<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
US XCHANGE, L.L.C.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MICHIGAN 4813 38-3305418
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
20 MONROE AVENUE NW, SUITE 450
GRAND RAPIDS, MICHIGAN 49503
(616) 493-7000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OR
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RICHARD POSTMA
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
US XCHANGE, L.L.C.
20 MONROE AVENUE NW, SUITE 450
GRAND RAPIDS, MICHIGAN 49503
(616) 493-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
JOHN P. DENNEEN, ESQ.
BRYAN CAVE LLP
211 N. BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102-2750
(314) 259-2265
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT PROPOSED PROPOSED
TITLE OF EACH CLASS OF TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
15% Senior Notes due
July 1, 2008................... $200,000,000 $1,000.00 $200,000,000 $59,000
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee under
Rule 457(f).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1998
PROSPECTUS
[USXCHANGE LOGO]
OFFER TO EXCHANGE
15% SENIOR NOTES DUE JULY 1, 2008
FOR ALL OUTSTANDING 15% SENIOR NOTES DUE JULY 1, 2008
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON
, 1998, UNLESS EXTENDED.
US Xchange, L.L.C., a Michigan limited liability company (the "Company"),
is hereby offering (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount
of its 15% Senior Notes due July 1, 2008 (the "Exchange Notes"), which exchange
has been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a registration statement of which this Prospectus
is a part, for each $1,000 principal amount of its outstanding 15% Senior Notes
due July 1, 2008 (the "Private Notes"), of which $200,000,000 in aggregate
principal amount was issued on June 25, 1998 and is outstanding as of the date
hereof. The form and terms of the Exchange Notes are identical in all material
respects to those of the Private Notes, except for certain transfer restrictions
and exchange and registration rights relating to the Private Notes and except
for certain interest provisions related to such registration rights. The
Exchange Notes will evidence the same indebtedness as the Private Notes (which
they replace) and will be entitled to the benefits of an Indenture dated as of
June 25, 1998 governing the Private Notes and the Exchange Notes (the
"Indenture"). The Private Notes and the Exchange Notes are sometimes referred to
herein collectively as the "Notes." See "The Exchange Offer" and "Description of
the Notes."
The Notes are non-callable. However, at any time prior to July 1, 2001, the
Company may redeem up to 35% of the aggregate principal amount of the Notes with
the proceeds of one or more Public Equity Offerings at 115% of their principal
amount, plus accrued interest; provided, however, that (i) after any such
redemption, Notes representing at least 65% of the aggregate principal amount of
the Notes originally issued remain outstanding and (ii) notice of any such
redemption is mailed within 60 days of such Public Equity Offering.
The Company has pledged a portfolio of Pledged Securities, consisting of
U.S. government securities, as security for the first six scheduled interest
payments on the Notes.
The Notes are unsubordinated, unsecured (except as described above)
indebtedness of the Company, rank pari passu in right of payment with all other
unsubordinated, unsecured indebtedness of the Company, rank senior in right of
payment to all subordinated indebtedness of the Company and are subordinated to
the claims of holders of any secured indebtedness of the Company with respect to
the assets securing such secured indebtedness. As of June 30, 1998, the total
amount of outstanding indebtedness of the Company (parent only) was $203.8
million, of which $3.8 million was secured. Moreover, the Company is a holding
company, and the Notes are effectively subordinated to all existing and future
liabilities (including trade payables) of the Company's subsidiaries. As of June
30, 1998, the subsidiaries of the Company had approximately $16.9 million in the
aggregate of liabilities (excluding intercompany payables).
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on ,
1998 unless the Exchange Offer is extended by the Company in its sole discretion
(the "Expiration Date"). Tenders of Private Notes may be withdrawn at any time
prior to the Expiration Date. Private Notes may be tendered only in integral
multiples of $1,000. The Exchange Offer is subject to certain customary
conditions. See "The Exchange Offer."
------------------------
FOR A DISCUSSION OF CERTAIN FACTORS RELATING TO THE EXCHANGE OFFER AND AN
INVESTMENT IN THE NOTES, INCLUDING RISKS RELATED TO THE COMPANY'S LIMITED
OPERATING HISTORY AND COMPETITION IN SMALLER MARKETS, SEE "RISK FACTORS"
BEGINNING ON PAGE 15.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
[MAP DEPICTING EXISTING AND PLANNED US XCHANGE NETWORKS OMITTED]
2
<PAGE> 4
NOTICE TO INVESTORS
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company undertaken in connection with the issuance of the
Private Notes. Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission") set forth in no-action letters issued to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Private Notes may be offered for resale,
resold and otherwise transferred by a holder thereof ("Holder") without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the holder is acquiring the Exchange Notes in the
ordinary course of its business, is not participating and has no arrangement or
understanding with any person to participate in the distribution of the Exchange
Notes and is not an "affiliate" of the Company within the meaning of Rule 405 of
the Securities Act. Holders of Private Notes wishing to accept the Exchange
Offer must represent to the Company that such conditions have been met. The
Company believes that none of the registered Holders of the Private Notes is an
"affiliate" of the Company as such term is defined in Rule 405 under the
Securities Act.
Each broker-dealer who holds Private Notes acquired for its own account as
a result of market-making or other trading activities and who receives Exchange
Notes for its own account in exchange for such Private Notes pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by any such broker-dealer in
connection with resales of such Exchange Notes. The Letter of Transmittal states
that, by acknowledging that it will deliver a prospectus in connection with any
resale of such Exchange Notes, and by delivering a prospectus, any such
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The Company has agreed to make this Prospectus
(as it may be amended or supplemented) available to any such broker-dealer that
requests copies of such Prospectus in the Letter of Transmittal for use in
connection with any such resale for a period of up to 90 days after the
Expiration Date. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the
Exchange Notes. There can be no assurance as to the liquidity of any market that
may develop for the Exchange Notes, the ability of Holders to sell Exchange
Notes, or the price at which Holders would be able to sell Exchange Notes. The
Company does not intend to apply for listing of the Exchange Notes for trading
on any securities exchange or for inclusion of the Exchange Notes in any
automated quotation system. The National Association of Securities Dealers, Inc.
("NASD") has designated the Private Notes as securities eligible for trading in
the Private Offerings, Resales and Trading through Automatic Linkages ("PORTAL")
market of the NASD (see "Price Range of the Private Notes") and the Company has
been advised that Morgan Stanley & Co. Incorporated has heretofore acted as
market maker for the Private Notes. The Company has been advised by Morgan
Stanley & Co. Incorporated that it currently intends to make a market in the
Exchange Notes. Future trading prices of the Exchange Notes will depend on many
factors, including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. Historically, the
market for securities similar to the Exchange Notes, including non-investment
grade debt, has been subject to disruptions that have caused substantial
volatility in the prices of such securities. There can be no assurance that any
market for the Exchange Notes, if such market develops, will not be subject to
similar disruptions. See "Risk Factors--No Prior Public Market for Exchange
Notes; Possible Volatility of Market Price of Exchange Notes."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection with
the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
3
<PAGE> 5
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement") under the Securities Act with
respect to the Exchange Notes offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus omits certain information,
exhibits and undertakings contained in the Exchange Offer Registration
Statement. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or document filed or incorporated
by reference as an exhibit to the Exchange Offer Registration Statement, each
such statement being qualified in all respects by such reference. For further
information with respect to the Company and the Exchange Notes offered hereby,
reference is made to the Exchange Offer Registration Statement, including the
exhibits thereto.
Upon effectiveness of the Exchange Offer Registration Statement, the
Company will be subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will file reports and other information with
the Commission. The Exchange Offer Registration Statement and reports and other
information filed by the Company with the Commission may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be
available for inspection and copying at the regional offices of the Commission
located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511 and
Suite 1300, 7 World Trade Center, New York, New York 10048. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a website (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Under the
terms of the Indenture pursuant to which the Private Notes were, and the
Exchange Notes will be, issued, the Company will be required to file with the
Commission, and to furnish Holders of the Notes with, the information, documents
and other reports specified in Sections 13 and 15(d) of the Exchange Act,
including reports on Forms 10-K, 10-Q and 8-K.
INCORPORATION BY REFERENCE
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Exchange Offer shall be deemed to be incorporated in this
Prospectus by reference and to be a part hereof from the date of the filing of
such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner of Notes, to whom a copy of this Prospectus is delivered, upon
written or oral request of such person, a copy of any documents incorporated
herein by reference (other than exhibits to such documents unless such exhibits
are specifically incorporated by reference in such documents). Such a request
may be directed in writing to Donald Offringa, Vice President of Finance, US
Xchange, L.L.C., 20 Monroe Avenue NW, Suite 450, Grand Rapids, Michigan 49503,
telephone (616) 493-7000.
4
<PAGE> 6
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THE STATEMENTS CONTAINED IN THIS PROSPECTUS WHICH ARE NOT HISTORICAL FACTS
ARE "FORWARD-LOOKING STATEMENTS" (AS SUCH TERM IS DEFINED IN THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995) THAT INVOLVE RISKS AND UNCERTAINTIES.
THESE FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "WILL," "MAY," "SHOULD," "BELIEVES,"
"EXPECTS" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON
OR COMPARABLE TERMINOLOGY, OR BY DISCUSSION OF CERTAIN STRATEGIES THAT INVOLVE
RISKS AND UNCERTAINTIES. MANAGEMENT WISHES TO CAUTION INVESTORS THAT THESE
FORWARD-LOOKING STATEMENTS, SUCH AS THE COMPANY'S PLANS AND STRATEGIES, ITS
ANTICIPATION OF REVENUES FROM DESIGNATED MARKETS, AND STATEMENTS REGARDING THE
DEVELOPMENT OF THE COMPANY'S BUSINESSES, THE MARKETS FOR THE COMPANY'S SERVICES
AND PRODUCTS, THE COMPANY'S ANTICIPATED CAPITAL EXPENDITURES, POSSIBLE CHANGES
IN REGULATORY REQUIREMENTS AND OTHER STATEMENTS CONTAINED HEREIN REGARDING
MATTERS THAT ARE NOT HISTORICAL FACTS, ARE ONLY PREDICTIONS, ASSUMPTIONS AND
ESTIMATES REGARDING FUTURE EVENTS AND CIRCUMSTANCES. NO ASSURANCE CAN BE GIVEN
THAT SUCH PREDICTIONS, ASSUMPTIONS OR ESTIMATES WILL BE ACHIEVED; ACTUAL EVENTS
OR RESULTS MAY DIFFER MATERIALLY AS A RESULT OF RISKS FACING THE COMPANY. SUCH
RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S ABILITY TO MEET ITS
ADDITIONAL CAPITAL REQUIREMENTS, GENERATE POSITIVE OPERATING CASH FLOW, COMPETE
IN ITS TARGETED MARKETS, SUCCESSFULLY MARKET ITS SERVICES TO CURRENT AND NEW
CUSTOMERS, INTERCONNECT WITH ILECS, DEVELOP EFFICIENT OPERATIONS SUPPORT AND
OTHER BACK OFFICE SYSTEMS, PROVISION AND SERVICE ITS CUSTOMERS, ASSESS MARKETS,
INSTALL FACILITIES, INCLUDING SWITCHING ELECTRONICS, AND OBTAIN RIGHTS-OF-WAY
AND ANY REQUIRED GOVERNMENTAL AUTHORIZATIONS, FRANCHISES AND PERMITS, ALL IN A
TIMELY MANNER, AT REASONABLE COSTS AND ON SATISFACTORY TERMS AND CONDITIONS.
REGULATORY, LEGISLATIVE AND JUDICIAL DEVELOPMENTS COULD ALSO CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE FUTURE RESULTS INDICATED, EXPRESSED OR
IMPLIED IN SUCH FORWARD-LOOKING STATEMENTS. ALL SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE FOREGOING CAUTIONARY
STATEMENTS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THEIR DATES. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
5
<PAGE> 7
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including the consolidated
financial statements of the Company and the notes thereto, appearing elsewhere
in this Prospectus. Unless the context otherwise requires, the term "Company,"
as used in this Prospectus, means US Xchange, L.L.C., a Michigan limited
liability company, and, where appropriate, its subsidiaries. See "Glossary of
Selected Terms" beginning at page G-1 for the definitions of certain technical
terms used in this Prospectus. Certain other capitalized terms used herein have
the meanings ascribed to them in "Description of the Notes--Certain
Definitions."
THE COMPANY
The Company is a facilities-based competitive local exchange carrier
("CLEC") offering telecommunications services primarily in Tier III Markets in
the midwestern United States. The Company's target customers include small and
medium-sized businesses, Internet Service Providers ("ISPs") and government and
other institutional end users, as well as residential end users. The Company's
objective is to become the leading competitor to the incumbent local exchange
carrier ("ILEC") in each of its target markets by offering complete,
cost-effective telecommunications solutions.
The Company commenced commercial operations in July 1997. It was founded by
Ronald H. VanderPol and Richard Postma, experienced operators of competitive
telecommunications companies, including (i) City Signal, Inc., one of the
country's first CLECs, which sold its Michigan operations to Brooks Fiber
Properties, Inc. in 1996 and sold certain other fiber properties to Teleport
Communications Group Inc. and a predecessor of Nextlink Communications Inc.,
(ii) Teledial America, Inc., a switch-based long distance reseller that was sold
to LCI International, Inc. in 1996, and (iii) Digital Signal, Inc., a carrier's
carrier that was sold to a predecessor of Qwest Communications International
Inc. in 1990. Mr. VanderPol has made an equity investment of $60 million in the
Company. The Company's senior management team includes individuals with over 100
years of collective experience in the telecommunications industry, including key
executives with significant experience in telecommunications marketing, network
design, deployment and operation, operations support systems ("OSS") and other
back office systems, finance and regulatory affairs.
As of the date of this Prospectus, the Company was providing services
primarily on a resale basis in seven commercial regions in Wisconsin and Indiana
and had six switches and six local fiber optic networks commercially
operational. The Company is currently deploying or plans to deploy an additional
seven switches and 12 local networks. Upon entering a market, the Company
resells the services of the ILEC. As each of the Company's networks and
switching systems becomes commercially operational in that market, the Company
will transition its resale customers to its own facilities-based services.
The Company interconnects its networks with all or substantially all of the
ILEC central offices and long distance carrier ("IXC") points of presence
("POPs") in each of its markets and obtains "last mile" connections to its
customers primarily through unbundled network elements leased from the ILEC. The
Company installs a Lucent Technologies, Inc. ("Lucent") Series 5ESS(TM)-2000
host switch, transmission equipment and a SONET fiber optic ring network in each
of its commercial regions. Each commercial region consists of one or more target
markets served either by the host switch or by a remote switch or other
transmission equipment linked to the host switch for such commercial region. A
remote switch can provide substantially all of the same telecommunications
services as a host switch, even if the link connecting the two switches is
temporarily interrupted, for approximately 33% to 50% of the installation and
operational costs of a host switch. The Company believes its host/remote network
architecture will allow it to cost-effectively provide its services in smaller
markets and over a broader geographic area.
As of June 30, 1998, the Company had invested approximately $62.2 million
in networks and equipment, and had approximately 300 route miles of local and
long haul optical fiber deployed, 10,231 access lines in service, nine local
sales offices and approximately 350 full-time employees, including approximately
160 employees engaged full time in its sales and marketing efforts. The Company
has entered into interconnection agreements with ILECs for, and is certified as
a CLEC in, each of its current and target markets. Resale
6
<PAGE> 8
revenues from July 1997 (when the Company commenced commercial operations)
through December 31, 1997 totaled approximately $207,000, of which approximately
$85,000 was generated in December 1997. Revenues for the six months ended June
30, 1998, substantially all of which were resale revenues, totalled
approximately $1,984,000, of which approximately $565,000 and $1,419,000 was
generated in the first and second quarters of 1998, respectively.
The following table presents information concerning the commercial regions
in the Company's current development plans:
<TABLE>
<CAPTION>
SWITCH AND PLANNED TARGETED
RESALE NETWORK ROUTE TARGETED ADDRESSABLE APPROXIMATE
COMMERCIAL REGION COMMENCEMENT(1) OPERATIONAL(1) MILES(2) COLLOCATIONS ACCESS LINES POPULATION(3)
----------------- --------------- -------------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Green Bay/Appleton, WI.... 3Q/97 1Q/98 28 7 254,567 770,000
Milwaukee, WI............. 3Q/97 3Q/98 115 11 372,026 1,799,000
Madison, WI............... 3Q/97 3Q/98 41 7 223,823 883,000
South Bend, IN............ 1Q/98 3Q/98 45 7 212,468 601,000
Bloomington, IN........... 2Q/98 4Q/98 15 2 75,193 235,000
Ft. Wayne, IN............. 2Q/98 4Q/98 50 8 183,900 680,000
Evansville, IN............ 3Q/98 4Q/98 30 3 74,888 518,000
Rockford, IL.............. 4Q/98 4Q/98 22 3 126,878 439,000
Kalamazoo, MI............. 4Q/98 2Q/99 75 9 376,710 1,619,000
</TABLE>
- ---------------
(1) Quarter during which the Company began or plans to begin offering services
on a resale basis or the network and switch became or are planned to become
commercially operational, as the case may be.
(2) Does not include long haul fiber that interconnects the Company's networks.
As of June 30, 1998, the Company had approximately 300 route miles of local
network and long haul fibers deployed in its Green Bay/Appleton, Milwaukee
and Madison, Wisconsin commercial regions.
