Custody Agreement.
(f) To do all things and to perform all acts required to be performed
on the part of the Undersigned in connection with the sale by the Undersigned of
the Undersigned's Shares, including, but not limited to, (i) the transfer of the
Shares of the Undersigned on the books of the Company in order to effect their
sale, (ii) the endorsement and execution and delivery of all stock certificates,
stock powers, certificates, receipts, instructions to transfer agents and
registrars, and any other document and paper required, contemplated by, or
deemed necessary or advisable by the Attorneys-in-Fact, or either or them,, in
their sole discretion, in connection with, the performance of the Underwriting
Agreement, the Custody Agreement, the registration of the Shares pursuant to the
act, and the exemption, qualification or registration of the Shares under the
securities or Blue Sky laws of any state or jurisdiction, (iii) the
authorization for payment by the Custodian out of the net proceeds of any sale
to the Underwriters, or the withholding by Bear, Stearns & Co. Inc. Credit
Suisse First Boston Corporation and Prudential Securities Incorporated as
representatives of the Underwriters (the "Representatives") from such proceeds,
of the Undersigned's necessary transfer taxes in connection with the sale and
delivery to the Underwriters of the Shares sold by the Undersigned, (iv) the
retention of one legal counsel in connection with all matters referred to herein
(which counsel may, but need not be, counsel for the Company), (v) the return to
the Undersigned of certificates representing the number of Shares (if any)
received by the Custodian but not sold by the Undersigned to the Underwriters,
(vi) instructing the Custodian as to the number of Shares to be sold by the
Undersigned and (vii) to otherwise act for, in the name of and on behalf of the
Undersigned with respect to the transactions described in the Underwriting
Agreement and the Custody Agreement, as fully as the Undersigned could if then
personally present and acting.
The Undersigned recognizes that the number of Shares that the
Underwriters will purchase from the Selling Shareholders (the "Underwritten
Shares") may be less than the number of Shares desired to be sold by any or all
Selling Shareholders. In the event the number of underwritten Shares is less
than the aggregate number of Shares desired to be sold by any or all Selling
Shareholders, the Attorneys-in-Fact, or either or them,, is authorized and
directed to determine that portion of the Shares that the Undersigned is
entitled to sell, if any, on a pro rata basis among each of the other Selling
Shareholders and any such determination by the Attorneys-in-Fact, or either or
them,, shall be final and binding upon the undersigned.
The Attorneys-in-Fact, or either or them, shall be entitled to act and
rely upon any statement, notice or instruction received by the Undersigned in
writing or by facsimile transmission.
2. Irrevocability. All authority conferred hereby shall be deemed
granted and conferred in contemplation and furtherance of the interests of the
Underwriters and the Company, and this Power of Attorney is irrevocable and is
coupled with an interest, subject to the provisions of Section 4 hereof. The
obligations and authorizations of the Undersigned hereunder shall not be
terminated by operation of law or the occurrence of any event whatsoever,
including, but not limited to, the merger, consolidation, reorganization,
liquidation, dissolution,
33
<PAGE>
bankruptcy, insolvency, death or incapacity of the Undersigned or the occurrence
of any other similar event; and if, after the execution of this Power of
Attorney and before the completion of the transactions contemplated by the
Underwriting Agreement, the Undersigned merges, consolidates, liquidates,
reorganizes, enters bankruptcy, becomes insolvent, dissolves, dies or becomes
incapacitated or any other similar event occurs, the Attorneys-in-Fact, and each
of them, are nevertheless authorized and directed to complete all such
transactions, including the delivery of the certificates for the Shares to be
sold to the Underwriters, as if such merger, consolidation, reorganization,
liquidation, dissolution, bankruptcy, insolvency, death, incapacity or other
similar event had not occurred, regardless of whether or not the Attorneys-in-
Fact shall have received notice thereof.
3. Representations and warranties.
(a) The Undersigned represents and warrants to the Attorneys-in-Fact,
to the Company, to each of the Underwriters and to legal counsel for the Company
and the Undersigned, that:
(i) the Undersigned has, and at and as of the date the
Underwriting Agreement is executed and at the Closing Date and any Additional
Closing Date (each as defined in the Underwriting Agreement) will have, full
right, power and authority and all authorizations and approvals required by law
or otherwise to enter into this Power of Attorney, the Custody Agreement and
Underwriting Agreement, and
(ii) the consummation of the transactions contemplated hereby
and thereby and the fulfillment of the terms hereof and thereof will not
conflict with or constitute a breach of, or default under, any bond, debenture,
note or any other evidence of indebtedness or in any indenture or other material
Agreement to which the Undersigned is a party or by which it is bound or to
which any of its properties is subject, or any law, statute, rule, regulation,
judgment or court decree applicable to the Undersigned.
(b) The Undersigned hereby represents and warrants to the Attorneys-
in-Fact, the Company, the Underwriters and to legal counsel for the Company and
the Undersigned, that the Undersigned has carefully reviewed the
representations, warranties, statements and Agreements to be made by the
Undersigned as a Selling Shareholder pursuant to the Underwriting Agreement,
including, without limitation, those contained in Section 1.B of the
Underwriting Agreement and the indemnity and contribution Agreements contained
in Sections 7 and 8 of the Underwriting Agreement (and such representations and
warranties are incorporated herein by reference), and hereby certifies,
represents and warrants to the Attorney-in-Facts, the Company, each of the
Underwriters and to legal counsel for the Company and the Undersigned, that the
representations and warranties to be made by the Undersigned in Section 1.B of
the Underwriting Agreement are true and correct on the date hereof and will be
true and correct at and as of the date such Underwriting Agreement is executed
and at and as of the Closing Date and any Additional Closing Date, and that such
Agreements, insofar as they relate to the Undersigned, have been complied with
as of the date hereof and will be complied with on and after the Closing Date
and any Additional Closing Date.
34
<PAGE>
(c) For purposes of delivering any certificate on behalf of the
Undersigned which may be required pursuant to the Underwriting Agreement or by
counsel to the Company and the Undersigned, the Attorneys-in-Fact may rely on
the representations and warranties of the Undersigned set forth herein and in
the Underwriting Agreement as if said representations and warranties had been
set forth in a separate certificate directed to the Attorneys-in-Fact at and as
of the Closing Date or any Additional Closing Date, provided the Attorneys-in-
Fact are not in receipt of written notice from or on behalf of the Undersigned
or otherwise do not reasonably believe that any such representation or warranty
is not true and correct at and as of the Closing Date or any Additional Closing
Date.
(d) The Undersigned will immediately notify the Company, the
Attorneys-in-Fact, each of the Underwriters and legal counsel for the Company
and the Undersigned of the occurrence of any event which shall cause the
representations and warranties set forth herein or incorporated herein by
reference not to be true and correct during the period of the public offering of
the Shares or at any time of delivery of the Shares pursuant to the Underwriting
Agreement.
(e) All of the information heretofore, now or hereafter furnished by
the Undersigned to the Company, each of the Attorneys-in-Fact, each of the
Underwriters and legal counsel for the Company and the Undersigned in connection
with the offering and sale of the Shares is accurate and complete. The maximum
number of Shares of common stock to be sold by the Undersigned to the
Underwriters is accurately stated below the Undersigned's name on the signature
page hereof.
(f) If the Undersigned has a spouse, such spouse has joined in the
execution and delivery of this Power of Attorney for all purposes, and all
references to "the Undersigned" shall mean both the Selling Shareholder who is a
signatory to this Power of Attorney and to such spouse just as if such spouse
were also a Selling Shareholder. The joinder of such spouse, however, has been
made without regard to the ownership of the Shares to which this Power of
Attorney relates.
(g) If the Undersigned is a trust and the Shares held by such trust
are held by a nominee which holds such Shares for the account of the
Undersigned, such nominee has joined in the execution and delivery of this Power
of Attorney for all purposes and all references to "the Undersigned" shall mean
both the Undersigned and the nominee which holds the Shares for the account of
the Undersigned as if both the Undersigned and the nominee which holds the
Shares for the account of the Undersigned were Selling Shareholders.
(h) The Undersigned has received a copy of Amendment No. 1 to the
Registration Statement filed by the Company with the Commission on July 6, 1999.
The information relating to the Undersigned set forth under the captions
Principal Stockholders commencing on page 61 of the preliminary prospectus
forming a part of the Registration Statement, is true and correct in all
respects.
35
<PAGE>
4. Expenses. In addition to the expenses, if any, to be paid by the
Undersigned as set forth in the Underwriting Agreement, the Undersigned shall
pay all reasonable out-of-pocket costs and expenses incurred by the Attorneys-
in-Fact in the discharge of their responsibilities hereunder, provided that the
Attorneys-in-Fact shall serve without compensation.
5. Termination. If the Underwriting Agreement shall not be entered
into on behalf of the Undersigned, or if it shall not become effective pursuant
to its terms, or if it shall be terminated pursuant to its terms, or if the
Closing Date shall not have occurred on or before [___________, 1999], or if no
Additional Closing Date shall occur before [__________, 1999], then after such
date the Undersigned shall have the power, on written notice to the Attorneys-
in-Fact, to terminate this Power of Attorney, subject, however, (i) to any
action to be taken pursuant to the Custody Agreement and (ii) to all lawful
action of the Attorneys-in-Fact done or performed pursuant hereto prior to
actual receipt of such notice, and thereafter the Attorneys-in-Fact shall have
no further responsibilities or liabilities to the Undersigned.
6. Ownership of Stock. Subject to the terms of the Custody
Agreement, until payment of the purchase price for the Shares being sold by the
Undersigned pursuant to the Underwriting Agreement has been made by or for the
account of the Underwriters, the Undersigned shall remain the legal and
beneficial owner of the Shares deposited with the Custodian pursuant to the
Custody Agreement and shall have the right to vote such Shares and to receive
all dividends and distributions thereon. However, until such payment in full
has been made or until the Underwriting Agreement has been terminated, the
Undersigned agrees not to give, sell, pledge, hypothecate, grant any lien on or
security interest in, transfer, deal with or contract with respect to the Shares
to be sold by the Undersigned pursuant to the Underwriting Agreement or any
interest therein, except in accordance with the Underwriting Agreement, or as
otherwise agreed in writing by the Underwriters.
7. Indemnification. The Undersigned hereby agrees to indemnify and
hold harmless the attorneys-in- fact against any and all expenses, losses,
claims, damages or liabilities, joint or several, to which the attorneys-in-
fact may become subject insofar as such expenses, losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
action taken or omitted to be taken by the Attorneys-in-Fact pursuant hereto,
other than those expenses, losses, claims, damages or liabilities which result
from the negligence or bad faith of the Attorneys-in-Fact. The Attorneys-in-
Fact assume no responsibility or liability to any person other than in the
discharge of their responsibilities hereunder.
8. Power of Substitution. Each of the Attorneys-in-Fact is hereby
granted and shall have full power of substitution hereunder. Such substitution
shall be effected by notice thereof to the Undersigned, signed by the Attorney-
in-Fact who is being substituted for as well as by his successor Attorney-in-
Fact.
9. Governing law. This Power of Attorney for all purposes shall be
governed by and construed in accordance with the internal laws of the State of
New York.
36
<PAGE>
10. Notice. Any notice required to be given pursuant to this Power
of Attorney shall be deemed given if in writing and delivered in person, or if
given by telephone or facsimile if subsequently confirmed in writing, (i) to the
Attorneys-in-Fact, 8665 New Trails Drive, The Woodlands, Texas 77381, Attention:
William R. Wilson or Patrick J. McGettigan, Jr. (facsimile no.: (____) ______-
____), or (ii) to the Undersigned at the address or facsimile number set forth
on the signature page hereof. Each of the Attorneys-in-Fact agree to forward
copies of any and all notices received by him to the Undersigned at the address
and facsimile number set forth on the signature page hereof.
37
<PAGE>
IN WITNESS WHEREOF, the Undersigned has executed this Power of Attorney
this ___ day of ______________, 199__.
(To be signed exactly as name appears on Certificate(s) representing the Shares)
- ----------------------------------------
Print name, address and facsimile number:
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
Number of Shares to be sold:
NOTE: ALL SIGNATURES ON THIS POWER OF ATTORNEY MUST BE GUARANTEED BY A
PARTICIPANT IN A RECOGNIZED SIGNATURE GUARANTEE MEDALLION PROGRAM.
Signature(s) guaranteed by:
- -----------------------------------
Name:
38
<PAGE>
INDIVIDUAL ACKNOWLEDGMENT
STATE OF ____________)
(ss.):
COUNTY OF ___________)
On this __ day of _______________, 1999, before me personally came
___________________, to me known to be the individual described in and who
executed the foregoing Power of Attorney and acknowledged that he executed the
same.
- ----------------------------------------
Notary Public
39
<PAGE>
If the Selling Shareholder is an individual, check whether married [ ] or not
married [ ]. If married and spouse has not signed above as a Selling
Shareholder because spouse is not a registered owner of the deposited stock
certificates, spouse must consent by signing below and having signature
guaranteed:
Selling Shareholder Spouse
- ----------------------------------------
Name:
NOTE: ALL SIGNATURES ON THIS POWER OF ATTORNEY MUST BE GUARANTEED BY A
PARTICIPANT IN A RECOGNIZED SIGNATURE GUARANTEE MEDALLION PROGRAM.
Signature(s) guaranteed by:
- ----------------------------------------
Name:
40
<PAGE>
Acceptance by the Attorneys-in-Fact
William R. Wilson and Patrick J. McGettigan, Jr. each hereby accepts his
appointment as attorney- in-fact pursuant to the foregoing Power of Attorney and
agrees to abide by and act in accordance with the terms of said Agreement.
- ---------------------------------------
William R. Wilson
- ---------------------------------------
Patrick J. McGettigan, Jr.
41
<PAGE>
EXHIBIT B TO POWER OF ATTORNEY
SPLITROCK SERVICES, INC.
CUSTODY AGREEMENT
Patrick J. McGettigan, Jr., Esq.
Senior Vice President
8665 New Trails Drive
The Woodlands, Texas 77381
The Undersigned have delivered to you certificates (the "Certificates") in
negotiable form representing ____________ Shares of the issued and outstanding
common stock, par value $.001 per share (the "Common Stock"), of Splitrock
Services, Inc., a Delaware corporation (the "Company"), together with any
executed stock powers required to transfer such certificates in accordance with
the terms hereof and the Underwriting Agreement (as defined below). The
Certificates are to be held by you as Custodian hereunder for the account of the
Selling Shareholders listed in Exhibit I hereto (collectively, the "Selling
Stockholders") and are to be disposed of in accordance with the following
instructions:
1. The Undersigned has been appointed Attorney-in-Fact ("Attorney-in-
Fact") for each of the Selling Shareholders pursuant to the Power of Attorney
executed by each such Selling Shareholder (collectively, the "Power of
Attorney"), and is authorized, subject to certain terms and conditions set forth
in the Power of Attorney, to execute and deliver on behalf of the Selling
Shareholders an Underwriting Agreement (the "Underwriting Agreement"),
substantially in the form attached hereto as Exhibit II, by and among the
Selling Shareholders, the Company, and the Underwriters named in Schedule I
thereof (the "Underwriters"), pursuant to which for the sole purpose of covering
over-allotments in connection with the sale of the Firm Shares, the Company and
the Selling Stockholders propose, at the option of the Underwriters, to sell to
the Underwriters up to an additional 1,472,625 and 157,372 shares, respectively,
(the "Additional Shares") of Common Stock at the price set forth in the
Underwriting Agreement. (the "Additional Shares" and, together with the Firm
Shares, the "Shares").
2. You are hereby authorized and directed to hold the Certificates
for the Shares and, subject to the Underwriters having concurrently provided you
with a counterpart of the Underwriting Agreement that has been executed by or on
behalf of the Selling Shareholders and all other parties thereto (i) on the
Closing Date and any Additional Closing Date (each as defined in the
Underwriting Agreement), to cause to be delivered to the Underwriters for their
respective accounts, against payment therefor in full of the purchase price per
Share determined in accordance with and after satisfaction of the terms of the
Underwriting Agreement, one or more certificates (each, an "Omnibus
Certificate") representing the number of Additional Shares to be sold on the
Closing Date or the on any Additional Closing Date, as the case may be; (ii) to
obtain
42
<PAGE>
an Omnibus Certificate upon transfer of or in exchange for the certificates
deposited with you hereunder; (iii) to have separate certificates for the
aggregate number of Shares represented by any Omnibus Certificate registered in
such names and denominations as the Underwriters shall have requested at least
two full business days prior to the Closing Date, or any Additional Closing
Date, as the case may be, prepared and available for checking and packaging by
the Underwriters at a location in New York, New York at least one full business
day prior to the Closing Date, or any Additional Closing Date, as the case may
be, for delivery to the Underwriters upon cancellation of such Omnibus
Certificate. You shall not be regarded as making any representations as to the
validity, sufficiency, value or genuineness of any of the Certificates or of any
other documents surrendered to you or as to the validity or genuineness of any
signatures on any letters of transmittal, facsimiles or other documents
delivered to you in connection herewith. You may rely on the instructions of the
Undersigned, or any substitute Attorney-in-Fact under the Power of Attorney,
with respect to any discrepancies in the form of the Certificates or
accompanying documents.
3. You are authorized, for and on behalf of the Selling Shareholders,
to accept and acknowledge receipt from the Underwriters for their respective
accounts of payment for all Shares sold and delivered by the Selling
Shareholders to the respective Underwriters. The payment received by you for
the account of the Selling Shareholders shall, upon order, in accordance with
the instructions, of the Undersigned, be paid by you, in immediately available
funds, to the Selling Shareholders, less such amount, if any, as necessary to
provide for each Selling Shareholder's proportionate share of all expenses, if
any, of the Selling Shareholders as provided in the Underwriting Agreement,
including all necessary transfer taxes in connection with the sale and delivery
to the Underwriters of the Shares sold by the Selling Shareholders, such amount
to be delivered to the Company or as shall be specified by the Undersigned.
4. If the Underwriting Agreement shall not be executed, or shall not
become effective pursuant to its terms, or shall be terminated pursuant to the
provisions thereof, or the Closing Date shall not have occurred on or before
_________, 1999, or if the Additional Shares represented by the certificates
deposited with you hereunder are not taken up and paid for by the respective
Underwriters by __________, 1999 in accordance with the provisions of the
Underwriting Agreement, you are authorized and directed to exchange the Omnibus
Certificate obtained pursuant to paragraph 2 above, if any, for certificates
denominated as necessary to return to the Selling Shareholders Shares equal to
the Shares deposited with you hereunder, and to return to the Selling
Shareholders such certificates together with any stock powers, and you shall
have no further responsibility hereunder. The Undersigned shall notify you
promptly of the execution of the Underwriting Agreement. In addition, you shall
also, as instructed by the Attorney-in-Fact, return to each of the Selling
Shareholders certificates representing the number of Shares of such Selling
Shareholders that are held by you in excess of the number of Shares sold by such
Selling Shareholders pursuant to the Underwriting Agreement.
5. It is understood that until delivery by you of the certificates
deposited with you hereunder has been made in accordance with the Underwriting
Agreement and payment in full for the Shares represented by such certificates
has been made by or for the account of the respective Underwriters, the Selling
Shareholders shall remain the legal and beneficial owners of
43
<PAGE>
such Shares and shall have the right to vote such Shares and to receive all
dividends and distributions thereon.
6. Under the terms of the Underwriting Agreement, the Undersigned
agrees that the Shares represented by the certificates held in custody for the
Selling Shareholders under this Custody Agreement are subject to the interest of
the respective Underwriters under the Underwriting Agreement, that the
arrangements made by the Selling Shareholders for such Custodianship are to that
extent irrevocable and that the obligations of the Selling Shareholders under
the Underwriting Agreement shall not be terminated by operation of law or by the
occurrence of any event whatsoever, including, but not limited to, the merger,
consolidation, reorganization, liquidation, dissolution, bankruptcy, insolvency,
death, incapacity or similar event of one or more of the Selling Shareholders.
If one or more of the Selling Shareholders should merge, consolidate,
reorganize, liquidate, dissolve, enter bankruptcy, become insolvent, die or
become incapacitated, or if any other such similar event shall occur before the
termination of this Custody Agreement, you are nevertheless authorized and
directed to deal with the certificates deposited hereunder and with the terms
and conditions hereof as if such merger, consolidation, reorganization,
liquidation, dissolution, bankruptcy, insolvency, death, incapacity or similar
event had not occurred, regardless of whether or not you shall have received
notice of such merger, consolidation, reorganization, liquidation, dissolution,
bankruptcy, insolvency, death, incapacity or similar event.
7. It is understood that you are authorized to accept this Custody
Agreement and to take any and all actions hereunder as you shall, in your
discretion, determine to be necessary to consummate the transactions
contemplated hereby and by the Underwriting Agreement, and that you assume no
responsibility or liability to the Selling Shareholders or to any person other
than to deal with the certificates and the cash held and received by you
pursuant to the terms of this Custody Agreement in accordance with the
provisions hereof, and the Selling Shareholders agree to indemnify and hold you
harmless with respect to anything done by you in good faith in any and all
matters covered by this Custody Agreement in accordance with the foregoing
instructions.
8. In taking any of the actions described herein on behalf of the
Selling Shareholders, you are authorized and shall be entitled to ask for and
act and rely upon instructions, any request made, or notices, information or
assurances of fact given in writing to you by the Undersigned, or any substitute
Attorney-in-Fact appointed under the Power of Attorney; provided, however, that
you shall not be entitled to act on any statement or notice to you with respect
to the noneffectiveness or termination of the Underwriting Agreement, or advice
that the Underwriting Agreement has not been executed and delivered, unless such
statement, notice or advice shall have been confirmed in writing to you by one
of the Representatives.
9. It is agreed that your duties are only such as are herein
specifically provided, being purely ministerial in nature, and that you shall
incur no liability whatever except for liabilities resulting from your actions
taken or omitted to be taken by you in bad faith.
44
<PAGE>
10. You shall be under no responsibility in respect of any of the
items deposited with you hereunder other than to follow in good faith the
instructions by the Attorney-in-Fact or otherwise herein contained. You may
consult with counsel (which may be counsel to the Company) and shall be fully
protected in any action taken in good faith, in accordance with such advice.
You shall not be required to defend any legal proceedings which may be
instituted unless requested to do so by the Selling Shareholders and unless you
are indemnified to your satisfaction against the cost and expense of such
defense. You shall not be required to institute legal proceedings of any kind.
You shall have no responsibility for the genuineness or validity of any document
or other item deposited with you hereunder and you shall be fully protected in
acting in accordance with any written instructions given to you hereunder and
believed by you to have been signed by the Undersigned.
11. The Undersigned hereby represents and warrants that the
Undersigned has full right, power and authority to enter into this Custody
Agreement and the Underwriting Agreement on behalf of the Selling Shareholders
to sell, assign, transfer and deliver the Shares deposited hereunder and to be
sold pursuant to the Underwriting Agreement and, upon delivery and payment for
said Shares pursuant to the Underwriting Agreement, unencumbered title to such
Shares shall be acquired by the respective Underwriters.
12. Your acceptance hereof by the execution of this Custody Agreement
shall constitute an acknowledgment by you of receipt of the certificates
hereinbefore referred to and the acceptance by you of the authorizations herein
conferred and shall evidence your Agreement to carry out and perform this
Custody Agreement in accordance with its terms.
13. This Custody Agreement shall for all purposes be governed by and
construed in accordance with the internal laws of the State of New York.
45
<PAGE>
IN WITNESS WHEREOF, this Custody Agreement is executed this ___ day of
______________, 1999.
Very truly yours,
SELLING SHAREHOLDERS
[LIST ALL]
By:
- ------------------------------------
Name:
As Attorney-in-Fact for the Selling Shareholders
AGREED and ACCEPTED as of this
__ day of ___________, 1999 by:
CUSTODIAN
Patrick J. McGettigan, Jr., as Custodian
By: ----------------------------------------
Name: Patrick J. McGettigan, Jr.
46
<PAGE>
EXHIBIT I TO CUSTODY AGREEMENT
SELLING SHAREHOLDERS
Name Number of Additional Shares
Available for Sale
47
<PAGE>
EXHIBIT II TO CUSTODY AGREEMENT
FORM OF UNDERWRITING AGREEMENT
48
<PAGE>
Exhibit 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
SPLITROCK SERVICES, INC.
Splitrock Services, Inc., a Delaware corporation, the original certificate
of incorporation of which was filed with the secretary of State of the State of
Delaware on April 15, 1998 under the name Splitrock Services, Inc., HEREBY
CERTIFIES that this Restated Certificate of Incorporation, restating,
integrating and amending its Certificate of Incorporation, was duly adopted by
its Board of Directors and its stockholders in accordance with Sections 228, 242
and 245 of the Delaware General Corporation Law (the "DGCL"). The Certificate
of Incorporation of Splitrock Services, Inc., is hereby amended and restated in
its entirety to read as follows:
ARTICLE I
NAME
The name of the Corporation is Splitrock Services, Inc. (the
"Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the Corporation's registered office in the State of Delaware
is 9 East Loockerman Street, City of Dover, Kent County, Delaware 19901. The
name of its registered agent at such address is Capitol Services, Inc.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the DGCL.
ARTICLE IV
CAPITAL STOCK
(A) General.
-------
(1) Authorized Stock. The total number of shares of all classes of
----------------
capital stock which the Corporation shall have authority to issue is one hundred
seventy-five million (175,000,000) shares, of which:
(i) one hundred fifty million (150,000,000) shares, par value $.001
per share, shall be shares of common stock (the "Common Stock"); and
<PAGE>
(ii) twenty-five million (25,000,000) shares, par value $.001 per
share, shall be shares of preferred stock (the "Preferred Stock").