(3) Includes populations of cities within the commercial region that are linked
to the host switch. Populations are based on 1996 figures contained in the
1998 Rand McNally Commercial Atlas and Marketing Guide.
In addition to deploying its own local networks in targeted commercial
regions, the Company plans to (i) construct, lease or acquire long haul fiber
that will interconnect its owned local networks and host switches and (ii) lease
feature group access to ILEC tandem switches to originate and terminate calls in
regions bordering its owned facilities, as well as certain other regions where
cost and demand justify. See "Business--Markets." The Company also is
considering opportunities to expand its operations into additional commercial
regions in the Midwest, which would require additional financing. See "Risk
Factors--Additional Capital Requirements."
US XCHANGE STRATEGY
The principal elements of the Company's business strategy include:
Focus on Tier III Markets. The Company primarily targets Tier III Markets
with attractive demographic, economic, competitive and telecommunications demand
characteristics. The Company evaluates each of its potential markets on the
basis of (i) the Company's "bottom up" analyses of the potential demand for its
telecommunications services, (ii) the level of actual and potential CLEC
competition and (iii) the disparity between ILEC local service pricing and the
Company's anticipated cost of providing comparable service. The Company believes
that, in Tier III Markets, network construction is generally less expensive,
labor costs and the costs of obtaining rights-of-way are generally lower, aerial
deployment of fiber optic cable (which is less expensive than underground
deployment) is generally permitted to a greater extent, and there are fewer ILEC
central office and IXC POP connections required for comprehensive market
coverage than in Tier I and Tier II Markets.
Achieve Early-to-Market Advantage. The Company strives to be the first CLEC
in a commercial region to actively market and provide services. The Company
believes that, by effecting early entry into selected Tier III Markets, it can
discourage market entry by additional CLECs. To gain early entry into each
target
7
<PAGE> 9
market, the Company establishes a local sales force offering switched local,
long distance and Centrex services on a resale basis until its network switching
system becomes commercially operational, which the Company believes will be
approximately six to nine months after beginning network construction. Entering
a market by reselling services enables the Company to build brand name
recognition and develop a customer base that it can transition to its own
networks as they become commercially operational. To accelerate the deployment
of its networks, the Company outsources the installation and initial service
turn-up of its network systems to Lucent.
Gain Broad, Regional Market Coverage. The Company believes that Tier III
Markets are most effectively penetrated by installing networks and switching
facilities designed to address customers in an entire commercial region. The
Company believes that this regional focus enables it to (i) take advantage of
economies of scale in network architecture, management and operation, (ii)
cost-effectively address the available customer base in each of its markets and
(iii) leverage the US Xchange brand name across the markets within a commercial
region.
Establish Fully Integrated Networks. The Company intends to develop the
capability to provide facilities-based telecommunications services over a fully
integrated system of networks throughout its targeted commercial regions in the
Midwest. The Company plans to (i) construct, lease or acquire long haul fiber
that will interconnect its owned local networks and host switches and (ii) lease
feature group access to ILEC tandem switches to originate and terminate calls in
regions bordering its owned facilities, as well as certain other regions where
cost and demand justify, which will allow the Company to transmit such traffic
at an attractive cost. Through this integrated design, the Company believes it
can reduce its use of the facilities of other providers and more economically
provide long distance services.
Emphasize Local Presence to Gain Market Share. The Company staffs each of
its markets with experienced, local direct sales and technical personnel who
provide personalized customer service. The Company believes its local presence
and responsive customer service will give it a competitive advantage over the
ILECs in Tier III Markets, where the Company believes the ILECs generally do not
have significant local sales and technical support presence. The Company also
tailors its US Xchange brand advertising campaigns and marketing programs in
each of its selected markets to establish its brand identity as a provider that
is interested in and responsive to the particular telecommunications needs of
its local customers.
Install High Quality Flexible Networks at a Low Cost. The Company believes
its network design and technology and its use of ILEC unbundled network elements
to obtain "last mile" connections to its customers allow it to (i) reduce
investments in property and equipment needed to provide services, (ii) enter
markets quickly, (iii) reduce underutilized and/or stranded investments in
connections to customer premises, (iv) provide the broad market coverage needed
to address business and residential end users simultaneously and (v) if and when
supported by market demand, cost-effectively construct "last mile" transport to
selected customers. The Company's systems are designed to support a full
complement of services, including local dial tone and advanced local features,
long distance, Centrex, integrated services digital network ("ISDN") and frame
relay data transmission, Internet access and wireless services.
Maintain Innovative, Integrated Operations Support, Customer Care and
Billing Systems. The Company has recently implemented scalable, automated
provisioning and order entry systems that automate many of the functions that
have traditionally been performed manually to support the ILEC's "legacy"
systems. In addition to cost advantages, the Company believes that its automated
operations support, customer care and billing systems provide it with a
marketing advantage by allowing it more quickly and efficiently to activate and
change services for its customers and to provide more responsive customer
support and service. All of the services offered by the Company, including
bundled third party services, are billed to the customer on a single,
easy-to-read billing statement, which the Company believes provides it with a
competitive advantage.
------------------------
The Company is a Michigan limited liability company with its principal
executive offices located at 20 Monroe Avenue NW, Suite 450, Grand Rapids,
Michigan 49503, and its telephone number is (616) 493-7000.
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<PAGE> 10
THE EXCHANGE OFFER
The Exchange Offer............ The Company is hereby offering to exchange
$1,000 principal amount of Exchange Notes for
each $1,000 principal amount of Private Notes
that are properly tendered and accepted. The
Company will issue Exchange Notes on or as
promptly as practicable after the Expiration
Date. As of the date hereof, there is
$200,000,000 aggregate principal amount of
Private Notes outstanding. See "The Exchange
Offer."
Based on interpretations by the staff of the
Commission set forth in no-action letters
issued to third parties, the Company believes
that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes
may be offered for resale, resold and otherwise
transferred by a Holder thereof without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that the Holder is acquiring Exchange
Notes in the ordinary course of its business,
is not participating and has no arrangement or
understanding with any person to participate in
the distribution of the Exchange Notes and is
not an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act.
Any Holder of Private Notes who tenders in the
Exchange Offer with the intention to
participate, or for the purpose of
participating, in a distribution of the
Exchange Notes could not rely on the
above-referenced position of the staff of the
Commission and, in the absence of an exemption
therefrom, would have to comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any resale transaction. Failure
to comply with such requirements in such
instance could result in such Holder incurring
liability under the Securities Act for which
the Holder is not indemnified by the Company.
See "The Exchange Offer--Resale of the Exchange
Notes."
Each broker-dealer who holds Private Notes
acquired for its own account as a result of
market-making or other trading activities and
who receives Exchange Notes pursuant to the
Exchange Offer for its own account in exchange
therefor must acknowledge that it will deliver
a copy of this Prospectus, as it may be amended
or supplemented from time to time, in
connection with any resale of such Exchange
Notes. The Letter of Transmittal that
accompanies this Prospectus states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of
the Securities Act.
Registration Rights
Agreement................... The Private Notes were sold by the Company on
June 25, 1998 to Morgan Stanley & Co.
Incorporated (the "Placement Agent") pursuant
to a Placement Agreement, dated June 22, 1998,
by and among the Company and the Placement
Agent (the "Placement Agreement"). Pursuant to
the Placement Agreement, the Company and the
Placement Agent entered into a Registration
Rights Agreement, dated as of June 25, 1998
(the "Registration Rights Agreement"), which
grants the Holders of the Private Notes certain
exchange and registration rights. The Exchange
Offer is intended to satisfy such rights, which
will terminate upon the consummation of the
Exchange Offer. The Holders of the
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<PAGE> 11
Exchange Notes will not be entitled to any
exchange or registration rights with respect to
the Exchange Notes. See "The Exchange
Offer--Termination of Certain Rights." The
Company will not receive any proceeds from, and
has agreed to bear the expenses of, the
Exchange Offer. See "Use of Proceeds."
Expiration Date............... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 1998,
unless the Exchange Offer is extended by the
Company in its sole discretion, in which case
the term "Expiration Date" shall mean the
latest date and time to which the Exchange
Offer is extended. See "The Exchange
Offer--Expiration Date; Extensions;
Amendments."
Procedures for Tendering
Private Notes............... Each Holder of Private Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal,
or such facsimile, together with such Private
Notes and any other required documentation to
The Bank of New York, as exchange agent (the
"Exchange Agent"), at the address set forth
herein. By executing the Letter of Transmittal,
the Holder will represent to and agree with the
Company that, among other things, (i) the
Exchange Notes to be acquired by such Holder of
Private Notes in connection with the Exchange
Offer are being acquired by such Holder in the
ordinary course of its business, (ii) such
Holder has no arrangement or understanding with
any person to participate in a distribution of
the Exchange Notes and (iii) such Holder is not
an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act.
If the Holder is a broker-dealer that will
receive Exchange Notes for its own account in
exchange for Private Notes that were acquired
for its own account as a result of
market-making or other trading activities, such
Holder will be required to acknowledge in the
Letter of Transmittal that such Holder will
deliver a prospectus in connection with any
resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus,
such Holder will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. See "The Exchange
Offer--Procedures for Tendering."
Special Procedures for
Beneficial Owners............. Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Private Notes in
the Exchange Offer should contact such
registered Holder promptly and instruct such
registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on its own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering such owner's Private
Notes, either make appropriate arrangements to
register ownership of the Private Notes in such
owner's name or obtain a properly completed
bond power from the registered Holder. The
transfer of registered ownership may take
considerable time and may not be able to be
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<PAGE> 12
completed prior to the Expiration Date. See
"The Exchange Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures.................... Holders of Private Notes who wish to tender
their Private Notes and whose Private Notes are
not immediately available or who cannot deliver
their Private Notes, the Letter of Transmittal
or any other documentation required by the
Letter of Transmittal to the Exchange Agent
prior to the Expiration Date, must tender their
Private Notes in accordance with the guaranteed
delivery procedures set forth under "The
Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of the Private
Notes and Delivery of the
Exchange Notes.............. Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company
will accept for exchange any and all Private
Notes that are properly tendered in the
Exchange Offer prior to the Expiration Date. NO
VOTE OF THE COMPANY'S SECURITY HOLDERS IS
REQUIRED TO EFFECT THE EXCHANGE OFFER AND NO
SUCH VOTE (OR PROXY THEREFOR) IS BEING SOUGHT
HEREBY. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered on or as
promptly as practicable after the Expiration
Date. See "The Exchange Offer--Terms of the
Exchange Offer."
Withdrawal Rights............. Tenders of Private Notes may be withdrawn at
any time prior to the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
Certain United States Federal
Income Tax Considerations... For a discussion of certain United States
federal income tax considerations relating to
the exchange of Exchange Notes for Private
Notes, see "Certain United States Federal
Income Tax Considerations."
Exchange Agent................ The Bank of New York is serving as the Exchange
Agent in connection with the Exchange Offer.
The Bank of New York also serves as trustee
under the Indenture and as collateral agent
under the Pledge Agreement.
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<PAGE> 13
THE NOTES
The Exchange Offer applies to $200,000,000 aggregate principal amount of
Private Notes. The form and terms of the Exchange Notes are identical in all
material respects to the form and terms of the Private Notes, except that the
exchange will have been registered under the Securities Act, and, therefore, the
Exchange Notes will not bear legends restricting the transfer thereof, and
Holders of the Exchange Notes will not be entitled to any of the exchange and
registration rights of Holders of the Private Notes under the Registration
Rights Agreement, which rights will terminate upon consummation of the Exchange
Offer. The Exchange Notes will evidence the same indebtedness as the Private
Notes (which they replace) and will be issued under, and be entitled to the
benefits of, the Indenture and the Pledge Agreement. For further information and
for definitions of certain capitalized terms used herein, see "Description of
the Notes."
Issuer........................ US Xchange, L.L.C.
Securities Offered............ $200,000,000 principal amount of 15% Senior
Notes due 2008.
Maturity...................... July 1, 2008.
Interest...................... Interest on the Notes is payable semi-annually
in cash on July 1 and January 1 of each year,
beginning on January 1, 1999. Interest on each
Exchange Note will accrue at the rate of 15%
per annum from the last payment date on which
interest was paid on the Private Note
surrendered in exchange therefor or, if no
interest has been paid on the Private Note,
from June 25, 1998, the date of original
issuance of the Private Notes.
Non-callable.................. The Notes are non-callable.
Redemption Upon Receipt of
Public Equity Offering
Proceeds.................... At any time prior to July 1, 2001, the Company
may redeem up to 35% of the aggregate principal
amount of the Notes with the proceeds of one or
more Public Equity Offerings at 115% of their
principal amount, plus accrued interest;
provided, however, that (i) after any such
redemption, Notes representing at least 65% of
the aggregate principal amount of the Notes
originally issued remains outstanding and (ii)
notice of any such redemption is mailed within
60 days of such Public Equity Offering. See
"Description of the Notes--Redemption Upon
Receipt of Public Equity Offering Proceeds."
Change of Control............. Upon a Change of Control, the Company will be
required to make an offer to purchase all of
the outstanding Notes at a purchase price equal
to 101% of their principal amount, plus accrued
interest. There can be no assurance that the
Company will have sufficient funds available at
the time of any Change of Control to make any
required debt repayment (including repurchases
of the Notes). See "Description of the
Notes--Repurchase of Notes Upon a Change of
Control."
Security...................... Pursuant to the Indenture, the Company has
purchased and pledged to the Trustee under the
Indenture, as security for the benefit of the
Holders of the Notes, approximately $79.6
million of Pledged Securities consisting of
U.S. government securities, which the Company
believes will be sufficient, upon receipt of
scheduled principal and interest payments
thereon to provide for the payment
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<PAGE> 14
in full of the first six scheduled interest
payments due on the Notes. See "Description of
the Notes--Security."
Ranking....................... The Notes are unsubordinated, unsecured (except
as described above under "--Security")
indebtedness of the Company, rank pari passu in
right of payment with all other unsubordinated,
unsecured indebtedness of the Company, rank
senior in right of payment to all subordinated
indebtedness of the Company and are
subordinated to the claims of holders of any
secured indebtedness of the Company with
respect to the assets securing such secured
indebtedness. As of June 30, 1998, the total
amount of outstanding indebtedness of the
Company (parent only) was $203.8 million, of
which $3.8 was secured. Moreover, the Company
is a holding company, and the Notes will be
effectively are subordinated to all existing
and future liabilities (including trade
payables) of the Company's subsidiaries. As of
June 30, 1998, the subsidiaries of the Company
had approximately $16.9 million in the
aggregate of liabilities (excluding
intercompany payables). See "Risk Factors--
Additional Capital Requirements,"
"--Substantial Indebtedness; Possible
Substantial Additional Indebtedness; Financing
Risks," "--Priority of Holders of Secured
Indebtedness," and "--Holding Company
Structure; Structural Subordination of the
Notes" and "Description of Existing
Indebtedness."
Certain Covenants............. The Indenture contains certain covenants that,
among other things, restrict the ability of the
Company and its Restricted Subsidiaries to
incur additional indebtedness, create liens,
engage in sale-leaseback transactions, pay
dividends or make distributions in respect of
their membership interests, redeem membership
interests, make investments or certain other
restricted payments, sell assets, issue or sell
membership interests of Restricted
Subsidiaries, enter into transactions with
members or affiliates or effect a consolidation
or merger. However, these limitations are
subject to a number of important qualifications
and exceptions. See "Description of the
Notes--Covenants."
Book-Entry; Delivery and
Form.......................... It is expected that delivery of the Exchange
Notes will be made in book-entry form as
described below. The Notes will be issued only
in registered form without coupons and in
minimum denominations of $1,000 and any
integral multiples of $1,000 in excess thereof.
Exchange Notes issued in exchange for Private
Notes sold in reliance on Rule 144A under the
Securities Act will be evidenced by one or more
Notes in global form (each a "Global Note"),
which will be deposited with the Trustee as
custodian for, and registered in the name of, a
nominee of The Depository Trust Company ("DTC")
in New York, New York. Exchange Notes issued in
exchange for Private Notes sold in offshore
transactions pursuant to Regulation S under the
Securities Act will be evidenced by one or more
Global Notes which will be deposited with the
Trustee as custodian for, and registered in the
name of, a nominee of DTC for the accounts of
Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear
System ("Euroclear"), and Cedel Banks, societe
anonyme ("Cedel Bank"). Beneficial interests in
such Global
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<PAGE> 15
Notes will be shown on, and transfers thereof
will be effected only through, records
maintained by DTC and its participants. Such
interests will trade in DTC's Same-Day Funds
Settlement System, and secondary market trading
activity in such interests will therefore
settle in immediately available funds, subject
in all cases to the rules and procedures of DTC
and its participants. Beneficial interests in a
Global Note may not be exchanged for Notes
issued in certificated form except in the
limited circumstances described herein. See
"Description of the Notes--Book Entry; Delivery
and Form."
For additional information regarding the Notes, see "Notice to Investors,"
"Description of the Notes" and "Certain United States Tax Federal Income Tax
Considerations."
RISK FACTORS
See "Risk Factors" for a description of certain factors relating to the
Exchange Offer and an investment in the Exchange Notes, including risks related
to the Company's limited operating history and competition in smaller markets.
Prospective investors should carefully consider such risk factors in addition to
the other information contained in this Prospectus.
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<PAGE> 16
RISK FACTORS
An investment in the Exchange Notes involves a high degree of risk. The
following risk factors, together with the other information set forth in this
Prospectus, should be considered carefully when evaluating an investment in the
Exchange Notes.
LIMITED HISTORY OF OPERATIONS; HISTORICAL AND ANTICIPATED FUTURE NEGATIVE CASH
FLOW AND OPERATING LOSSES
The Company commenced commercial operations in July 1997 and, as a result,
prospective investors have limited operating and financial data about the
Company upon which to base an evaluation of the Company's performance and an
investment in the Notes.
As a result of the Company's limited operating history, the Company has
generated only nominal revenues from operations resulting in significant
operating losses and negative EBITDA to date. During the period from July 1,
1997 (when the Company commenced commercial operations) through June 30, 1998,
the Company had total revenues of $2.2 million, losses from operations of $18.8
million, earnings before net interest, income taxes, depreciation and
amortization ("EBITDA") of negative $17.5 million, net loss of $19.2 million and
a deficiency of earnings to cover fixed charges of $19.2 million ($45.4 million
after giving pro forma effect to the increase in net interest expense resulting
from the issuance of the Notes). The Company expects that planned capital
expenditures, together with the associated operating expenses in each of its
target markets, will result in negative EBITDA for approximately 24 to 36 months
after facilities-based switched operations commence in each of such markets,
and, accordingly, the Company expects to experience increasing consolidated
operating losses and negative EBITDA as it expands its operations, builds its
network and switching facilities and develops its customer base. None of the
Company's markets currently generates positive EBITDA. The Company must
significantly increase its revenues and cash flows to meet its obligations on
the Notes. There can be no assurance that the Company will sufficiently increase
its revenues, achieve or sustain positive EBITDA or profitability or generate
sufficient positive consolidated cash flow to meet its working capital and debt
service requirements. The Company's failure to accomplish any of the foregoing
would have a material adverse effect on the Company and its ability to meet its
obligations on the Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Liquidity and Capital Resources."
ADDITIONAL CAPITAL REQUIREMENTS
The Company's current plans for the development and expansion of its
networks, services and customer base, and the continued funding of its operating
losses, will require significant capital. The Company estimates that, as of July
31, 1998, its future capital requirements (including requirements for capital
expenditures, working capital, debt service and operating losses) to fund the
installation, deployment and operating losses of the networks in its current
development plans and the interconnection of certain of such networks through
the construction or acquisition of long haul fiber routes will total
approximately $147 million. The Company believes that its existing equity and
debt capital will provide the Company with sufficient capital to fund the
installation and deployment of networks in its current development plans and
estimated operating losses of such networks through December 31, 1998. The
Company plans to seek additional financing to fund the balance of the capital
requirements for its current development plans, although the Company currently
has no commitments for such additional capital.
The Company's expectations of its capital requirements are based on the
Company's current estimates. However, the Company is in the early stages of the
implementation of its network buildout plans, and actual capital requirements
may vary based upon the timing and success of the Company's implementation of
its development plans. There can be no assurance that actual expenditures will
not be significantly higher or lower. Factors which could affect the amount and
timing of the Company's capital requirements include, among other things, the
demand for the Company's services and regulatory, technological and competitive
developments. The Company is considering opportunities to expand its operations
into additional commercial regions in the Midwest which would require additional
financing. The Company may commence these activities before obtaining such
additional financing. The Company may also require additional financing (or
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<PAGE> 17
require additional financing sooner than anticipated) if: (i) the Company's
current development plans or projections change or prove to be inaccurate or
attractive additional opportunities are identified; (ii) the Company effects any
acquisitions or joint ventures; (iii) the Company's cost projections prove to be
underestimated; or (iv) the Company accelerates or otherwise alters the schedule
or target markets of its roll-out plans. If available, sources of additional
financing may include commercial bank borrowings, vendor financing, the private
or public sale of additional equity or debt securities and joint ventures.
There can be no assurance that the additional capital that the Company will
require to fully implement its current development plans and to fund any
expansion beyond the Company's current development plans will be available to
the Company, that the Company will be successful in raising any additional
capital on terms that it will consider acceptable or that the Company's
operations will produce positive consolidated cash flow in amounts sufficient to
meet its additional capital requirements. If the Company is unable to raise and
generate sufficient funds, it may be required to modify, delay or abandon some
of its planned expansion or expenditures or to forego the installation and
deployment of networks in additional commercial regions. Any of the foregoing
factors would have a material adverse effect on the Company and its ability to
meet its obligations on the Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
SUBSTANTIAL INDEBTEDNESS; POSSIBLE SUBSTANTIAL ADDITIONAL INDEBTEDNESS;
FINANCING RISKS
At June 30, 1998, the Company had $203.8 million of indebtedness and $60.0
million of contributed equity. To fully implement the Company's current
development plans and to fund any future expansion beyond the Company's current
development plans, the Company will be required to raise additional financing.
See "--Additional Capital Requirements" above. The Indenture limits, but does
not prohibit, the incurrence of additional indebtedness by the Company. In
particular, the Indenture permits the Company and its subsidiaries to incur an
unlimited amount of indebtedness (including secured indebtedness) to finance the
cost of equipment, inventory and network assets (including the cost of the
design, development, acquisition, construction, installation, improvement,
transportation and integration thereof).
A relatively high level of indebtedness could have important consequences
to the Company's future prospects, including the following: (i) limiting the
ability of the Company to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes; (ii) requiring that a substantial portion of the Company's cash flow
from operations, if any, be dedicated to the payment of principal of and
interest on its indebtedness; (iii) limiting its flexibility in planning for, or
reacting to changes in, its business; (iv) making the Company more highly
leveraged than some of its competitors, which may place it at a competitive
disadvantage; (v) making it more difficult for the Company to meet its
obligations on the Notes; and (vi) increasing the Company's vulnerability in the
event of a downturn in its business. The debt service requirements of any
additional indebtedness of the Company and its subsidiaries would also make it
more difficult for the Company to meet its obligations on the Notes. There can
be no assurance that the Company's consolidated cash flow and capital resources
will be sufficient for payment of the principal of, premium, if any, and
interest on, its indebtedness (including the Notes).
Cash flow from operations may be insufficient to repay the Company's
indebtedness, including the Notes, in full, and, accordingly, a substantial
portion of the Company's indebtedness may need to be refinanced. Any additional
indebtedness incurred in the future may mature prior to the Notes and may also
need to be refinanced. There can be no assurance that the Company will be able
to effect such refinancings. The ability of the Company to meet its debt service
requirements and to effect any needed refinancings will be dependent upon, among
other things, the future performance of the Company, which will be subject to
prevailing economic conditions and to financial, business, regulatory and other
factors, including factors beyond the Company's control. Further, there can be
no assurance that the Company will have sufficient funds available at the time
of any Change of Control to make any required debt repayment (including
repurchases of the Notes). See "Description of the Notes--Repurchase of Notes
Upon a Change of Control."
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<PAGE> 18
PRIORITY OF HOLDERS OF SECURED INDEBTEDNESS
The Indenture permits the Company to incur an unlimited amount of
indebtedness for capital expenditures and to secure such indebtedness. At June
30, 1998, the Company had $3.8 million of outstanding secured indebtedness. See
"Description of Existing Indebtedness." Holders of secured indebtedness of the
Company will have claims that are prior to the claims of the holders of the
Company's unsecured indebtedness (including the Notes) with respect to the
assets securing such secured indebtedness. In addition, to the extent the value
of such assets is insufficient to satisfy such secured indebtedness of the
Company, the holders of such secured indebtedness would be entitled to share
pari passu with the holders of the Company's unsecured indebtedness (including
the Notes) to the extent of the remaining unpaid amounts thereunder. The
priority claims of the holders of secured indebtedness of the Company could have
a material adverse effect on the ability of the Company to meet its obligations
on the Notes.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION OF THE NOTES
The Company is a holding company, and its principal assets consist of its
equity interests in its operating subsidiaries. The Company will rely upon
payments from its subsidiaries to generate the funds necessary to meet its
obligations, including the payment of the principal of, premium, if any, and
interest on, the Notes. The Company's subsidiaries, however, are legally
distinct from the Company, and such subsidiaries have no obligation, contingent
or otherwise, to pay amounts due pursuant to the Notes or to make funds
available for such payment. The Company's subsidiaries have not guaranteed the
Notes. The ability of the Company's subsidiaries to make such payments to the
Company will be subject to, among other things, the availability of funds and
the terms of any indebtedness of such subsidiaries. The Indenture permits
subsidiaries of the Company to incur substantial amounts of indebtedness. Claims
of such subsidiaries' creditors, including trade creditors, will generally have
priority as to the assets of such subsidiaries over the claims of the holders of
the Company's indebtedness, including the Notes. Accordingly, the Notes are
effectively subordinated to the liabilities (including trade payables) of the
subsidiaries of the Company. As of June 30, 1998, the subsidiaries of the
Company had approximately $16.9 million of liabilities (excluding intercompany
payables). The Company's holding company structure could have a material adverse
effect on the Company's ability to meet its obligations on the Notes.
COMPETITION
The telecommunications industry is highly competitive, and one of the
primary purposes of the Telecommunications Act of 1996 (the "Telecommunications
Act") is to foster additional competition. In each of its markets, the Company
competes principally with the ILEC serving such market, which is generally one
of the Regional Bell Operating Companies (the "RBOCs") or GTE Corporation
("GTE") or one of its affiliated companies (the "GTE Companies"). The ILECs have
long-standing relationships with their customers, have financial, technical and
marketing resources substantially greater than those of the Company and have the
potential to fund competitive services with cash flows from a variety of
businesses. ILECs presently have a near 100% market share in each of the
Company's target markets. The Company expects to face significant competitive
product and pricing pressure in each of its markets.
It is likely that the Company will also face competition from other
facilities-based CLECs in certain of its markets. After the investment and
expense of establishing a network and support services in a given market, the
marginal cost of carrying an additional call is negligible. Accordingly, in Tier
III Markets where there are other facilities-based CLECs, the Company expects
substantial price competition. The Company believes that Tier III Markets will
support only a limited number of competitors and that operations in Tier III
Markets with multiple competitive providers are likely to be unprofitable for
one or more of such providers.
CLEC competitors that provide local services or have started or announced
plans for either construction or solicitation activities in the Company's
current markets include: Telephone and Data Systems, Inc. ("TDS") and McLeod USA
Incorporated ("McLeod") in Green Bay/Appleton, Wisconsin; Teleport
Communications Group Inc. ("TCG"), TWI Cable Inc. (a wholly owned subsidiary of
Time Warner Companies, Inc.) ("TWI"), McLeod and Ovation Communications, Inc.
("OCI") in Milwaukee, Wisconsin;
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<PAGE> 19
KMC Telecom Holdings, Inc. ("KMC Telecom"), TDS and McLeod in Madison,
Wisconsin; KMC Telecom in Ft. Wayne, Indiana; McLeod in Rockford, Illinois;
Climax Telephone Company in Kalamazoo, Michigan; and Brooks Fiber Properties,
Inc. ("Brooks Fiber"), a wholly owned subsidiary of MCI WorldCom Inc. ("MCI
WorldCom"), in Grand Rapids, Michigan. The Company believes that there may be
additional competitors that have formulated plans to enter its target markets,
including the additional markets in its current development plans.
The Company has acquired from another carrier an IRU for dark fibers along
long haul routes that interconnect certain of the Company's networks in
Wisconsin and Illinois and, in exchange, the Company has granted such carrier an
IRU for dark fibers in and between certain of the Company's networks in
Wisconsin and Illinois. While this and any other similar swap of excess fiber
capacity which the Company may enter into with other carriers reduces the cable
investments of both parties, it also facilitates the market entry of the carrier
acquiring the right to use the Company's fiber.
Other potential competitors in the Company's markets include resellers,
microwave, satellite and other wireless telecommunications providers, cable
television companies, electric utilities and RBOCs seeking to operate outside
their current local service areas. In particular, electric utilities and cable
companies are likely competitors given their existing rights of way. Electric
utilities using Digital Line Power ("DLP") technologies can transmit Internet
and data services over their power lines at speeds faster than those achievable
by telephone companies on their asymmetric digital subscriber lines ("ADSL") or
ISDN lines. The development of networks utilizing new technologies such as
Internet telephony, cable modem service and wireless networks utilizing Local
Multi-Point Distribution Services ("LMDS") and satellite transmission, which can
be used to provide high capacity wireless local loop, LAN, Internet access and
interactive services, might also create significant new competitors that may
have a lower cost basis than the Company. The Company believes that there may
also be an increasing level of agent and distributor resale initiatives in Tier
III Markets.
Prices in both the long distance business and the data transmission
business have declined significantly in recent years and are expected to
continue to decline. The Company will face competition from large carriers such
as AT&T Corp. ("AT&T"), MCI WorldCom and Sprint Corporation ("Sprint"), as well
as from other resellers and companies offering Internet telephony services,
which could create additional pricing pressures. In addition, long distance
carriers, including AT&T, MCI WorldCom and Sprint, as well as smaller carriers,
have begun to offer integrated local and long distance telecommunications
services. MCI WorldCom was recently formed by the merger of WorldCom, Inc. and
MCI Communications Corporation, and AT&T has recently acquired TCG and announced
a proposed combination with Tele-Communications, Inc. ("TCI"), which
combinations should enhance its ability to offer bundled local and long distance
telecommunications services. The RBOCs are also making concerted efforts to gain
regulatory permission under the Telecommunications Act to offer their own
bundled local and long distance telecommunications services.
Increasing competition has led to consolidations among the original seven
RBOCs, including the recently announced agreements of SBC Communications, Inc.
("SBC") to acquire Ameritech Corp. ("Ameritech") and Southern New England
Telecommunications Corp. ("SNET"). Following these combinations, SBC would be a
coast-to-coast local telephone company with an estimated 30% of all United
States local access lines. SBC has also announced plans to enter an additional
30 markets outside the territories of the combined entity. In addition, Bell
Atlantic Corporation ("Bell Atlantic") has reached an agreement for the
acquisition of GTE. Further consolidation of telecommunications companies and
the formation of additional strategic alliances within the telecommunications
industry could give rise to significant new competitors.
While recent regulatory initiatives, which allow CLECs such as the Company
to interconnect with ILEC facilities and to obtain unbundled network elements
from the ILECs, provide increased business opportunities for the Company, such
regulatory initiatives have been accompanied by increased pricing flexibility
for, and relaxation of regulatory oversight of, the ILECs. This may present
ILECs with an opportunity to subsidize services that compete with the Company's
services with revenues generated from non-competitive services, thereby allowing
ILECs to offer competitive services at lower prices. There can be no assurance
that the Company will be able to obtain the interconnections and unbundled
network elements it requires at rates, and
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on terms and conditions, that will permit the Company to offer switched and
advanced, high speed digital services at rates that are both competitive and
profitable. See "--Implementation Risks" below. If the ILECs engage in increased
volume and discount pricing practices or charge CLECs increased fees for
interconnection or unbundled network elements, or if the ILECs delay
implementation of interconnection or the provision of unbundled network
elements, the Company would be adversely affected.
The Company expects to experience declining prices and increasing price
competition. There can be no assurance that the Company will be able to achieve
or maintain adequate market share or margins, or compete effectively, in any of
its markets. Moreover, substantially all of the Company's current and potential
competitors have financial, technical, marketing, personnel and other resources,
including brand name recognition, substantially greater than those of the
Company, as well as other competitive advantages over the Company.
Any of the foregoing factors could have a material adverse effect on the
Company and its ability to meet its obligations on the Notes. See
"Business--Competition."
BUSINESS DEVELOPMENT AND EXPANSION RISKS; POSSIBLE INABILITY TO MANAGE GROWTH
The Company must achieve substantial growth in order to meet its payment
obligations on the Notes and its other indebtedness. The Company began providing
switched local, long distance and Centrex services on a resale basis to its
customers in July 1997, and its first network became commercially operational in
March 1998. The continued development and expansion of the Company's operations
will depend, among other things, upon the Company's ability to install cable and
establish facilities, including switches and electronics, obtain needed OSS
interfaces and unbundled network elements from the ILECs, obtain required rights
of way and governmental authorizations, franchises and permits, provision and
service customers, implement interconnection and collocation with ILEC
facilities, implement efficient operations support and other back office and
customer care systems, and develop and retain a sufficient customer base, all in
a timely manner, at reasonable costs and on satisfactory terms and conditions.
The Company's business success will also depend upon the Company's ability to
control costs, maintain regulatory compliance, maintain effective quality
controls and attract, assimilate and retain sufficient qualified management,
technical and sales personnel. See "--Dependence on Key Personnel" below. To the
extent the Company may determine to pursue acquisitions or joint ventures, its
ability to do so will depend on, among other things, the Company's ability to
successfully identify, finance, complete and assimilate such acquisitions or
joint ventures. See "--Risks Related to Potential Acquisitions and Joint
Ventures" below.
The failure of the Company to successfully manage the continued development
and expansion of its operations could adversely affect the expansion of the
Company's customer base and service offerings. There can be no assurance that
the Company will successfully implement and maintain the needed operational,
information and customer care systems, procedures and controls and successfully
obtain, integrate and utilize the employees and management, operational,
technical and financial resources necessary to manage a developing and expanding
business in an evolving, highly regulated and increasingly competitive industry.
Any significant failure by the Company to meet the demands of its customers and
to manage the expansion of its business and operations would have a material
adverse effect on the Company and its ability to meet its obligations on the
Notes.
DEPENDENCE ON KEY PERSONNEL
The Company is managed by a small number of key executive officers, most
notably Mr. Ronald H. VanderPol, the Company's Co-Chairman and co-founder, and
Mr. Richard Postma, its Co-Chairman, Chief Executive Officer and co-founder. The
loss of services of one or more of these key executive officers, particularly
Mr. VanderPol or Mr. Postma, could have a material adverse effect on the
business of the Company, its prospects and its ability to meet its obligations
on the Notes. The Company believes that its success will depend in large part on
its ability to develop a large and effective sales force and its ability to
attract and retain highly skilled and qualified management, technical and sales
personnel. Only three of the executive officers of the Company have employment
agreements, and the Company does not maintain key
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person life insurance for any of its executive officers (See
"Management--Executive Officers" and "--Employment Agreements"). Although the
Company has been successful to date in attracting and retaining a sufficient
number of qualified management, technical and sales personnel, the competition
for qualified personnel in the telecommunications industry is intense, and,
accordingly, there can be no assurance that the Company will be able to continue
to attract and retain the qualified management, technical and sales personnel
necessary to achieve its business objectives. The Company's failure to attract
and retain such key personnel could have a material adverse effect on the
Company and its ability to meet its obligations on the Notes.