(2) Reclassification. Immediately upon the effectiveness of this
-----------------
Restated Certificate of Incorporation (the "Effective Date"), each one (1) share
of the Corporation's common stock, par value $0.001 per share, issued and
outstanding immediately prior to the Effective Date (the "Old Common Stock"),
shall automatically and without any action on the part of the holder thereof be
reclassified and changed into 0.563 of a share of the Corporation's Common
Stock, subject to the treatment of fractional share interests as described
below. Each holder of a certificate or certificates, which immediately prior to
the Effective Date represented outstanding shares of Old Common Stock (the "Old
Certificates," whether one or more), shall be entitled to receive, upon
surrender of such Old Certificates to the Corporation for cancellation, a
certificate or certificates (the "New Certificates," whether one or more)
representing the number of whole shares of Common Stock into which and for which
the shares of the Old Common Stock formerly represented by such Old Certificates
so surrendered are reclassified under the terms hereof. From and after the
Effective Date, Old Certificates shall represent only (i) the number of shares
of Common Stock into which the shares of Old Common Stock represented thereby
were reclassified and (ii) the right to receive New Certificates pursuant to the
provisions hereof. No certificates or scrip representing fractional share
interests in New Common Stock will be issued, and no such fractional share
interest will entitle the holder thereof to vote, or to any rights of a
shareholder of the Corporation. In lieu of any fractional shares, each holder
who would otherwise be entitled to a fractional share shall be entitled to
receive an amount in cash, without interest, equal to such fraction multiplied
by the fair market value of the Common Stock as determined by the Corporation's
board of directors. If more than one Old Certificate shall be surrendered for
the account of the same stockholder, the number of full shares of Common Stock
for which New Certificates shall be issued shall be computed on the basis of the
aggregate number of shares represented by the Old Certificates so surrendered.
If any New Certificate is to be issued in a name other than that in which the
Old Certificates surrendered for exchange are issued, the Old Certificates so
surrendered shall be properly endorsed and otherwise in proper form for
transfer, and the person or persons requesting such exchange shall affix any
requisite stock transfer tax stamps to the Old Certificates surrendered, or
provide funds for their purchase, or establish to the satisfaction of the
Corporation that such taxes are not payable.
(B) Common Stock. Except as (1) otherwise required by law or (2) expressly
------------
provided in this Restated Certificate of Incorporation (as amended from time to
time), each share of Common Stock shall have the same powers, rights and
privileges and shall rank equally, share ratably and be identical in all
respects as to all matters.
(1) Dividends. Subject to the rights of the holders of Preferred
---------
Stock and to the other provisions of this Restated Certificate of Incorporation
(as amended from time to time), holders of Common Stock shall be entitled to
receive equally, on a per share basis, such dividends and other distributions in
cash, securities or other property of the Corporation as may be declared thereon
by the Board of Directors from time to time out of assets or funds of the
Corporation legally available therefore.
-2-
<PAGE>
(2) Voting Rights. At every annual or special meeting of stockholders
-------------
of the Corporation, each holder of Common Stock shall be entitled to cast one
(1) vote for each share of Common Stock standing in such holder's name on the
stock transfer records of the Corporation.
(3) Liquidation Rights. In the event of any liquidation, dissolution or
------------------
winding up of the affairs of the Corporation, whether voluntary or involuntary,
after payment or provision for payment of the Corporation's debts and amounts
payable upon shares of Preferred Stock entitled to a preference, if any, over
holders of Common Stock upon such dissolution, liquidation or winding up, the
remaining net assets of the Corporation shall be distributed among holders of
shares of Common Stock equally on a per share basis. A merger or consolidation
of the Corporation with or into any other corporation or other entity, or a sale
or conveyance of all or any part of the assets of the Corporation (which shall
not in fact result in the liquidation of the Corporation and the distribution of
assets to its stockholders) shall not be deemed to be a voluntary or involuntary
liquidation or dissolution or winding up of the Corporation within the meaning
of this Paragraph (B)(3).
(C) Preferred Stock. The Board of Directors is authorized, subject to
---------------
limitations prescribed by law, to provide by resolution or resolutions for the
issuance of shares of Preferred Stock in one or more series, to establish the
number of shares to be included in each such series, and to fix the voting
powers (if any), designations, powers, preferences, and relative, participating,
optional or other rights, if any, of the shares of each such series, and any
qualifications, limitations or restrictions thereof. Irrespective of the
provisions of Section 242(b)(2) of the DGCL, the number of authorized shares of
Preferred Stock may be increased or decreased (but not below the number of
shares thereof then outstanding) by the affirmative vote of the holders of a
majority in voting power of the stock of the Corporation entitled to vote,
without the separate vote of the holders of the Preferred Stock as a class.
ARTICLE V
BOARD OF DIRECTORS
(A) Management. The business and affairs of the Corporation shall be
----------
managed by or under the direction of the Board of Directors. The Board of
Directors may exercise all such authority and powers of the Corporation and do
all such lawful acts and things as are not by statute or this Restated
Certificate of Incorporation directed or required to be exercised or done by the
stockholders.
(B) Number of Directors. The number of directors of the Corporation shall
-------------------
be fixed from time to time by, or in the manner provided in, the Bylaws;
provided, however, that the number of directors shall not be fewer than three
(3).
(C) Classes and Terms of Directors. The directors shall be divided into
------------------------------
three classes (I, II and III), as nearly equal in number as possible, and no
class shall include less than one director. The initial term of office for
members of Class II shall expire at the annual meeting of stockholders in 2000;
the initial term of office for members of Class III shall expire at the annual
meeting of stockholders in 2001; and the initial term of office for members of
Class I shall expire at the annual meeting of stockholders in 2002. At each
annual meeting of stockholders
-3-
<PAGE>
following such initial classification and election, directors elected to
succeed those directors whose terms expire shall be elected for a term of office
to expire at the third succeeding annual meeting of stockholders after their
election, and shall continue to hold office until their respective successors
are elected and qualified. In the event of any increase in the number of
directors fixed by the Board of Directors, the additional directors shall be
classified so that all classes of directors have as nearly equal numbers of
directors as may be possible. In the event of any decrease in the number of
directors, all classes of directors shall be decreased equally as nearly as may
be possible.
(D) Newly-Created Directorships and Vacancies. Subject to the rights of
-----------------------------------------
the holders of any class of Common Stock or series of Preferred Stock then
outstanding, newly created directorships resulting from any increase in the
number of directors or any vacancies in the Board of Directors resulting from
death, resignation, retirement, disqualification, removal from office or any
other cause may be filled by the Board of Directors, provided that a quorum is
then in office and present, or by a majority of the directors then in office, if
less than a quorum is then in office, or by the sole remaining director.
Directors elected to fill a newly created directorship or other vacancies shall
hold office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred and until such
director's successor has been elected and has qualified.
(E) Removal of Directors. Subject to the rights of the holders of any
--------------------
series of Preferred Stock then outstanding, any director may be removed from
office at any time, with or without cause, at a meeting called for that purpose,
and only by the affirmative vote of the holders of at least a majority of the
voting power of all shares of Common Stock entitled to vote generally in the
election of directors, voting together as a single class.
(F) Rights of Holders of Preferred Stock. Notwithstanding the foregoing
------------------------------------
provisions of this Article V, whenever the holders of one or more series of
Preferred Stock issued by the Corporation shall have the right, voting
separately or together by series, to elect directors at an annual or special
meeting of stockholders, the election, term of office, filling of vacancies and
other features of such directorship shall be governed by the rights of such
Preferred Stock as set forth in the certificate of designations governing such
series.
(G) Written Ballot Not Required. Elections of directors need not be by
---------------------------
written ballot unless the By-laws of the Corporation shall otherwise provide.
(H) By-laws. The Board of Directors is expressly authorized to adopt,
-------
amend or repeal the by-laws of the Corporation. Any by-laws made by the
directors under the powers conferred hereby may be amended or repealed by the
directors or by the stockholders. Notwithstanding the foregoing and anything
contained in this Restated Certificate of Incorporation to the contrary, the by-
laws of the Corporation shall not be amended or repealed by the stockholders,
and no provision inconsistent therewith shall be adopted by the stockholders,
without the affirmative vote of the holders of 66-2/3% of the voting power of
all shares of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
-4-
<PAGE>
ARTICLE VI
LIMITATION OF LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that the foregoing shall not eliminate or
limit the liability of a director (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) under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit. If the DGCL is hereafter
amended to permit further elimination or limitation of the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the DGCL as so amended.
Any repeal or modification of this Article VI by the stockholders of the
Corporation or otherwise shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
ARTICLE VII
INDEMNIFICATION
Each person who was or is made a party or is threatened to be made a party
to or is involved (including, without limitation, as a witness) in any actual or
threatened action, suit or proceeding, whether civil, criminal, administrative
or investigative (hereinafter a "proceeding"), by reason of the fact that he is
or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, agent or employee of another
corporation or of a partnership, limited liability company, joint venture, trust
or other enterprise, including service with respect to an employee benefit plan
(hereinafter an "Indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director or officer or in any other capacity
while so serving, shall be indemnified and held harmless by the Corporation to
the full extent authorized by the DGCL, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such amendment), or by
other applicable law as then in effect, against all expense, liability and loss
(including attorneys' fees and related disbursements, judgments, fines, excise
taxes or penalties under the Employee Retirement Income Security Act of 1974, as
amended from time to time ("ERISA"), penalties and amounts paid or to be paid in
settlement) actually and reasonably incurred or suffered by such Indemnitee in
connection therewith, and such indemnification shall continue as to a person who
has ceased to be a director, officer, partner, member or trustee and shall inure
to the benefit of his or her heirs, executors and administrators. Each person
who is or was serving as a director or officer of a subsidiary of the
Corporation shall be deemed to be serving, or have served, at the request of the
Corporation.
(A) Procedure. Any indemnification (but not advancement of expenses) under
---------
this Article VII (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 or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth in the DGCL, as
the same exists or hereafter may be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification
-5-
<PAGE>
rights than said law permitted the Corporation to provide prior to such
amendment). Such determination shall be made with respect to a person who is a
director or officer at the time of such determination (a) by a majority vote of
the directors who were not parties to such proceeding (the "Disinterested
Directors"), even though less than a quorum, (b) by a committee of Disinterested
Directors designated by a majority vote of Disinterested Directors, even though
less than a quorum, (c) if there are no such Disinterested Directors, or if such
Disinterested Directors so direct, by independent legal counsel in a written
opinion, or (d) by the stockholders.
(B) Advances for Expenses. Expenses (including attorneys' fees, costs and
---------------------
charges) incurred by a director or officer of the Corporation in defending a
proceeding shall be paid by the Corporation in advance of the final disposition
of such proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay all amounts so advanced in the event that it shall
ultimately be determined that such director or officer is not entitled to be
indemnified by the Corporation as authorized in this Article VII. The majority
of the Disinterested Directors may, in the manner set forth above, and upon
approval of such director or officer of the Corporation, authorize the
Corporation's counsel to represent such person, in any proceeding, whether or
not the Corporation is a party to such proceeding.
(C) Procedure for Indemnification. Any indemnification or advance of
-----------------------------
expenses (including attorney's fees, costs and charges) under this Article VII
shall be made promptly, and in any event within 60 days upon the written request
of the director or officer (and, in the case of advance of expenses, receipt of
a written undertaking by or on behalf of Indemnitee to repay such amount if it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
therefor pursuant to the terms of this Article VII). The right to
indemnification or advances as granted by this Article VII shall be enforceable
by the director or officer in any court of competent jurisdiction, if the
Corporation denies such request, in whole or in part, or if no disposition
thereof is made within 60 days. Such person's costs and expenses incurred in
connection with successfully establishing his/her right to indemnification, in
whole or in part, in any such action shall also be indemnified by the
Corporation. It shall be a defense to any such action (other than an action
brought to enforce a claim for the advance of expenses (including attorney's
fees, costs and charges) under this Article VII where the required undertaking,
if any, has been received by the Corporation) that the claimant has not met the
standard of conduct set forth in the DGCL, as the same exists or hereafter may
be amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such amendment), but the
burden of proving such defense shall be on the Corporation. Neither the failure
of the Corporation (including its Board of Directors, its independent legal
counsel and its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he/she has met the applicable standard of conduct set
forth in the DGCL, as the same exists or hereafter may be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), nor the fact that there has
been an actual determination by the Corporation (including its Board of
Directors, its independent legal counsel and its stockholders) that the claimant
has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the claimant has not met the applicable
standard of conduct.
-6-
<PAGE>
(D) Other Rights; Continuation of Right to Indemnification. The
------------------------------------------------------
indemnification and advancement of expenses provided by this Article VII shall
not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any law (common
or statutory), by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his/her official capacity and as to
action in another capacity while holding office or while employed by or acting
as agent for the Corporation, and shall continue as to a person who has ceased
to be a director or officer, and shall inure to the benefit of the estate,
heirs, executors and administers of such person. All rights to indemnification
under this Article VII shall be deemed to be a contract between the Corporation
and each director or officer of the Corporation who serves or served in such
capacity at any time while this Article VII is in effect. Any repeal or
modification of this Article VII or any repeal or modification of relevant
provisions of the DGCL or any other applicable laws shall not in any way
diminish any rights to indemnification of such director or officer or the
obligations of the Corporation arising hereunder with respect to any proceeding
arising out of, or relating to, any actions, transactions or facts occurring
prior to the final adoption of such modification or repeal. For the purposes of
this Article VII, references to "the Corporation" include all constituent
corporations absorbed in a consolidation or merger as well as the resulting or
surviving corporation, so that any person who is or was a director or officer of
such a constituent corporation or is or was serving at the request of such
constituent corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article VII, with respect to the resulting
or surviving corporation, as he would if he/she had served the resulting or
surviving corporation in the same capacity.
(E) Insurance. The Corporation shall have power to purchase and maintain
---------
insurance on behalf of any person who is or was or has agreed to become a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted against
him and incurred by him or on his behalf 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 Article VII,
provided, however, that such insurance is available on acceptable terms, which
determination shall be made by a vote of a majority of the Board of Directors.
(F) Savings Clause. If this Article VII or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each person entitled to indemnification
under the first paragraph of this Article VII as to all expense, liability and
loss (including attorneys' fees and related disbursements, judgments, fines,
ERISA excise taxes and penalties, penalties and amounts paid or to be paid in
settlement) actually and reasonably incurred or suffered by such person and for
which indemnification is available to such person pursuant to this Article VII
to the full extent permitted by any applicable portion of this Article VII that
shall not have been invalidated and to the full extent permitted by applicable
law.
-7-
<PAGE>
ARTICLE VIII
AMENDMENT
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation which
restates, integrates and amends the provisions of the Certificate of
Incorporation of the Corporation, and which has been duly adopted in accordance
with the provisions of Sections 228, 242 and 245 of the DGCL, has been executed
by the undersigned on this 12 day of July, 1999.
SPLITROCK SERVICES, INC.
By: /s/ William R. Wilson
-------------------------
Name: William R. Wilson
Title: President
-8-
<PAGE>
IN WITNESS WHEREOF, this Restated Certificate of Incorporation which
restates, integrates and amends the provisions of the Certificate of
Incorporation of the Corporation, and which has been duly adopted in accordance
with the provisions of Sections 228, 242 and 245 of the DGCL, has been executed
by the undersigned on this day of July, 1999.
----
SPLITROCK SERVICES, INC.
By:
-----------------------------
Name: William R. Wilson
Title: President
-9-
<PAGE>
DRAFT 06/29/99
Exhibit 3.2
RESTATED BY-LAWS
OF
SPLITROCK SERVICES, INC.
ARTICLE I
Offices
SECTION 1. Registered Office. The registered office of the Corporation in
-----------------
the State of Delaware shall be located at 9 East Lockerman Street, Suite 214,
Dover, Delaware 19901. The name of the Corporation's registered agent at such
address shall be Capitol Services, Inc. The registered office and/or registered
agent of the Corporation may be changed from time to time by action of the Board
of Directors.
SECTION 2. Other Offices. The Corporation may have an office or offices
-------------
other than said registered office at such place or places, either within or
without the State of Delaware, as the Board of Directors shall from time to time
determine or the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
SECTION 1. Place of Meetings. All meetings of the stockholders for the
-----------------
election of directors or for any other purpose shall be held at any such place,
either within or without the State of Delaware, as shall be designated from time
to time by the Board of Directors and stated in the notice of meeting or in a
duly executed waiver thereof.
SECTION 2. Annual Meeting. An annual meeting of stockholders shall be
--------------
held each year and stated in a notice of meeting or in a duly executed waiver
thereof. The date, time and place of such meeting shall be determined by the
President of the Corporation; provided that if the President does not act, the
Board of Directors shall determine the date, time, and place of such meeting.
At such annual meeting, the stockholders shall elect, by a plurality vote, a
Board of Directors and transact such other business as may properly be brought
before the meeting.
SECTION 3. Special Meetings. Special meetings of stockholders may be
----------------
called for any purpose by the Board of Directors and may be held at such time
and place, within or without the State of Delaware, as shall be stated in a
notice of meeting or in a duly executed waiver of notice thereof.
SECTION 4. Notice of Meetings. Except as otherwise expressly required by
------------------
statute, written notice of each annual and special meeting of stockholders
stating the date, place and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called, shall be given
to each stockholder of record entitled to vote thereat not less than ten (10)
nor more than sixty (60) days before the date of the meeting. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice. Notice
<PAGE>
shall be given personally or by mail and, if by mail, shall be sent in a postage
prepaid envelope, addressed to the stockholder at his address as it appears on
the records of the Corporation. Notice by mail shall be deemed given at the time
when the same shall be deposited in the United States mail, postage prepaid.
Notice of any meeting shall not be required to be given to any person who
attends such meeting, except when such person attends the meeting in person or
by proxy for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened, or who, either before or after the meeting, shall submit a signed
written waiver of notice, in person or by proxy. Neither the business to be
transacted at, nor the purpose of, an annual or special meeting of stockholders
need be specified in any written waiver of notice.
SECTION 5. List of Stockholders. The officer who has charge of the stock
--------------------
ledger of the Corporation shall prepare and make, at least ten (10) days before
each meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, showing the address of and
the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten (10)
days prior to the meeting, either at a place within the city, town or village
where the meeting is to be held, which place shall be specified in the notice of
meeting, or, if not specified, at the place where the meeting is to be held.
The list shall be produced and kept at the time and place of the meeting during
the whole time thereof, and may be inspected by any stockholder who is present.
SECTION 6. Quorum; Adjournments. The holders of a majority of the voting
--------------------
power of the issued and outstanding stock of the Corporation entitled to vote
thereat, present in person or represented by proxy, shall constitute a quorum
for the transaction of business at all meetings of stockholders, except as
otherwise provided by statute or by the Certificate of Incorporation. If,
however, such quorum shall not be present or represented by proxy at any meeting
of stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented by proxy. At such adjourned meeting at which a
quorum shall be present or represented by proxy, any business may be transacted
which might have been transacted at the meeting as originally called. If the
adjournment is for more than thirty (30) days, or, if after adjournment a new
record date is set, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
SECTION 7. Organization. At each meeting of stockholders, the Chairman of
------------
the Board, if one shall have been elected, or, in his absence or if one shall
not have been elected, the President shall act as chairman of the meeting. The
Secretary or, in his absence or inability to act, the person whom the chairman
of the meeting shall appoint secretary of the meeting shall act as secretary of
the meeting and keep the minutes thereof.
SECTION 8. Order of Business. The order of business at all meetings of
-----------------
the stockholders shall be as determined by the chairman of the meeting.
SECTION 9. Voting. Except as otherwise provided by the Certificate of
------
Incorporation or the General Corporation Law of the State of Delaware, each
stockholder of the Corporation
-2-
<PAGE>
shall be entitled at each meeting of stockholders to one (1) vote for each
share of capital stock of the Corporation standing in his name on the record of
stockholders of the Corporation:
(a) on the date fixed pursuant to the provisions of Section 9 of
Article V of these By-laws as the record date for the determination of
the stockholders who shall be entitled to notice of and to vote at
such meeting; or
(b) if no such record date shall have been so fixed, then at the close
of business on the day next preceding the day on which notice thereof
shall be given, or, if notice is waived, at the close of business on
the date next preceding the day on which the meeting is held.
Each stockholder entitled to vote at any meeting of stockholders may authorize
another person or persons to act for him by a proxy which is in writing or
transmitted as permitted by law, including, without limitation, electronically,
via telegram, internet, interactive voice response system, or other means of
electronic transmission executed or authorized by such stockholder or his
attorney-in-fact, but no proxy shall be voted after (3) three years from its
date, unless the proxy provides for a longer period. Any such proxy shall be
delivered to the secretary of the meeting at or prior to the time designated in
the order of business for so delivering such proxies. Any proxy transmitted
electronically shall set forth information from which it can be determined by
the secretary of the meeting that such electronic transmission was authorized by
the stockholder. When a quorum is present at any meeting, the vote of the
holders of a majority of the voting power of the issued and outstanding stock of
the Corporation entitled to vote thereon, present and voting, in person or
represented by proxy, shall decide any question brought before such meeting,
unless the question is one upon which by express provision of statute or of the
Certificate of Incorporation or of these By-laws, a different vote is required,
in which case such express provision shall govern and control the decision of
such question. Unless required by statute, or determined by the chairman of the
meeting to be advisable, the vote on any question need not be by ballot. On a
vote by ballot, each ballot shall be signed by the stockholder voting, or by his
proxy, if there be such proxy, and shall state the number of shares voted and
the number of votes to which each share is entitled.
SECTION 10. Inspectors. The Board of Directors may, in advance of any
----------
meeting of stockholders, appoint one or more inspectors to act at such meeting
or any adjournment thereof. If any of the inspectors so appointed shall fail to
appear or act, the chairman of the meeting shall, or if inspectors shall not
have been appointed, the chairman of the meeting may, appoint one or more
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares of capital stock of the
Corporation outstanding and the voting power of each, the number of shares
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count and
tabulate all votes, ballots or consents, determine the results, and do such acts
as are proper to conduct the election or vote with fairness to all stockholders.
On request of the chairman of the meeting, the inspectors shall make a report in
writing of any challenge, request or matter determined by them and shall execute
a certificate of
-3-
<PAGE>
any fact found by them. No director or candidate for the office of director
shall act as an inspector of an election of directors. Inspectors need not be
stockholders.
SECTION 11. Advance Notice Provisions for Election of Directors. Only
---------------------------------------------------
persons who are nominated in accordance with the following procedures shall be
eligible for election as directors of the Corporation. Nominations of persons
for election to the Board of Directors may be made at any annual meeting of
stockholders, or at any special meeting of stockholders called for the purpose
of electing directors as provided under Section 3 of this Article II, (a) by or
at the direction of the Board of Directors (or any duly authorized committee
thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder
of record on the date of the giving of the notice provided for in this Section
11 and on the record date for the determination of stockholders entitled to vote
at such meeting and (ii) who complies with the notice procedures set forth in
this Section 11.
In addition to any other applicable requirements, for a nomination to be
made by a stockholder such stockholder must have given timely notice thereof in
proper written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation (a)
in the case of an annual meeting, not less than ninety (90) days prior to the
date of the anniversary of the previous year's annual meeting; provided,
---------
however, that in the event the annual meeting is scheduled to be held on a date
- -------
more than thirty (30) days prior to or delayed by more than sixty (60) days
after such anniversary date, notice by the stockholder in order to be timely
must be so received not later than the later of the close of business ninety
(90) days prior to such annual meeting or the tenth (10th) day following the day
on which such notice of the date of the annual meeting was mailed or such public
disclosure of the date of the annual meeting was made and (b) in the case of a
special meeting of stockholders called for the purpose of electing directors,
not later than the close of business on the tenth (10th) day following the day
on which notice of the date of the special meeting was mailed or public
disclosure of the date of the special meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth (a) as to each person whom the stockholder proposes to nominate for
election as a director (i) the name, age, business address and residence address
of the person, (ii) the principal occupation or employment of the person, (iii)
the class or series and number of shares of capital stock of the Corporation
which are owned beneficially or of record by the person and (iv) any other
information relating to the person that would be required to be disclosed in a
proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder; and (b) as to the stockholder giving the
notice (i) the name and record address of such stockholder, (ii) the class or
series and number of shares of capital stock of the Corporation which are owned
beneficially or of record by such stockholder, (iii) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nomination(s) are to be made by such stockholder, (iv) a
representation that such stockholder intends to appear in person or by proxy at
the meeting to
-4-
<PAGE>
nominate the persons named in its notice and (v) any other information relating
to such stockholder that would be required to be disclosed in a proxy statement
or other filings required to be made in connection with solicitations of proxies
for election of directors pursuant to Section 14 of the Exchange Act and the
rules and regulations promulgated thereunder. Such notice must be accompanied by
a written consent of each proposed nominee to being named as a nominee and to
serve as a director if elected.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Section 11.
If the Chairman of the meeting determines that a nomination was not made in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.
SECTION 12. Advance Notice Provisions for Business to be Transacted at
----------------------------------------------------------
Annual Meeting. No business may be transacted at an annual meeting of
- --------------
stockholders, other than business that is either (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors (or any duly authorized committee thereof), (b) otherwise properly
brought before the annual meeting by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or (c) otherwise properly
brought before the annual meeting by any stockholder of the Corporation (i) who
is a stockholder of record on the date of the giving of the notice provided for
in this Section 12 and on the record date for the determination of stockholders
entitled to vote at such annual meeting and (ii) who complies with the notice
procedures set forth in this Section 12.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than ninety (90) days prior to the date of the anniversary of the previous
year's annual meeting; provided, however, that in the event the annual meeting
is scheduled to be held on a date more than thirty (30) days prior to or delayed
by more than sixty (60) days after such anniversary date, notice by the
stockholder in order to be timely must be so received not later than the later
of the close of business ninety (90) days prior to such annual meeting or the
tenth (10th) day following the day on which such notice of the date of the
annual meeting was mailed or such public disclosure of the date of the annual
meeting was made.
To be in proper written form, a stockholder's notice to the Secretary must
set forth as to each matter such stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of such stockholder, (iii) the class
or series and number of shares of capital stock of the Corporation which are
owned beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business and (v) a representation that such stockholder
-5-
<PAGE>
intends to appear in person or by proxy at the annual meting to bring such
business before the meeting.