DEPENDENCE ON INFORMATION AND PROCESSING SYSTEMS
Sophisticated back office information and processing systems are vital to
the Company's growth and its ability to monitor costs, bill customers, provision
customer orders and achieve operating efficiencies. The Company's OSS systems
have either been acquired from or developed with third-party vendors and are
designed to be scalable, to be employed either centrally or in more than one
location and to automate many of the functions which previously have required
multiple manual entries of customer information to accomplish order management,
provisioning, switch administration and billing. The Company has recently
implemented new provisioning and order entry systems acquired from a third party
vendor and is in the process of integrating these new systems with its other
information and processing systems. However, there can be no assurance that the
Company will be successful in integrating such systems in-house to produce the
anticipated operational solutions or that the Company's information or
processing systems will perform as expected. As the Company expands its customer
base, deploys its networks and provides its own switch-based services, the
failure of these systems to perform as expected or interface with ILEC legacy
systems or the failure of the Company to adequately identify all of its
information and processing needs or to upgrade systems as necessary could have a
material adverse effect on the Company and its ability to meet its obligations
on the Notes. In addition, the Company's right to use certain of these systems
is dependent upon license agreements with third party vendors. Certain of such
agreements may be cancelable by the vendor, and the cancellation or nonrenewal
of these agreements may have an adverse effect on the Company and its ability to
meet its obligations on the Notes.
YEAR 2000 COMPLIANCE
The year 2000 issue is a matter of particular worldwide concern for
telecommunications carriers because it affects many aspects of
telecommunications technology, including the computer systems and software
applications that are essential for network administration and operations. A
significant portion of telecommunications voice and data networking and network
management devices have date-sensitive processing in them which affect network
administration and operations functions such as service activation, service
assurance and billing processes. However, since the Company has only recently
commenced operations, its key processing systems have recently been acquired and
Lucent and the other vendors of such systems have represented to the Company
that such systems are year 2000 compliant without any required modification, and
the Company will require confirmation of year 2000 compliance in its future
requests for proposals from Lucent and its other equipment and software vendors.
The failure of the Company's computer systems and software applications to
accommodate the year 2000 could have a material adverse effect on the Company
and its ability to meet its obligations on the Notes. Further, if the networks
and systems of the ILECs, IXCs and others on whose services the Company depends
and with whom the Company's networks and systems must interface are not year
2000 functional, it could have a material adverse effect on the operation of the
Company's networks and, as a result, have a material adverse effect on the
Company and its customers. Most major domestic carriers have announced that they
expect all of their network and support systems to be year 2000 functional by
mid 1999. However, other domestic and international carriers may not be year
2000 functional. The Company plans to participate in the interoperability
testing processes being put in place by industry organizations and the Company
intends to continue to monitor the performance of its accounting, information
and processing systems and software applications and those of its third-party
constituents to identify and resolve any year 2000 issues. To the extent
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necessary, the Company may need to replace, upgrade or reprogram certain
existing systems and software applications to ensure that all of the Company's
computer systems and software applications and all of its interoperability
applications are year 2000 functional. However, based on current information,
the Company does not believe that it will incur costs for any replacement,
upgrade or reprogramming of its computer systems and software applications to
resolve any year 2000 issues that will be material to its business, financial
condition or results of operations.
IMPLEMENTATION RISKS
The Company is a recent entrant into the CLEC industry. The local dial tone
services market was not fully opened to competition by CLECs until the passage
of the Telecommunications Act and related regulatory rulings in 1996. There are
numerous operating complexities associated with providing facilities-based local
exchange services. The Company will be required to develop and enhance new
services, products and systems and will need to develop new marketing
initiatives to sell these services.
The Company's services may not be profitable due to, among other factors,
lack of customer demand, inability to secure access to the ILECs' facilities on
acceptable terms, competition and pricing pressure from the ILECs, other CLECs
and other competitive providers, and cost overruns in connection with network
build-outs. The Company expects to face significant competitive product and
pricing pressure in each of its markets. The Company has very limited experience
providing any telecommunications services, and there can be no assurance that
the Company will be able to successfully implement its business strategy.
Implementation of the Company's own switched services is also subject to the
ability of Lucent and the Company's other suppliers to meet the Company's
network deployment schedules. See "--Reliance on Lucent for Supply, Installation
and Monitoring of Equipment" below. There can be no assurance that the Company's
networks will be deployed on the schedules contemplated by the Company or that,
if deployed, such networks will generate the revenues and EBITDA contemplated by
the Company.
The Company's business is highly dependent on its ability to interconnect
with and obtain unbundled network elements from the ILECs in its markets. In
each of its markets, the Company relies on ILECs to permit the Company to
collocate its equipment in the ILEC's central offices as a means of connecting
to its customers. Although, under the Telecommunications Act, the ILECs are
required to permit the Company to effect such collocations and interconnections
and to purchase only the origination and termination services and network
elements that the Company needs, thereby decreasing the Company's operating
expenses, there can be no assurance that the ILECs will effect such collocations
and interconnections and such unbundling of network elements in a timely manner
or at rates, and on terms and conditions, that will permit the Company to offer
switched services that are profitable.
In August 1996, the FCC issued an order which established national rules
for negotiating interconnection agreements and guidelines for review of such
agreements by state public utilities commissions, which rules, in general, are
favorable to new competitive entrants such as the Company. In July 1997, the
United States Court of Appeals for the Eighth Circuit (the "Eighth Circuit")
found significant portions of the FCC's rules to be beyond the scope of the
FCC's legal authority. The court ruled that the state public service
commissions, not the FCC, have jurisdiction over the pricing of interconnection,
unbundled network elements and resale services. State PSCs may favor ILECs, with
whom they have long-standing relationships in these matters. The Eighth Circuit
also ruled that the FCC's interpretation of the so-called "pick and choose"
provisions of the Telecommunications Act was incorrect. The Eighth Circuit held
that the Telecommunications Act allows CLECs to adopt an entire interconnection
agreement negotiated with an ILEC by another provider, but does not allow CLECs
to "pick and choose" from among pieces of existing agreements. In October 1997,
the Eighth Circuit issued a decision vacating additional FCC rules. This
decision will likely have the effect of increasing the costs of obtaining the
use of ILEC unbundled network elements. These Eighth Circuit decisions create
uncertainty about the rules governing the pricing, terms and conditions of
agreements to obtain needed interconnections and unbundled network elements,
could make negotiating and enforcing such agreements more difficult and
protracted and could require renegotiation of existing agreements. The United
States Supreme Court has agreed to review the Eighth Circuit decisions. Any
significant increase in the cost of
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interconnection or unbundled network elements would have a material adverse
effect on the Company and its ability to meet its obligations on the Notes.
To the extent the Company interconnects with and uses an ILEC's network to
service its customers, the Company will be dependent upon the technology and
capabilities of the ILEC, and the Company will be required to interface with the
ILEC's legacy systems in order to properly provision and service the Company's
customers. Many CLECs such as the Company have experienced difficulties in
working with the ILECs with respect to provisioning, interconnection,
collocation and implementation of the systems used by CLECs to order and receive
unbundled network elements and wholesale services from the ILECs. Coordination
with ILECs to gain access to network elements, complete the necessary OSS
interfaces and secure reasonable and affordable collocation is necessary for
CLECs such as the Company to provide integrated local services to customers on a
timely and competitive basis. In the event that the Company experiences
difficulties in obtaining high quality, reliable and reasonably priced services
from the ILECs, the attractiveness of the Company's services to its customers
could be impaired. The FCC has created a task force that is examining the
problems that have slowed the development of local telephone competition.
Sections 271 through 275 of the Telecommunications Act contain incentives
for the RBOCs to cooperate with their competitors and permit access to the
RBOCs' facilities by denying the RBOCs the ability to provide in-region long
distance services until there is adequate in-region local competition. On
December 31, 1997, the U.S. District Court for the Northern District of Texas
issued a decision finding that such sections of the Telecommunications Act are
unconstitutional since they impose restrictions on the RBOCs but do not impose
comparable restrictions on other ILECs such as the GTE Companies. On September
4, 1998, the United States Court of Appeals for the Fifth Circuit, in a 2-to-1
ruling, reversed the Texas District Court's decision. The RBOCs who were parties
to this appeal are expected to appeal the Fifth Circuit's decision either to the
full Fifth Circuit or to the United States Supreme Court. If the Fifth Circuit's
September 4 ruling is not upheld on appeal, it would likely have an unfavorable
effect on the Company's business for at least two reasons. First, RBOCs
currently have an incentive under the challenged provisions of the
Telecommunications Act to open their local markets to competition so that they
can qualify to offer in-region long distance services. Second, the Company is
legally able to offer its customers bundled long distance and local exchange
services, which the RBOCs currently may not do in their regions. The Company
believes that this ability to offer "one-stop shopping" gives the Company a
marketing advantage over the ILECs that it would no longer enjoy if the Fifth
Circuit's September 4 ruling is not upheld on appeal.
A number of ILECs throughout the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to telephone
calls received by their ISP customers. The ILECs claim that this traffic is
interstate in nature and therefore should be exempt from reciprocal compensation
arrangements applicable to local, intrastate calls. The FCC has requested public
and industry comments on a CLEC industry request for FCC confirmation that ISP
traffic should not be treated differently than other local traffic under
reciprocal compensation arrangements. To date, the FCC has not issued a decision
in response to such request. The Company anticipates that ISPs will be among its
target customers, and adverse decisions on this reciprocal compensation issue
could limit the Company's ability to serve this group of customers profitably.
To date, in each of the judicial and state public service commission proceedings
that have finally resolved the issue, including proceedings in Illinois,
Michigan and Wisconsin, the courts and state commissions have ruled that
reciprocal compensation is owed for telephone calls between end users and ISPs
within the same local calling area. However, states which have not resolved the
issue, including Indiana, could determine that no reciprocal compensation is due
with respect to calls made to ISPs. There can be no assurance that the payment
of reciprocal compensation for ISPs or other traffic types will be maintained. A
change in the type of traffic eligible for reciprocal compensation payments
would reduce the Company's ability to be compensated for the termination of ISP
destined traffic, and therefore could have a material adverse effect on the
Company and its ability to meet its obligations on the Notes.
The profitability of the Company's Internet access services, and related
services such as Web site hosting, may also be affected by its ability to obtain
"peering" arrangements with ISPs. In recent years, major ISPs routinely
exchanged traffic with other ISPs that met certain technical criteria on a
"peering" basis, meaning that each ISP accepted traffic routed to Internet
addresses on its system from its "peers" on a reciprocal basis,
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without payment of compensation. Since late 1997, however, several of the
largest ISPs have publicly announced they will not accept peering arrangements
with other ISPs that do not meet certain size criteria and that smaller carriers
will have to negotiate arrangements for the exchange of traffic with such ISPs
that have usually imposed charges for accepting their traffic. There can be no
assurance that the Company will be able to negotiate "peer" status with any of
the major nationwide ISPs, or that it will be able to terminate traffic on ISPs'
networks at favorable prices. See "--Competition."
On August 7, 1998, the FCC released a Memorandum Opinion and Order ("MO&O")
and Notice of Proposed Rule Making ("NPRM") proposing to ease regulations on the
deployment of advanced data services such as high-speed internet access and
video telephony by ILECs. In its MO&O, the FCC clarified that advanced
telecommunications facilities and services offered by ILECs are subject to
Sections 251 and 252 of the Telecommunications Act (regarding terms of and
procedures for interconnection with local exchange carriers), and that the
facilities and equipment used to provide advanced services are network elements
that must be provided to new entrants on an unbundled basis. The FCC also held
that ILECs must offer for resale, at wholesale rates, any advanced services that
they offer to subscribers that are not telecommunications carriers.
In its NPRM, however, the FCC proposed to permit ILECs to form separate
affiliates that could offer advanced services without giving competitors access
to network elements at discounted prices. Thus, the separate affiliates could
install new data equipment to upgrade the ILEC networks to Digital Subscriber
Line standards without having to share the new networks with competitors. To the
extent that the affiliates provided interstate exchange access service, they
would be presumed to be nondominant and therefore not subject to price cap or
rate of return regulation for advanced services, and would not be required to
file tariffs for such services. The ILECs, however, would be required to give
their competitors and the new affiliates access on an equitable basis to the
ILEC's central offices to install data equipment, and would also have to provide
access on an equitable basis to local loops conditioned for data use. The FCC's
proposal would not change the existing prohibition on the provision of services
by ILECs across LATA boundaries, although the FCC stated that it would take
comments on easing LATA restrictions in special cases. At least one ILEC is
expected to seek reconsideration of the FCC's NPRM. It is unclear at this time
whether the FCC's proposal will ultimately be adopted in its present form or
what effect such adoption may have, and the NPRM's impact on the Company is
therefore uncertain.
Any of the foregoing factors could have a material adverse effect on the
Company and its ability to meet its obligations on the Notes.
RISKS RELATED TO LONG DISTANCE BUSINESS
The Company offers long distance services to its customers as part of its
"one-stop shopping" offering of bundled telecommunications services. The long
distance business is extremely competitive, and prices have declined
substantially in recent years and are expected to continue to decline. In
addition, the long distance industry has a high average churn rate, as customers
frequently change long distance providers in response to the offering of lower
rates or promotional incentives by competitors. The Company relies on other
carriers to provide it with a major portion of its long distance transmission
services. Such agreements typically provide for the resale of long distance
services on a per-minute basis and contain minimum volume commitments. The
negotiation of these agreements involves estimates of future supply and demand
for transmission capacity as well as estimates of the calling patterns and
traffic levels of the Company's future customers. In the event the Company fails
to meet such minimum volume commitments, it may be obligated to pay
underutilization charges, and, in the event it underestimates its need for
transmission capacity, the Company may be required to obtain capacity through
more expensive means. The Company's failure to achieve acceptable profits on its
long distance business could have a material adverse effect on the Company and
its ability to meet its obligations on the Notes.
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RISKS RELATED TO RESIDENTIAL BUSINESS
The Company offers telecommunications services to residential customers in
each of its target markets. Factors that could affect the profitability of the
Company's residential business include, among other things, the demand for such
services, the number of lines required per residential customer, the amount of
usage on each residential line and the number of value-added services subscribed
to by each residential customer. The Company's success in providing services to
residential customers will depend, among other things, upon the Company's
ability to attract residential customers, to maintain competitive prices and
thus minimize the churn rate of its residential customers, and to provide high
quality customer care services without incurring significant additional costs.
The Company's success in providing residential services will also depend upon
its ability to evaluate the creditworthiness of prospective residential
customers, to collect amounts owed by such customers in a timely, cost-effective
manner and to limit the amount of uncollectible bad debt from such customers.
There can be no assurance that the Company will be able to achieve acceptable
profit margins on its residential business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Results of Operations." The Company's failure to achieve acceptable profits on
its residential business could have a material adverse effect on the Company and
its ability to meet its obligations on the Notes.
RISKS RELATED TO DATA TRANSMISSION BUSINESS
As part of its complete range of telecommunications services offerings, the
Company plans to offer data transmission services in markets where its network
and switches have become commercially operational. These services, which include
ISDN and frame relay services, are targeted at large and medium-sized businesses
with substantial data communications requirements. As a new entrant in the data
transmission business, the Company expects to generate low or negative gross
margins and substantial start-up expenses as it begins to offer data
transmission services. The Company does not expect such services to generate a
material portion of its revenues over the near term. The success of the
Company's entry into the data transmission business will be dependent upon,
among other things, the effectiveness of the Company's sales personnel in the
promotion and sale of the Company's data transmission services, the acceptance
of such services by potential customers, and the Company's ability to hire and
train qualified personnel and further enhance its services in response to future
technological changes. No assurance can be given that the Company will be
successful with respect to these matters. If the Company is not successful with
respect to these matters, it could have a material adverse effect on the Company
and its ability to meet its obligations on the Notes.
NEED TO ADAPT TO TECHNOLOGICAL DEVELOPMENTS
The telecommunications industry is subject to rapid and significant changes
in technology, with the Company relying on third parties for the development of
and access to new technologies. The Company believes its future success will
depend, in part, on its ability to anticipate or adapt to technological
developments and to offer, on a timely basis and at competitive prices, services
that meet customer demands for lower costs and better-integrated voice and data
services. There can be no assurance that the Company will obtain access to new
technologies on a timely basis or on satisfactory terms. While the Company
believes that, for the foreseeable future, technological changes will neither
materially affect the continued use of fiber optic cable and circuit-switched
transmission, nor materially hinder the Company's ability to acquire necessary
technologies, the effect of technological changes on the Company's operations
cannot be predicted. For example, Qwest Communications International Inc. and
Level 3 Communications Inc. are building global fiber optic communications
networks that are based on Internet Protocol ("IP") packet-switched technologies
and are designed to be cheaper and faster systems than networks using circuit
switching technologies such as those used by the Company. In May 1998, AT&T
announced that it also intends, over the long term, to transition its entire
network infrastructure, including its long distance voice network, to an IP
platform. In addition, Sprint recently has announced that it plans to carry
integrated voice and data traffic on ATM networks. These IP-based and ATM
networks are designed with capabilities to transmit voice, data, fax and video
communications simultaneously over the same lines. Additionally, LMDS wireless
service has bandwidth characteristics that are well suited for voice, data and
video transmission, and ADSL technology
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could increase the carrying capacity of the ILEC's copper wire networks. These
new technologies could provide competitive alternatives to the fiber optic
circuit-switched transmission technologies being deployed by the Company. Any of
the foregoing factors could have a material adverse effect on the Company and
its ability to meet its obligations on the Notes.