No business shall be conducted at the annual meeting of stockholders except
business brought before the annual meeting in accordance with the procedures set
forth in this Section 12; provided, however, that, once business has been
-------- -------
properly brought before the annual meeting in accordance with such procedures,
nothing in this Section 12 shall be deemed to preclude discussion by any
stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
SECTION 13. Action by Written Consent. Whenever the vote of stockholders
-------------------------
at a meeting thereof is required or permitted to be taken for or in connection
with any corporate action, by any provision of statute or of the Certificate of
Incorporation or of these By-laws, the meeting and vote of stockholders may be
dispensed with, and the action taken without such meeting and vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
the outstanding stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares of stock of the Corporation entitled to vote thereon were present and
voted. The consent shall be delivered to the Corporation by delivery to its
registered office in the State of Delaware, or the Corporation's principal place
of business, or an officer or agent of the Corporation having custody of the
book or books in which the proceedings of meetings of the stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested; provided, however,
-------- -------
that no consent delivered by certified or registered mail shall be deemed
delivered until such consent is actually received at the Corporation's
registered office. All consents properly delivered in accordance with this
Section 13 shall be deemed to be recorded when so delivered. No written consent
shall be effective to take the corporate action referred to therein unless,
within sixty (60) days of the earliest dated consent delivered to the
Corporation as required by this Section 13, written consents signed by the
holders of a sufficient number of shares to take such corporate action are so
recorded. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. Any action taken pursuant to such written
consent of the stockholders shall have the same force and effect as if taken by
the stockholders at a meeting thereof.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
--------------
shall be managed by or under the direction of the Board of Directors. The Board
of Directors may exercise all such authority and powers of the Corporation and
do all such lawful acts and things as are not by statute or the Certificate of
Incorporation directed or required to be exercised or done by the stockholders.
-6-
<PAGE>
SECTION 2. Number and Election. The number of directors which shall
-------------------
constitute the Board of Directors shall initially be five (5) but may be
increased or decreased from time to time by the Board of Directors; provided,
however, that (i) the number of directors shall not be fewer than three (3), and
(ii) no decrease in the number of directors shall shorten the term of any
incumbent director. Except as otherwise provided by the By-laws, the directors
shall be elected at the annual meeting of stockholders.
SECTION 3. Place of Meetings. Meetings of the Board of Directors shall be
-----------------
held at such place or places, within or without the State of Delaware, as the
Board of Directors may from time to time determine or as shall be specified in
the notice of any such meeting.
SECTION 4. Annual Meetings. The Board of Directors shall meet for the
---------------
purpose of organization, the election of officers and the transaction of other
business, as soon as practicable after each annual meeting of stockholders, on
the same day and at the same place where such annual meeting shall be held. In
the event such annual meeting is not so held, the annual meeting of the Board of
Directors may be held at such other time or place (within or without the State
of Delaware) as shall be specified in a notice thereof given as hereinafter
provided in Section 7 of this Article III.
SECTION 5. Regular Meetings. Regular meetings of the Board of Directors
----------------
shall he held at such time and place as the Board of Directors may fix. If any
day fixed for a regular meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting which would otherwise be held on that
day shall be held at the same hour on the next succeeding business day.
SECTION 6. Special Meetings. Special meetings of the Board of Directors
----------------
may be called by the Chairman of the Board, if one shall have been elected, or
by two or more directors of the Corporation or by the President.
SECTION 7. Notice of Meetings. Notice of regular meetings of the Board of
------------------
Directors need not be given except as otherwise required by law or these By-
laws. Notice of each special meeting of the Board of Directors, and of each
regular and annual meeting of the Board of Directors for which notice shall be
required, shall be given by the Secretary as hereinafter provided in this
Section 7, in which notice shall be stated the time and place of the meeting.
Except as otherwise required by these By-laws, such notice need not state the
purposes of such meeting. Notice of any special meeting, and of any regular or
annual meeting for which notice is required, shall be given to each director at
least (a) twenty-four (24) hours before the meeting if by telephone or by being
personally delivered or sent by telex, telecopy, or similar means or (b) five
(5) days before the meeting if delivered by mail to the director's residence or
usual place of business. Such notice shall be deemed to be delivered when
deposited in the United States mail so addressed, with postage prepaid, or when
transmitted if sent by telex, telecopy, or similar means. Neither the business
to be transacted at, nor the purpose of, any special meeting of the Board of
Directors need be specified in the notice or waiver of notice of such meeting.
Any director may waive notice of any meeting by a writing signed by the director
entitled to the notice and filed with the minutes or corporate records.
-7-
<PAGE>
SECTION 8. Waiver of Notice and Presumption of Assent. Any member of the
------------------------------------------
Board of Directors or any committee thereof who is present at a meeting shall be
conclusively presumed to have waived notice of such meeting except when such
member attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. Such member shall be conclusively presumed to have assented
to any action taken unless his or her dissent shall be entered in the minutes of
the meeting or unless his or her written dissent to such action shall be filed
with the person acting as the secretary of the meeting before the adjournment
thereof or shall be forwarded by registered mail to the Secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to any member who voted in favor of such action.
SECTION 9. Quorum and Manner of Acting. A majority of the entire Board of
---------------------------
Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors, and, except as otherwise expressly required
by statute or the Certificate of Incorporation or these By-laws, the act of a
majority of the directors present at any meeting at which a quorum is present
shall be the act of the Board of Directors. In the absence of a quorum at any
meeting of the Board of Directors, a majority of the directors present thereat
may adjourn such meeting to another time and place. Notice of the time and
place of any such adjourned meeting shall be given to all of the directors
unless such time and place were announced at the meeting at which the
adjournment was taken, in which case such notice shall only be given to the
directors who were not present thereat. At any adjourned meeting at which a
quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called. The directors shall act only as
a Board and the individual directors shall have no power as such.
SECTION 10. Organization. At each meeting of the Board of Directors, the
------------
Chairman of the Board, if one shall have been elected, or, in the absence of the
Chairman of the Board or if one shall not have been elected, the President (or,
in his absence, another director chosen by a majority of the directors present)
shall act as chairman of the meeting and preside thereat. The Secretary or, in
his absence, any person appointed by the chairman, shall act as secretary of the
meeting and keep the minutes thereof.
SECTION 11. Resignations; Newly Created Directorships; Vacancies; and
---------------------------------------------------------
Removals. Any director of the Corporation may resign at any time by giving
- --------
written notice of his resignation to the Corporation. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt.
Unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective. Newly created directorships resulting from
any increase in the number of directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal or any other cause shall be filled as provided in the Certificate of
Incorporation. Any director may be removed as provided in the Certificate of
Incorporation.
SECTION 12. Compensation. The Board of Directors shall have authority to
------------
fix the compensation, including fees and reimbursement of expenses, of directors
for services to the Corporation in any capacity.
-8-
<PAGE>
SECTION 13. Committees. The Board of Directors may, by resolution passed
----------
by a majority of the entire Board of Directors, designate one or more
committees, including an executive committee, each committee to consist of one
or more of the directors of the Corporation. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
Except to the extent restricted by statute or the Certificate of Incorporation,
each such committee, to the extent provided in the resolution creating it, shall
have and may exercise all the powers and authority of the Board of Directors and
may authorize the seal of the Corporation to be affixed to all papers which
require it. Each such committee shall serve at the pleasure of the Board of
Directors and have such name as may be determined from time to time by
resolution adopted by the Board of Directors. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors.
SECTION 14. Committee Rules. Each committee of the Board of Directors may
---------------
fix its own rules of procedure and shall hold its meetings as provided by such
rules, except as may otherwise be provided by a resolution of the Board of
Directors designating such committee. Unless otherwise provided in such a
resolution, the presence of at least a majority of the members of the committee
shall be necessary to constitute a quorum. In the event that a member and that
member's alternate, if alternates are designated by the Board of Directors as
provided in Section 13 of this Article III, of such committee is or are absent
or disqualified, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in place of any such absent or disqualified member.
SECTION 15. Action by Written Consent. Unless restricted by the
-------------------------
Certificate of Incorporation, any action required or permitted to be taken by
the Board of Directors or any committee thereof may be taken without a meeting
if all members of the Board of Directors or such committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of the proceedings of the Board of Directors or such committee, as the
case may be.
SECTION 16. Telephonic Meeting. Unless restricted by the Certificate of
------------------
Incorporation, any one or more members of the Board of Directors or any
committee thereof may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other.
Participation by such means shall constitute presence in person at a meeting.
ARTICLE IV
Officers
SECTION 1. Number and Qualifications. The officers of the Corporation
-------------------------
shall be elected by the Board of Directors and shall include the Chairman of the
Board, the President, one or more Vice-Presidents (including Senior, Executive
or other classifications of Vice-Presidents), the Secretary and the Treasurer.
If the Board of Directors wishes, it may also elect other officers
-9-
<PAGE>
(including one or more Assistant Treasurers and one or more Assistant
Secretaries) as may be necessary or desirable for the business of the
Corporation. Any two or more offices may be held by the same person, and no
officer except the Chairman of the Board need be a director. In its discretion,
the Board of Directors may choose not to fill any office for any period as it
may deem advisable, except that the offices of President and Secretary shall be
filled as expeditiously as possible.
SECTION 2. Election and Term of Office. The officers of the Corporation
---------------------------
shall be elected annually by the Board of Directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as conveniently
may be. The Chairman of the Board and President shall be elected annually by
the Board of Directors at the first meeting of the Board of Directors held after
each annual meeting of stockholders or as soon thereafter as conveniently may
be. Vacancies may be filled or new offices created and filled at any meeting of
the Board of Directors. Each officer shall hold office until his successor
shall have been duly elected and shall have qualified, or until his death, or
until he shall have resigned or have been removed, as hereinafter provided in
these By-laws.
SECTION 3. Resignations. Any officer of the Corporation may resign at any
------------
time by giving written notice of his resignation to the Corporation. Any such
resignation shall take effect at the time specified therein or, if the time when
it shall become effective shall not be specified therein, immediately upon
receipt. Unless otherwise specified therein, the acceptance of any such
resignation shall not be necessary to make it effective.
SECTION 4. Removal. Any officer of the Corporation may be removed, either
-------
with or without cause, at any time, by the Board of Directors at any meeting
thereof.
SECTION 5. Vacancies. Any vacancy occurring in any office because of
---------
death, resignation, removal, disqualification or otherwise, may be filled by the
Board of Directors for the unexpired portion of the term by the Board of
Directors then in office.
SECTION 6. Compensation. The compensation of the officers of the
------------
Corporation for their services as such officers shall be fixed from time to time
by the Board of Directors. An officer of the Corporation shall not be prevented
from receiving compensation by reason of the fact that he is also a director of
the Corporation.
SECTION 7. Chairman of the Board. The Chairman of the Board shall have
---------------------
the powers and perform the duties incident to that position. Subject to the
powers of the Board of Directors, he shall be in the general and active charge
of the entire business and affairs of the Corporation. He shall be a member of
the Board and an officer of the Corporation and, if present, shall preside at
each meeting of the Board of Directors or the stockholders. He shall advise and
counsel with the President, and in his absence with other executives of the
Corporation, and shall perform such other duties as may from time to time be
assigned to him by the Board of Directors. Whenever the President is unable to
serve, by reason of sickness, absence or otherwise, the Chairman of the Board
shall perform all the duties and responsibilities and exercise all the powers of
the President.
-10-
<PAGE>
SECTION 8. The President. The President shall be the chief executive
-------------
officer of the Corporation. He shall, in the absence of the Chairman of the
Board, preside at each meeting of the Board of Directors or the stockholders.
He shall perform all duties incident to the office of President and such other
duties as may from time to time be assigned to him by the Board of Directors,
Chairman, or as may be provided in these by-laws. Subject to the powers of the
Board of Directors, he shall have general charge of the business, affairs and
property of the Corporation, and control over its officers, agents and
employees. The President shall see that all orders and resolutions of the Board
of Directors are carried into effect, and execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation.
SECTION 9. Vice-President. Each Vice-President shall perform all such
--------------
duties as from time to time may be assigned to him by the Board of Directors or
the President. At the written request of the President, a Vice-President shall
perform the duties of the President, and, when so acting, shall have the powers
of and be subject to the restrictions placed upon the President in respect of
the performance of such duties.
SECTION 10. Treasurer. The Treasurer shall
---------
(a) have charge and custody of, and be responsible for, all the funds
and securities of the Corporation;
(b) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
(c) deposit all moneys and other valuables to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors or pursuant to its direction;
(d) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the
investments of its funds, taking proper vouchers therefor;
(f) render to the Board of Directors, whenever the Board of Directors
may require, an account of the financial condition of the Corporation;
and
(g) in general, perform all duties incident to the office of Treasurer
and such other duties as from time to time may be assigned to him by
the Board of Directors.
-11-
<PAGE>
SECTION 11. Secretary. The Secretary shall
---------
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board of Directors, the
committees of the Board of Directors and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all certificates for shares of the
Corporation (unless the seal of the Corporation on such certificates
shall be a facsimile, as hereinafter provided) and affix and attest
the seal to all other documents to be executed on behalf of the
Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are
properly kept and filed; and
(e) in general, perform all duties incident to the office of Secretary
and such other duties as from time to time may be assigned to him by
the Board of Directors.
SECTION 12. The Assistant Treasurer. The Assistant Treasurer, or if there
-----------------------
shall be more than one, the Assistant Treasurers in the order determined by the
Board of Directors (or, if there be no such determination, then in the order of
their election), shall, in the absence of the Treasurer or in the event of his
inability to act or his failure to act (in violation of a duty to act or in
contravention of direction to act by the Board of Directors), perform the duties
and exercise the powers of the Treasurer and shall perform such other duties as
from time to time may be assigned by the Board of Directors.
SECTION 13. The Assistant Secretary. The Assistant Secretary, or if there
-----------------------
be more than one, the Assistant Secretaries in the order determined by the Board
of Directors (or if there be no such determination, then in the order of their
election), shall, in the absence of the Secretary or in the event of his
inability to act or his failure to act (in violation of a duty to act or in
contravention of direction to act by the Board of Directors), perform the duties
and exercise the powers of the Secretary and shall perform such other duties as
from time to time may be assigned by the Board of Directors.
SECTION 14. Other Officers, Assistant Officers and Agents. Officers,
----------------------------------------------
assistant officers and agents, if any, other than those whose duties are
provided for in these by-laws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the Board of Directors.
SECTION 15. Officers' Bonds or Other Security. If required by the Board
---------------------------------
of Directors, any officer of the Corporation shall give a bond or other security
for the faithful performance of his duties, in such amount and with such surety
as the Board of Directors may require.
SECTION 16. Absence or Disability of Officers. In the case of the absence
---------------------------------
or disability of any officer of the Corporation and of any person hereby
authorized to act in such officer's place during such officer's
-12-
<PAGE>
absence or disability, the Board of Directors may by resolution delegate the
powers and duties of such officer to any other officer or to any director, or to
any other person whom it may select.
ARTICLE V
Stock Certificates and Their Transfer
SECTION 1. Stock Certificates. The Board of Directors may issue stock
------------------
certificates, or may provide by resolution or resolutions that some or all of
any or all classes or series of stock of the Corporation shall be uncertificated
shares of stock. Notwithstanding the adoption of such a resolution by the Board
of Directors, every holder of stock represented by a certificate and, upon
request, every holder of uncertificated shares shall be entitled to have a
certificate, signed by, or in the name of the Corporation by, the Chairman of
the Board or, the President or a Vice-President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by him or her in the
Corporation. A certificate representing shares issued by the Corporation shall,
if the Corporation is authorized to issue more than one class or series of
stock, set forth upon the face or back of the certificate, or shall state that
the Corporation will furnish to any stockholder upon request and without charge,
a full statement of the designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. The Corporation shall furnish to any holder of uncertificated shares,
upon request and without charge, a full statement of the designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Any request by a holder for a
certificate shall be in writing and directed to the Secretary of the
Corporation.
SECTION 2. Facsimile Signatures. Any or all of the signatures on a
--------------------
certificate may be a facsimile, engraved or printed. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he or she were such officer, transfer
agent or registrar at the date of issue.
SECTION 3. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen, or
destroyed certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as it may direct sufficient to indemnify it
against any claim that may be made against the Corporation on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate
SECTION 4. Transfers of Stock. Upon surrender to the Corporation or the
------------------
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of
-13-
<PAGE>
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its records; provided,
however, that the Corporation shall be entitled to recognize and enforce any
lawful restriction on transfer. Whenever any transfer of stock shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of transfer if, when the certificates are presented to the Corporation for
transfer, both the transferor and the transferee request the Corporation to do
so.
SECTION 5. Transfer Agents and Registrars. The Board of Directors may
------------------------------
appoint, or authorize any officer or officers to appoint, one or more transfer
agents and one or more registrars.
SECTION 6. Regulations. The Board of Directors may make such additional
-----------
rules and regulations, not inconsistent with these By-laws, as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of stock of the Corporation.
SECTION 7. Fixing the Record Date. In order that the Corporation may
----------------------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) nor less than
ten (10) days before the date of such meeting, nor more than sixty (60) days
prior to any other action. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be the close of business on the day
next preceding the day on which notice is given, or if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
SECTION 8. Fixing a Record Date for Action by Written Consent. In order
--------------------------------------------------
that the Corporation may determine the stockholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which date 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. Any
stockholder of record seeking to have the stockholders authorize or take
corporate action by written consent shall, by written notice to the Secretary,
request the Board of Directors to fix a record date. Such notice shall specify
the action proposed to be consented to by stockholders. The Board of Directors
shall promptly, but in all events within ten (10) days after the date on which
such a request is received, adopt a resolution fixing the record date. If no
record date has been fixed by the Board of Directors within ten (10) days after
the date on which such a request is received, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by
applicable law, 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. Such delivery to the Corporation shall be made to its
-14-
<PAGE>
registered office in the State of Delaware, its principal place of business, or
any officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded, to the attention of the
Secretary of the Corporation. Such delivery shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
applicable law, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting shall be the close of business
on the date on which the Board of Directors adopts the resolution taking such
prior action.
In the event of delivery to the Corporation of a written consent or written
consents purporting to authorize or take corporate action, and/or related
revocation or revocations, (each such written consent and related revocation,
individually and collectively, a "Consent"), the Secretary of the Corporation
shall provide for the safekeeping of such Consent and shall as soon as
practicable thereafter conduct such reasonable investigation as the Secretary
deems necessary or appropriate for the purpose of ascertaining the validity of
such Consent and all matters incident thereto, including, without limitation,
whether holders of shares having the requisite voting power to authorize or take
the action specified in the Consent have given consent. If after such
investigation the Secretary shall determine that the Consent is sufficient and
valid, that fact shall be certified on the records of the Corporation kept for
the purpose of recording the proceedings of meetings of the stockholders, and
the Consent shall be filed in such records, at which time the Consent shall
become effective as stockholder action.
SECTION 9. Registered Stockholders. The Corporation shall be entitled to
-----------------------
recognize the exclusive right of a person registered on its records as the owner
of shares of stock to receive dividends and to vote as such owner, shall be
entitled to hold liable for calls and assessments a person registered on its
records as the owner of shares of stock, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares of stock on the
part of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VI
General Provisions
SECTION 1. Dividends. Subject to the provisions of statute and the
---------
Certificate of Incorporation, dividends upon the shares of capital stock of the
Corporation may be declared by the Board of Directors at any regular or special
meeting. Dividends may be paid in cash, in property or in shares of stock of
the Corporation, unless otherwise provided by statute or the Certificate of
Incorporation.
SECTION 2. Reserves. Before payment of any dividend, there may be set
--------
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors may, from time to time, in its absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation or for such other purpose as the Board of Directors may think
conducive to the interests of the Corporation. The Board of Directors may
modify or abolish any such reserves in the manner in which it was created.
-15-
<PAGE>
SECTION 3. Seal. The seal of the Corporation shall be in such form as
----
shall be approved by the Board of Directors, which form may be changed by
resolution of the Board of Directors.
SECTION 4. Fiscal Year. The fiscal year of the Corporation shall end on
-----------
December 31 of each fiscal year and may thereafter be changed by resolution of
the Board of Directors.
SECTION 5. Checks, Notes, Drafts, Etc. All checks, notes, drafts or other
--------------------------
orders for the payment of money of the Corporation shall be signed, endorsed or
accepted in the name of the Corporation by such officer, officers, person or
persons as from time to time may be designated by the Board of Directors or by
an officer or officers authorized by the Board of Directors to make such
designation.
SECTION 6. Execution of Contracts, Deeds, Etc. The Board of Directors may
----------------------------------
authorize any officer or officers, agent or agents, in the name and on behalf of
the Corporation to enter into or execute and deliver any and all deeds, bonds,
mortgages, contracts and other obligations or instruments, and such authority
may be general or confined to specific instances.
SECTION 7. Loans. The Corporation may lend money to, or guarantee any
-----
obligation of, or otherwise assist any officer or other employee of the
Corporation or of its subsidiary, including any officer or employee who is a
director of the Corporation or its subsidiary, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the board
of Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the Corporation at
common law or under any statute.
SECTION 8. Voting of Stock in Other Corporations. Unless otherwise
-------------------------------------
provided by resolution of the Board of Directors, the Chairman of the Board, or
the President, from time to time, may (or may appoint one or more attorneys or
agents to) cast the votes which the Corporation may be entitled to cast as a
shareholder or otherwise in any other corporation, any of whose shares or
securities may be held by the Corporation, at meetings of the holders of the
shares or other securities of such other corporation. In the event one or more
attorneys or agents are appointed, the Chairman of the Board, or the President
may instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent. The Chairman of the Board, or the President may,
or may instruct the attorneys or agents appointed to, execute or cause to be
executed in the name and on behalf of the Corporation and under its seal or
otherwise, such written proxies, consents, waivers or other instruments as may
be necessary or proper in the circumstances.
SECTION 9. Inspection of Books and Records. Any stockholder of record, in
-------------------------------
person or by attorney or other agent, shall, upon written demand under oath
stating the purpose thereof, have the right during the usual hours for business
to inspect for any proper purpose the Corporation's stock ledger, a list of its
stockholders, and its other books and records, and to make copies or extracts
therefrom. A proper purpose shall mean any purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or
other agent shall
-16-
<PAGE>
be the person who seeks the right of inspection, the demand under oath shall be
accompanied by a power of attorney or such other writing which authorizes the
attorney or other agent to so act on behalf of the stockholder. The demand under
oath shall be directed to the Corporation at its registered office in the State
of Delaware or at its principal place of business.
SECTION 10. Inconsistency Provisions. In the event that any provision of
-------------------------
these By-laws is or becomes inconsistent with any provision of the Certificate
of Incorporation, the General Corporation Law of the State of Delaware or any
other applicable law, the provision of these By-laws shall not be given any
effect to the extent of such inconsistency but shall otherwise be given full
force and effect.
ARTICLE VII
Amendments
These By-laws may be amended or repealed or new By-laws adopted only in
accordance with Article V of the Certificate of Incorporation.
-17-
<PAGE>
COMMON STOCK COMMON STOCK
- ------------ -------------
Number Shares
SSC-
- ------------ SPLITROCK -------------
SPLITROCK SERVICES, INC.
A CARRIER OF WISDOM(TM)
INCORPORATED UNDER THE LAWS CUSIP 848636 30 4
OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITION
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
- --------------------------------------------------------------------------------
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF
SPLITROCK SERVICES, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and Registrar. This certificate and the shares represented thereby are
subject to all the terms, conditions and limitations of the Certificate of
Incorporation and all amendments thereto and supplements thereof.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
DATED:
/s/ SPLITROCK SERVICES, INC /S/
SECRETARY CORPORATE SEAL PRESIDENT AND CHIEF
APPEARS HERE EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, N.J.)
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED OFFICER
<PAGE>
SPLITROCK SERVICES, INC.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Any such request should be directed to the Corporation, attention of its
Secretary, at the Corporation's principal executive offices.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT - ___________________ Custodian __________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ______________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, ________________________________________ hereby
sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[_____________________________________]_________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ________________________________________
________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By: __________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
July 26, 1999
(202) 639-7032
Board of Directors
Splitrock Services, Inc.
8665 New Trails Drive, #200
The Woodlands, Texas 77381
Re: Registration Statement on Form S-1 (No. 333-79909)
--------------------------------------------------
Gentlemen:
We are acting as special counsel for Splitrock Services, Inc., a
Delaware corporation (the "Company"), in connection with the underwritten public
offering of up to 12,305,000 shares (the "Shares") of the Company's common
stock, par value $.001 per share. The Shares are to be offered to the public
pursuant to an underwriting agreement to be entered into among the Company,
certain selling stockholders, and Bear, Stearns & Co. Inc., Credit Suisse First
Boston Corporation and Prudential Securities Corporation, as representatives of
the underwriters (the "Underwriting Agreement").
In connection with this opinion, we have (i) investigated such
questions of law, (ii) examined originals or certified, conformed or
reproduction copies of such agreements, instruments, documents and records of
the Company, (iii) examined such certificates of public officials, officers or
other representatives of the Company, and other persons, and such other
documents, and (iv) reviewed such information from officers and representatives
of the Company and others as we have deemed necessary or appropriate for the
purposes of this opinion.
In all such examinations, we have assumed the legal capacity of all
natural persons executing documents (other than the capacity of officers of the
Company executing documents in such capacity), the genuineness of all signatures
on original or certified copies, and the conformity to original or certified
documents of all copies submitted to us as conformed or reproduction copies. As
to various questions of fact relevant to the opinions expressed herein, we have
relied upon, and assumed the accuracy of, certificates and oral or written
statements and other information of or from public officials, officers or other
representatives of the Company, and other persons.
Based upon the foregoing, and subject to the limitations,
qualifications and assumptions set forth herein, we are of the opinion that the
Shares to be offered by the Company and the selling stockholders, when issued,
delivered and paid for in accordance with the terms of the
<PAGE>
Board of Directors
Splitrock Services, Inc.
July 26, 1999
Page 2
Underwriting Agreement as contemplated by the Registration Statement, will be
legally issued, fully paid and non-assessable.
The opinions expressed herein are limited to the General Corporation
Law of the State of Delaware. We assume no obligation to supplement this letter
if any applicable laws change after the date hereof or if we become aware of any
facts that might change the opinions expressed herein after the date hereof.
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 caption
"Legal Matters" in the prospectus forming a part of the Registration Statement.
In giving this consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By: /s/ Andrew P. Varney
-----------------------
Andrew P. Varney
<PAGE>
EXHIBIT "A"
Grantor System Map
------------------
Confidential & Proprietary
<PAGE>
Level (3) Intercity Backbone Network
[MAP]
THIS MAP DEPICTS CERTAIN SEGMENTS NOT COVERED BY THE AGREEMENT
<PAGE>
EXHIBIT "B"
Segments/City Pairs
-------------------
Grantor Intercity Route Schedule
--------------------------------
Confidential & Proprietary
<PAGE>
NOTE: Redacted portions have been marked with astericks (***). The redacted
portions are subject to a request for confidential treatment that has been filed
with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Route Segment City Pairs PM Est. Route Miles Scheduled
Completion Date
Western Region
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2A San Francisco to San Jose Watt 54 (***)
2B San Jose to San Luis Obispo Watt 243 (***)
2C San Luis Obispo to LA Watt 237 (***)
2D San Francisco to Oakland 11 (***)
2E Oakland to Sacramento 111 (***)
13A Sacramento to Portland 687 (***)
13B Portland to Seattle 200 (***)
18 Seattle to Salt Lake City 1,205 (***)
4A San Bernardino to Las Vegas Watt 315 (***)
4A1 Los Angeles to San Bernardino 560 (***)
4E Salt Lake City (Ogden) to Las Vegas Watt 499 (***)
8A LA to Orange Watt 32 (***)
8B Orange to San Diego Watt 93 (***)
12A San Diego to Phoenix Watt 360 (***)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Regional Total 4,087
- ------------------------------------------------------------------------------------------------------------------------------------
Central Region
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4F Denver to Salt Lake City Zagata 553 (***)
12C Phoenix to El Paso Zagata 442 (***)
12E El Paso to Stratford Zagata 500 (***)
12D Fort Worth to Stratford Zagata 473 (***)
12B Fort Worth to Dallas Zagata 33 (***)
7 Dallas to Houston Zagata 239 (***)
19A Houston to San Antonio Zagata 211 (***)
19B San Antonio to Austin Zagata 100 (***)
19C Austin to Fort Worth Zagata 216 (***)
4G Denver to Omaha Zagata 573 (***)
4D Omaha to Kansas City Zagata 206 (***)
4C Kansas City to St. Louis Zagata 291 (***)
4B St. Louis to Chicago Zagata 311 (***)
14A Stratford to Denver Zagata 364 (***)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Regional Total 4,512
- ------------------------------------------------------------------------------------------------------------------------------------
North East Region
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1F DC to Baltimore Nissan 38 (***)
1E Baltimore to Wilmington Nissan 74 (***)
1D Wilmington to Philly Nissan 27 (***)
1C Philly to Princeton Nissan 50 (***)
1B Princeton to Newark Nissan 40 (***)
1A Newark to New York Nissan 11 (***)
6A New York to White Plains Nissan 29 (***)
6C White Plains to Stamford Nissan 17 (***)
6D Stamford to Hartford Nissan 78 (***)
6E Hartford to Providence Nissan 72 (***)
6B Providence to Boston Nissan 47 (***)
15A Buffalo to Cleveland Nissan 190 (***)
15B Boston to Albany Nissan 175 (***)
15C Toronto to Buffalo Nissan 112 (***)
15D Montreal to Albany 239 (***)
15E Toronto to Ottawa 264 (***)
15F Ottawa to Montreal 124 (***)
3C Detroit to Cleveland Nissan 176 (***)
3A Chicago to Detroit Nissan 265 (***)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Regional Total 2,028
- ------------------------------------------------------------------------------------------------------------------------------------
Southeastern Region
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Route Segment City Pairs PM Est. Route Miles Scheduled
Completion Date
Western Region
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5C Memphis to Dallas Zagata 553 (***)
5E Nashville to Memphis Pimentel 216 (***)
17 Nashville to Atlanta Pimentel 260 (***)
5F Louisville to Nashville Pimentel 181 (***)
5D Cincinnati to Louisville Pimentel 116 (***)
5B Indianapolis to Cincinnati Nissan 114 (***)
5A Chicago to Indianapolis Nissan 190 (***)
9B Charlotte to Atlanta Pimentel 277 (***)
9D Raleigh to Charlotte Pimentel 155 (***)
9C Richmond to Raleigh Pimentel 165 (***)
9A DC to Richmond Pimentel 110 (***)
10A Atlanta to Jacksonville 314 (***)
10B Orlando to Miami 234 (***)
10C Jacksonville to Orlando 144 (***)
10D Tampa to Miami 261 (***)
11A New Orleans to Tampa 701 (***)
11C Nashville to Atlanta 260 (***)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Regional Total 4,251
- ------------------------------------------------------------------------------------------------------------------------------------
Nationwide Total 14,878
</TABLE>
<PAGE>
EXHIBIT "C"
Intentionally Deleted
---------------------
38
<PAGE>
EXHIBIT "D"
Intentionally Deleted
---------------------
39
<PAGE>
EXHIBIT "E"
Financing Terms and Conditions
------------------------------
Confidential & Proprietary
<PAGE>
NOTE: Redacted portions have been marked with asterisks (***). The redacted
portions are subject to a request for confidential treatment that has been filed
with the Securities and Exchange Commission.
Splitrock Services, Inc.
Vendor Financing
Indicative Summary of Principal Terms
-------------------------------------
Borrower Splitrock Services, Inc. (the "Borrower")
----------------
Facilities Senior Secured Credit Facility (the "Facility", consisting
of several Tranches as defined below) to finance the IRUs.
Terms of the Tranches will be the same with the exception
of principal amount, interest rate and final maturity.
Each Segment delivered to the Borrower in connection with
the IRUs will represent a Tranche.
Principal Amount The principal amount of each Tranche shall not exceed (***)
with respect to the Initial Fibers in such Segment.
Conditions Subject to completion of due diligence, Level 3 Executive
Committee approval, and satisfactory documentation,
including but not limited to a credit agreement, guarantee
and security documentation. Each Tranche will also be
subject to usual and customary borrowing conditions,
including but not limited to certain Representations and
Warranties and absence of defaults.
Term (***) from the date of delivery by Level 3 and acceptance
by the []/1/ of each completed intercity dark fiber segment
("Segment Delivery").
Interest Rate and (***)
Commitment Fees
Payment Schedule Upon each Segment Deliver, the Borrower will commence
making (***) payments to Level 3 of interest and principal
due on such Tranche. Interest will be calculated based on
Actual/360 days.
- ------------------------------
/1/ The brackets indicate that a word is missing in the original document.
<PAGE>
EXHIBIT "F"
Construction Specifications
---------------------------
General
- -------
The intent of this Exhibit is to delineate the general specifications and
standards for construction of the Grantor System. Deviations from the
specifications may occur in those instances where either (i) strict compliance
is impractical due to physical (including environmental) conditions,
right-of-way issues or code restrictions, or (ii) Grantor has acquired a portion
of the Grantor System from a third party pursuant to Section 7.11 of the
Agreement. Grantor shall in all events comply with any higher standards imposed
by any Governmental Authority.
1. Material
--------
X Steel casings shall be minimum 35,000 PSI.
X Any exposed steel conduit, brackets or hardware (i.e., bridge
attachments) shall be galvanized.
X Hand holes shall have a minimum 20,000 pound loading rating with 6 to 12
inches of cover.
X Manholes shall have a minimum H-20 loading rating.
X Fiber optic cable shall be single armored.
X HDPE SDR 11 conduits shall be used for plowing and HDPE SDR 9 conduits
shall be installed in rock areas.
2. Minimum Depths
--------------
X Minimum cover required in the placement of conduit shall be 42 inches,
except in the following instances:
X The minimum cover in borrow ditches adjacent to roads, highways,
railroads, and interstate shall be 48 inches below the clean-out line or
existing grade, whichever is greater.
X The minimum cover across streams, river washes and other waterways shall
be 48 inches below the clean-out line or existing grade, whichever is
greater.
X At locations where conduit crosses other subsurface utilities or other
structures, the conduit shall be installed to provide a minimum of 12
inches of vertical clearance; otherwise the conduit will be installed
under the existing utility or other structure.
X In rock, the conduit shall be placed to provide a minimum of 8 inches
below the surface of the solid rock with a steel or concrete cap, or 18
inches below the surface of the rock or provide a minimum of 42 inches of
total cover, whichever requires the least rock excavation. HDPE conduit
will be backfilled with 2 inches of select materials (bedding) and 4
inches of select cover in rock areas.
X In the case of the use/conversion of existing steel pipelines or salvaged
conduit systems, the existing depths shall be considered adequate.
3. Buried Cable Warning Tape
-------------------------
All conduit will be installed with buried cable warning tape except where
existing steel pipelines or salvaged conduit systems are used. The warning
tape shall generally be placed at a depth of 12 inches below grade and
directly above the conduit.
Confidential & Proprietary
<PAGE>
4. Conduit Construction
--------------------
X Conduits may be placed by means of trenching, plowing, jack and bore, or
directional bore. Conduit will generally be placed on a level grade
parallel to the surface, with only gradual changes in grade elevation.
X Steel conduit will be joined with threaded collars, Zap-Lok or welding.
X Railroad crossings will be encased in steel conduit where required.
X All underground crossings of major streams, rivers, bays and navigable
waterways will be placed in either HDPE or steel conduit at a minimum
depth of 20 feet below the bottom of the waterway.
X All conduits placed on DOT bridges will be bullet-proof fiberglass where
allowed by the authority and all other bridges galvanized steel conduit
shall be installed.
X All conduits placed on bridges shall have expansion joint placed at each
structural (bridge) expansion joint or at least every 100 feet, whichever
is the shorter distance.
5. Innerduct Installation
----------------------
X HDPE innerducts, where utilized, shall be 1-1/4 inches.
X HDPE innerduct(s), where utilized, shall be encased by a HDPE or steel
conduit.
X HDPE innerduct(s) shall extend beyond the end of all conduits a minimum
of 18 inches.
6. Cable Installation
------------------
X The fiber optic cable shall be installed using a powered pulling winch
and hydraulic powered assist pulling wheels. The maximum pulling force
to be applied to the fiber optic cable shall be 600 pounds.
X Bends of small radii (less then 20 times the outside diameter of the
cable) and twists that may damage the cable shall be avoided during cable
placement.
X The cable shall be lubricated and placed in accordance with the cable
manufacturer specifications.
X A pulling swivel break-away rated at 600 pounds shall be used at all
times.
X All spices will be contained in a hand hole or manhole.
X A minimum of 13 feet of slack cable will be left in all intermediate
hand holes or manholes.
X A minimum of 50 feet of slack cable from each cable end will be left in
all splice locations.
X A minimum of 100 feet of slack cable will be left in all Regeneration and
ILA Facilities.
7. Manholes and Hand holes
-----------------------
X Hand holes and Manholes placed in traveled surface streets be HS-20
loading rated and shall have locking lids.
X Hand holes shall be placed in all other areas and be installed with a
minimum of 6 inches of soil covering the lid.
8. Cable Markers (Warning Signs)
-----------------------------
Confidential & Proprietary
<PAGE>
Cable markers (with the same information as buried cable warning tape) shall
be installed at all changes in cable running line directions, waterways,
subsurface utilities, hand holes and at both sides of street, highway, bridge
or railroad crossings. At no time shall any markers be spaced more than 1000
feet apart. Markers shall be positioned so that they can be seen from the
location of the cable and generally set facing perpendicular to the cable
running line.
9. Compliance
----------
All work will be done in strict accordance with federal, state, local and
applicable private rules and laws regarding safety and environmental issues,
including those set forth by OSHA and the EPA. In addition, all work and the
resulting fiber system will comply with the current requirements of all
governing entities (FCC, NEC, DEC, and other national, state, and local
codes).
1. As Built Drawings
- ---------------------
X As-built drawings will contain a minimum of the following:
X Information showing the location of running line, relative to
permanent land marks, including but not limited to, railroad
mileposts, boundary crossings and utility crossings
X Manhole and hand hole locations
X Conduit information (type, length, expansion joints, etc.)
X Notation of all deviations from specifications (depth, etc.)
X ROW detail (type, centerline distances, boundaries, waterways, road
crossings, known utilities and obstacles)
X Cable marker locations and stationing
X Regeneration and Optical Amplifier Facility locations and floor plans
X Drawings will be updated with actual field data during and after
construction.
X Metro area scale shall not exceed 1 inch = 200 feet
X Rural area scale shall not exceed 1 inch = 500 feet
X As-built will be provided within 90 days after the Acceptance Date, in
both hard copy and electronic format. Updates to the as-built will be
provided within 60 days of completion of change
11. Aerial Construction
-------------------
X Aerial construction methods will only be in local loop construction and
in those circumstances where buried construction techniques are
impractical due to environmental conditions, schedule or economic
considerations, right of way issues, or code restrictions. Aerial
construction on utility structures using optical groundwire or all
dielectric self-support methods may be used.
X Aerial design standards and construction techniques will conform with
industry-accepted practices for aerial fiber optic cable systems. All
aerial plant must comply with applicable national (i.e., NEC, NESC,
etc.), state, and local codes.
X The fiber optic cable placed on an aerial system shall be armored and
designed for aerial applications.
X The cable will be placed in accordance with manufacturer specifications.
Cable tension will be monitored during placement. Cable rollers will be
placed at a maximum interval of 35 feet. Cable expansion loops will be
placed at every pole. Cable identification/warning tags will be placed at
every pole. All cable splices will be buried in handholes or manholes.
X Cable sheath to suspension strand bonds and grounding will be performed
at the first and last pole of the system and at 0.25 mile intervals.
X Fiber optic cable at all riser poles will be protected with galvanized
steel U-guard from 12 inches below grade to a point 24 inches below the
suspension strand. Conduit sweeps will be used to transition from the U-
guard to either a handhole or manhole.
Confidential & Proprietary
<PAGE>
X All aerial plant will be designed and constructed with 10M EHS (Class A
galvanized) suspension strand unless otherwise dictated by the pole
owners or field conditions. The fiber optic cable will be doubled lashed
to the suspension strand using 45 mil stainless lashing wire.
X Span length shall account for storm loading (wind and ice) in accordance
with zones outlined in NESC code. Sags and tensions will be calculated
in accordance with industry accepted practices and account for strand
size, span length, ambient temperature at placement, and loading. The
suspension strand will be transformed with a strand dynamometer. A
catenary suspension system may be used if the system exceeds maximum
span length specifications.
X Prior to attachment to any existing pole line, the system will be
inspected for compliance with applicable codes and standards, as well as
the physical condition of the poles and existing hardware. Any make-
ready work will be reviewed with the pole owner and specifically
addressed prior to construction.
X If a pole line needs to be constructed, the preferred poles will be
Class 4 (40 feet) and Class 5 (35 feet). Use of the preferred poles will
make it unnecessary to calculate pole loading (horizontal, vertical, and
bending moments) in most field conditions. Some unusual conditions may
require the use of a stronger class pole. Depth of placement will be
dictated by soil conditions, slope of terrain, and length of pole. Poles
will be guyed in accordance with industry-accepted standards. All pole
attachment hardware will be galvanized steel.
X Aerial cable will be placed below power attachments and above all other
attachments unless otherwise dictated by the pole owner. Pole contact
clearances and locations will be dictated by current NESC code and the
presence of existing attachments; however, the following minimum
objective clearances will apply:
X power line-40 inches (below)
X non-current carrying power line-30 inches
X telephone, CATV, and other signal lines-12 inches (above)
X vertical clearances for crossings or parallel lines will be dictated
by current NESC code; however, the objective clearance for most
objects (roads, alleys, etc.) is 18 feet (at 100E F) with the
exception of railroad tracks and waterways which have an objective of
27 feet (at 100E F).
Confidential & Proprietary
<PAGE>
EXHIBIT "G"
Fiber Specifications
--------------------
Confidential & Proprietary
<PAGE>
Corning(R) LEAF(R) Optical Fiber
The Large Effective Area Advantage CORNING
PI1107
Issued:12/98
ISO 9001 Registered
For Multi-Window Applications
With the invention of LEAF(R) optical fiber, Corning has broken the bandwidth
barrier by developing a fiber product that optical scientists had thought
impossible: a low dispersion fiber with a large effective area (A/eff/) and
excellent bend performance. LEAF fiber represents the next generation of
non-zero dispersion-shifted (NZ-DSF) optical fiber, outperforming current NZ-DSF
designs.
The Large Effective Area Advantage
LEAF fiber's larger A/eff/ offers higher power-handling capability, improved
optical signal-to-noise ratio, longer amplifier spacing, and maximum dense
wavelength division multiplexing (DWDM) channel plan flexibility. Fiber with a
larger A/eff/ also provides a critical performance advantage- the ability to
uniformly reduce all non-linear effects (Figure 1). Non-linear effects represent
the greatest performance limitation in today's multi-channel DWDM systems.
The Next Generation
In addition to outperforming other NZ-DSF fibers in the conventional band
(C-Band: 1530-1565 nm), LEAF fiber facilitates the next technological
development in fiber-optic networks -- the migration to the long band (L-Band:
1565-1625 nm). In tests conducted by Corning, LEAF optical fiber demonstrated
superior transmission performance and system cost benefits when compared to NZ-
DSFs with smaller effective areas. In both C-Band and L-Band operation, LEAF
fiber demonstrated greater ability to handle more channels by reducing non-
linear effects such as four-wave mixing, self-phase modulation and cross-phase
modulation in multi-channel DWDM transmission.
Reduce Network Costs
With its increased optical reach advantage, LEAF fiber requires fewer amplifers
and regenerators, and therefore provides immediate and long-term cost savings.
LEAF fiber is also compatible with installed base fibers and photonic
components. In fact, LEAF fiber's slightly larger mode-field diameter improves
its splicing performance, especially when connecting to standard single-mode
fiber such as Corning(R) SMF-28(TM) fiber. And, as with all Corning optical
fiber, LEAF fiber's geometry package is the best in the industry. With LEAF
fiber, it is easy and economical to increase the information-carrying capacity
of your network.
Figure 1
[GRAPHIC] [GRAPHIC]
LEAF fiber's larger A/eff/ increases the area where the light can propagate,
thereby reducing non-linear effects.
Count on Corning(R) fiber
www.corningfiber.com
<PAGE>
Fiber For Today & Tomorrow
While LEAF fiber is exceptionally suited to operate with 2.5 Gbps DWDM systems,
it offers system designers the capability to use today's 32-channel, 10 Gbps
systems, and provides the ability to upgrade in the future to tomorrow's 40+
channel, 10 Gbps systems. Additionally, LEAF fiber's tight specifications on
polarization mode dispersion (PMD) prepare fiber installed today for operation
at data rates greater than 10 Gbps.
LEAF Fiber- All About Value
With LEAF fiber's proven large A/eff/ advantage, the industry's best geometry
package, and inherent future-proof design, LEAF fiber continues to be the fiber
of choice for today's high-capacity and tomorrow's all-optical networks.
Network providers on the leading edge have embraced large A/eff/ technology as
the fiber "platform" for high-data-rate network now and in the future.
Technology Achievement Award
LEAF fiber was awarded the Laser Focus World 1999 Commercial Technology
Achievement Award in the fiber optics category. The award gives Corning "the
unique distinction of having brought to the market a product deemed of
exceptional commerical significance."
Optical Specifications
Attenuation
greater or equal to 0.25 dB/km at 1550 nm
greater or equal to 0.25 dB/km at 1625 nm
. No point discontinuity greater than
0.10 dB at 1550 nm
. Attenuation at 1383 plus or minus 3 nm shall not
exceed 1.0 dB/km
Attenuation vs Wavelength
------------------------------------------------------------
Range Ref. lambda Max Increase alpha
(nm) (nm) (dB/km)
------------------------------------------------------------
1525-1575 1550 0.05
------------------------------------------------------------
1625 1550 0.05
------------------------------------------------------------
The attenuation in a given wavelength range does not exceed the attenuation of
the reference wavelength (lambda) by more then the value alpha. In all cases, a
maximum attenuation of greater or equal to 0.25 dB/km applies at 1550 nm
and 1625 nm.
Attentuation with Bending
- --------------------------------------------------------------------------------
Mandrel Number Wavelength Induced
Diameter (micron m) of Turns (nm) Attentuation (dB)
- --------------------------------------------------------------------------------
32 1 1550 & 1625 greater or equal to 0.50
- --------------------------------------------------------------------------------
75 100 1550 & 1625 greater or equal to 0.05
- --------------------------------------------------------------------------------
The induced attenuation due to fiber wrapped around a mandrel of a specified
diameter.
Mode-Field Diameter
. 9.20 to 10.00 micron m at 1550 nm
Dispersion
. Total Dispersion: 2.0 to 6.0 psec/(nm*km)
over the range 1530 to 1565 nm
. 4.5 to 11.2 psec/(nm*km) over the range
of 1565 to 1625 nm
------------------------------------------------
Fiber Polarization Mode Dispersion (PMD)
------------------------------------------------
___
Value (ps/ per \/km
------------------------------------------------
PMD Link Value 0.08*
------------------------------------------------
Maximum Individual Fiber 0.2
------------------------------------------------
* Complies with IEC SC 86A/WG1, Method 1, September 1997
(n=24, Q=0.196)
The PMD link value is a term used to describe the PMD of concatenated lengths of
fiber (also known as the link quadrature average). This value is used to
determine a statistical upper limit for system PMD performance.
PMD values may change when fiber is cabled. Corning's fiber specification
supports emerging network design requirements for high-data-rate systems
operating at 10 Gbps (TDM) rates and higher.
Environmental Specifications
Environmental Test Induced Attenuation
Condition (dB/km)
1550 nm
- --------------------------------------------------------------------
Temperature Dependence
- -60 degree C to +85 degree C* greater or equal to 0.05
- --------------------------------------------------------------------
Temperature - Humidity Cycling
- -10 degree C to +85 degree C* and up to
98% RH greater or equal to 0.05
- --------------------------------------------------------------------
Water Immersion 23 degree C greater or equal to 0.05
- --------------------------------------------------------------------
Heat Aging, 85 degree C* greater or equal to 0.05
- --------------------------------------------------------------------
Operating Temperature Range: -60 degree C to +85 degree C
* Reference Temperature is +23 degree C
<PAGE>
Dimensional Specifications
Standard Length (km/reel)
. 4.4 - 25.2 *
* Longer spliced lengths available at a premium.
Glass Geometry
. Fiber Curl: greater or equal to 4.0 m radius of curvature
. Cladding Diameter: 125.0 +/- 1.0 micron m
. Core/Clad Concentricity: less or equal to 0.5 micron m
. Cladding Non-Circularity: less or equal to 1.0%
Defined as:
[ Min. Cladding Diameter ]
[ 1- ---------------------- ] X 100
[ Max. Cladding Diameter ]
Coating Geometry
. Coating Diameter: 245 +/- 5 micron m
. Coating/Cladding Concentricity: less than 12 micron m
Mechanical Specifications
Proof Test
. The entire length of fiber is subjected to a tensile proof stress greater or
equal to 100 kpsi (0.7 GN/(m/2/)*
* Higher proof test available at a premium.
Performance Characterizations
Characterized parameters are typical values.
Effective Area (A/eff/)
. 72 micron m/2/
Effective Group Index of Refraction (N/eff/)
. 1.469 at 1550 nm
Fatigue Resistance Parameter (n/d/)
. 20
Coating Strip Force
. Dry 0.6 lbs (3.0 N)
. Wet, 14 days room temperature:
0.6 lbs (3.0 N)
Dispersion Calculation
(D(1565 nm) - D(1530 nm) )
Dispersion = D(lambda) =(---------------------- X (lambda - 1565)) + D(1565 nm)
( 35 )
lambda = Operating wavelength up to 1565
(D(1625 nm) - D(1565 nm) )
Dispersion = D(lambda) =(---------------------- X (lambda - 1625)) + D(1625 nm)
( 60 )
lambda = Operating wavelength from 1565-1625
Corning fiber is made in the U.S.A.
<PAGE>
Ordering Information
To order Corning(R) LEAF(R) CPC optical fiber, contact your sales
representative, or call the Telecommunications Products Division Customer
Service Department at 910-395-7659 (North America) and +1 607-974-7174
(International). Please specify the following parameters when ordering.
Fiber Type: Corning(R) LEAF(R) Non-Zero Dispersion-Shifted Single-Mode Fiber
- --------------------------------------------------------------------------------
Coating: CPC (245 micron m outside diameter)
- --------------------------------------------------------------------------------
Fiber Attenuation Cell: dB/km
- --------------------------------------------------------------------------------
Fiber Quality: kms
- --------------------------------------------------------------------------------
Other: (Requested ship date, etc.)
- --------------------------------------------------------------------------------
Corning Incorporated
Telecommunications Products Division
Corning, NY 14831
Phone: 910-395-7659 (North America)
Phone: +1 607-974-5354 (International)
Fax: 910-395-7286 (North America)
Fax: +1 607-974-7041 (International)
Email: [email protected]
Internet: www.corningfiber.com
Corning and LEAF are a recognized trademark and
SMF-28 is a trademark of Corning Incorporated, Corning, N.Y.
(C) 1998. Corning Incorporated Count on Corning(R) Fiber
<PAGE>
EXHIBIT "H"
Facilities Specifications
-------------------------
The intent of this Exhibit is to delineate the general specifications of the
Facilities forming a part of the Grantor System. Deviations from these
specifications may occur in those instances where either (i) strict compliance
is impractical due to physical (including environmental) conditions, right-of-
way issues or code restrictions, or (ii) Grantor has acquired a portion of the
Grantor System from a third party pursuant to Section 7.11 of the Agreement.
Grantor will use its commercially reasonable best efforts to comply to Bellcore
NEBS (TR-NWT 000063) Generic Requirements.