GOVERNMENT REGULATION
The Company's networks and the provision of its telecommunications services
are subject to significant regulation at the federal, state and local levels.
Delays in receiving required regulatory approvals, or new adverse regulations or
regulatory or judicial requirements, may have a material adverse effect upon the
Company and its ability to meet its obligations on the Notes.
The FCC exercises jurisdiction over the Company with respect to interstate
and international services. Additionally, the Company files tariffs with the
FCC. On October 29, 1996, the FCC approved an order that eliminates the tariff
filing requirements for interstate domestic long distance service provided by
non-dominant carriers such as the Company (the "Detariffing Order"). On February
13, 1997, the United States Court of Appeals for the District of Columbia
Circuit (the "District of Columbia Circuit") stayed the FCC order, and the
Company is required to continue filing tariffs while this stay remains in
effect. If the stay is lifted and the Detariffing Order becomes effective,
telecommunications carriers such as the Company will no longer be able to rely
on the filing of tariffs with the FCC as a means of providing notice to
customers of the prices, terms and conditions on which they offer interstate
services. If the Company cancels its FCC tariffs as a result of the Detariffing
Order, it will need to implement replacement contracts, which could result in
substantial legal and administrative expenses.
On August 6, 1998, the FCC released a proposal to make significant changes
to the application of its International Settlements Policy. That policy was
designed to protect U.S. carriers from discriminatory treatment in their
dealings with foreign correspondents, and places restrictions on the nature of
the arrangements into which U.S. and foreign carriers may enter with one
another. If adopted, the FCC's proposed changes would eliminate those
restrictions in many cases and enhance the Company's ability to compete in the
U.S. market for international services. The changes would also, however,
intensify competition in that market. See "Business--Regulation."
State regulatory commissions exercise jurisdiction over the Company to the
extent it provides intrastate services. As such a provider, the Company is
required to obtain regulatory authorizations and/or file tariffs with state
agencies in each of the states in which it operates. Local authorities regulate
the Company's access to municipal rights-of-way. Network buildouts are also
subject to numerous local regulations such as building codes and licensing
requirements. Such regulations vary on a city-by-city and county-by-county
basis. See "Business--Regulation."
There can be no assurance that the FCC or state or local authorities will
grant required authorizations or refrain from taking action against the Company
if it is found to have provided services without obtaining the necessary
authorizations or without complying with other regulatory obligations. If
authority is not obtained or if tariffs are not filed, or are not updated, or
otherwise do not fully comply with the tariff filing rules of the FCC or state
regulatory agencies, or if other regulatory obligations are not met, third
parties or regulators could challenge these actions. Such challenges could cause
the Company to incur substantial legal and administrative expenses and
sanctions.
The Telecommunications Act provides for a significant deregulation of the
domestic telecommunications industry. The Telecommunications Act remains subject
to judicial review and additional FCC rulemaking, and thus it is difficult to
predict what effect the legislation will have on the Company and its operations.
There are currently many regulatory actions underway and being contemplated by
federal and state authorities regarding interconnection, pricing and other
issues that could result in significant changes to the business conditions in
the telecommunications industry. There can be no assurance that these changes
will not have a material adverse effect upon the Company and its ability to meet
its obligations on the Notes. See "--Implementation Risks" above and
"Business--Regulation."
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The Telecommunications Act subjects CLECs such as the Company to certain
federal regulatory requirements relating to the provision of local exchange
service. Both ILECs and CLECs are obligated to interconnect with other carriers,
offer reciprocal compensation for termination of traffic and provide dialing
parity and telephone number portability. The Telecommunications Act also
requires all telecommunications carriers to ensure that their services are
accessible to and usable by persons with disabilities.
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies of up to $2.7 billion for telecommunications and
information services provided to qualifying schools and libraries and for
services provided to rural heath care providers. The FCC also expanded the
federal subsidies for local exchange telephone service provided to low-income
consumers. Providers of interstate telecommunications service, such as the
Company, as well as certain other entities, must pay for these programs. The
Company's share of these federal subsidy funds will be based on its share of
certain defined telecommunications end-user revenues. Currently, the FCC is
assessing such payments on the basis of a provider's revenue for the previous
year. Since the Company had no significant revenue in 1997, it will not be
liable for subsidy payments in any material amount during 1998. With respect to
subsequent years, however, the Company is currently unable to quantify the
amount of subsidy payments that it will be required to make and the effect that
these required payments will have on its financial condition and results of
operation. In addition, many state PSCs have instituted proceedings to revise
state universal service fund contribution requirements to make them consistent
with the requirements of the Telecommunications Act. The Company will be subject
to state, as well as federal, universal service fund contribution requirements,
which will vary from state to state. In the May 8th order, the FCC also
announced that it will soon revise its rules for subsidizing service provided to
consumers in high cost areas, which may result in further substantial increases
in the overall cost of the subsidy programs. Several parties have appealed the
May 8th order. Such appeals have been consolidated and transferred to the United
States Court of Appeals for the Fifth Circuit where they are currently pending.
In addition, on July 3, 1997, several ILECs filed a petition for stay of the May
8th order with the FCC. That petition is pending, as well as several petitions
for administrative reconsideration of the order.
The Company is required to pay access charges to ILECs when it uses the
facilities of those companies to originate or terminate interexchange calls.
Also, as a CLEC, the Company provides access services to other interexchange
service providers. The interstate access charges of ILECs are subject to
extensive regulation by the FCC, while those of CLECs are subject to a lesser
degree of FCC regulation but remain subject to the requirement that all charges
be just, reasonable and not unreasonably discriminatory. In two orders released
on December 24, 1996 and May 16, 1997, the FCC made major changes in the
interstate access charge structure. In the December 24th order, the FCC removed
restrictions on ILECs' ability to lower access prices and relaxed the regulation
of new switched access services in those markets where there are other providers
of access services. The May 16th order substantially increased the costs that
ILECs subject to the FCC's price cap rules may recover through monthly,
non-traffic-sensitive access charges and substantially decreased the costs that
ILECs may recover through traffic-sensitive access charges based on minutes of
use. In the May 16th order, the FCC also announced its plan to bring interstate
access rate levels more in line with costs. The plan will include rules that are
expected to be established sometime in 1998 that may grant ILECs increased
pricing flexibility upon demonstration of increased competition (or potential
competition) in relevant markets. The manner in which the FCC implements this
approach to lowering access charge levels could have a material effect on the
Company's ability to compete in providing interstate access services. Several
parties have appealed the May 16th order. Those appeals have been consolidated
and have been transferred to the Eighth Circuit where they are currently
pending.
RELIANCE ON LUCENT FOR SUPPLY, INSTALLATION AND MONITORING OF EQUIPMENT
The Company has contracted with Lucent to supply its host and remote
switches and transmission and related electronic equipment, to install and turn
up its network systems and to monitor and maintain its networks and switching
and transmission equipment until the Company's Network Operations Control Center
(the "NOC Center") is constructed and becomes fully operational. There can be no
assurance that Lucent will be able to continue to meet the Company's
requirements on a timely basis or that the Company will have
26
<PAGE> 28
its NOC Center available to transition from Lucent's provision of monitoring and
maintenance services as currently scheduled during the second quarter of 1999.
Further, Lucent may terminate its agreement with the Company at any time and for
any reason with 60 days' prior written notice to the Company. There can be no
assurance that Lucent will not terminate such agreement. While the Company
believes that its Lucent-based switching systems are compatible with alternative
suppliers' equipment and platforms, any extended interruption in the supply of
switches or other network equipment, disturbance in the pricing arrangements
with Lucent, extended interruption of the installation, turn-up, monitoring and
maintenance of the Company's networks, or delay in transitioning an alternative
supplier's products or services into the Company's networks could disrupt the
Company's operations. Any of the foregoing factors could have a material adverse
effect on the Company and its ability to meet its obligations on the Notes.
RISKS RELATED TO POTENTIAL ACQUISITIONS AND JOINT VENTURES
The Company may, as part of its business strategy, acquire other businesses
that complement its existing businesses. Management is unable to predict whether
or when any prospective acquisitions will occur or the likelihood of a material
transaction being completed on favorable terms and conditions. Acquisitions
commonly involve certain risks, including, among others: the difficulty in
assimilating the acquired operations and personnel; the potential disruption of
the Company's ongoing business and diversion of resources and management time;
the possible inability of management to maintain uniform standards, controls,
procedures and policies; the risks of entering markets in which the Company has
little or no direct prior experience; and the potential impairment of
relationships with employees, suppliers or customers as a result of changes in
management. There can be no assurance that any acquisition will be made, that
the Company will be able to finance or obtain financing needed to complete any
such acquisition and, if any acquisition is so made, that the acquired business
will be successfully integrated into the Company's operations or that the
acquired business will perform as expected.
The Company may also enter into joint venture transactions. These
transactions present many of the same risks involved in acquisitions, and many
also involve the risk that the Company will not have control over the venture
and that a joint venture partner may have economic, business or legal interests
or objectives that are inconsistent with those of the Company. Joint venture
partners may also be unable to meet their economic or other obligations, thereby
forcing the Company to fulfill these obligations or abandon or curtail the
venture.
The Company has no definitive agreement with respect to any material
acquisition or joint venture, although from time to time it has discussions with
other companies and assesses opportunities on an ongoing basis. To the extent
the Company may determine to pursue acquisitions or joint ventures, it could
have a material adverse effect on the Company and its ability to meet its
obligations on the Notes.
NO PRIOR PUBLIC MARKET FOR THE EXCHANGE NOTES; POSSIBLE VOLATILITY OF MARKET
PRICE OF EXCHANGE NOTES
The NASD has designated the Private Notes as securities eligible for
trading in the PORTAL market of the NASD (see "Price Range of the Private
Notes"). However, the Exchange Notes are new securities for which there is
currently no market. The Company does not intend to apply for listing of the
Exchange Notes on any securities exchange or for inclusion of the Exchange Notes
in any automated quotation system. Although the Company has been advised by the
Placement Agent that it currently intends to make a market in the Exchange Notes
following completion of the Exchange Offer, the Placement Agent is not obligated
to do so, and any such market making activities may be discontinued at any time
without notice. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchange Notes. If a market for the Exchange
Notes were to develop, the Exchange Notes could trade at prices that may be
higher or lower than their principal amount depending upon many factors,
including prevailing interest rates, the Company's operating results and the
markets for similar securities. Historically, the market for non-investment
grade debt such as the Notes has been subject to disruptions that have caused
substantial volatility in the prices of securities similar to the Notes. There
can be no assurance that, if a market for the Exchange Notes were to develop,
such a market would not be subject to similar disruptions.
27
<PAGE> 29
FAILURE TO EXCHANGE PRIVATE NOTES
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, Holders of Private Notes desiring to tender such Private Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes for exchange. Private Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. To the extent that
Private Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Private Notes could be
adversely affected due to the limited amount, or "float," of the Private Notes
that are expected to remain outstanding following the Exchange Offer. Generally,
a lower "float" of a security could result in less demand to purchase such
security and could, therefore, result in lower prices for such security. For the
same reason, to the extent that a large amount of Private Notes are not tendered
or are tendered and not accepted in the Exchange Offer, the trading market for
the Exchange Notes could be adversely affected. See "The Exchange Offer" and
"Plan of Distribution."
USE OF PROCEEDS
Of the $193.1 million of net proceeds to the Company from the sale of the
Private Notes, approximately $82.5 million was used to purchase the Pledged
Securities, consisting of U.S. government securities and including accrued
interest, to secure and fund the first six scheduled semi-annual payments of
interest on the Notes. The Pledged Securities have been pledged to the Trustee
as security for the benefit of the Holders. The Trustee is holding and will
continue to hold the Pledged Securities pursuant to the Pledge Agreement,
pending disbursement. See "Description of the Notes--Security." The Company
currently intends to use the remaining $110.6 million of the net proceeds to
fund the installation and deployment of networks in its current development
plans and operating losses of such networks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby and has
agreed to pay the expenses of the Exchange Offer. In consideration for issuing
the Exchange Notes as contemplated in this Prospectus, the Company will receive,
in exchange, Private Notes in like principal amount. The form and terms of the
Exchange Notes are identical in all material respects to the form and terms of
the Private Notes, except as otherwise described herein under "The Exchange
Offer--Terms of the Exchange Offer." The Private Notes surrendered in exchange
for the Exchange Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the outstanding debt of the Company.
28
<PAGE> 30
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of June 30, 1998. This table should be read in conjunction with "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Company's consolidated financial
statements, including the notes thereto, contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $111,838
Restricted investments for payment of interest(1)........... 82,546
========
Long-term debt:
15% Senior Notes.......................................... $200,000
Note payable, less current maturities(2).................. 3,000
--------
Total long-term debt................................... 203,000
Member's capital:
Capital contributions..................................... 60,000
Accumulated deficit....................................... (20,215)
--------
Total members' capital................................. 39,785
--------
Total capitalization................................... $242,785
========
</TABLE>
- ---------------
(1) Represents Pledged Securities which the Company has purchased to secure the
first six scheduled interest payments on the Notes. See "Description of the
Notes--Security."
(2) See "Description of Existing Indebtedness."
29
<PAGE> 31
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the period
from August 5, 1996 (date of inception) to December 31, 1996 and for the year
ended December 31, 1997 were derived from the audited consolidated financial
statements of the Company contained elsewhere in this Prospectus, which have
been audited by BDO Seidman, LLP, independent certified public accountants. The
selected consolidated financial data set forth below as of the end of and for
the six months ended June 30, 1998 were derived from the unaudited consolidated
financial statements of the Company contained elsewhere in this Prospectus,
which have been prepared on the same basis as the audited consolidated financial
statements of the Company and, in the opinion of management, reflect all normal
recurring adjustments necessary for a fair presentation of the Company's
consolidated financial position and results of operations as of the end of and
for such period. The results for the six months ended June 30, 1998 are not
necessarily indicative of the operating results to be expected for the entire
year. All of the selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERIOD FROM JUNE 30,
AUGUST 5, 1996(1) YEAR ENDED --------------------------
TO DECEMBER 31, 1996 DECEMBER 31, 1997 1998 1997
-------------------- ----------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ -- $ 206,682 $ 1,984,403 $ --
--------- ----------- ------------ -----------
Cost and expenses:
Cost of communication
services.................... -- 749,662 4,007,146 13,059
Selling, general and
administrative.............. 137,810 5,065,589 10,723,009 792,089
Depreciation and
amortization................ -- 189,347 1,084,805 25,846
--------- ----------- ------------ -----------
Total costs and expenses.... 137,810 6,004,598 15,814,960 830,994
--------- ----------- ------------ -----------
Loss from operations............. (137,810) (5,797,916) (13,830,557) (830,994)
Interest expense, net(2)......... -- 30,452 (630,196) --
Interest income.................. -- -- 211,665 --
--------- ----------- ------------ -----------
Net loss......................... $(137,810) $(5,828,368) $(14,249,088) $ (830,994)
========= =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 JUNE 30, 1998
----------------- ----------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ -- $ 100,590 $111,837,895
Restricted investments(3).................... -- -- 82,545,916
Networks and equipment, net.................. -- 27,967,741 60,964,203
Total assets................................. 25,675 28,385,270 263,680,917
Advances from affiliate...................... 163,485 21,038,789 --
Long-term debt, less current maturities...... -- 2,189,000 203,000,000
Capital contributions........................ -- 5,000,000 60,000,000
Members' capital (deficit)................... (137,810) (966,178) 39,784,734
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERIOD FROM JUNE 30,
AUGUST 5, 1996(1) YEAR ENDED --------------------------
TO DECEMBER 31, 1996 DECEMBER 31, 1997 1998 1997
-------------------- ----------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OTHER DATA:
Capital expenditures............. $ -- $28,157,088 $ 34,069,212 $ 3,364,089
EBITDA(4)........................ (137,810) (5,608,569) (12,745,752) (805,148)
Cash flows from operating
activities..................... (163,485) (395,530) 132,102 (687,833)
Cash flows from investing
activities..................... -- (28,168,184) (116,562,220) (3,365,189)
Cash flows from financing
activities..................... 163,485 28,664,304 228,167,423 4,059,444
Ratio of earnings to fixed
charges(5)..................... -- -- -- --
</TABLE>
30
<PAGE> 32
- ---------------
(1) The Company was organized on August 5, 1996.
(2) Excludes capitalized interest of $2,103 for 1997 and $10,300 for the six
months ended June 30, 1998. During the construction of the Company's
networks, interest expense related to construction expenditures is
capitalized.
(3) Represents Pledged Securities which the Company has purchased to secure the
first six scheduled interest payments on the Notes. See "Description of the
Notes--Security."
(4) EBITDA consists of earnings (loss) before net interest, income taxes,
depreciation and amortization. EBITDA is provided because it is a measure
commonly used in the telecommunications industry. It is presented to enhance
an understanding of the Company's operating results and is not intended to
represent cash flow or results of operations in accordance with generally
accepted accounting principles ("GAAP"). EBITDA is not calculated under GAAP
and is not necessarily comparable to similarly titled measures of other
companies. For a presentation of cash flows calculated under GAAP, see the
Company's consolidated financial statements contained elsewhere in this
Prospectus.