Grantor will install modular, prefabricated structures approximately 80-120
kilometers apart, along the System Route, to house DC power plants and the
telecom infrastructure for the installation and operation of regeneration
electronic and optronic equipment for the Grantor System.
Grantee space will be separated by a wire mesh partition or Grantee's space may
be located in a secured cabinet. Access to the Grantee space will be via a joint
or separate entrance into the facilities from the outside, which will be secured
24 hours per day. The total facility, in most cases, will be 12 feet in depth by
approximately 36 feet in length.
The facilities will be equipped at a minimum with 200 amp 120/208 volt
electrical service, which will be used by Grantor, Grantee and other users of
the Grantor System. Grantor will provide Grantee with sufficient 48V DC power at
all sites. The minimum power is 60 amps per rack or 150 amps per 96 sq. ft. of
colocation space.
The entire site, including the structure, will be secured within a chain link
fenced area where permitted. The structures will be placed on a structural
concrete slab with gravel surrounding the outer perimeter.
The following are general specifications of the facilities and support
equipment.
X Standard production, pre-manufactured, concrete reinforced buildings with
rebar. All door frame are to be cast into the concrete panels for added
security and to prevent water leakage around the frame.
X Facilities will be equipped with either BARD, Marvair, Liebert or other
comparable compact Air Conditioning Units, to maintain room temperature at
72 degrees Fahrenheit (plus or minus 5 degrees) and maintain no more than
60% humidity. There will be two units installed at each facility. Each of
the two units will be sufficient to cool the facilities independently.
X The facility sites will be equipped with an external backup generator. The
generator fuel tanks will have approximately 48 hour fuel capacity. As a
part of the normal maintenance, the generator will be exercised on a
monthly basis, running on a load bank of a minimum of two (2) hours. There
will be an Automatic Transfer Switch for the automatic start-up of the
generator in the event of a primary power loss.
X Fire extinguishers will be provided within the facilities.
X The facilities will have grounding system termination bars terminated to
either the main electrical system ground and/or to the perimeter system
ring (#2.0 bare copper) connected (preferably cadweld) to driven ground
rods (preferably 12 feet in length). In any event, the NEC 250 code shall
be met.
X The facilities will be equipped with A/C duplex isolated outlets for test
equipment and miscellaneous use and will be backed-up by the generator
during power interruptions and outages. Such outlets will be placed every 6
feet around the perimeter walls.
X The facilities will have sufficient lighting on the interiors as well as
the exteriors.
Confidential & Proprietary
<PAGE>
X Grantor will be responsible for installation of the overhead single tier
12" cable ladder rack and fiber guide systems in the Grantee's space.
Grantor will be responsible for the installation of Grantee's equipment
relay racks in Grantee's space. The ladder rack will be used for DC power
distribution signal cable distribution.
X If Grantee elects to provide its own 48V power supply, Grantee shall have
the option, in its sole discretion, to provide its own independent DC power
plant within Grantee's space for Grantee's sole use, the exact size to be
determined by Grantee subject to Grantor's approval, which approval shall
not be unreasonably withheld. Grantor shall have the right to approve the
power plant make and model to ensure a clean connection to the Grantor's
electrical system. Grantee's power plant may not induce more than 8%
harmonic distortion into Grantor's electrical power system. Grantee shall
have the option, in its sole discretion, to use the same power system as
Grantor, and also request that Grantor install Grantee's power system (for
such additional payments as may be agreed between the parties). The battery
plant for the DC power system is typically designed for two (2) hours of
reserve time.
X The fiber cable through the facility will enter and exit within the Grantor
space. Fiber will be brought over to the Grantee space via a fiber guide
using a tie cable.
X All entry and exits and environmental systems, including smoke detection,
will be monitored remotely on a 24 hour basis.
Grantee will monitor its own power plant and regeneration equipment.
Grantee may elect to have Grantor monitor and report all alarms to Grantee.
Confidential & Proprietary
<PAGE>
EXHIBIT "I"
Acceptance Testing Procedures and Standards
-------------------------------------------
All splices will be performed with an industry accepted fusion splicing
machine. Grantor will perform two stages of testing during the construction
of a new fiber cable route. Initially, Optical Time Domain Reflectometer
("OTDR") tests will be taken from one direction. As soon as fiber
connectivity has been achieved between any two Facilities, Grantor will
verify and record the continuity of all fibers. Grantor will take and
record power level readings on all fibers in both directions. Grantor will
bi-directional OTDR test all fibers.
During the initial construction, it is only possible to measure the fiber
from one direction. Because of this, splices will be qualified during
initial construction with an OTDR from only one direction. The profile
alignment system or light injection detection system on the fusion splicer
may be used to qualify splices as long as a close correlation to OTDR date
is established. The pigtails will also be qualified at this stage using an
OTDR and a minimum 1 km launch reel. All measurements at this stage in
construction will be taken at 1550 nm.
After Grantor has completed end-to-end connectivity on the fibers,
bi-directional span testing will done. These measurements must be made
after the splice manhole or handhole is closed in order to check for
macro-bending problems. Continuity tests will be done to verify that no
fibers have been "frogged" or crossed in any of the splice points. Once the
pigtails have been spliced, loss measurements will be recorded using an
industry-accepted laser source and a power meter. OTDR traces will be taken
and splice loss measurements will be recorded. Grantor will store OTDR
traces on diskette and on data sheets. Laser Precision format will be used
on all traces. Copies of all data sheets and tables, and one set of
diskettes with all traces will be available to Grantee.
The power loss measurement shall be made at 1550 nm, and performed
bi-directionally.
OTDR traces shall be taken in both directions at 1550 nm.
The splicing standards are as follows:
The loss value of the pigtail connector and its associated splice will not
exceed 0.50 dB. This value does not include the insertion loss from its
connector to the FDP. For values greater than this, the splice will be
broken and respliced until an accepted loss value is achieved. If, after
five attempts is not able to produce a loss value less than 0.50 dB, the
splice will be marked as Out-of-Spec ("OOS") on the data sheet. Each
splicing attempt shall be documented on the data sheet.
During initial uni-directional OTDR testing, the objective for each splice
is a loss of 0.15 dB or less. If, after three attempts, Grantor is not able
to produce a loss value of less than 0.15 dB, then 0.25 dB will be
acceptable. If, after two additional attempts, a value of less than 0.25 dB
is not achievable, then the splice will be marked OOS on the data sheet.
Each splicing attempt shall be documented on the data sheet.
During end-to-end testing of a span (a span shall be FDP to FDP), the
objective for each splice is a bi-directional average loss of 0.15 dB or
less.
The standard for each fiber within a span shall be an average
bi-directional loss of 0.10 dB or less for each splice. For example, if a
given span has 10 splices, each flow shall have a total bi-directional loss
(due to the 10 splices) of 1.0 dB or less. Each individual splice may have
a bi-directional loss of 0.15 dB or less, but the average bi-directional
splice loss across the span must be 0.10 dB or less.
The entire fiber optic cable system shall be properly protected from
foreign voltage and grounded with an industry-accepted system.
Using end-to-end bi-directional testing of a span (FDP to FDP), each span
must have an average loss of no more than 0.26dB per km, and a total span
loss of no more than 25dB. Each fiber will have a minimum return loss of no
less than 40dB, including the terminating connector.
Confidential & Proprietary
<PAGE>
The fibers shall be terminated to the FDP with Ultra SC-PC connectors, unless
another type of connector is specified. Pigtails and jumpers will be single mode
fiber.
Confidential & Proprietary
<PAGE>
EXHIBIT "J"
Maintenance Requirements and Procedures
---------------------------------------
Maintenance
- -----------
Scheduled Maintenance. Routine maintenance and repair of the Grantor System
- ---------------------
described in this section ("Scheduled Maintenance") shall be performed by or
under the direction of Grantor, at Grantor's reasonable discretion. Scheduled
Maintenance shall commence with respect to each Segment upon the Acceptance
Date. Scheduled Maintenance shall only include the following activities:
X patrol of Grantor System route on a regularly scheduled basis, which
will not be less than monthly, unless hi-rail access is necessary, in
which case, it will be quarterly;
X maintenance of a "Call-Before-You-Dig" program and all required and
related cable locales;
X maintenance of sign posts along the Grantor System right-of-way with the
number of the local "Call-Before-You-Dig" organization and the "800"
number for Grantor's "Call-Before-You-Dig" program; and
X assignment of fiber maintenance technicians to locations along the
route of the Grantor System initially at approximately 110 mile
intervals dependent upon terrain and accessibility, and subject to
subsequent modification in Grantor's reasonable discretion;
X non-routine maintenance and repair of the Grantor System costing less
than (***) per event or occurrence.
Unscheduled Maintenance. Non-routine maintenance and repair of the Grantor
- -----------------------
System which is not included as Scheduled Maintenance ("Unscheduled
Maintenance"), shall be performed by or under the direction of Grantor.
Unscheduled Maintenance shall commence with respect to each Segment upon the
Acceptance Date. Unscheduled Maintenance shall consist of:
X "Emergency Unscheduled Maintenance" in response to an alarm
identification by Grantor's Operations Center, notification by Grantee
or notification by any third party of any failure, interruption or
impairment in the operation of the Grantor System, or any event
imminently likely to cause the failure, interruption or impairment in
the operation of the Grantor System.
X "Non-Emergency Unscheduled Maintenance" in response to any potential
service-affecting situation to prevent any failure, interruption or
impairment in the operation of the Grantor System not covered by
Scheduled Maintenance. Grantee shall immediately report the need for
Unscheduled-Maintenance to Grantor in accordance with reasonable
procedures promulgated by Grantor from time to time. Grantor will log
the time of Grantee's report, verify the problem and dispatch personnel
immediately to take corrective action.
Operations Center
- -----------------
Grantor shall operate and maintain an Operations Center ("OC") staffed
twenty-four (24) hours an day, seven (7) days a week by trained and qualified
personnel. Grantor's maintenance employees shall be available for dispatch
twenty-four (24) hours a day, seven (7) days a week. Grantor shall have its
first maintenance employee at the site requiring Emergency Unscheduled
Maintenance activity within two (2) hours after the time Grantor becomes aware
of an event requiring Emergency Unscheduled Maintenance, unless delayed by
circumstances beyond the reasonable control of Grantor. Grantor shall maintain a
toll-free telephone number to contact personnel at the OC. Grantor's OC
personnel shall dispatch maintenance and repair personnel along the system to
handle and repair problems detected in the Grantor System: (i) through the
Grantee's remote surveillance equipment and/or upon notification by Grantee to
Grantor, or (ii) upon notification by a third party.
Cooperation and Coordination
- ----------------------------
Confidential & Proprietary
NOTE: Redacted portions have been marked with asterisks (***). The redacted
portions are subject to a request for confidential treatment that has been filed
with the Securities and Exchange Commission.
<PAGE>
X In performing its services hereunder, Grantor shall take workmanlike
care to prevent impairment to the signal continuity and performance of
the Grantor System. The precautions to be taken by Grantor shall include
notifications to Grantee. In addition, Grantor shall reasonably
cooperate with Grantee in sharing information and analyzing the
disturbances regarding the cable and/or fibers. In the event that any
Scheduled or Unscheduled Maintenance hereunder requires a traffic roll
or reconfiguration involving cable, fiber, electronic equipment, or
regeneration or other facilities of the Grantee, then Grantee shall, at
Grantor's reasonable request, make such personnel of Grantee available
as may be necessary in order to accomplish such maintenance, which
personnel shall coordinate and cooperate with Grantor in performing such
maintenance as required of Grantor hereunder.
X Grantor shall notify Grantee at least ten (10) business days prior to
the date in connection with any Planned Service Work Period ("PSWP") of
any Scheduled Maintenance and as soon as possible after becoming aware
of the need for Unscheduled Maintenance. Grantee shall have the right to
be present during the performance of any Scheduled Maintenance or
Unscheduled Maintenance so long as this requirement does not interfere
with Grantor's ability to perform its obligations under the Agreement.
In the event that Scheduled Maintenance is canceled or delayed for
whatever reason as previously notified, Grantor shall notify Grantee at
Grantor's earliest opportunity, and will comply with the provisions of
the previous sentence to reschedule any delayed activity.
Facilities
- ----------
X Grantor shall maintain the Grantor System in a manner which will permit
Grantee's use, in accordance with the terms and conditions of the
Agreement.
X Grantee will be solely responsible for providing and paying for any and
all maintenance of all electronic, optronic and other equipment,
materials and facilities used by Grantee in connection with the
operation of the Grantee Fibers, none of which is included in the
maintenance services to be provided hereunder.
Cable/Fibers
- ------------
X Grantor shall perform appropriate Scheduled Maintenance on the cables
contained in the Grantor System in accordance with Grantor's then
current preventative maintenance procedures which shall not
substantially deviate from standard industry practice.
X Grantor shall have qualified representatives on site any time Grantor
has reasonable advance knowledge that another person or entity is
engaging in construction activities or otherwise digging within five (5)
feet of any cable.
X Grantor shall maintain sufficient capability to teleconference with
Grantee during an Emergency Unscheduled Maintenance in order to provide
regular communications during the repair process. When correcting or
repairing cable discontinuity or damage, including but not limited to in
the event of Emergency Unscheduled Maintenance, Grantor shall use
reasonable efforts to repair traffic-affecting discontinuity as soon as
practicable after Grantor's representative's arrival at the problem
site. In order to accomplish such objective, it is acknowledged that the
repairs so effected may be temporary in nature. In such event, within
twenty-four (24) hours after completion of any such Emergency
Unscheduled Maintenance, Grantor shall commence its planning for
permanent repair, and thereafter promptly shall notify Grantee of such
plans, and shall implement such permanent repair within an appropriate
time thereafter. Restoration of open fibers on fiber strands not
immediately required for service shall be completed on a mutually
agreed-upon schedule. If the fiber is required for immediate service,
the repair shall be schedule for the next available PSWP.
X In performing repairs, Grantor shall comply with the splicing
specifications as set forth in Exhibit "G". Grantor shall provide to
Grantee any modifications to these specifications as may be necessary or
appropriate in any particular instance.
X Grantor's representatives that are responsible for initial restoration
of a cut cable shall carry on their vehicles the typically appropriate
equipment that would enable a temporary splice, with the objective of
Confidential & Proprietary
<PAGE>
Restoring operating capability in a little time as possible. Grantor shall
maintain and supply an inventory of spare cable in storage facilities
supplied and maintained by Grantor at strategic locations to facilitate
timely restoration.
Planned Service Work Period
- ---------------------------
Scheduled Maintenance which is reasonably expected to produce any signal
discontinuity must be coordinated between the parties. Generally, this work
should be scheduled after midnight and before 6:00 a.m. local time. Major system
work, such as fiber rolls and hot cuts, will be scheduled for PSWP weekends. A
calendar showing approved PSWP will be agreed upon in the last quarter of every
year for the year to come. The intent is to avoid jeopardy work on the first and
last weekends of the month and high-traffic holidays.
Restoration
- -----------
X Grantor shall respond to any interruption of service or a failure of the
Grantee Fibers to operate in accordance with the specifications set forth
in Exhibit "G" (in any event, an "Outage") as quickly as possible
(allowing for delays caused by circumstances beyond the reasonable control
of Grantor).
X The goal of emergency restoration splicing shall be to restore service as
quickly as possible. This may require the use of some type of mechanical
splice, such as the "3M FiberLock"to complete the temporary restoration.
Permanent restorations will take place as soon as possible after the
temporary splice is complete.
Subcontracting
- ---------------
Grantor may subcontract any of the maintenance services hereunder, provided that
Grantor shall require the subcontractor(s) to perform in accordance with the
requirement and procedures set forth herein.
Escalation Procedures
=====================
The Technical Services organization at (toll free) 1-877-4Level 3
=================================================================
(1-877-453-8353) is responsible for the generation of repair tickets, first
===========================================================================
level testing, and the coordination of expeditious resolution of issues with
===============================================================================
our customers service.
======================
Customer Care is your single point of contact. Your Level 3 Communications
===========================================================================
Technical Services Representative will own the repair ticket through its life
=============================================================================
cycle. This mean that your Technical Service Representative will proactively
============================================================================
provide you with status reports on your repair ticket through resolution.
=======================================================================
During the research and resolution process you will receive an update within one
================================================================================
half-hour of your trouble report and every hour thereafter until your issue has
==============================================================================
been resolved.
==============
Repair tickets are assigned a status and will automatically escalate in the
===========================================================================
following manner:
=================
CALL TYPE & PROCESS
===================
1-877-4Level 3 (1-877-453-8353) option #1
========================================
Information Request-(Request for assistance or information regarding service.
============================================================================
Circuit is not down, but require assistance of a technical nature.)
===================================================================
- --------------------------------------------------------------------------------
1st Level 2nd Level 3rd Level 4th Level 5th Level 6th Level
- --------------------------------------------------------------------------------
Customer Customer Customer Customer Customer Customer
======= ============= =========== ======== ======== ========
Care TSR Care Sr. Rep. Care Manager Care Sr. Care Sr. Care Vice
======== ============= ============ ======== ======== =========
Manager Director president
- --------------------------------------------------------------------------------
Immediate 4 hours 6 hours 8 hours 10 hours No escalation
- --------------------------------------------------------------------------------
1-877-4Level 3 (1-877-453-8353) option #1
=========================================
Service Impaired ACD option #1-(Circuit is completely down, or there is
=======================================================================
degradation in service, i,e, line errors
========================================
- --------------------------------------------------------------------------------
1st Level 2nd Level 3rd Level 4th Level 5th Level 6th Level
- --------------------------------------------------------------------------------
Confidential & Proprietary
<PAGE>
Customer Customer Customer Customer Customer Customer
======= ============= =========== ======== ======== ========
Care TSR Care Sr. Rep. Care Manager Care Sr. Care Sr. Care Vice
======== ============= ============ ======== ======== =========
Manager Director president
- --------------------------------------------------------------------------------
Immediate 4 hours 6 hours 8 hours 10 hours No escalation
- --------------------------------------------------------------------------------
1-877-4Level 3 (1-877-453-8353) option #1
=========================================
Major Outage ACD option #1-(Several Customers are experiencing a service outage
================================================================================
due to a higher level equipment trouble, fiber outage or switch related
=======================================================================
problems.)
==========
- --------------------------------------------------------------------------------
1st Level 2nd Level 3rd Level 4th Level 5th Level 6th Level
- --------------------------------------------------------------------------------
Customer Customer Customer Care Customer Customer Customer
======= ============= =========== ======== ======== ========
Care TSR Care Sr. Rep. Manager Care Sr. Care Sr. Care Vice
======== ============= ============ ======== ======== =========
Manager Director president
- --------------------------------------------------------------------------------
Immediate Immediate Immediate Immediate Immediate Immediate
- --------------------------------------------------------------------------------
Your Level 3 Communications Technical Services Representative will execute
============================================================================
this escalation through the appropriate channels.
=================================================
If you ar not satisfied with the service that you receive please escalate your
==============================================================================
concerns in the following order to expedite ticket resolution. All levels can
=============================================================================
be reached through 1-877-4Level 3 (1-877-453-8353). option #1
=============================================================
- --------------------------------------------------------------------------------
Escalation Level Contact
- --------------------------------------------------------------------------------
1st Level Level 3 Communications Technical Service Representatives
========= ========================================================
- --------------------------------------------------------------------------------
2nd Level Level 3 Communications Senior Technical Services
========= ================================================
- --------------------------------------------------------------------------------
3rd Level Manager: Repair & Telephony Products
========= ====================================
Manager: Repair & IP Services
=============================
- --------------------------------------------------------------------------------
4th Level Senior Director: Customer Care
========= ==============================
- --------------------------------------------------------------------------------
5th Level Vice President: Customer Service and Support
========= ============================================
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 10.19
SPLITROCK SERVICES, INC.
1999 STOCK INCENTIVE PLAN
1. Purpose.
-------
The purpose of this Plan is to strengthen Splitrock Services, Inc., a
Delaware corporation (the "Company"), by providing an incentive to its
employees, officers, directors and consultants and thereby encouraging them to
devote their abilities and industry to the success of the Company's business
enterprise. It is intended that this purpose be achieved by extending to
employees (including future employees who have received a formal written offer
of employment), officers, directors, and consultants of the Company and its
Subsidiaries an added long-term incentive for high levels of performance and
unusual efforts through the grant of Incentive Stock Options, Nonqualified Stock
Options, Formula Options, Stock Appreciation Rights, Dividend Equivalent Rights,
Performance Awards, Share Awards, Phantom Stock and Restricted Stock (as each
term is herein defined). After the Effective Date of this Plan, no further
awards shall be made under the Splitrock Services, Inc. 1997 Incentive Share
Plan (as amended and currently in effect, the "Former Plan"). Each award
outstanding under the Former Plan as of the Effective Date of this Plan shall
remain outstanding and continue to be subject to the terms of the Former Plan
and the award agreement under which such award was granted. Each Share that is
available for the granting of new awards under the Former Plan as of the
Effective Date of this Plan and each Share that is the subject of an award under
the Former Plan but is not issued prior to the time that such award expires or
otherwise terminates shall, after the Effective Date of this Plan, not be
available for the granting of awards under the Former Plan, but shall instead be
available for the granting of Options or Awards under this Plan.
2. Definitions.
-----------
For purposes of the Plan:
2.1 "Adjusted Fair Market Value" means, in the event of a Change in
--------------------------
Control, the highest price per Share paid to holders of the Shares in any
transaction (or series of related transactions) constituting or resulting in a
Change in Control other than pursuant to Section 2.10(b).
2.2 "Affiliate" means, with respect to any Person, any other Person
---------
that, directly or indirectly through one or more intermediaries, controls, or is
controlled by, or under common control with, such Person. Any Relative (for this
purpose, "Relative" means a spouse, child, parent, parent of spouse, sibling or
grandchild) of an individual shall be deemed to be an Affiliate of such
individual for purposes hereof. Neither the
<PAGE>
Company nor any Person controlled by the Company shall be deemed to be an
Affiliate of any holder of Company stock.
2.3 "Agreement" means the written agreement between the Company and
---------
an Optionee or Grantee evidencing the grant of an Option or Award and setting
forth the terms and conditions thereof.
2.4 "Award" means a grant of Restricted Stock, Phantom Stock, a Stock
-----
Appreciation Right, a Performance Award, a Dividend Equivalent Right, a Share
Award, or any or all of them.
2.5 "Beneficial Ownership" means ownership within the meaning of Rule
--------------------
13d-3 promulgated under the Exchange Act.
2.6 "Beneficiary" means an individual, trust or estate who or which,
-----------
by a written designation of the Optionee or Grantee filed with the Company by
operation of law succeeds to the rights and obligations of the Optionee or
Grantee under the Plan and an Agreement upon the Optionee's or Grantee's death.
2.7 "Board" means the Board of Directors of the Company.
-----
2.8 "Cause" means:
-----
(a) for purposes of Section 6.4, the term "Cause" shall mean (i)
intentional failure to perform duties as a Director, (ii) intentional
misrepresentation or the commission of an act of fraud in the performance of
such duties, (iii) breach of fiduciary duty involving personal profit including,
without limitation, embezzlement, misappropriation or conversion of assets or
opportunities of the Company or any of its Subsidiaries or (iv) willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) in connection with the performance of duties as a Director;
provided, however, that if the term "Cause" is defined in the certificates of
incorporation of the Company, Cause shall have the meaning given such term in
such certificates of incorporation, or
(b) in the case of an Optionee or Grantee whose employment with
the Company or a Subsidiary is, as the date of the applicable Agreement, subject
to the terms of an employment agreement between such Optionee or Grantee and the
Company or Subsidiary, which employment agreement includes a definition of
"Cause," the term "Cause" as used in this Plan or any Agreement shall have the
meaning set forth in such employment agreement during the period that such
employment agreement remains in effect; or
(c) in all other cases, the term "Cause" as used in this Plan or
any Agreement shall mean (i) intentional failure to perform reasonably assigned
duties, (ii) dishonesty or willful misconduct in the performance of duties,
(iii) involvement in a
-2-
<PAGE>
transaction in connection with the performance of duties to the Company or any
of its Subsidiaries which transaction is adverse to the interests of the Company
or any of its Subsidiaries and which is engaged in for personal profit or (iv)
willful violation of any law, rule or regulation (other than traffic violations
or similar offenses) in connection with the performance of duties.
2.9 "Change in Capitalization" means any increase or reduction in the
------------------------
number of Shares, or any change (including, without limitation, in the case of a
spin-off, dividend or other distribution in respect of Shares, a change in
value) in the Shares or exchange of Shares for a different number or kind of
shares or other securities of the Company or another corporation, by reason of a
reclassification, recapitalization, merger, consolidation, reorganization, spin-
off, split-up, issuance of warrants or rights or debentures, stock dividend,
stock split or reverse stock split, cash dividend, property dividend,
combination or exchange of shares, repurchase of shares, change in corporate
structure or a substantially similar transaction.