(5) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as net loss plus fixed charges (other than capitalized
interest). Fixed charges consist of interest expense and amortization of
debt issuance costs, whether expensed or capitalized, and that portion of
rental expense (one-third) estimated to represent interest expense. The
Company's earnings for the period from inception (August 5, 1996) through
December 31, 1996, for the year ended December 31, 1997 and for the six
months ended June 30, 1998 were insufficient to cover fixed charges by
approximately $138,000, $5.9 million and $14.3 million, respectively. After
giving pro forma effect to the increase in interest expense resulting from
the issuance of the Notes, as of the beginning of each such period, net
interest expense would have been $10.6 million, $25.9 million and $12.9
million, respectively, and earnings would have been insufficient to cover
fixed charges by approximately $11.0 million, $32.4 million and $26.8
million, respectively.
31
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a facilities-based CLEC offering telecommunications services
primarily in Tier III Markets in the midwestern United States. The Company
currently provides switched local, long distance and Centrex services primarily
on a resale basis and is deploying and plans to deploy high-capacity digital
switches and fiber optic networks in each of its target markets. The Company's
target customers include small and medium-sized businesses, ISPs and government
and other institutional end users, as well as residential end users. The
Company's objective is to become the leading competitor to the ILEC in each of
its target markets by offering complete, cost-effective telecommunications
solutions.
The Company was formed in August 1996 and was a development stage
enterprise until July 1, 1997, when it first began providing services on a
resale basis. As of the date of this Prospectus, the Company was providing
services primarily on a resale basis in seven commercial regions in Wisconsin
and Indiana and had six switches and six local fiber optic networks commercially
operational. The Company is currently deploying or plans to deploy an additional
seven switches and 12 local networks. As of June 30, 1998, the Company had
invested approximately $62.2 million in networks and equipment, and had
approximately 300 route miles of local and long haul optical fiber deployed,
10,231 access lines in service, nine local sales offices and approximately 350
full-time employees, including approximately 160 employees engaged full time in
its sales and marketing efforts. The Company has entered into interconnection
agreements with ILECs for, and is certified as a CLEC in, each of its current
and target markets. Resale revenues from July 1997 (when the Company commenced
commercial operations) through December 31, 1997 totaled approximately $207,000,
of which approximately $85,000 was generated in December 1997. Revenues for the
six months ended June 30, 1998, substantially all of which were resale revenues,
totaled approximately $1,984,000 of which approximately $565,000 and $1,419,000
was generated in the first and second quarters of 1998, respectively.
As a result of the Company's limited operating history, the Company has
generated only nominal revenues from operations resulting in significant
operating losses and negative EBITDA to date. The Company expects that planned
capital expenditures, together with the associated operating expenses in each of
its target markets, will result in negative EBITDA for approximately 24 to 36
months after facilities-based switched operations commence in each of such
markets, and, accordingly, the Company expects to experience increasing
consolidated operating losses and negative EBITDA as it expands its operations,
builds its network and switching facilities and develops its customer base. The
Company's operations have resulted in negative EBITDA of $137,810 for the period
from its inception (August 5, 1996) through December 31, 1996, approximately
$5.6 million for the year ended December 31, 1997 and approximately $12.7
million for the six months ended June 30, 1998. None of the Company's markets
currently generates positive EBITDA.
FACTORS AFFECTING RESULTS OF OPERATIONS
REVENUES
The Company directs its sales and marketing efforts primarily towards small
to medium-sized business customers, ISPs and governmental and other
institutional end users in its target markets. After identifying a target
market, the Company initially resells ILEC services to establish a market
presence and enhance its market penetration efforts. As each of its network
switching systems becomes commercially operational, the Company transitions its
resale customers to its own switch-based networks. The Company believes that its
strategy of being an early CLEC entrant in selected underserved Tier III Markets
will result in faster penetration of the available customer base and will
discourage market entry by additional CLECs. The Company competes primarily on
the basis of competitive pricing, superior service and products and innovative
service and product offerings. By using its own switched-based facilities, the
Company believes it will be able to achieve higher gross margins on the
telecommunications services it offers than can currently be obtained by
reselling ILEC services.
32
<PAGE> 34
The Company also expects to generate revenues from the sale of its services
to residential customers. The Company believes that its bundled service
offerings, high degree of front office and back office automation and customer
care, billing and automated credit-checking systems and procedures enhance its
ability to offer services to residential customers in its target markets. In
addition, the Company believes it has significant operating leverage and a
relatively low marginal cost of providing service to residential customers. The
Company targets creditworthy residential customers who the Company believes are
likely to have needs for multiple services with various affinity and other
cost-effective marketing programs and service packages designed to appeal to
such customers.
To further leverage its fixed costs, the Company intends to establish
strategic alliances with and supply wholesale services to electric utilities and
other selected telecommunications providers for the bundling of services and
billing to such entities' own customers. The Company also intends to offer its
local and Internet services on a wholesale basis to ISPs in each of its target
markets.
OPERATING EXPENSES
The Company's primary operating expenses consist of the cost of
communication services, selling, general and administrative expenses and
depreciation and amortization charges.
Cost of Communication Services. Cost of communication services consists of
the fixed costs of leased facilities, minutes-of-use charges for origination and
termination services and access line charges for local and long distance
services, including the costs to use ILEC unbundled network elements, costs for
installation and initial service turn-up and support services outsourced to
Lucent, and costs of network personnel. As network installation progresses, the
Company incurs rights-of-way costs and, in certain markets, franchise fees and
taxes paid to local governments based on revenue. After the network
infrastructure is established and the switched system is activated, the Company
expects it will be able to add customers and associated revenues with nominal
additional expense, providing significant contributions to EBITDA. While the
Company primarily targets business, ISP, governmental and other institutional
customers, it believes that, once a network is operational, the marginal cost of
providing its services to residential customers is low enough to allow the
Company to economically address such customers because they generally require
less complex services than the Company's other customers. Cost of communication
services does not include depreciation and amortization.
Selling, General and Administrative. The Company's selling, general and
administrative expenses include sales and marketing costs (including print and
radio advertisements), customer service and technical support, billing and
collection, and general management and overhead expenses. The Company expects
that these costs will grow significantly as it expands its operations and that
administrative overhead will be a large portion of these expenses during the
deployment of the Company's networks in its target markets. However, the Company
expects that, as it expands its customer base, these expenses will eventually
become a smaller percentage of the Company's revenues.
Depreciation and Amortization. The Company depreciates and amortizes its
property and equipment using the straight-line method over the estimated useful
life of the assets, ranging from five to eight years for equipment, 20 years for
fiber and the lesser of 10 years or the lease term for leasehold improvements.
The Company also depreciates and amortizes its third-party software costs using
the straight-line method over three to five years.
INTEREST EXPENSE
The Company did not incur material interest expense through June 30, 1998.
However, as a result of the issuance of the 15% Senior Notes due 2008 on June
25, 1998, the Company will incur substantial interest expense in future periods.
33
<PAGE> 35
RESULTS OF OPERATIONS
From its inception on August 5, 1996 through June 30, 1997, the Company was
in the development stage of operations. During that time, the Company's
principal activities included developing business plans, hiring management and
other key personnel, designing the architecture for its network systems and
negotiating an interconnection agreement with an ILEC.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues for the six months ended June 30, 1998, totaled approximately
$1,984,000 of which $19,000 were derived from facility-based switched operations
and $1,965,000 were from resale services. Revenues for the second quarter of
1998 were $1.4 million compared to $565,203 for the first quarter of 1998, an
increase of 251%. The increase in revenues is the result of the Company's
aggressive sales and marketing efforts in its markets, as well as the offering
of services in additional markets.
Cost of communication services increased to $4.0 million for the six months
ended June 30, 1998, from $13,000 for the same period in 1997. A substantial
portion of the increase, approximately $3.0 million, relates to the costs of
leased telecommunications facilities and services in connection with the
Company's resale services. In addition, approximately $479,000 results from
increased network personnel related costs as the Company expands its network
operations.
Selling, general and administrative expenses increased $9.9 million to
$10.7 million for the six months ended June 30, 1998 compared to $792,000 for
the same period in 1997. The increase was due primarily to hiring additional
personnel in the areas of sales and marketing, customer service and technical
support services as a result of the Company's continued growth.
Depreciation and amortization expenses increased to $1.1 million for the
six months ended June 30, 1998, from $26,000 for the same period in 1997. The
increase reflected the two networks that became commercially operational during
the six months ended June 30, 1998 and the overall growth in capital assets
through June 30, 1998.
Interest expense of $630,000 for the six months ended June 30, 1998
included approximately $493,000 related to the accrual of interest on the 15%
Senior Notes with the remainder associated with the borrowings under the
Company's $4.0 million Loan Agreement dated August 28, 1997 (the "Bank Credit
Facility"). See "Description of Existing Indebtedness."
Interest income of approximately $212,000 for the six months ended June 30,
1998, resulted primarily from interest earnings on the cash available from the
proceeds of the issuance of the 15% Senior Notes.
For the reasons stated above, the net loss increased to $14.2 million for
the six months ended June 30, 1998, compared to $831,000 for the same period in
1997.
1997 Compared to 1996
Following the completion of its development stage activities, the Company
began its sales efforts in July 1997 and generated resale revenues of
approximately $207,000 for 1997, of which approximately $85,000 was generated in
December 1997.
Total operating expenses (other than interest expense) for 1997
approximated $6.0 million, including approximately $750,000 related to cost of
communication services, approximately $5.1 million of selling, general and
administrative expenses, which primarily consisted of payroll and legal and
professional costs related to the commencement of the Company's operations, and
depreciation and amortization on office equipment and leaseholds of
approximately $189,000. During the period from inception through December 31,
1996, the Company incurred general and administrative expenses of approximately
$138,000, primarily due to payroll and professional costs related to the
commencement of the Company's operations. Interest expense for 1997 of
approximately $30,000 was due to the borrowings under the Company's Bank Credit
Facility.
34
<PAGE> 36
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have required a substantial capital investment for
the purchase of telecommunications equipment and the construction and
development of its networks. Capital expenditures for the Company were
approximately $34.1 million and $3.4 million for the six months ended June 30,
1998 and 1997, respectively, and approximately $28.2 million during the year
ended December 31, 1997. The Company has funded these expenditures through its
existing equity capital and the Bank Credit Facility.
The costs associated with the initial installation and expansion of each
network, including development, installation, certain organizational costs and
early operating expenses, and the construction of its planned long haul routes
interconnecting its commercial regions are significant and will result in
negative cash flow for each market until an adequate customer base and revenue
stream have been established. The Company estimates that, as of July 31, 1998,
its future capital requirements (including requirements for capital
expenditures, working capital, debt service and operating losses) to fund the
installation, deployment and operating losses of the networks in its current
development plans will total approximately $147.0 million. The Company expects
that net proceeds from the issuance of the 15% Senior Notes due 2008,
approximating $110.6 million, will be available to fund the further installation
and deployment of networks in its current development plans and the estimated
operating losses of such networks through December 31, 1998. The Company plans
to seek additional debt financing to fund the balance of the capital
requirements for its current development plans, although the Company currently
has no commitments for such additional capital funding.
The Company will require additional financing to fully fund its current
development plans and to fund any expansion beyond the Company's current
development plans. The actual amount and timing of future capital requirements
may differ significantly from the Company's estimates as a result of, among
other things, the demand for the Company's services and regulatory,
technological and competitive developments. The Company may also require
additional financing (or require additional financing sooner than anticipated)
if (i) the Company's current development plans or projections change or prove to
be inaccurate or attractive additional opportunities are identified, (ii) the
Company effects any acquisitions or joint ventures, (iii) the Company's cost
projections prove to be underestimated or (iv) the Company accelerates or
otherwise alters the schedule or target markets of its roll-out plans. As of
June 30, 1998, the Company had existing capital expenditure commitments in the
aggregate amount of approximately $23.1 million payable over the next 12 months,
including expenditures for the acquisition of host and remote switches,
transmission, Advanced Intelligent Network ("AIN") and other equipment from
Lucent, and voice mail systems and OSS and billing software from third-party
vendors.
A variety of factors, including the ability of the Company to deploy its
network systems in a timely manner in accordance with its cost projections and
to negotiate favorable prices for purchases of equipment, as well as the
customer penetration achieved, the extent and pricing of subscriber services
offered by the Company and regulatory, technological and competitive
developments, will affect the Company's cost of operating its business and
success in implementing its business plan. Actual revenues and costs may vary
materially from expected amounts, and such variations will likely affect the
Company's future cash flow requirements. Accordingly, there can be no assurance
that the Company's actual capital requirements will not exceed the anticipated
amounts described above.
YEAR 2000 COMPLIANCE
The year 2000 issue is a matter of particular worldwide concern for
telecommunications carriers because it affects many aspects of
telecommunications technology, including the computer systems and software
applications that are essential for network administration and operations. A
significant portion of telecommunications voice and data networking and network
management devices have date-sensitive processing in them which affect network
administration and operations functions such as service activation, service
assurance and billing processes. However, since the Company has only recently
commenced operations, its key processing systems have recently been acquired and
Lucent and the other vendors of such systems have represented to the Company
that such systems are year 2000 compliant without any required modification, and
the Company
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will require confirmation of year 2000 compliance in its future requests for
proposals from Lucent and its other equipment and software vendors.
The failure of the Company's computer systems and software applications to
accommodate the year 2000 could have a material adverse effect on the Company
and its ability to meet its obligations on the Notes. Further, if the networks
and systems of the ILECs, IXCs and others on whose services the Company depends
and with whom the Company's networks and systems must interface are not year
2000 functional, it could have a material adverse effect on the operation of the
Company's networks and, as a result, have a material adverse effect on the
Company and its customers. Most major domestic carriers have announced that they
expect all of their network and support systems to be year 2000 functional by
mid-1999. However, other domestic and international carriers may not be year
2000 functional. The Company plans to participate in the interoperability
testing processes being put in place by industry organizations and the Company
intends to continue to monitor the performance of its accounting, information
and processing systems and software applications and those of its third-party
constituents to identify and resolve any year 2000 issues. To the extent
necessary, the Company may need to replace, upgrade or reprogram certain
existing systems and software applications to ensure that all of the Company's
computer systems and software applications and all of its interoperability
applications are year 2000 functional. However, based on current information,
the Company does not believe that it will incur costs for any replacement,
upgrade or reprogramming of its computer systems and software applications to
resolve any year 2000 issues that will be material to its business, financial
condition or results of operations.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, this standard requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Gains and losses resulting from changes in the fair values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. This standard is effective for
fiscal years beginning after June 15, 1999, though earlier adoption is
encouraged and retroactive application is prohibited. The Company believes that
this standard will not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position (SOP) 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." Among other
provisions, SOP 98-1 requires that entities capitalize certain internal-use
software costs once certain criteria are met. In April 1998, the AICPA issued
SOP 98-5, "Reporting on the Costs of Start-Up Activities," which, among other
provisions, requires costs of start-up activities and organization costs to be
expensed as incurred. Both SOP 98-1 and 98-5 are effective for fiscal years
beginning after December 15, 1998, though earlier adoption is encouraged. The
Company believes that the adoption of SOP 98-1 and 98-5 will not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
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<PAGE> 38
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on June 25, 1998 to the
Placement Agent pursuant to the Placement Agreement. The Placement Agent
subsequently sold the Private Notes (i) to "qualified institutional buyers"
("QIBs"), as defined in Rule 144A under the Securities Act, in reliance on Rule
144A under the Securities Act and (ii) in "Offshore Transactions" to persons
other than "U.S. Persons" as defined in Rule 902 of Regulation S under the
Securities Act. As a condition to the sale of the Private Notes, the Company and
the Placement Agent entered into the Registration Rights Agreement. Pursuant to
the Registration Rights Agreement, the Company agreed that it would use its
reasonable best efforts to file and cause to become effective a registration
statement under the Securities Act with respect to the Exchange Notes, and to
issue and exchange Exchange Notes for all Private Notes validly tendered and not
withdrawn before the Expiration Date. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus is a part. The Exchange Offer Registration
Statement is intended to satisfy certain of the Company's obligations under the
Registration Rights Agreement and the Placement Agreement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date.
The Company will issue $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of outstanding Private Notes validly
tendered pursuant to the Exchange Offer and not withdrawn prior to the
Expiration Date. Private Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) Holders of the Exchange Notes will not
be entitled to any of the exchange and registration rights of Holders of Private
Notes under the Registration Rights Agreement, which rights will terminate upon
the consummation of the Exchange Offer. The Exchange Notes will evidence the
same indebtedness as the Private Notes which they replace and will be issued
under, and be entitled to the benefits of, the Indenture, which also authorized
the issuance of the Private Notes, such that both series of Notes will be
treated as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $200,000,000 in aggregate principal
amount of the Private Notes is outstanding, all of which is registered in the
name of Cede & Co., as nominee for DTC (the "Depositary"). Only a registered
Holder of the Private Notes (or such Holder's legal representative or
attorney-in-fact) as reflected on the records of the Trustee under the Indenture
may participate in the Exchange Offer. Solely for reasons of administration, the
Company has fixed the close of business on , 1998 as the record date
for the Exchange Offer for purposes of determining the persons to whom this
Prospectus and the Letter of Transmittal will be mailed initially. There will be
no fixed record date for determining registered Holders of the Private Notes
entitled to participate in the Exchange Offer.