2.10 A "Change in Control" shall mean the occurrence of any of the
-----------------
following:
(a) An acquisition in one transaction or a series of related
transactions (other than directly from the Company or pursuant to Options or
Awards granted under this Plan or otherwise by the Company) of any Voting
Securities of the Company by any Person (other than the Founders) immediately
after which such Person has Beneficial Ownership of:
(i) Thirty-five percent (35%) or more of the combined
voting power of the Company's then outstanding Voting Securities,
and
(ii) A number of Voting Securities having combined voting
power greater than the combined voting power of the Voting
Securities then Beneficially Owned by the Founders;
provided, however, in determining whether a Change in Control has occurred
pursuant to this Section 2.10(a), Voting Securities which are acquired in a
"Non-Control Acquisition" (as hereinafter defined) shall not constitute an
acquisition which would cause a Change in Control. A "Non-Control Acquisition"
shall mean an acquisition by (i) an employee benefit plan (or a trust forming a
part thereof) maintained by (A) the Company or (B) any corporation or other
Person of which a majority of its voting power or its voting equity securities
or equity interest is owned, directly or indirectly, by the Company (for
purposes of this definition, a "Related Entity"), (ii) the Company or any
Related Entity, or (iii) any Person in connection with a "Non-Control
Transaction" (as hereinafter defined);
-3-
<PAGE>
(b) The individuals who, as of the date hereof, are members of
the Board (the "Incumbent Board"), cease for any reason to constitute at least a
majority of the members of the Board; provided, however, that if the election,
or nomination for election by the Company's common stockholders, of any new
director was approved by a vote of at least two-thirds of the Incumbent Board,
such new director shall, for purposes of this Plan, be considered as a member of
the Incumbent Board; provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest; or
(c) The consummation of:
(i) A merger, consolidation or reorganization involving the
Company unless:
(A) the stockholders of the Company, immediately
before such merger, consolidation or reorganization, own
directly or indirectly immediately following such merger,
consolidation or reorganization, more than fifty percent 50%
of the combined voting power of the outstanding voting
securities of the corporation resulting from such merger or
consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as their
ownership of the Voting Securities immediately before such
merger, consolidation or reorganization,
(B) the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization
constitute at least a majority of the members of the board
of directors of the Surviving Corporation, or a corporation
Beneficially Owning directly or indirectly a majority of the
voting securities of the Surviving Corporation, and
(C) no Person other than (1) the Company, (2) any
Related Entity, (3) any employee benefit plan (or any trust
forming a part thereof) that, immediately prior to such
merger, consolidation or reorganization, was maintained by
the Company, the Surviving Corporation, or any Related
Entity or (4) any Person who, together with its Affiliates,
-4-
<PAGE>
immediately prior to such merger, consolidation or
reorganization had Beneficial Ownership of thirty-five
percent (35%) or more of the then outstanding Voting
Securities, owns, together with its Affiliates, Beneficial
Ownership of (i) thirty-five percent (35%) or more of the
combined voting power of the Surviving Corporation's then
outstanding voting securities, and (ii) a number of the
Surviving Corporation's voting securities having combined
voting power greater than the combined voting power of the
Surviving Corporation's voting securities held by the
Founders.
(D) a transaction described in clauses (A) through
(C) above shall herein be referred to as a "Non-Control
Transaction;"
(ii) A complete liquidation or dissolution of the Company;
or
(iii) An agreement for the sale or other disposition of all
or substantially all of the assets of the Company to any Person
(other than a transfer to a Related Entity or the distribution to
the Company's stockholders of the stock of a Related Entity or
any other assets).
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of thirty-five percent (35%) or more of the combined voting power of
the Company's then outstanding Voting Securities as a result of the acquisition
of Voting Securities by the Company which, by reducing the number of Voting
Securities then outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Persons, provided that if a Change in Control
would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and (1) before such share
acquisition by the Company the Subject Person becomes the Beneficial Owner of
any new or additional Voting Securities in a related transaction or (2) after
such share acquisition by the Company the Subject Person becomes the Beneficial
Owner of any new or additional Voting Securities which in either case increases
the percentage of the then outstanding Voting Securities Beneficially Owned by
the Subject Person, then a Change in Control shall occur.
2.11 "Code" means the Internal Revenue Code of 1986, as amended.
----
2.12 "Committee" means a committee, as described in Section 3.1,
---------
appointed by the Board from time to time to administer the Plan and to perform
the functions set forth herein.
-5-
<PAGE>
2.13 "Company" means Splitrock Services, Inc.
-------
2.14 "Director" means a director of the Company.
--------
2.15 "Disability" means:
----------
(a) in the case of an Optionee or Grantee whose employment with
the Company or a Subsidiary is, as of the date of the applicable Agreement,
subject to the terms of an employment agreement between such Optionee or Grantee
and the Company or Subsidiary, which employment agreement includes a definition
of "Disability," the term "Disability" as used in this Plan or any Agreement
shall have the meaning set forth in such employment agreement during the period
that such employment agreement remains in effect; or
(b) in all other cases, the term "Disability" as used in this
Plan or any Agreement shall mean a physical or mental infirmity which impairs
the Optionee's or Grantee's ability to perform substantially his or her duties
for a period of one hundred eighty (180) consecutive days.
2.16 "Disability Date" means the date which is one hundred eighty
---------------
(180) consecutive days after the date on which an Optionee or Grantee is first
absent from active employment with the Company by reason of a Disability.
2.17 "Dividend Equivalent Right" means a right to receive all or some
-------------------------
portion of the cash dividends that are or would be payable with respect to
Shares.
2.18 "Division" means any of the operating units or divisions of the
--------
Company designated as a Division by the Committee.
2.19 "Eligible Individual" means any of the following individuals who
-------------------
is designated by the Committee as eligible to receive Options or Awards subject
to the conditions set forth herein: (a) any director (other than a Nonemployee
Director), officer or employee of the Company or a Subsidiary, (b) any
individual to whom the Company or a Subsidiary has extended a formal, written
offer of employment, or (c) any consultant or advisor of the Company or a
Subsidiary.
2.20 "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
2.21 "Fair Market Value" on any date means the closing sales prices
-----------------
of the Shares on such date on the principal national securities exchange on
which such Shares are listed or admitted to trading, or, if such Shares are not
so listed or admitted to trading, the average of the per Share closing bid price
and per Share closing asked price on such date as quoted on the National
Association of Securities Dealers Automated Quotation System or such other
market in which such prices are regularly quoted, or, if
-6-
<PAGE>
there have been no published bid or asked quotations with respect to Shares on
such date, the Fair Market Value shall be the value established by the Board in
good faith and, in the case of an Incentive Stock Option, in accordance with
Section 422 of the Code.
2.22 "Former Plan" means the Splitrock Services, Inc. 1997 Incentive
-----------
Share Plan.
2.23 "Formula Option" means an Option granted pursuant to Section 6.
--------------
2.24 "Founders" means: (i) William R. Wilson, Kwok L. Li, members of
--------
their "immediate family" (as defined in Rule 16a-1 promulgated under the
Exchange Act), and Linsang Partners, L.L.C., (ii) a trust solely for the benefit
of any of the individuals referred to in clause (i) above; (iii) the guardian,
conservator, estate or other legal representative of any of the individuals
referred to in clause (i) above; and (iv) any corporation, partnership, limited
liability company or other entity all of the outstanding equity securities of
which are owned, directly or indirectly, by the individuals or entities referred
to in clause (i), (ii) or (iii) above.
2.25 "Grantee" means a person to whom an Award has been granted under
-------
the Plan.
2.26 "Incentive Stock Option" means an Option satisfying the
----------------------
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
2.27 "Initial Public Offering" means the consummation of the first
-----------------------
public offering of Shares pursuant to a registration statement (other than on
Form S-8 or successor form) filed with, and declared effective by, the
Securities and Exchange Commission.
2.28 "Nonemployee Director" means a director of the Company who is a
--------------------
"nonemployee director" within the meaning of Rule 16b-3 promulgated under the
Exchange Act.
2.29 "Nonqualified Stock Option" means an Option which is not an
-------------------------
Incentive Stock Option.
2.30 "Normal Retirement Date" means the date on which an Optionee or
----------------------
Grantee terminates active employment with the Company on or after attainment of
age 65, but does not include termination by the Company for Cause.
2.31 "Option" means a Nonqualified Stock Option, an Incentive Stock
------
Option, a Formula Option, or any or all of them.
-7-
<PAGE>
2.32 "Optionee" means a person to whom an Option has been granted
--------
under the Plan.
2.33 "Outside Director" means a director of the Company who is an
----------------
"outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
2.34 "Parent" means any corporation which is a parent corporation
------
(within the meaning of Section 424(e) of the Code) with respect to the Company.
2.35 "Performance Awards" means Performance Units, Performance Shares
------------------
or either or both of them.
2.36 "Performance-Based Compensation" means any Option or Award that
------------------------------
is intended to constitute "performance based compensation" within the meaning of
Section 162(m)(4)(C) of the Code and the regulations promulgated thereunder.
2.37 "Performance Cycle" means the time period specified by the
-----------------
Committee at the time Performance Awards are granted during which the
performance of the Company, a Subsidiary or a Division will be measured.
2.38 "Performance Objectives" has the meaning set forth in Section
----------------------
11.
2.39 "Performance Shares" means Shares issued or transferred to an
------------------
Eligible Individual under Section 11.
2.40 "Performance Units" means Performance Units granted to an
-----------------
Eligible Individual under Section 11.
2.41 "Person" means `person' as such term is used for purposes of
------
Section 13(d) or 14(d) of the Exchange Act, including without limitation, any
individual, corporation, limited liability company, partnership, trust,
unincorporated organization, government or any agency or political subdivision
thereof, or any other entity or any group of Persons.
2.42 "Phantom Stock" means a right granted to an Eligible Individual
-------------
under Section 12 representing a number of hypothetical Shares.
2.43 "Plan" means the Splitrock Services, Inc. 1999 Stock Incentive
----
Plan, as amended and restated from time to time.
2.44 "Pooling Transaction" means an acquisition of the Company in a
-------------------
transaction which is intended to be treated as a "pooling of interests" under
generally accepted accounting principles.
-8-
<PAGE>
2.45 "Restricted Stock" means Shares issued or transferred to an
----------------
Eligible Individual pursuant to Section 10.
2.46 "Share Award" means a grant of Shares pursuant to Section 12.
-----------
2.47 "Shares" means the common stock, par value $.0001 per share, of
------
the Company.
2.48 "Stock Appreciation Right" means a right to receive all or some
------------------------
portion of the increase in the value of the Shares as provided in Section 8
hereof.
2.49 "Subsidiary" means (i) except as provided in subsection (ii)
----------
below, any corporation which is a subsidiary corporation (within the meaning of
Section 424(f) of the Code) with respect to the Company, and (ii) with respect
to provisions relating to the eligibility to receive Options or Awards other
than Incentive Stock Options and to continued employment for purposes of Options
and Awards (unless the Committee determines otherwise), any entity, whether or
not incorporated, in which the Company directly or indirectly owns fifty percent
(50%) or more of the outstanding equity or other ownership interests.
2.50 "Successor Corporation" means a corporation, or a parent or
---------------------
subsidiary thereof which issues or assumes an Option or Award in a transaction
described in Section 424(a) of the Code without regard to Sections 424(a)(1) and
(2) thereof.
2.51 "Tax Benefit" means an actual decrease in the Company's
-----------
liability for taxes in any period.
2.52 "Ten-Percent Stockholder" means an Eligible Individual, who, at
-----------------------
the time an Incentive Stock Option is to be granted to him or her, owns (within
the meaning of Section 422(b)(6) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company, or of a Parent or a Subsidiary.
2.53 "Termination of Employment" means the later of (i) severance of
-------------------------
the employer-employee relationship with the Company or (ii) the resignation,
removal or termination of an officer or Director of the Company.
2.54 "Transition Period" means the period beginning with an Initial
-----------------
Public Offering and ending as of the earlier of (i) the date of the first annual
meeting of stockholders of the Company at which Directors are to be elected that
occurs after the close of the third (3rd) calendar year following the calendar
year in which the Initial Public Offering occurs, (ii) the expiration of the
Plan, (iii) a material modification of the Plan within the meaning of Treasury
Regulation (S) 1.162-27(h)(1)(iii), or (iv) the issuance of all Shares that have
been allocated under the Plan.
-9-
<PAGE>
2.55 "Voting Securities" means all outstanding voting securities of
-----------------
the Company entitled to vote generally in the election of the Board of
Directors.
3. Administration.
--------------
3.1 (a) Subject to Section 3.1(b), the Plan shall be administered
by the Committee, which shall be appointed by the Board. The Committee shall
hold meetings at such times as may be necessary for the proper administration of
the Plan. The Committee shall keep minutes of its meetings. A quorum shall
consist of a majority of the members of the Committee and a majority of a quorum
may authorize any action. Any decision or determination reduced to writing and
signed by all of the members of the Committee shall be as fully effective as if
made by a majority vote at a meeting duly called and held. The Committee shall
consist of at least two (2) Directors and may consist of the entire Board;
provided, however, that from and after the date of an Initial Public Offering,
(A) if the Committee consists of less than the entire Board, each member shall
be a Nonemployee Director and (B) to the extent necessary for any Option or
Award intended to qualify as Performance-Based Compensation to so qualify, each
member of the Committee, whether or not it consists of the entire Board, shall
be an Outside Director.
(b) Notwithstanding anything to the contrary in Section 3.1(a),
the Board may appoint a separate committee (which may consist of one director
who need not be a Nonemployee Director or Outside Director) to act as the
Committee with respect to Awards or Options granted to any Eligible Individual
who is not an "officer" within the meaning of Rule 16b-1(f) promulgated under
the Exchange Act and not a "covered employee" within the meaning of Section
162(m) of the Code.
3.2 For purposes of the preceding sentence, if one or more members of
the Committee is not a Nonemployee Director and, if necessary for any Option or
Award intended to qualify as Performance-Based Compensation to so qualify, an
Outside Director, but recuses himself or herself or abstains from voting with
respect to a particular action taken by the Committee, then the Committee, with
respect to that action, shall be deemed to consist only of the members of the
Committee who have not recused themselves or abstained from voting. Subject to
applicable law, the Committee may delegate its authority under the Plan to any
other person or persons.
3.3 No member of the Committee shall be liable for any action,
failure to act, determination or interpretation made in good faith with respect
to this Plan or any transaction hereunder. The Company hereby agrees to
indemnify each member of the Committee for all costs and expenses and, to the
extent permitted by applicable law, any liability incurred in connection with
defending against, responding to, negotiating for the settlement of or otherwise
dealing with any claim, cause of action or dispute of any kind
-10-
<PAGE>
arising in connection with any actions in administering this Plan or in
authorizing or denying authorization to any transaction hereunder.
3.4 Subject to the express terms and conditions set forth herein, the
Committee shall have the power from time to time to:
(a) determine those Eligible Individuals to whom Options shall
be granted under the Plan and the number of such Options to be granted and to
prescribe the terms and conditions (which need not be identical) of each such
Option, including the purchase price per Share subject to each Option, and make
any amendment or modification to any Option Agreement consistent with the terms
of the Plan;
(b) select those Eligible Individuals to whom Awards shall be
granted under the Plan and to determine the number of Shares in respect of which
each Award is granted, the terms and conditions (which need not be identical) of
each such Award, including the restrictions or Performance Objectives relating
to Awards and the maximum value of any Award, and make any amendment or
modification to any Award Agreement consistent with the terms of the Plan;
(c) construe and interpret the Plan and the Options and Awards
granted hereunder and to establish, amend and revoke rules and regulations for
the administration of the Plan, including, without limitation, correcting any
defect or supplying any omission, or reconciling any inconsistency in the Plan
or in any Agreement, in the manner and to the extent it shall deem necessary or
advisable, including so that the Plan and the operation of the Plan complies
with the Code to the extent applicable and other applicable law, and otherwise
to make the Plan fully effective. All decisions and determinations by the
Committee in the exercise of this power shall be final, binding and conclusive
upon the Company, its Subsidiaries, the Optionees and Grantees, and all other
persons having any interest therein;
(d) determine the duration and purposes for leaves of absence
which may be granted to an Optionee or Grantee on an individual basis without
constituting a termination of employment or service for purposes of the Plan;
(e) exercise its sole discretion with respect to the powers and
rights granted to it as set forth in the Plan; and
(f) generally, exercise such powers and to perform such acts as
are deemed necessary or advisable to promote the best interests of the Company
with respect to the Plan.
4. Stock Subject to the Plan; Grant Limitations.
--------------------------------------------
-11-
<PAGE>
4.1 The aggregate number of Shares that may be made the subject of
Options and Awards granted under this Plan or the Former Plan shall not exceed
20,000,000; provided, however, that in the aggregate, not more than one-third of
the number of allotted Shares may be made the subject of Restricted Stock Awards
under Section 10 of the Plan (other than shares of Restricted Stock made in
settlement of Performance Units pursuant to Section 11.2(b). Upon a Change in
Capitalization, the maximum number of Shares referred to in the first sentence
of this Section 4.1 shall be adjusted in number and kind pursuant to Section 14.
The Company shall reserve for the purposes of the Plan, out of its authorized
but unissued Shares or out of Shares held in the Company's treasury, or partly
out of each, such number of Shares as shall be determined by the Board.
4.2 Upon the granting of an Option or an Award, the number of Shares
available under Section 4.1 for the granting of further Options and Awards shall
be reduced as follows:
(a) In connection with the granting of an Option or an Award
(other than the granting of a Performance Unit denominated in dollars), the
number of Shares shall be reduced by the number of Shares in respect of which
the Option or Award is granted or denominated.
(b) In connection with the granting of a Performance Unit
denominated in dollars, the number of Shares shall be reduced by an amount equal
to the quotient of (i) the dollar amount in which the Performance Unit is
denominated, divided by (ii) the Fair Market Value of a Share on the date the
Performance Unit is granted.
4.3 Whenever any outstanding Option or Award or portion thereof under
this Plan or the Former Plan expires, is canceled, or is otherwise terminated
for any reason without having been exercised or payment having been made in
respect of the entire Option or Award, the Shares allocable to the expired,
canceled, or otherwise terminated portion of the Option or Award may again be
the subject of Options or Awards granted hereunder.
-12-
<PAGE>
5. Option Grants for Eligible Individuals.
--------------------------------------
5.1 Authority of Committee. Subject to the provisions of the Plan,
----------------------
the Committee shall have full and final authority to select those Eligible
Individuals who will receive Options, the terms and conditions of which shall be
set forth in an Agreement; provided, however, that no Eligible Individual shall
receive any Incentive Stock Options unless he is an employee of the Company, a
Parent or a Subsidiary at the time the Incentive Stock Option is granted.
5.2 Purchase Price. The purchase price (which may be greater than,
--------------
less than or equal to the Fair Market Value on the date of grant) or the manner
in which the purchase price is to be determined for Shares under each Option
shall be determined by the Committee and set forth in the Agreement pursuant to
which each Option is granted; provided, however, that the purchase price per
Share under each Incentive Stock Option shall not be less than 100% of the Fair
Market Value of a Share on the date the Option is granted (110% in the case of
an Incentive Stock Option granted to a Ten-Percent Stockholder).
5.3 Maximum Duration. Options granted hereunder shall be for such
----------------
term as the Committee shall determine; provided, however, that an Option shall
not be exercisable after the expiration of ten (10) years from the date it is
granted (five (5) years in the case of an Incentive Stock Option granted to a
Ten-Percent Stockholder); provided, further, however, that the Committee may
provide that an Option (other than an Incentive Stock Option) may, upon the
death of the Optionee, be exercised for up to one (1) year following the date of
the Optionee's death even if such period extends beyond ten (10) years from the
date the Option is granted. The Committee may, subsequent to the granting of
any Option, extend the term thereof, but in no event shall the term as so
extended exceed the maximum term provided for in the preceding sentence.
5.4 Exercisability. Subject to Sections 5.5 and 7.5, each Option
--------------
shall become exercisable in such installments (which need not be equal) and at
such times as may be designated by the Committee and set forth in the Agreement.
To the extent not exercised, installments shall accumulate and be exercisable,
in whole or in part, at any time after becoming exercisable, but not later than
the date the Option expires. The Committee may accelerate the exercisability of
any Option or portion thereof at any time.
5.5 Termination. Subject to Sections 7.5 and 13 and unless otherwise
-----------
provided by the Committee, in its sole discretion, in the applicable Agreement,
the following provisions shall apply to Options upon a Termination of
Employment:
(a) Subject to Section 5.3, unless otherwise determined by the
Committee at the time of grant (and set forth in the applicable Agreement) or at
a later date, except in the case of Disability, retirement on or after the
Optionee's Normal
-13-
<PAGE>
Retirement Date and death as provided in Sections 5.5(c) and 5.5(d) below, upon
an Optionee's Termination of Employment with the Company, a Parent or a
Subsidiary for any reason other than a termination for Cause, any unexercised
Option held by such Optionee shall expire three (3) months after the Optionee
has a Termination of Employment and such Option may only be exercised by the
Optionee or his or her Beneficiary to the extent that the Option or a portion
thereof was exercisable on the date of Termination of Employment; provided,
however, that no Option may be exercised after the expiration date specified for
the particular Option in the Agreement.
(b) If the Optionee's Termination of Employment arises as a
result of a termination for Cause, then, unless the Committee determines
otherwise at the time of the Termination of Employment, any unexercised Options
(whether or not vested and exercisable) held by such Optionee shall terminate
and expire concurrently with the Optionee's Termination of Employment and no
rights thereunder may be exercised.
(c) Subject to Section 5.3, unless otherwise determined by the
Committee at the time of grant (and set forth in the applicable Agreement) or at
a later date, if an Optionee suffers a Disability or retires on or after the
Optionee's Normal Retirement Date, any unexercised Option held by such disabled
or retired Optionee shall expire one (1) year after the Disability Date or date
of Termination of Employment by reason of retirement, as the case may be, and
such Option may only be exercised by the Optionee or his or her guardian or
legal representative to the extent that the Option or a portion thereof was
exercisable on the Disability Date or the date of Termination of Employment by
reason of retirement, as the case may be; provided, however, no Option may be
exercised after the expiration date specified for the particular Option in the
Agreement.
(d) Subject to Section 5.3, unless otherwise determined by the
Committee at the time of grant (and set forth in the applicable Agreement) or at
a later date, if an Optionee dies while still employed by the Company, the
Options which the Optionee was entitled to exercise on the date of the
Optionee's death may be exercised at any time after the Optionee's death by the
Optionee's Beneficiary; provided, however, that no Option may be exercised after
the earlier of: (i) one (1) year after the Optionee's death or (ii) the
expiration date specified for the particular Option in the Agreement. If an
Optionee dies after his or her Termination of Employment, then the Options which
the Optionee was entitled to exercise on the date of the Optionee's death may be
exercised by his or her Beneficiary within the period specified in Sections
5.5(a) or 5.5(c), as the case may be.
(e) Subject to Section 5.3 and notwithstanding any other
provision of this Section 5.5, upon an Optionee's Termination of Employment at
any time on, or within one (1) year after, the occurrence of a Change in
Control, each Option held by the Optionee that was exercisable as of the date of
such Termination of Employment
-14-
<PAGE>
shall remain exercisable for a period ending not before the earlier of (A) the
first anniversary of the Termination of Employment or (B) the expiration of the
stated term of the Option.
(f) Unless otherwise determined by the Committee at the time of
grant (and set forth in the applicable Agreement) or at a later date, the Option
(or portion thereof), to the extent not yet vested and exercisable as of the
date of the Optionee's Termination of Employment, shall terminate immediately
upon such date.
5.6 Deferred Delivery of Option Shares. The Committee may, in its
----------------------------------
sole discretion, permit Optionees to elect to defer the issuance of Shares upon
the exercise of one or more Nonqualified Stock Options granted pursuant to the
Plan. The terms and conditions of such deferral shall be determined at the time
of the grant of the Option or thereafter and shall be set forth in the Agreement
evidencing the Option.
5.7 Modification. No modification of a Option shall adversely alter
------------
or impair any rights or obligations under the Option without the Optionee's
consent.
5.8 Limitations on Incentive Stock Options. To the extent that the
---------------------------------------
aggregate Fair Market Value (determined as of the date of the grant) of Shares
with respect to which Incentive Stock Options granted under the Plan and
"incentive stock options" (within the meaning of Section 422 of the Code)
granted under all other plans of the Company or its Subsidiaries (in either case
determined without regard to this Section 5.8) are exercisable by an Optionee
for the first time during any calendar year exceeds $100,000, such Incentive
Stock Options shall be treated as Nonqualified Stock Options. In applying the
limitation in the preceding sentence in the case of multiple Option grants,
Options which were intended to be Incentive Stock Options shall be treated as
Nonqualified Stock Options according to the order in which they were granted
such that the most recently granted Options are first treated as Nonqualified
Stock Options.
6. Option Grants for Nonemployee Directors.
---------------------------------------
6.1 Grant. Formula Options shall be granted (i) to a Nonemployee
-----
Director who becomes a member of the Board after July 1, 1999 upon election or
appointment and (ii) to all Nonemployee Directors who are members of the Board
as follows:
(a) Initial Grant. Each Nonemployee Director who becomes a
-------------
Director after July 1, 1999 shall, upon becoming a Director, be granted a
Formula Option in respect of 20,000 Shares.
(b) Annual Grant. Each Nonemployee Director shall be granted a
------------
Formula Option in respect of 20,000 Shares on the first business day of January
in each year that the Plan is in effect provided that the Nonemployee Director
is a Director on
-15-
<PAGE>
such date; provided, however, that a Nonemployee Director shall not be entitled
to receive an annual grant pursuant to this Section 6.1(b) for the calendar year
in which such Nonemployee Director is first elected or appointed to the Board.
(c) Terms and Conditions. All Formula Options granted pursuant
--------------------
to this Section 6 shall be evidenced by an Agreement containing such other terms
and conditions not inconsistent with the provisions of this Plan as determined
by the Board; provided, however, that such terms shall not vary the price,
amount or timing of Formula Options provided under this Section 6, including
provisions dealing with vesting, forfeiture and termination of such Formula
Options.
6.2 Purchase Price. The purchase price for Shares under each Formula
--------------
Option shall be equal to 100% of the Fair Market Value of such Shares on the
date the Formula Option is granted.
6.3 Vesting. Each Formula Option shall be fully vested and
-------
exercisable on the date of grant; provided, however, that the Optionee is a
Director on such date.
6.4 Duration. Subject to Section 7.5, each Formula Option shall
--------
terminate on the date which is the tenth (10th) anniversary of the date of
grant; provided, however, that if an Optionee dies while a Director and prior to
such tenth (10th) anniversary, the Formula Option may be exercised for up to one
(1) year following the date of the Optionee's death even if such period extends
beyond ten (10) years from the date the Formula Option is granted, unless
terminated earlier as follows:
(a) If an Optionee's service as a Director terminates for any
reason other than Disability, death or Cause, the Optionee may for a period of
three (3) months after such termination exercise his or her Formula Option,
after which time the Formula Option shall automatically terminate in full.
(b) If an Optionee's service as a Director terminates by reason
of the Optionee's resignation or removal from the Board due to Disability, the
Optionee or his or her guardian or legal representative may, for a period of one
(1) year after such termination, exercise his or her Formula Option, after which
time the Formula Option shall automatically terminate in full.
(c) If an Optionee's service as a Director terminates for Cause,
the Formula Option granted to the Optionee hereunder shall immediately terminate
in full and no rights thereunder may be exercised.
(d) If an Optionee dies while a Director, the Formula Option may
be exercised at any time after the Optionee's death by the Optionee's
Beneficiary; provided, however, that no Formula Option may be exercised after
the first anniversary of the Optionee's death. If an Optionee dies after his or
her service as a Director terminates,
-16-
<PAGE>
then the Formula Option may be exercised by his or her Beneficiary within the
period specified in Sections. 6.4(a) or 6.4 (b), as the case may be.
(e) Notwithstanding any other provision of this Section 6.4, in
the event an Optionee's service as a Director of the Company is terminated at
any time on, or within one (1) year after, the occurrence of a Change in
Control, each Formula Option held by the Optionee shall remain exercisable for a
period ending not before the earlier of (A) the first anniversary of the
termination of the Optionee's employment or service or (B) the expiration of the
stated term of the Formula Option.
7. Terms and Conditions Applicable to All Options.
----------------------------------------------
7.1 Additional Terms. The provisions of this Section 7 shall apply
----------------
to all Options.
7.2 Non-Transferability. No Option granted hereunder shall be
-------------------
transferable by the Optionee to whom it is granted otherwise than by will or by
the laws of descent and distribution or, in the case of an Option other than an
Incentive Stock Option, in the Committee's sole discretion, to a spouse or
former spouse in a transfer described in Section 1041(a) of the Code (a "Code
1041 Transfer"), and, except with respect to an Option transferred pursuant to a
Code 1041 Transfer, an Option shall be exercisable during the lifetime of such
Optionee only by the Optionee or his or her guardian or legal representative.
Notwithstanding the foregoing, the Committee may set forth in the Agreement
evidencing an Option (other than an Incentive Stock Option) at the time of grant
or thereafter, that the Option may be transferred to members of the Optionee's
immediate family, to trusts solely for the benefit of such immediate family
members and to partnerships in which such family members and/or trusts are the
only partners. Following transfer, for purposes of this Plan, a transferee of
an Option shall be deemed to be the Optionee; provided that the Option shall be
exercisable by the transferee only to the extent and for such periods that the
Option would have been exercisable if held by the original Optionee. For this
purpose, immediate family means the Optionee's spouse, parents, children,
stepchildren and grandchildren and the spouses of such parents, children,
stepchildren and grandchildren. The terms of an Option shall be final, binding
and conclusive upon the beneficiaries, executors, administrators, heirs and
successors of the Optionee.
7.3 Method of Exercise.
------------------
(a) The exercise of an Option shall be made only by a written
notice delivered in person or by mail to the Secretary of the Company at the
Company's principal executive office, specifying the number of Shares to be
purchased and, to the extent applicable, accompanied by payment therefor and
otherwise in accordance with such procedures which may be approved by the
Committee from time to time, and in accordance with the Agreement pursuant to
which the Option was granted; provided,
-17-
<PAGE>
however, that Options may not be exercised by an Optionee for twelve months
following a hardship distribution to the Optionee, to the extent such exercise
is prohibited under Treasury Regulation (S) 1.401(k)-1(d)(2)(iv)(B)(4). The
purchase price for any Shares purchased pursuant to the exercise of an Option
shall be paid, as determined by the Committee in its sole discretion, by any one
or a combination of the following: (a) delivery of cash or a check to the order
of the Company or (b) transferring to the Company Shares that have been held by
the Optionee for at least six (6) months (or such lesser period as may be
permitted by the Committee) prior to the exercise of the Option and that have a
Fair Market Value equal in amount to the purchase price, such transfer to be
upon such terms and conditions as determined by the Committee. In addition, both
Options and Formula Options may be exercised through a registered broker-dealer
pursuant to such cashless exercise procedures which are, from time to time,
deemed acceptable by the Committee. Any Shares transferred to the Company as
payment of the purchase price under an Option shall be valued at their Fair
Market Value on the day preceding the date of exercise of such Option. If
requested by the Committee, the Optionee shall deliver the Agreement evidencing
the Option to the Secretary of the Company who shall endorse thereon a notation
of such exercise and return such Agreement to the Optionee. No fractional Shares
(or cash in lieu thereof) shall be issued upon exercise of an Option and the
number of Shares that may be purchased upon exercise shall be rounded to the
nearest number of whole Shares.
(b) If the Fair Market Value of the Shares with respect to which
the Option is being exercised exceeds the purchase price of such Option, an
Optionee may, instead of exercising an Option as provided in Section 7.3(a),
request that the Committee authorize payment to the Optionee of the difference
between the Fair Market Value of part or all of the Shares which are the subject
of the Option and the purchase price of the Option, such difference to be
determined as of the date the Committee receives the request from the Optionee.
The Committee, in its sole discretion, may grant or deny such a request from an
Optionee with respect to part or all of the Shares as to which the Option is
then exercisable and, to the extent granted, shall direct the Company to make
the payment to the Optionee either in cash or in Shares or in any combination
thereof; provided, however, that the payment in Shares shall be based upon the
Fair Market Value of Shares as of the date the Committee received the request
from the Optionee. An Option shall be deemed to have been exercised and shall be
canceled to the extent that the Committee grants a request pursuant to this
Section 7.3(b).
7.4 Rights of Optionees. No Optionee shall be deemed for any purpose
-------------------
to be the owner of any Shares subject to any Option unless and until (a) the
Option shall have been exercised pursuant to the terms thereof, (b) the Company
shall have issued and delivered Shares to the Optionee, and (c) the Optionee's
name shall have been entered as a stockholder of record on the books of the
Company. Thereupon, the Optionee shall have full voting, dividend and other
ownership rights with respect to such Shares, subject to such terms and
conditions as may be set forth in the applicable Agreement.
-18-
<PAGE>
7.5 Effect of Change in Control.
---------------------------
(a) In the event of a Change in Control, all Options outstanding
on the date of such Change in Control shall become immediately and fully
exercisable. In addition, to the extent set forth in an Agreement
evidencing the grant of an Option, an Optionee will be permitted to
surrender to the Company for cancellation within sixty (60) days after such
Change in Control any Option or portion of an Option to the extent not yet
exercised and the Optionee will be entitled to receive a cash payment in an
amount equal to the excess, if any, of (a) (i) in the case of a
Nonqualified Stock Option, the greater of (A) the Fair Market Value, on the
date preceding the date of surrender, of the Shares subject to the Option
or portion thereof surrendered or (B) the Adjusted Fair Market Value of the
Shares subject to the Option or portion thereof surrendered or (ii) in the
case of an Incentive Stock Option, the Fair Market Value, on the date
preceding the date of surrender, of the Shares subject to the Option or
portion thereof surrendered, over (b) the aggregate exercise price for such
Shares under the Option or portion thereof surrendered.
(b) To the extent set forth in the applicable Agreement, if, as
a result of a Change in Control transaction, an Option intended to qualify
as an Incentive Stock Option fails to so qualify solely because of the
-------
failure to meet the holding requirements of Code Section 422(a)(1) (a
"Disqualifying Disposition"), the Company shall make a cash payment to the
Optionee equal to the amount which will, after taking into account all
taxes imposed on the Disqualifying Disposition and the receipt of such
payment, leave the Optionee in the same after-tax position the Optionee
would have been in had the Code Section 422(a)(1) holding requirements been
met at the time of the Disqualifying Disposition, provided, however, that
no payment described in this Section shall exceed the Tax Benefit to the
Company resulting from deductions relating to ordinary income recognized by
the Optionee as a result of the Disqualifying Disposition. The payment
described in this Section shall be made by the Company within thirty (30)
days of the filing by the Company of the federal tax return which includes
the tax items associated with the income recognized by the Optionee as a
result of the Disqualifying Disposition (or, if the Tax Benefit described
in the preceding sentence is not realized until a later year, within thirty
(30) days of the filing by the Company of the federal tax return with
respect to which such Tax Benefit is realized).
(c) To the extent set forth in the applicable Agreement and
provided that an Optionee is not entitled to payment under Section 7.5(b)
hereof, if, as a result of a Change in Control transaction, an Option intended
to qualify as an Incentive Stock Option fails to so qualify solely because the
------
vesting of the Option is accelerated pursuant to Section 7.5(a) and such
acceleration causes the aggregate fair market value
-19-
<PAGE>
(determined at the time the Option is granted) of the Shares with respect to
which Options are exercisable for the first time by an Optionee during the
calendar year in which such vesting occurs to exceed $100,000, within the
meaning of Code Section 422(d) (a "Disqualified Option"), then, upon exercise of
such Disqualified Option, the Company shall make a cash payment to the Optionee
equal to the amount which will, after taking into account all taxes imposed on
the exercise of such Disqualified Option and the receipt of such payment, leave
the Optionee in the same after-tax position the Optionee would have been in had
the Disqualified Option continued to qualify as an Incentive Stock Option on the
date of exercise and the Optionee sold the Shares received upon exercise of the
Option at their Fair Market Value on the date of exercise, provided, however,
that no payment described in this Section shall exceed the Tax Benefit to the
Company resulting from deductions relating to ordinary income recognized by the
Optionee as a result of exercising the Disqualified Option and the receipt of
such payment. The payment described in this Section shall be made by the Company
within thirty (30) days of the filing by the Company of the federal tax return
which includes the tax items associated with the income recognized by the
Optionee as a result of exercising the Disqualified Option (or, if the Tax
Benefit described in the preceding sentence is not realized until a later year,
within thirty (30) days of the filing by the Company of the federal tax return
with respect to which such Tax Benefit is realized); provided, however, that if
more than one Optionee is entitled to a cash payment pursuant to this Section
7.5(c) in any single tax year and the Tax Benefit realized by the Company in
such year with respect to all such Optionees is less than the aggregate amount
of the payments due to such Optionees hereunder, then (i) each such Optionee
shall receive a portion of such cash payment equal to an amount determined by
multiplying the amount of the Tax Benefit realized by the Company in such year
by a fraction the numerator of which is equal to the amount of payment due to
such Optionee and the denominator of which is equal to the aggregate amount due
to all such Optionees entitled to a payment hereunder, and (ii) subject to
further application of this proviso, shall be entitled to receive the remaining
portion within thirty (30) days of the filing by the Company of the federal tax
return with respect to which such Tax Benefit is realized.
8. Stock Appreciation Rights.
-------------------------
The Committee may in its sole discretion, either alone or in
connection with the grant of an Option, grant Stock Appreciation Rights in
accordance with the Plan, the terms and conditions of which shall be set forth
in an Agreement. If granted in connection with an Option, a Stock Appreciation
Right shall cover the same Shares covered by the Option (or such lesser number
of Shares as the Committee may determine) and shall, except as provided in this
Section 8, be subject to the same terms and conditions as the related Option.
-20-
<PAGE>
8.1 Time of Grant. A Stock Appreciation Right may be granted (a) at
-------------
any time if unrelated to an Option, or (b) if related to an Option, either at
the time of grant, or (except in the case of an Incentive Stock Option) at any
time thereafter during the term of the Option.
8.2 Stock Appreciation Right Related to an Option.
---------------------------------------------
(a) Exercise. Subject to Section 8.9, a Stock Appreciation Right
--------
granted in connection with an Option shall be exercisable at such time or times
and only to the extent that the related Options are exercisable (including,
without limitation, exercisability upon Termination of Employment or a Change in
Control), and will not be transferable except to the extent the related Option
may be transferable. A Stock Appreciation Right granted in connection with an
Incentive Stock Option shall expire no later than the expiration of the related
Incentive Stock Option and shall be exercisable only if the Fair Market Value of
a Share on the date of exercise exceeds the purchase price of the Option
specified in the related Incentive Stock Option Agreement.
(b) Treatment of Related Options and Stock Appreciation Rights
----------------------------------------------------------
Upon Exercise. Upon the exercise of a Stock Appreciation Right granted in
- -------------
connection with an Option, the Option shall be canceled to the extent of the
number of Shares as to which the Stock Appreciation Right is exercised, and upon
the exercise of an Option granted in connection with a Stock Appreciation Right,
the Stock Appreciation Right shall be canceled to the extent of the number of
Shares as to which the Option is exercised or surrendered.
8.3 Stock Appreciation Right Unrelated to an Option.
-----------------------------------------------
(a) Terms. Stock Appreciation Rights unrelated to Options shall
-----
contain such terms and conditions as to exercisability (subject to Section 8.9),
vesting and duration as the Committee shall determine, but in no event shall
they have a term of greater than ten (10) years; provided, however, that the
Committee may provide that Stock Appreciation right may, upon the death of the
Grantee, be exercised for up to one (1) year following the date of the Grantee's
death even if such period extends beyond ten (10) years from the date the Stock
Appreciation Right is granted.
(b) Termination. Subject to Section 13 and except as provided in
-----------
Section 8.9, and unless otherwise provided by the Committee, in its sole
discretion, in the applicable Agreement, upon a Grantee's Termination of
Employment, a Stock Appreciation Right shall be exercisable by the Grantee to
the same extent that an Option would be exercisable by an Optionee upon the
Optionee's Termination of Employment under the provisions of Section 5.5;
provided, however, no Stock Appreciation Right may be exercised after the
expiration date specified for the particular Stock Appreciation Right in the
applicable Agreement.
-21-
<PAGE>
8.4 Amount Payable. Subject to Section 8.7, upon the exercise of
--------------
a Stock Appreciation Right, the Grantee shall be entitled to receive an amount
determined by multiplying (x) the excess of the Fair Market Value of a Share on
the date preceding the date of exercise of such Stock Appreciation Right over
(A) in the case of a Stock Appreciation Right granted in connection with an
Option, the per Share purchase price under the related Option, or (B) in the
case of a Stock Appreciation Right unrelated to an Option, the Fair Market Value
of a Share on the date the Stock Appreciation Right was granted, by (y) the
number of Shares as to which such Stock Appreciation Right is being exercised.
Notwithstanding the foregoing, the Committee may limit in any manner the amount
payable with respect to any Stock Appreciation Right by including such a limit
in the Agreement evidencing the Stock Appreciation Right at the time it is
granted.
8.5 Non-Transferability. No Stock Appreciation Right shall be
-------------------
transferable by the Grantee to whom it was granted otherwise than by will or by
the laws of descent and distribution or, in the Committee's sole discretion,
(except in the case of a Stock Appreciation Right granted in connection with an
Incentive Stock Option), to a spouse or former spouse in a transfer described in
Section 1041(a) of the Code (a "Code 1041 Transfer") and, except with respect to
a Stock Appreciation Right transferred pursuant to a Code 1041 Transfer, such
Stock Appreciation Right shall be exercisable during the lifetime of such
Grantee only by the Grantee or his or her guardian or legal representative. The
terms of such Stock Appreciation Right shall be final, binding and conclusive
upon the beneficiaries, executors, administrators, heirs and successors of the
Grantee.
8.6 Method of Exercise. Stock Appreciation Rights shall be exercised
------------------
by a Grantee only by a written notice delivered in person or by mail to the
Secretary of the Company at the Company's principal executive office, specifying
the number of Shares with respect to which the Stock Appreciation Right is being
exercised. If requested by the Committee, the Grantee shall deliver the
Agreement evidencing the Stock Appreciation Right being exercised and the
Agreement evidencing any related Option to the Secretary of the Company who
shall endorse thereon a notation of such exercise and return such Agreement to
the Grantee.
8.7 Form of Payment. Payment of the amount determined under Section
---------------
8.4 may be made in the sole discretion of the Committee solely in whole Shares
in a number determined at their Fair Market Value on the date preceding the date
of exercise of the Stock Appreciation Right, or solely in cash, or in a
combination of cash and Shares. If the Committee decides to make full payment in
Shares and the amount payable results in a fractional Share, no fractional
Shares (or cash in lieu thereof) shall be issued upon the exercise of the Stock
Appreciation Right and the number of Shares that will be delivered shall be
rounded to the nearest number of whole Shares.
8.8 Modification. No modification of an Award shall adversely alter
------------
or impair any rights or obligations under the Agreement without the Grantee's
consent.
-22-
<PAGE>
8.9 Effect of Change in Control. In the event of a Change in
---------------------------
Control, all Stock Appreciation Rights shall become immediately and fully
exercisable. In addition, to the extent set forth in an Agreement evidencing the
grant of a Stock Appreciation Right unrelated to an Option, a Grantee will be
entitled to receive a payment from the Company in cash in an amount equal to the
excess, if any, of (a) the greater of (i) the Fair Market Value, on the date
preceding the date of exercise, of the underlying Shares subject to the Stock
Appreciation Right or portion thereof exercised and (ii) the Adjusted Fair
Market Value, on the date preceding the date of exercise, of the Shares over (b)
the aggregate Fair Market Value, on the date the Stock Appreciation Right was
granted, of the Shares subject to the Stock Appreciation Right or portion
thereof exercised. In the event a Grantee's employment with the Company
terminates following a Change in Control, each Stock Appreciation Right held by
the Grantee that was exercisable as of the date of termination of the Grantee's
employment shall, notwithstanding any shorter period set forth in the Agreement
evidencing the Stock Appreciation Right, remain exercisable for a period ending
not before the earlier of the first anniversary of (x) the termination of the
Grantee's employment or (y) the expiration of the stated term of the Stock
Appreciation Right.
-23-
<PAGE>
9. Dividend Equivalent Rights.
--------------------------
The Committee may in its sole discretion grant Dividend Equivalent
Rights to Eligible Individuals in tandem with an Option or Award or as a
separate Award. The terms and conditions (including, without limitation, terms
and conditions relating to a Change in Control) applicable to each Dividend
Equivalent Right shall be specified in the Agreement under which the Dividend
Equivalent Right is granted. In the sole discretion of the Committee, amounts
payable in respect of Dividend Equivalent Rights may be payable currently or
deferred until the lapsing of restrictions on such Dividend Equivalent Rights or
until the vesting, exercise, payment, settlement or other lapse of restrictions
on the Option or Award to which the Dividend Equivalent Rights relate. In the
event that the amount payable in respect of Dividend Equivalent Rights are to be
deferred, the Committee shall determine whether such amounts are to be held in
cash or reinvested in Shares or deemed (notionally) to be reinvested in Shares.
If amounts payable in respect of Dividend Equivalent Rights are to be held in
cash, there may be credited at the end of each year (or portion thereof)
interest on the amount of the account at the beginning of the year at a rate per
annum as the Committee, in its sole discretion, may determine. In the sole
discretion of the Committee, Dividend Equivalent Rights may be settled in cash
or Shares or a combination thereof, in a single installment or multiple
installments. With respect to Dividend Equivalent Rights granted in tandem with
an Option, the Agreement may provide that the Optionee may elect to have amounts
payable in respect of such Dividend Equivalent Rights applied against the
purchase price of such Option. To the extent necessary for any Dividend
Equivalent Right intended to qualify as Performance-Based Compensation under
Section 162(m) of the Code to so qualify, the terms and conditions of the
Dividend Equivalent Right shall be such that payment of the Dividend Equivalent
Right is contingent upon attainment of specified Performance Objectives within
the Performance Cycle, as provided for in Section 11, and such Dividend
Equivalent Right shall be treated as a Performance Award for purposes of
Sections 11 and 16.
10. Restricted Stock.
----------------
10.1 Grant. The Committee may in its sole discretion grant Awards to
-----
Eligible Individuals of Restricted Stock, which shall be evidenced by an
Agreement between the Company and the Grantee. Each Agreement shall contain such
restrictions, terms and conditions as the Committee may, in its sole discretion,
determine and (without limiting the generality of the foregoing) such Agreements
may require that an appropriate legend be placed on Share certificates. Awards
of Restricted Stock shall be subject to the terms and provisions set forth below
in this Section 10.
-24-
<PAGE>
10.2 Rights of Grantee. Shares of Restricted Stock granted pursuant to
-----------------
an Award hereunder shall be issued in the name of the Grantee as soon as
reasonably practicable after the Award is granted provided that the Grantee has
executed an Agreement evidencing the Award, the appropriate blank stock powers
and, in the sole discretion of the Committee, an escrow agreement and any other
documents which the Committee may require as a condition to the issuance of such
Shares. If a Grantee shall fail to execute the Agreement evidencing a Restricted
Stock Award, the appropriate blank stock powers, an escrow agreement or any
other documents which the Committee may require within the time period
prescribed by the Committee at the time the Award is granted, the Award shall be
null and void. At the sole discretion of the Committee, Shares issued in
connection with a Restricted Stock Award shall be deposited together with the
stock powers with an escrow agent (which may be the Company) designated by the
Committee. Unless the Committee determines otherwise and as set forth in the
Agreement, upon delivery of the Shares to the escrow agent, the Grantee shall
have all of the rights of a stockholder with respect to such Shares, including
the right to vote the Shares and to receive all dividends or other distributions
paid or made with respect to the Shares.
10.3 Non-transferability. Until all restrictions upon the Shares of
-------------------
Restricted Stock awarded to a Grantee shall have lapsed in the manner set forth
in Section 10.4, such Shares shall not be sold, transferred or otherwise
disposed of and shall not be pledged or otherwise hypothecated, nor shall they
be delivered to the Grantee.
10.4 Lapse of Restrictions.
---------------------
(a) Generally. Subject to Section 10.4(b), restrictions upon
---------
Shares of Restricted Stock awarded hereunder shall lapse at such time or times
and on such terms and conditions as the Committee may determine; provided,
however, that except in the case of Shares of Restricted Stock issued in full or
partial settlement of another Award or other earned compensation, such
restrictions shall not fully lapse prior to the third anniversary of the date on
which such Shares of Restricted Stock were granted. The Agreement evidencing the
Award shall set forth any such restrictions.
(b) Effect of Change in Control. Unless the Committee shall
---------------------------
determine otherwise at the time of the grant of an Award of Restricted Stock,
the restrictions upon Shares of Restricted Stock shall lapse upon a Change in
Control. The Agreement evidencing the Award shall set forth any such provisions.
10.5 Terms of Restricted Stock.
-------------------------
(a) Forfeiture of Restricted Stock. Subject to Sections 10.4(b),
------------------------------
10.5(b) and 13, all Restricted Stock shall be forfeited and returned to the
Company and all rights of the Grantee with respect to such Restricted Stock
shall terminate unless the Grantee continues in the service of the Company as an
employee or director until the
-25-
<PAGE>
expiration of the forfeiture period for such Restricted Stock and satisfies any
and all other conditions set forth in the Agreement. The Committee, in its sole
discretion, shall determine the forfeiture period (which may, but need not,
lapse in installments) and any other terms and conditions applicable with
respect to any Restricted Stock Award.
(b) Waiver of Forfeiture Period. Notwithstanding anything
---------------------------
contained in this Section 10 to the contrary, the Committee may, in its sole
discretion, waive the forfeiture period and any other conditions set forth in
any Agreement under appropriate circumstances (including, without limitation,
the death, Disability or retirement of the Grantee or a material change in
circumstances arising after the date of grant) and subject to such terms and
conditions (including, without limitation, forfeiture of a proportionate number
of the Restricted Stock) as the Committee shall deem appropriate, provided that
the Grantee shall at that time have completed at least one (1) year of
employment or service after the date of grant.
10.6 Modification or Substitution. Subject to the terms of the Plan,
----------------------------
including, without limitation, Section 16, the Committee may modify outstanding
Awards of Restricted Stock or accept the surrender of outstanding shares of
Restricted Stock (to the extent the restrictions on such Shares have not yet
lapsed) and grant new Awards in substitution for them. Notwithstanding the
foregoing, no modification of an Award shall adversely alter or impair any
rights or obligations under the Agreement without the Grantee's consent.
10.7 Treatment of Dividends. At the time an Award of Shares of
----------------------
Restricted Stock is granted, the Committee may, in its sole discretion,
determine that the payment to the Grantee of dividends, or a specified portion
thereof, declared or paid on such Shares by the Company shall be (a) deferred
until the lapsing of the restrictions imposed upon such Shares and (b) held by
the Company for the account of the Grantee until such time. In the event that
dividends are to be deferred, the Committee shall determine whether such
dividends are to be reinvested in Shares (which shall be held as additional
Shares of Restricted Stock) or held in cash. If deferred dividends are to be
held in cash, there may be credited at the end of each year (or portion thereof)
interest on the amount of the account at the beginning of the year at a rate per
annum as the Committee, in its sole discretion, may determine. Payment of
deferred dividends in respect of Shares of Restricted Stock (whether held in
cash or as additional Shares of Restricted Stock), together with interest
accrued thereon, if any, shall be made upon the lapsing of restrictions imposed
on the Shares in respect of which the deferred dividends were paid, and any
dividends deferred (together with any interest accrued thereon) in respect of
any Shares of Restricted Stock shall be forfeited upon the forfeiture of such
Shares.
10.8 Delivery of Shares. Upon the lapse of the restrictions on Shares
------------------
of Restricted Stock, the Committee shall cause a stock certificate to be
delivered to the Grantee with respect to such Shares, free of all restrictions
hereunder.
-26-
<PAGE>
11. Performance Awards.
------------------
11.1 Performance Objectives
----------------------
(a) Establishment. Performance Objectives for Performance
-------------
Awards may be expressed in terms of (i) earnings per Share, (ii) Share price,
(iii) pre-tax profits, (iv) after-tax profits, (v) operating profits, (vi) sales
or expenses, (vii) net earnings, (viii) return on equity or assets, (ix)
revenues, (x) EBITDA (earnings before interest, taxes, depreciation and
amortization), (xi) market share, or market penetration, (xii) any combination
of the foregoing or (xiii) prior to the end of the Transition Period, such other
criteria as the Committee may determine, and may be determined before or after
accounting changes, special charges, foreign currency effects, acquisitions,
divestitures, or other extraordinary events as determined by the Committee.
Performance Objectives may be in respect of the performance of the Company, any
of its Subsidiaries, any of its Divisions or any combination thereof.