No vote of the Company's security holders is required to effect the
Exchange Offer and no such vote (or proxy therefor) is being sought hereby.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Michigan Limited Liability Company Act or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Securities Act and the rules and regulations of
the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, and if, the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as
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<PAGE> 39
agent for the tendering Holders of Private Notes for the purposes of receiving
the Exchange Notes from the Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses" below.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) mail to the
registered Holders of Private Notes an announcement thereof and (iii) issue a
press release or other public announcement which shall include disclosure of the
approximate amount of Private Notes deposited to the date of such announcement,
in each case prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if, in
the opinion of counsel, for the Company, the consummation of the Exchange Offer
would violate any applicable law, rule or regulation or any applicable
interpretation of the staff of the Commission, to terminate or amend the
Exchange Offer by giving oral or written notice of such delay, extension,
termination or amendment to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered Holders of Private Notes. If
the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such amendment
by means of a prospectus supplement that will be distributed to the registered
Holders of Private Notes, and the Company will extend the Exchange Offer for a
period of five to ten business days, depending upon the significance of the
amendment and the manner of disclosure to the registered Holders of Private
Notes, if the Exchange Offer would otherwise expire during such five to ten
business day period.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
INTEREST ON THE NOTES
The Private Notes and the Exchange Notes bear interest from June 25, 1998
at the rate of 15% per annum, payable semi-annually in arrears on July 1 and
January 1 of each year, commencing January 1, 1999.
RESALE OF THE EXCHANGE NOTES
Based upon interpretations by the staff of the Commission set forth in
certain no-action letters issued to third parties, the Company believes that a
Holder who exchanges Private Notes for Exchange Notes in the ordinary course of
business, who is not participating, does not intend to participate, and has no
arrangement with any person to participate in a distribution of the Exchange
Notes, and who is not an "affiliate" of the Company within the meaning of Rule
405 of the Securities Act, will be allowed to resell Exchange Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any Holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in the distribution of the Exchange Notes, such Holder cannot rely
on the position of the staff of the Commission enumerated in those no-action
letters and must comply with the registration and prospectus delivery
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<PAGE> 40
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Private Notes
acquired by such broker-dealer for its own account as a result of market-making
or other trading activities must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. The Letter of Transmittal
states that, by so acknowledging and by delivering a prospectus, any such
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by any such broker-dealer in
connection with resales of any Exchange Notes received in exchange for Private
Notes acquired by such broker-dealer for its own account as a result of
market-making or other trading activities. Pursuant to the Registration Rights
Agreement, the Company has agreed to make this Prospectus, as it may be amended
or supplemented from time to time, available to any such broker-dealer that
requests copies of such Prospectus in the Letter of Transmittal for use in
connection with any such resale for a period of up to 90 days after the
Expiration Date. See "Plan of Distribution."
PROCEDURES FOR TENDERING
Only a registered Holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a Holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "--Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Private Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Private Notes, if such procedure is
available, into the Exchange Agent's account at the Depositary pursuant to the
procedure for book-entry transfer described below under "--Book-Entry Transfer",
must be received by the Exchange Agent prior to the Expiration Date or (iii) the
Holder must comply with the guaranteed delivery procedures described below under
"--Guaranteed Delivery Procedures".
The tender by a Holder of Private Notes that is not withdrawn prior to the
Expiration Date will constitute an agreement between such Holder and the Company
in accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. DO NOT SEND THE PRIVATE NOTES, THE LETTER OF
TRANSMITTAL OR ANY OTHER REQUIRED DOCUMENTS TO THE COMPANY. HOLDERS MAY REQUEST
THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES
TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered Holder
promptly and instruct such registered Holder to tender such Private Notes on
such beneficial owner's behalf. If such beneficial owner wishes to tender on its
own behalf, such beneficial owner must, prior to completing and executing the
Letter of Transmittal and delivering such beneficial owner's Private Notes,
either make appropriate arrangements to register ownership of the Private Notes
in its name or obtain a properly completed bond power from the registered
Holder. The transfer of registered ownership may take considerable time and may
not be able to be completed prior to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below under "--Withdrawal of Tenders", as the case may be, must be guaranteed by
an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered Holder thereof who has not
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<PAGE> 41
completed the box titled "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be made by a
member firm of a registered national securities exchange or of the NASD, a
commercial bank or trust company having an office or correspondent in the United
States (each an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Private Notes listed therein, such Private Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered Holder exactly as such registered Holder's name appears on such
Private Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Private
Notes not properly tendered or any Private Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Private Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Private Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify Holders of any defects or irregularities with respect to
tenders of Private Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification. Tenders
of Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date and, to the extent permitted by applicable law, purchase Private
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering Private Notes pursuant to the Exchange Offer, each Holder of
Private Notes will represent to the Company that, among other things, (i) the
Exchange Notes to be acquired by such Holder of Private Notes in connection with
the Exchange Offer are being acquired by such Holder in the ordinary course of
business of such Holder, (ii) such Holder has no arrangement or understanding
with any person to participate in the distribution of the Exchange Notes, (iii)
such Holder acknowledges and agrees that any person who is a broker-dealer
registered under the Exchange Act or is participating in the Exchange Offer for
the purposes of distributing the Exchange Notes must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction of the Exchange Notes acquired by
such person and cannot rely on the position of the staff of the Commission
enumerated in certain no-action letters issued to third parties, (iv) such
Holder understands that a secondary resale transaction described in clause (iii)
above and any resales of Exchange Notes obtained by such Holder in exchange for
Private Notes acquired by such Holder directly from the Company should be
covered by an effective registration statement containing the selling
securityholder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (v) such Holder is not an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act. If a Holder
of Private Notes is a broker-dealer that will receive Exchange Notes for such
Holder's own account in exchange for Private Notes that were acquired as a
result of
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<PAGE> 42
market-making activities or other trading activities, such Holder will be
required to acknowledge in the Letter of Transmittal that such Holder will
deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, such Holder will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are withdrawn
or are submitted for a greater principal amount than the Holder thereof desires
to exchange, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering Holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depositary pursuant to the book-entry transfer procedures described below
under "--Book-Entry Transfer," such Private Notes will be credited to an account
maintained by such Holder with the Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in any of the Depositary's book-entry systems
may make book-entry delivery of Private Notes by causing the Depositary to
transfer such Private Notes into the Exchange Agent's account at the Depositary
in accordance with the Depositary's procedures for book-entry transfer. However,
although delivery of Private Notes may be effected through book-entry transfer
at the Depositary, the Letter of Transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address set
forth below under "-- Exchange Agent" on or prior to the Expiration Date or
pursuant to the guaranteed delivery procedures described below under
"--Guaranteed Delivery Procedures".
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder, the certificate number(s) of such Private Notes and
the principal amount of Private Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof), together with the certificate(s) representing the
Private Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Private
Notes in proper form for transfer and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a form of Notice of Guaranteed Delivery
will be sent to Holders of Private Notes who wish to tender their Private Notes
in accordance with the guaranteed delivery procedures set forth above.
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<PAGE> 43
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Private Notes) and (iii) be signed by the Holder in the same
manner as the original signature on the Letter of Transmittal with which such
Private Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of any such notice of withdrawal will be determined by the Company, in its sole
discretion, whose determination shall be final and binding on all parties. Any
Private Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer, and no Exchange Notes will be issued with
respect thereto unless the Private Notes so withdrawn are validly retendered
prior to the Expiration Date. Properly withdrawn Private Notes may be retendered
by following one of the procedures described above under "Procedures for
Tendering" at any time prior to the Expiration Date.
TERMINATION OF CERTAIN RIGHTS
All exchange and registration rights under the Registration Rights
Agreement accorded to Holders of the Private Notes (and all rights to receive
additional interest in the event of a Registration Default as defined therein)
will terminate upon consummation of the Exchange Offer except with respect to
the Company's continuing obligation for a period of up to 90 days after the
Expiration Date to keep the Registration Statement effective and to provide
copies of the latest version of the Prospectus to any broker-dealer that
requests copies of such Prospectus in the Letter of Transmittal for use in
connection with any resale by such broker-dealer of Exchange Notes received for
its own account pursuant to the Exchange Offer in exchange for Private Notes
acquired for its own account as a result of market-making or other trading
activities.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Tenders of Private Notes in the Exchange Offer and any questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests for a form of Notice of Guaranteed
Delivery should be directed to the Exchange Agent addressed as follows:
<TABLE>
<CAPTION>
By Registered or Certified Mail: By Hand/Overnight Delivery: By Facsimile:
<S> <C> <C>
The Bank of New York The Bank of New York (212) 571-3080
One Wall Street--27 One Wall Street--27 Confirm by Telephone:
New York, New York 10286 Corporate Trust & Agency (212) 815-2742
Attn.: Reorganization Section Services Window
Ground Level
New York, New York 10286
Attn.: Reorganization Section
</TABLE>
The Bank of New York also serves as Trustee under the Indenture and as
collateral agent under the Pledge Agreement.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
solicitation of tenders is being made primarily by mail; however, additional
solicitations may be made by telegraph, facsimile transmission, telephone or in
person by officers and regular employees of the Company and its affiliates.
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The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable, out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$200,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees, and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes for Exchange Notes pursuant to the Exchange Offer. If, however,
a transfer tax is imposed for any reason other than the exchange of Private
Notes for Exchange Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered Holder or any other
person) will be payable by the tendering Holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering Holder.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Private Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain "restricted securities" within the meaning of Rule
144(a)(3) under the Securities Act. Accordingly, such Private Notes may not be
offered, sold, pledged or otherwise transferred except (i) to a person whom the
seller reasonably believes is a "qualified institutional buyer" within the
meaning of Rule 144A under the Securities Act purchasing for its own account or
for the account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A, (ii) in an offshore transaction complying with Rule
903 or Rule 904 of Regulation S under the Securities Act, (iii) pursuant to an
exemption from registration under the Securities Act provided by Rule 144
thereunder (if available), (iv) pursuant to an effective registration statement
under the Securities Act or (v) to institutional accredited investors in a
transaction exempt from the registration requirements of the Securities Act,
and, in each case, in accordance with all other applicable securities laws.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer and the
unamortized expenses related to the issuance of the Private Notes will be
amortized over the remaining term of the Notes.
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BUSINESS
The Company is a facilities-based CLEC offering telecommunications services
primarily in Tier III Markets in the midwestern United States. The Company's
target customers include small and medium-sized businesses, ISPs and government
and other institutional end users, as well as residential end users. The
Company's objective is to become the leading competitor to the ILEC in each of
its target markets by offering complete, cost-effective telecommunications
solutions.
The Company commenced commercial operations in July 1997. It was founded by
Ronald H. VanderPol and Richard Postma, experienced operators of competitive
telecommunications companies, including (i) City Signal, Inc., one of the
country's first CLECs, which sold its Michigan operations to Brooks Fiber
Properties, Inc. in 1996 and sold certain other fiber properties to Teleport
Communications Group Inc. and a predecessor of Nextlink Communications Inc.,
(ii) Teledial America, Inc., a switch-based long distance reseller that was sold
to LCI International, Inc. in 1996, and (iii) Digital Signal, Inc., a carrier's
carrier that was sold to a predecessor of Qwest Communications International
Inc. in 1990. Mr. VanderPol has made an equity investment of $60 million in the
Company. The Company's senior management team includes individuals with over 100
years of collective experience in the telecommunications industry, including key
executives with significant experience in telecommunications marketing, network
design, deployment and operation, OSS and other back office systems, finance and
regulatory affairs.
As of the date of this Prospectus, the Company was providing services
primarily on a resale basis in seven commercial regions in Wisconsin and Indiana
and had six switches and six local fiber optic networks commercially
operational. The Company is currently deploying or plans to deploy an additional
seven switches and 12 local networks. Upon entering a market, the Company
resells the services of the ILEC. As each of the Company's networks and
switching systems becomes commercially operational in that market, the Company
will transition its resale customers to its own facilities-based services.
The Company interconnects its networks with all or substantially all of the
ILEC central offices and IXC POPs in each of its markets and obtains "last mile"
connections to its customers primarily through unbundled network elements leased
from the ILEC. The Company installs a Lucent Series 5ESS(TM)-2000 host switch,
transmission equipment and a SONET fiber optic ring network in each of its
commercial regions. The markets within a commercial region are served either by
the host switch or by a remote switch or other transmission equipment linked to
the host switch. A remote switch can provide substantially all of the same
telecommunications services as a host switch, even if the link connecting the
two switches is temporarily interrupted, for approximately 33% to 50% of the
installation and operational costs of a host switch. The Company believes its
host/remote network architecture will allow the Company to cost-effectively
provide its services in smaller markets and over a broader geographic area.
As of June 30, 1998, the Company had invested approximately $62.2 million
in networks and equipment, and had approximately 300 route miles of local and
long haul optical fiber deployed, 10,231 access lines in service, nine local
sales offices and approximately 350 full-time employees, including approximately
160 employees engaged full time in its sales and marketing efforts. The Company
has entered into interconnection agreements with ILECs for, and is certified as
a CLEC in, each of its current and target markets. Resale revenues from July
1997 (when the Company commenced commercial operations) through December 31,
1997 totaled approximately $207,000, of which approximately $85,000 was
generated in December 1997. Revenues for the six months ended June 30, 1998,
substantially all of which were resale revenues, totalled approximately
$1,984,000 of which approximately $565,000 and $1,419,000 was generated in the
first and second quarters of 1998, respectively.
US XCHANGE STRATEGY
The principal elements of the Company's business strategy include:
Focus on Tier III Markets. The Company primarily targets Tier III Markets
with attractive demographic, economic, competitive and telecommunications demand
characteristics. The Company evaluates each of its potential markets on the
basis of (i) the Company's "bottom up" analyses of the potential demand
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<PAGE> 46
for its telecommunications services, (ii) the level of actual and potential CLEC
competition and (iii) the disparity between ILEC local service pricing and the
Company's anticipated cost of providing comparable service. The Company believes
that, in Tier III Markets, network construction is generally less expensive,
labor costs and the costs of obtaining rights-of-way are generally lower, aerial
deployment of fiber optic cable (which is less expensive than underground
deployment) is generally permitted to a greater extent, and there are fewer ILEC
central offices and IXC POP connections required for comprehensive market
coverage than in Tier I and Tier II Markets.
Achieve Early-to-Market Advantage. The Company strives to be the first CLEC
in a commercial region to actively market and provide services. The Company
believes that, by effecting early entry into selected Tier III Markets, it can
discourage market entry by additional CLECs. To gain early entry into each
target market, the Company establishes a local sales force offering switched
local, long distance and Centrex services on a resale basis until its network
switching system becomes commercially operational, which the Company believes
will be approximately six to nine months after beginning network construction.
Entering a market by reselling services enables the Company to build brand name
recognition and develop a customer base that it can transition to its own
networks as they become commercially operational. To accelerate the deployment
of its networks, the Company outsources the installation and initial service
turn-up of its network systems to Lucent.
Gain Broad, Regional Market Coverage. The Company believes that Tier III
Markets are most effectively penetrated by installing networks and switching
facilities designed to address customers in an entire commercial region. The
Company believes that this regional focus enables it to (i) take advantage of
economies of scale in network architecture, management and operation, (ii)
cost-effectively address the available customer base in each of its markets and
(iii) leverage the US Xchange brand name across the markets within a commercial
region.
Establish Fully Integrated Networks. The Company intends to develop the
capability to provide facilities-based telecommunications services over a fully
integrated system of networks throughout its targeted commercial regions in the
Midwest. The Company plans to (i) construct, lease or acquire long haul fiber
that will interconnect its owned local networks and host switches and (ii) lease
feature group access to ILEC tandem switches to originate and terminate calls in
regions bordering its owned facilities, as well as certain other regions where
cost and demand justify, which will allow the Company to transmit such traffic
at an attractive cost. Through this integrated design, the Company believes it
can reduce its use of the facilities of other providers and more economically
provide long distance services.
Emphasize Local Presence to Gain Market Share. The Company staffs each of
its markets with experienced, local direct sales and technical personnel who
provide personalized customer service. The Company believes its local presence
and responsive customer service will give it a competitive advantage over the
ILECs in Tier III Markets, where the Company believes the ILECs generally do not
have significant local sales and technical support presence. The Company also
tailors its US Xchange brand advertising campaigns and marketing programs in
each of its selected markets to establish its brand identity as a provider that
is interested in and responsive to the particular telecommunications needs of
its local customers.
Install High Quality Flexible Networks at a Low Cost. The Company believes
its network design and technology and its use of ILEC unbundled network elements
to obtain "last mile" connections to its customers allow it to (i) reduce
investments in property and equipment needed to provide services, (ii) enter
markets quickly, (iii) reduce underutilized and/or stranded investments in
connections to customer premises, (iv) provide the broad market coverage needed
to address business and residential end users simultaneously and (v) if and when
supported by market demand, cost-effectively construct "last mile" transport to
selected customers. The Company's systems are designed to support a full
complement of services, including local dial tone and advanced local features,
long distance, Centrex, ISDN and frame relay data transmission, Internet access
and wireless services.
Maintain Innovative, Integrated Operations Support, Customer Care and
Billing Systems. The Company has recently implemented scalable, automated
provisioning and order entry systems that automate many of the functions that
have traditionally been performed manually to support the ILEC's "legacy"
systems. In
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<PAGE> 47
addition to cost advantages, the Company believes that its automated operations
support, customer care and billing systems provide it with a marketing advantage
by allowing it more quickly and efficiently to activate and change services for
its customers and to provide more responsive customer support and service. All
of the services offered by the Company, including bundled third party services,
are billed to the customer on a single, easy-to-read billing statement, which
the Company believes provides it with a competitive advantage.
INDUSTRY OVERVIEW
According to the FCC's Statistics of Communications Common Carriers, ILECs
in the United States generated approximately $103.1 billion in total revenue in
1997. Local exchange services consist of a number of service components and are
defined by specific regulatory classifications. For 1997, total revenue by
service was: (i) interstate dedicated access service (i.e.,connecting a customer
with a long distance carrier's facilities) revenues of approximately $4.6
billion; (ii) interstate switched access service (i.e.,originating and
terminating calls from a long distance carrier) revenues of approximately $11.8
billion; (iii) end-user fees (i.e., access charges paid by the consumer for the
use of the ILEC's networks) of approximately $7.7 billion; (iv) local network
service (including dial tone, local area charges, dedicated point-to-point
intra-LATA service and enhanced calling features) revenues of approximately
$52.0 billion; (v) toll call revenues of approximately $9.2 billion; (vi)
intrastate access (i.e., local origination and termination for long distance
carriers for calls within a state) revenues of approximately $8.0 billion; and
(vii) miscellaneous (including provision of directories, billing and collection
services, corporate operations, non-regulated revenues and accounting for
uncollectables) revenues of approximately $9.9 billion.