Performance Objectives may be absolute or relative (to prior performance of the
Company or to the performance of one or more other entities or external indices)
and may be expressed in terms of a progression within a specified range. The
Performance Objectives with respect to a Performance Cycle shall be established
in writing by the Committee by the earlier of (x) the date on which a quarter of
the Performance Cycle has elapsed or (y) the date which is ninety (90) days
after the commencement of the Performance Cycle, and in any event while the
performance relating to the Performance Objectives remains substantially
uncertain.
(b) Effect of Certain Events. At the time of the granting of a
------------------------
Performance Award, or at any time thereafter, in either case to the extent
permitted under Section 162(m) of the Code and the regulations thereunder
without adversely affecting the treatment of the Performance Award as
Performance-Based Compensation, the Committee may provide for the manner in
which performance will be measured against the Performance Objectives (or may
adjust the Performance Objectives) to reflect the impact of specified corporate
transactions, accounting or tax law changes and other extraordinary or
nonrecurring events.
(c) Determination of Performance. Prior to the vesting, payment,
----------------------------
settlement or lapsing of any restrictions with respect to any Performance Award
that is intended to constitute Performance-Based Compensation made to a Grantee
who is subject to Section 162(m) of the Code, the Committee shall certify in
writing that the applicable Performance Objectives have been satisfied.
11.2 Performance Units. The Committee, in its sole discretion, may
-----------------
grant Awards of Performance Units to Eligible Individuals, the terms and
conditions of which shall be set forth in an Agreement between the Company and
the Grantee. Performance Units may be denominated in Shares or a specified
dollar amount and, contingent upon the attainment of specified Performance
Objectives within the Performance Cycle,
-27-
<PAGE>
represent the right to receive payment as provided in Section 11.2(b) of (i) in
the case of Share-denominated Performance Units, the Fair Market Value of a
Share on the date the Performance Unit was granted, the date the Performance
Unit became vested or any other date specified by the Committee, (ii) in the
case of dollar-denominated Performance Units, the specified dollar amount or
(iii) a percentage (which may be more than 100%) of the amount described in
clause (i) or (ii) depending on the level of Performance Objective attainment;
provided, however, that, the Committee may at the time a Performance Unit is
granted specify a maximum amount payable in respect of a vested Performance
Unit. Each Agreement shall specify the number of Performance Units to which it
relates, the Performance Objectives which must be satisfied in order for the
Performance Units to vest and the Performance Cycle within which such
Performance Objectives must be satisfied.
(a) Vesting and Forfeiture. Subject to Sections 11.1(c) and
----------------------
11.4, Performance Units shall become vested in such installments (which need not
be equal) and at such times or times and on such terms, conditions and
satisfaction of Performance Objectives as the Committee may, in its sole
discretion, determine at the time an Award is granted.
(b) Payment of Awards. Subject to Section 11.1(c), payment to
-----------------
Grantees in respect of vested Performance Units shall be made as soon as
practicable after the last day of the Performance Cycle to which such Award
relates unless the Agreement evidencing the Award provides for the deferral of
payment, in which event the terms and conditions of the deferral shall be set
forth in the Agreement. Subject to Section 11.4, such payments may be made
entirely in Shares valued at their Fair Market Value as of the day preceding the
date of payment or such other date specified by the Committee, entirely in cash,
or in such combination of Shares and cash as the Committee in its sole
discretion shall determine at any time prior to such payment; provided, however,
that if the Committee in its sole discretion determines to make such payment
entirely or partially in Shares of Restricted Stock, the Committee must
determine the extent to which such payment will be in Shares of Restricted Stock
and the terms of such Restricted Stock at the time the Award is granted.
(c) Non-transferability. Until the vesting of Performance
-------------------
Units, such Performance Units shall not be sold, transferred or otherwise
disposed of and shall not be pledged or otherwise hypothecated.
11.3 Performance Shares. The Committee, in its sole discretion, may
------------------
grant Awards of Performance Shares to Eligible Individuals, the terms and
conditions of which shall be set forth in an Agreement between the Company and
the Grantee. Each Agreement may require that an appropriate legend be placed on
Share certificates. Awards of Performance Shares shall be subject to the
following terms and provisions:
-28-
<PAGE>
(a) Rights of Grantee. The Committee shall provide at the time
-----------------
an Award of Performance Shares is made the time or times at which the actual
Shares represented by such Award shall be issued in the name of the Grantee;
provided, however, that no Performance Shares shall be issued until the Grantee
has executed an Agreement evidencing the Award, the appropriate blank stock
powers and, in the sole discretion of the Committee, an escrow agreement and any
other documents which the Committee may require as a condition to the issuance
of such Performance Shares. If a Grantee shall fail to execute the Agreement
evidencing an Award of Performance Shares, the appropriate blank stock powers,
an escrow agreement and any other documents which the Committee may require
within the time period prescribed by the Committee at the time the Award is
granted, the Award shall be null and void. At the sole discretion of the
Committee, Shares issued in connection with an Award of Performance Shares shall
be deposited together with the stock powers with an escrow agent (which may be
the Company) designated by the Committee. Except as restricted by the terms of
the Agreement, upon delivery of the Shares to the escrow agent, the Grantee
shall have, in the sole discretion of the Committee, all of the rights of a
stockholder with respect to such Shares, including the right to vote the Shares
and to receive all dividends or other distributions paid or made with respect to
the Shares.
(b) Non-transferability. Until any restrictions upon the
-------------------
Performance Shares awarded to a Grantee shall have lapsed in the manner set
forth in Sections 11.3(c) or 11.4, such Performance Shares shall not be sold,
transferred or otherwise disposed of and shall not be pledged or otherwise
hypothecated, nor shall they be delivered to the Grantee. The Committee may also
impose such other restrictions and conditions on the Performance Shares, if any,
as it deems appropriate.
(c) Lapse of Restrictions. Subject to Sections 11.1(c) and 11.4,
---------------------
restrictions upon Performance Shares awarded hereunder shall lapse and such
Performance Shares shall become vested at such time or times and on such terms,
conditions and satisfaction of Performance Objectives as the Committee may, in
its sole discretion, determine at the time an Award is granted.
(d) Treatment of Dividends. At the time the Award of Performance
----------------------
Shares is granted, the Committee may, in its sole discretion, determine that the
payment to the Grantee of dividends, or a specified portion thereof, declared or
paid on Shares represented by such Award which have been issued by the Company
to the Grantee shall be (i) deferred until the lapsing of the restrictions
imposed upon such Performance Shares and (ii) held by the Company for the
account of the Grantee until such time. In the event that dividends are to be
deferred, the Committee shall determine whether such dividends are to be
reinvested in Shares (which shall be held as additional Performance Shares) or
held in cash. If deferred dividends are to be held in cash, there may be
credited at the end of each year (or portion thereof) interest on the amount of
the account at the beginning of the year at a rate per annum as the Committee,
in its sole
-29-
<PAGE>
discretion, may determine. Payment of deferred dividends in respect of
Performance Shares (whether held in cash or in additional Performance Shares),
together with interest accrued thereon, if any, shall be made upon the lapsing
of restrictions imposed on the Performance Shares in respect of which the
deferred dividends were paid, and any dividends deferred (together with any
interest accrued thereon) in respect of any Performance Shares shall be
forfeited upon the forfeiture of such Performance Shares.
(e) Delivery of Shares. Upon the lapse of the restrictions on
------------------
Performance Shares awarded hereunder, the Committee shall cause a stock
certificate to be delivered to the Grantee with respect to such Shares, free of
all restrictions hereunder.
11.4 Effect of Change in Control. In the event of a Change in
---------------------------
Control, unless otherwise determined by the Committee and set forth in the
Agreement evidencing the Award:
(a) With respect to Performance Units, the Grantee shall (i)
become vested in all outstanding of the Performance Units as if all Performance
Objectives had been satisfied at the maximum level and (ii) be entitled to
receive in respect of all Performance Units which become vested as a result of a
Change in Control a cash payment within ten (10) days after such Change in
Control.
(b) With respect to Performance Shares, all restrictions shall
lapse immediately on all outstanding Performance Shares as if all Performance
Objectives had been satisfied at the [maximum] level.
(c) The Agreements evidencing Performance Shares and Performance
Units shall provide for the treatment of such Awards (or portions thereof), if
any, which do not become vested as the result of a Change in Control, including,
but not limited to, provisions for the adjustment of applicable Performance
Objectives.
11.5 Termination. Except as provided in Section 13, and unless
-----------
otherwise provided by the Committee, in its sole discretion, in the applicable
Agreement, the following provisions shall apply to Performance Awards upon a
Termination of Employment:
(a) Termination of Employment Prior to End of Performance Cycle.
-----------------------------------------------------------
Except as provided in Sections 11.5(b) and (d), in the case of a Grantee's
Termination of Employment, prior to the end of a Performance Cycle, the Grantee
will not be entitled to any Performance Awards, and any Performance Shares shall
be forfeited.
(b) Disability, Retirement or Death Prior to End of Performance
-----------------------------------------------------------
Performance Cycle. Unless otherwise provided by the Committee, in its sole
- -----------------
discretion, in the Agreement, if a Grantee's Disability Date or Termination of
Employment by reason of
-30-
<PAGE>
retirement on or after the Grantee's Normal Retirement Date or death occurs
following at least twelve (12) months of participation in any Performance Cycle,
but prior to the end of a Performance Cycle, the Grantee or such Grantee's
Beneficiary, as the case may be, shall be entitled to receive a pro-rata share
of his or her Performance Award as determined under Subsection (c).
(c) Pro-Rata Payment.
----------------
(i) Performance Units. With respect to Performance Units,
-----------------
the amount of any payment made to a Grantee (or Beneficiary) under circumstances
described in Section 11.5(b) will be the amount determined by multiplying the
amount of the Performance Units payable in Shares or dollars which would have
been earned, determined at the end of the Performance Cycle, had such employment
not been terminated, by a fraction, the numerator of which is the number of
whole months such Grantee was employed during the Performance Cycle, and the
denominator of which is the total number of months of the Performance Cycle. Any
such payment shall be made as soon as practicable after the end of the
respective Performance Cycle, and shall relate to attainment of Performance
Objectives over the entire Performance Cycle.
(ii) Performance Shares. With respect to Performance
------------------
Shares, the amount of Performance Shares held by a Grantee (or Beneficiary) with
respect to which restrictions shall lapse under circumstances described in
Section 11.5(b) will be the amount determined by multiplying the amount of the
Performance Shares with respect to which restrictions would have lapsed,
determined at the end of the Performance Cycle, had such employment not been
terminated, by a fraction, the numerator of which is the number of whole months
such Grantee was employed during the Performance Cycle, and the denominator of
which is the total number of months of the Performance Cycle. The Committee
shall determine the amount of Performance Shares with respect to which
restrictions shall lapse under this Section 11.5(c)(ii) as soon as practicable
after the end of the respective Performance Cycle, and such determination shall
relate to attainment of Performance Objectives over the entire Performance
Cycle. At that time, all Performance Shares relating to that Performance Cycle
with respect to which restrictions shall not lapse shall be forfeited.
(d) Other Events. Notwithstanding anything to the contrary in this
------------
Section 11, the Committee may, in its sole discretion, determine to pay all or
any portion of a Performance Award to a Grantee who has a Termination of
Employment prior to the end of a Performance Cycle under certain circumstances
(including, without limitation, a material change in circumstances arising after
the date of grant) and subject to such terms and conditions as the Committee
shall deem appropriate, provided that the Grantee shall have completed at his or
her date of Termination of Employment at least one (1) year of employment after
the date of grant.
-31-
<PAGE>
(e) Termination of Employment After End of Performance Cycle.
--------------------------------------------------------
Subject to Section 11.5(f), in the case of a Grantee's Termination of Employment
after the end of a Performance Cycle in which the applicable Performance
Objectives have been satisfied, the Grantee shall not be entitled to any
Performance Awards that have not yet vested as of the date of the Grantee's
Termination of Employment.
(f) Waiver of Forfeiture. Notwithstanding anything to the
--------------------
contrary in Section 11(e), in the case of a Grantee's Termination of Employment
after the end of a Performance Cycle in which the applicable Performance
Objectives have been satisfied, the Committee may, in its sole discretion, waive
the forfeiture of Performance Awards and any other conditions set forth in any
Agreement under appropriate circumstances (including, without limitation, the
death, Disability, or retirement of the Grantee or a material change in
circumstances arising after the date of grant) and subject to such terms and
conditions as the Committee shall deem appropriate.
11.6 Modification or Substitution. Subject to the terms of the Plan,
----------------------------
including, without limitation, Section 16, the Committee may modify outstanding
Performance Awards or accept the surrender of outstanding Performance Awards and
grant new Performance Awards in substitution for them. Notwithstanding the
foregoing, no modification of a Performance Award shall adversely alter or
impair any rights or obligations under the Agreement without the Grantee's
consent.
12. Other Share Based Awards.
------------------------
12.1 Share Awards. The Committee may, in its sole discretion, grant
------------
a Share Award to any Eligible Individual on such terms and conditions as the
Committee may, in its sole discretion, determine. Share Awards may be made as
additional compensation for services rendered by the Eligible Individual or may
be in lieu of cash or other compensation to which the Eligible Individual is
entitled from the Company.
12.2 Phantom Stock Awards.
--------------------
(a) Grant. The Committee may, in its sole discretion, grant
-----
shares of Phantom Stock to any Eligible Individual. Such Phantom Stock shall be
subject to the terms and conditions established by the Committee and set forth
in the applicable Agreement.
(b) Payment of Awards. Upon the vesting of a Phantom Stock
Award, the Grantee shall be entitled to receive a cash payment in respect of
each share of Phantom Stock which shall be equal to the Fair Market Value of a
Share as of the date of the Phantom Stock Award was granted, or such other date
as determined by the Committee at the time the Phantom Stock Award was granted.
The Committee may, at the time a Phantom Stock Award is granted, provide a
limitation on the amount payable in respect of each share of Phantom Stock. In
lieu of a cash payment, the Committee
-32-
<PAGE>
may settle Phantom Stock Awards with Shares having a Fair Market Value on the
date of vesting equal to the cash payment to which the Grantee has become
entitled.
13. Employment Agreement Governs Termination of Employment.
------------------------------------------------------
An employment agreement, if applicable, between an Optionee or Grantee
and the Company shall govern with respect to the terms and conditions applicable
to such Option or Award upon a termination or change in the status of the
employment of the Optionee or Grantee, to the extent that such employment
agreement provides for terms and conditions that differ from the terms and
conditions provided for in the applicable Agreement or the Plan; provided,
however, that to the extent necessary for an Option or Award intended to qualify
as performance-based compensation under Section 162(m) of the Code to so
qualify, the terms of the applicable Agreement or the Plan shall govern the
Option or Award; and, provided further, that the Committee shall have reviewed
and, in its sole discretion, approved the employment agreement.
14. Adjustment Upon Changes in Capitalization.
-----------------------------------------
(a) In the event of a Change in Capitalization, the Committee shall
conclusively determine the appropriate adjustments, if any, to (i) the maximum
number and class of Shares or other stock or securities with respect to which
Options or Awards may be granted under the Plan, (ii) the maximum number and
class of Shares or other stock or securities with respect to which Options or
Awards may be granted to any Eligible Individual during any calendar year
period, (iii) the number and class of Shares or other stock or securities which
are subject to outstanding Options or Awards granted under the Plan and the
purchase price therefor, if applicable, (iv) the number and class of Shares or
other securities in respect of which Formula Options are to be granted under
Section 6 and (v) the Performance Objectives.
(b) Any such adjustment in the Shares or other stock or securities
subject to outstanding Incentive Stock Options (including any adjustments in the
purchase price) shall be made in such manner as not to constitute a modification
as defined by Section 424(h)(3) of the Code and only to the extent otherwise
permitted by Sections 422 and 424 of the Code and, to the extent necessary for
any Option or Award intended to qualify as Performance-Based Compensation to
continue to so qualify, any such adjustment in the Shares or other stock or
securities subject to such Options and Awards shall be made in such manner as to
comply with Section 162(m) of the Code and the regulations promulgated
thereunder.
(c) If, by reason of a Change in Capitalization, a Grantee of an
Award shall be entitled to, or an Optionee shall be entitled to exercise an
Option with respect to, new, additional or different shares of stock or
securities of the Company or any other corporation, such new, additional or
different shares shall thereupon be subject to all of the conditions,
restrictions and performance criteria which were applicable to the Shares
-33-
<PAGE>
subject to the Award or Option, as the case may be, prior to such Change in
Capitalization.
15. Effect of Certain Transactions.
------------------------------
Subject to Sections 7.5, 8.9, 10.4(b) and 11.4 or as otherwise
provided in an Agreement, in the event of (a) the liquidation or dissolution of
the Company or (b) a merger or consolidation of the Company (a "Transaction"),
the Plan and the Options and Awards issued hereunder shall continue in effect in
accordance with their respective terms, except that following a Transaction each
Optionee and Grantee shall be entitled to receive in respect of each Share
subject to any outstanding Options or Awards, as the case may be, upon exercise
of any Option or payment or transfer in respect of any Award, the same number
and kind of stock, securities, cash, property or other consideration that each
holder of a Share was entitled to receive in the Transaction in respect of a
Share; provided, however, that such stock, securities, cash, property, or other
consideration shall remain subject to all of the conditions, restrictions and
performance criteria which were applicable to the Options and Awards prior to
such Transaction.
16. Interpretation.
--------------
Following the required registration of any equity security of the
Company pursuant to Section 12 of the Exchange Act, unless otherwise expressly
stated in the relevant Agreement, each Option, Stock Appreciation Right and
Performance Award granted under the Plan to a "covered employee" within the
meaning of Section 162(m)(3) of the Code is intended to be Performance-Based
Compensation (except that, in the event of a Change in Control, payment of
Performance Awards to a Grantee who remains a "covered employee" with respect to
such payment may not qualify as Performance-Based Compensation). The Committee
shall not be entitled to exercise any discretion otherwise authorized hereunder
with respect to such Options or Awards if the ability to exercise such
discretion or the exercise of such discretion itself would cause the
compensation attributable to such Options or Awards to fail to qualify as
Performance-Based Compensation. Notwithstanding anything to the contrary in the
Plan, the provisions of the Plan may at any time be bifurcated by the Board or
the Committee in any manner so that certain provisions of the Plan or any
Performance Award intended (or required in order) to satisfy the applicable
requirements of Section 162(m) of the Code are only applicable to persons whose
compensation is subject to Section 162(m).
17. Pooling Transactions.
--------------------
Notwithstanding anything contained in the Plan or any Agreement to the
contrary, in the event of a Change in Control which is also intended to
constitute a Pooling Transaction, the Committee shall take such actions, if any,
as are specifically
-34-
<PAGE>
recommended by an independent accounting firm retained by the Company to the
extent reasonably necessary in order to assure that the Pooling Transaction will
qualify as such, including, without limitation, (a) deferring the vesting,
exercise, payment, settlement or lapsing of restrictions with respect to any
Option or Award, (b) providing that the payment or settlement in respect of any
Option or Award be made in the form of cash, Shares or securities of a successor
or acquirer of the Company, or a combination of the foregoing, and (c) providing
for the extension of the term of any Option or Award to the extent necessary to
accommodate the foregoing, but not beyond the maximum term permitted for any
Option or Award.
18. Effective Date, Termination and Amendment of the Plan.
-----------------------------------------------------
18.1 Effective Date. The effective date of this Plan shall be the
--------------
date the Plan is adopted by the Board, subject only to the approval of the
holders of a majority of the outstanding Common Stock of the Company within
twelve (12) months of the adoption of the Plan by the Board.
18.2 Plan Amendment or Termination. The Plan shall terminate on the
-----------------------------
day preceding the tenth anniversary of the date of its adoption by the Board and
no Option or Award may be granted thereafter. The Board may sooner terminate the
Plan and the Board may at any time and from time to time amend, modify or
suspend the Plan; provided, however, that:
(a) no such amendment, modification, suspension or termination
shall impair or adversely alter any Options or Awards theretofore granted under
the Plan, except with the consent of the Optionee or Grantee, nor shall any
amendment, modification, suspension or termination deprive any Optionee or
Grantee of any Shares which he or she may have acquired through or as a result
of the Plan; and
(b) to the extent necessary under any applicable law, regulation
or exchange requirement no amendment shall be effective unless approved by the
stockholders of the Company in accordance with applicable law, regulation or
exchange requirement .
19. Non-Exclusivity of the Plan.
---------------------------
The adoption of the Plan by the Board shall not be construed as
amending, modifying or rescinding any previously approved incentive arrangement
or as creating any limitations on the power of the Board to adopt such other
incentive arrangements as it may deem desirable, including, without limitation,
the granting of stock options otherwise than under the Plan, and such
arrangements may be either applicable generally or only in specific cases.
20. Limitation of Liability.
-----------------------
-35-
<PAGE>
As illustrative of the limitations of liability of the Company, but
not intended to be exhaustive thereof, nothing in the Plan shall be construed
to:
(a) give any person any right to be granted an Option or Award other
than at the sole discretion of the Committee;
(b) give any person any rights whatsoever with respect to Shares
except as specifically provided in the Plan;
(c) limit in any way the right of the Company or any Subsidiary to
terminate the employment of any person at any time; or
(d) be evidence of any agreement or understanding, expressed or
implied, that the Company will employ any person at any particular rate of
compensation or for any particular period of time.
21. Regulations and Other Approvals; Governing Law.
----------------------------------------------
21.1 Except as to matters of federal law, the Plan and the rights of
all persons claiming hereunder shall be construed and determined in accordance
with the laws of the State of Delaware without giving effect to conflicts of
laws principles thereof.
21.2 The obligation of the Company to sell or deliver Shares with
respect to Options and Awards granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
21.3 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Individuals granted Incentive Stock Options
the tax benefits under the applicable provisions of the Code and regulations
promulgated thereunder.
21.4 Each Option and Award is subject to the requirement that, if at
any time the Committee determines, in its sole discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan is
required by any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Option or
Award or the issuance of Shares, no Options or Awards shall be granted or
payment made or Shares issued, in whole or in part, unless listing,
registration, qualification, consent or approval has been effected or obtained
free of any conditions as acceptable to the Committee.
-36-
<PAGE>
21.5 Notwithstanding anything contained in the Plan or any Agreement
to the contrary, in the event that the disposition of Shares acquired pursuant
to the Plan is not covered by a then current registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), and is not otherwise
exempt from such registration, such Shares shall be restricted against transfer
to the extent required by the Securities Act and Rule 144 or other regulations
thereunder. The Company may place on any certificate representing any such
Shares any legend deemed desirable by the Company's counsel to comply with
federal or state securities laws and the Committee may require any individual
receiving Shares pursuant to an Option or Award granted under the Plan, as a
condition precedent to receipt of such Shares, to represent and warrant to the
Company in writing that the Shares acquired by such individual are acquired
without a view to any distribution thereof and will not be sold or transferred
other than pursuant to an effective registration thereof under said Act or
pursuant to an exemption applicable under the Securities Act or the rules and
regulations promulgated thereunder.
22. Miscellaneous.
-------------
22.1 Multiple Agreements. The terms of each Option or Award may
-------------------
differ from other Options or Awards granted under the Plan at the same time, or
at some other time. The Committee may also grant more than one Option or Award
to a given Eligible Individual during the term of the Plan, either in addition
to, or in substitution for, one or more Options or Awards previously granted to
that Eligible Individual.
22.2 Captions. The use of captions in this Plan or any Agreement is
--------
for the convenience of reference only and shall not affect the meaning of any
provision of the Plan or such Agreement.
22.3 Severability. Whenever possible, each provision of the Plan or
------------
an Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of the Plan or an Agreement shall be
held by a court of competent jurisdiction to be prohibited by or invalid or
unenforceable under applicable law, then (a) such provision shall be deemed to
be amended to accomplish the objectives of the provision as originally written
to the fullest extent permitted by law and (b) all other provisions of the Plan
or an Agreement shall remain in full force and effect.
22.4 Withholding of Taxes.
--------------------
(a) At such times as an Optionee or Grantee recognizes taxable
income in connection with the receipt of Shares or cash hereunder (a "Taxable
Event"), the Optionee or Grantee shall pay to the Company an amount equal to the
federal, state and local income taxes and other amounts as may be required by
law to be withheld by the Company in connection with the Taxable Event (the
"Withholding Taxes") prior to the issuance, or release from escrow, of such
Shares or the payment of such cash. The
-37-
<PAGE>
Company shall have the right to deduct from any payment of cash to an Optionee
or Grantee an amount equal to the Withholding Taxes in satisfaction of the
obligation to pay Withholding Taxes. In satisfaction of the obligation to pay
Withholding Taxes to the Company, the Optionee or Grantee may make a written
election (the "Tax Election"), which may be accepted or rejected in the sole
discretion of the Committee, to have withheld a portion of the Shares then
issuable to him or her having an aggregate Fair Market Value, on the date
preceding the date of such issuance, equal to the Withholding Taxes.
(b) If an Optionee makes a disposition, within the meaning of
Section 424(c) of the Code and regulations promulgated thereunder, of any Share
or Shares issued to such Optionee pursuant to the exercise of an Incentive Stock
Option within the two-year period commencing on the day after the date of the
grant or within the one-year period commencing on the day after the date of
transfer of such Share or Shares to the Optionee pursuant to such exercise, the
Optionee shall, within ten (10) days of such disposition, notify the Company
thereof, by delivery of written notice to the Company at its principal executive
office.
22.5 Post-Transition Period. Any Option or Award granted under the
----------------------
Plan after the expiration of the Transition Period which is intended to be
Performance-Based Compensation shall be subject to the approval of the material
terms of the Plan by a majority of the stockholders of the Company in accordance
with Section 162(m) of the Code and the regulations promulgated thereunder.
-38-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 3 to the Registration
Statement on Form S-1 (No. 333-79909) of our reports dated March 24, 1999,
except as to the reverse stock split described in Note 12 which is as of July
12, 1999, relating to the financial statements and financial statement schedule
of Splitrock Services, Inc., which appear in such Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
PricewaterhouseCoopers LLP
Houston, TX
July 23, 1999