Until recently, the competitive local telecommunications industry had
generally been limited to providing private line, dedicated access and switched
access transport services. The Telecommunications Act opened local services
markets to full competition by preempting state and local laws, to the extent
that they prevented competitive entry with respect to the provision of any
telecommunications service, and imposed a variety of new duties on ILECs in
order to promote competition in local exchange and access services. See
"--Regulation" below.
SERVICES
Since July 1997, the Company has provided switched local and long distance
primarily on a resale basis in selected Wisconsin and Indiana markets. In March
1998, the Company began providing its own facilities-based switched services to
customers in the Green Bay/Appleton, Wisconsin commercial region, and, as of the
date of this Prospectus, was also providing such facilities-based services in
Milwaukee and Madison, Wisconsin, and in South Bend, Indiana. The Company is
continuing to develop and deploy its networks to allow it to provide its own
switched local exchange services in its other target markets. See '--Markets"
below.
The Company provides switched services primarily on a retail basis but will
also provide certain of its services to other carriers and ISPs on a wholesale
basis as its networks become commercially operational. The Company believes that
its investment in SONET fiber optic ring networks, advanced switching,
transmission and related electronic equipment, coupled with its emphasis on
personalized sales and customer care, will allow it cost-effectively to tailor
its service offerings to meet the diverse voice and data transmission needs of
its customers, as well as provide its customers with the convenience of
"one-stop shopping" for telecommunications services.
The Company is offering or plans to offer the following services in each of
its target markets:
Local Switched Services. The Company offers a full complement of local
switched services, including local dial tone, 911, directory assistance and
operator-assisted calling. As its networks become operational, the Company also
offers expanded area calling plans that are generally unavailable from the
ILECs.
Advanced Local Features. To supplement its line of local switched services,
the Company deploys advanced software and equipment on its networks to offer
advanced local features, including conference calling, speed dialing, call
waiting, voice mail, call forwarding, caller ID, last number redial and return
calling.
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<PAGE> 48
The Company also offers a full range of AIN services, such as end-user
time-of-day routing and local number portability, which it believes will enhance
its market penetration.
Centrex. The Company's switches are equipped with the software and
equipment needed to provide Centrex services, including digital Centrex, to
business customers seeking a less costly alternative to a PBX to direct their
telecommunications traffic.
Advanced Data Services. The Company offers high speed, digital packet
switched data transmission services, such as ISDN and frame relay.
Long Distance Services. The Company provides a full range of inter-LATA,
international and toll-free 800/888 long distance services. The Company
purchases these services wholesale from IXCs and resells them to the Company's
customers. The Company intends to provide its own facilities-based long distance
services by constructing, leasing or acquiring long haul fiber interconnecting
its owned local networks and host switches and by leasing feature group access
to ILEC access tandems in regions which are contiguous to its owned facilities,
as well as certain other regions when cost and demand justify.
Dedicated Access. The Company offers private line, dedicated access
services to its customers, typically larger business and governmental and other
institutional end users, who desire high capacity transmission connections to
IXC POPs and to interconnect their own internal networks.
Internet Services. The Company offers a variety of Internet services for
both retail customers and ISPs. The Company offers dedicated and dial-up high
speed Internet access services via conventional modem connections, ISDN and
frame relay, and markets its retail Internet services under the US Xchange brand
name. The Company incorporates Netscape Communications Corporation's high-end
commercial Internet software products into its Internet services and receives
technical support for such products from Netscape. The Company offers
individualized, comprehensive turn-key Internet services to its business
customers, including Web page hosting and design. The Company intends to offer a
full range of local and Internet access services on a wholesale basis to ISPs,
including local telephone numbers and switched and dedicated access to the
Internet.
Paging and Cellular/PCS Services. The Company intends to offer paging and
cellular/PCS services on a resale basis by bundling such services with its other
service offerings.
MARKETS
The Company evaluates each of its potential markets on the basis of (i) the
Company's "bottom up" analyses of the potential demand for its
telecommunications services, which includes analyses of certain publicly
available, third-party economic and demographic data and management's experience
in similar markets, (ii) the level of actual and potential CLEC competition and
(iii) the disparity between ILEC local service pricing and the Company's
anticipated cost of providing comparable service. The Company believes it can
distinguish itself from larger regional or national telecommunications providers
by rapidly establishing a strong local market presence and brand name
recognition in each of its markets. The Company believes that, by effecting
early entry into selected Tier III Markets, it can discourage market entry by
other CLECs. To gain early entry into each selected market, the Company
establishes a local sales force offering switched local, long distance and
Centrex services on a resale basis until its network switching system becomes
commercially operational, which the Company believes will require approximately
six to nine months from the beginning of network construction in a market to the
provision of facilities-based switched services. This enables the Company to
build brand name recognition in each of its markets as well as a customer base
that it can transition to its own networks as they become operational. To
accelerate the deployment of its networks, the Company outsources the
installation and initial service turn-up of its network systems to Lucent.
As of the date of this Prospectus, the Company was providing service
primarily on a resale basis in seven commercial regions in Wisconsin and Indiana
and had six switches and six local fiber optic networks commercially
operational. The Company is currently deploying or plans to deploy an additional
seven switches and 12 local networks. The Company believes that Tier III Markets
are most effectively penetrated by installing networks and switching facilities
designed to address customers in an entire commercial region. The
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<PAGE> 49
Company believes that this regional focus enables it to (i) take advantage of
economies of scale in network marketing, management and operation, (ii)
cost-effectively address the available customer base in each of its markets and
(iii) leverage the US Xchange brand name across the markets within a commercial
region.
The following table presents information concerning the networks in the
Company's current development plans:
<TABLE>
<CAPTION>
OTHER LOCATIONS SWITCH AND PLANNED TARGETED
COMMERCIAL SUPPORTED BY RESALE NETWORK ROUTE TARGETED ADDRESSABLE
REGION(1) HOST SWITCH(1) COMMENCEMENT(2) OPERATIONAL(2) MILES(3) COLLOCATIONS ACCESS LINES
- ------------------------------ ---------------- --------------- -------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
GREEN BAY/ APPLETON, WI 3Q/97 1Q/98 1 2 97,660
Oshkosh, WI 3Q/97 2Q/98 4 1 42,711
Green Bay, WI 3Q/97 2Q/98 23 4 114,196
MILWAUKEE, WI 3Q/97 3Q/98 105 7 260,876
Kenosha, WI 3Q/97 4Q/98 6 2 50,065
Racine, WI 3Q/97 4Q/98 4 2 61,085
MADISON, WI 3Q/97 3Q/98 28 5 156,984
Beloit, WI 3Q/97 4Q/98 12 1 25,031
Janesville, WI 3Q/97 4Q/98 1 1 41,808
SOUTH BEND, IN 1Q/98 3Q/98 20 4 137,580
Elkhart, IN 2Q/98 4Q/98 25 3 74,888
BLOOMINGTON, IN 2Q/98 4Q/98 15 2 75,193
FT. WAYNE, IN 2Q/98 4Q/98 50 8 183,900
EVANSVILLE, IN 3Q/98 4Q/98 30 3 74,888
ROCKFORD, IL 4Q/98 4Q/98 22 3 126,878
KALAMAZOO, MI 4Q/98 2Q/99 30 2 84,213
Battle Creek, MI 4Q/98 2Q/99 20 2 58,111
Grand Rapids, MI 1Q/99 2Q/99 25 5 234,386
<CAPTION>
COMMERCIAL APPROXIMATE
REGION(1) POPULATION(4)
- ------------------------------ -------------
<S> <C>
GREEN BAY/ APPLETON, WI 433,000
--
337,000
MILWAUKEE, WI 1,799,000
--
--
MADISON, WI 649,000
--
234,000
SOUTH BEND, IN 349,000
252,000
BLOOMINGTON, IN 235,000
FT. WAYNE, IN 680,000
EVANSVILLE, IN 518,000
ROCKFORD, IL 439,000
KALAMAZOO, MI 377,000
233,000
1,009,000
</TABLE>
- ---------------
(1) Host switch locations are indicated in bold type; remote switch locations
are indicated in standard type; and locations with other transmission
equipment are italicized.
(2) Quarter during which the Company began or plans to begin offering services
on a resale basis or the network or switch became or is planned to become
commercially operational, as the case may be.
(3) Does not include long haul fiber that interconnects networks. As of June 30,
1998, the Company had approximately 300 route miles of local and long haul
fiber deployed in its Green Bay/Appleton, Milwaukee and Madison, Wisconsin
commercial regions.
(4) Cities whose populations are not included in this table are included with
other cities in the same commercial region. Populations are based on 1996
figures contained in the 1998 Rand McNally Commercial Atlas and Marketing
Guide.
The Company intends to develop the capability to provide facilities-based
telecommunications services over a fully integrated system of networks
throughout its targeted commercial regions in the Midwest. The Company plans to
construct, lease or acquire long haul fiber that will interconnect its owned
local networks and host switches. The Company intends to construct its own long
haul routes connecting certain of its networks in Wisconsin, Illinois, Indiana
and Michigan. The Company has acquired from another carrier an IRU for dark
fibers along certain of that carrier's long haul routes interconnecting certain
of the Company's networks in Wisconsin and Illinois and, in exchange, has
granted that carrier an IRU for dark fibers in and between certain of the
Company's networks in Wisconsin and in Illinois. The Company may also acquire
other IRUs for dark fiber from IXCs, ILECs, CLECs and other carriers that have
overbuilt their fiber optic networks along long haul routes connecting the
Company's targeted markets, primarily for its long distance transmission
requirements. In addition to constructing, leasing and acquiring network
facilities, the Company plans to lease feature group access to ILEC tandem
switches to originate and terminate calls in regions bordering its owned
facilities, as well as certain other regions where cost and demand justify,
which will allow the Company to transmit such traffic at an attractive cost.
Expansion into additional regions in the Midwest would require additional
financing. See "Risk Factors--Additional Capital Requirements."
NETWORK DEVELOPMENT
The Company's strategy for simultaneously pursuing business and residential
market segments requires broad market coverage and a favorable cost position. As
a result of recent developments in switching
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<PAGE> 50
technologies, the Company can cost-effectively bundle its own switched local
services with long distance and other services offered by third-party providers
within the same switching platform. The Company believes that by utilizing newer
technologies and by strategically deploying fully redundant fiber optic networks
and switching systems within a commercial region and not solely in a specific
city or metropolitan area, it can provide a full line of services at a lower
cost than the ILECs.
The Company interconnects its networks with all or substantially all of the
ILEC central offices and IXC POPs in each of its markets and obtains "last mile"
connections to its customers primarily through unbundled network elements leased
from the ILEC. The Company has chosen Lucent Series 5ESS(TM)-2000 switching
systems, transmission equipment, AIN equipment and related electronics for use
throughout its networks. All systems are equipped with advanced software and are
designed to offer a full complement of features and have the flexibility to add
new services, including broadband and wireless communications, without
significant incremental cost. The Company installs a Lucent Series 5ESS(TM)-2000
host switch, transmission equipment and a SONET fiber optic ring network in each
of its commercial regions. Certain markets within a commercial region are served
only by a host switch, while others are served by a Lucent Series 5ESS(TM)-2000
EXM remote switch or Lucent FAST(TM)-equipment. A remote switch is linked to a
host switch for administrative functions, but can provide substantially all of
the same telecommunications services as a host switch, even if the link
connecting them is temporarily interrupted, for approximately 33% to 50% of the
installation and operational costs of a host switch. Lucent's FAST(R) equipment
can be used in markets with only one ILEC central office to carry traffic from
such central office location to the Company's host switch and, by accommodating
up to 3,500 access lines, serves as a cost-effective alternative to standard
subscriber loop carrier transmission equipment, which can only accommodate up to
672 access lines. The Company believes its network architecture will allow it to
cost-effectively provide its services in smaller markets and over a broader
geographic area.
The Company plans to compare and evaluate, on an ongoing basis, the cost of
leasing local loop facilities from the ILEC versus constructing "last mile"
transport to selected customers. The Company also reviews the cost and quality
implications of using alternative local loop providers or deploying other
transmission technologies (such as wireless).
The Company's networks consist of digital fiber optic cable backbones,
typically containing 72 fiber strands, which have significantly greater
bandwidth carrying capacity than traditional analog copper cables. A single pair
of glass fibers on the Company's networks can carryup to 32,256 simultaneous
voice or data transmissions, whereas a typical pair of wires in a standard
analog copper cable can currently carry only a maximum of 24 simultaneous voice
conversations. However, the use of dense wavelength division multiplexing
("DWDM") equipment can increase the carrying capacity of optical fiber, and the
use of ADSL can increase the carrying capacity of copper wire networks. The
SONET ring architecture of the Company's local networks allows for the routing
of traffic simultaneously in both directions around the ring, which provides
protection against fiber cuts in the network. Back-up electronics become
operational in the event of the failure of the primary network components, which
adds further redundancy to the Company's systems.
The Company believes that its network design and technology will produce a
significant cost advantage compared to the ILECs. The Company's networks are
designed to allow the Company to serve the customers of multiple ILEC central
offices with a single switching system, which the Company believes will
substantially reduce the investment and ongoing operational expense of the
Company as compared to the ILECs. The Company's SONET fiber optic ring networks
interconnect its strategically located switching systems with all or
substantially all of the ILEC central offices and IXC POPs located in each of
its target markets. The Company collocates transmission equipment in the ILEC
central office in order to interconnect to available local loop facilities
provided by the ILEC. The Company leases unbundled loops from the ILECs in order
to complete the "last mile" connection to its customers. In specific cases if
customer demand justifies the cost, the Company will physically connect
customers to its networks or link customers to its network through the use of
wireless technologies leased from other carriers.
The Company will monitor its fiber optic networks and switching and
transmission equipment seven days per week, 24 hours per day, using its planned
NOC Center in Grand Rapids, Michigan. The Company has
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<PAGE> 51
contracted with Lucent to provide monitoring and maintenance services for the
Company through an electronic interface with Lucent's own facilities until the
Company's NOC Center becomes fully operational, which is currently scheduled to
occur in the second quarter of 1999. See "Risk Factors--Reliance on Lucent for
Supply, Installation and Monitoring of Equipment."
SALES AND MARKETING
The Company's customer base includes both business and residential end
users, and the Company also intends to offer certain of its services on a
wholesale basis to ISPs, utilities and other telecommunications providers. The
Company believes that Tier III markets will support only a limited number of
competitors and that operations in Tier III Markets with multiple competitive
providers are likely to be unprofitable for one or more of such providers (see
"Risk Factors--Competition"). Accordingly, the Company believes its planned
early establishment of a broad, local market presence and brand name recognition
across both business and residential customer bases are important for its
success in its target markets. The Company expects that its locally oriented,
personalized sales and marketing organization and programs will provide the
Company competitive advantages over less focused ILECs in terms of image,
service and customer loyalty.
The Company maintains market-wide US Xchange brand name advertising
campaigns from the start of its market entry, which support both business and
residential marketing efforts. The Company implements inbound and outbound
telemarketing programs immediately upon entry into each market as local sales
persons are hired and begin their direct sales activities. The Company also
participates in affinity programs and marketing partnerships with local and
regional businesses, including utilities. These programs have a local market
emphasis tailored to the particular market.
The Company's direct sales and customer care programs focus on providing
responsive, personalized service to its customers on a local market and regional
basis. The Company establishes sales offices in each of its local markets and
recruits City Managers from each local market to manage its sales office in such
market. The Company also has inside sales staff located in Green Bay, Wisconsin
and at the Company's headquarters in Grand Rapids, Michigan. As of June 30,
1998, the Company had approximately 160 employees engaged full time in its sales
and marketing efforts, including 94 persons staffing sales offices located in
Wisconsin and another 28 sales personnel located in Indiana. The Company plans
that its sales force will grow to approximately 240 persons by the end of 1998
and also plans to launch an agency program to supplement its internal marketing
efforts.
In addition to their direct sales activities, the Company's sales personnel
provide customer care services to the Company's customers on both a local and
regional basis. The Company's support staffs in Green Bay and Grand Rapids
provide customer care to customers in other markets who require support or
service during non-business hours.
BUSINESS CUSTOMER STRATEGY
The Company's local sales forces primarily target small to medium-sized
businesses and institutions in their respective markets because the Company
believes that a significant portion of these customers prefer a single source
telecommunications provider that can deliver a full range of sophisticated and
cost-effective solutions to their telecommunications needs with excellent,
personalized customer service. Further, the Company believes that the ILECs
typically do not have effective "face-to-face" marketing and customer service
programs designed to specifically address the needs of these customers. The
Company is employing strategies designed specifically to address these small and
medium-sized businesses, including: (i) hiring and training specialized account
executives dedicated to developing this customer segment; (ii) increasing
marketing efforts to shared tenant office buildings; (iii) developing special
services and service packages that are attractive to this market segment; and
(iv) developing US Xchange brand name recognition.
Although the primary focus of the Company's outside sales force is on small
and medium-sized businesses, the Company also intends to provide services to
larger businesses and governmental and other institutional end users. These
customers require maximum reliability, high quality solutions and the timely
introduction of new and innovative services. The Company addresses the
requirements of these customers by
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providing (i) a specialized sales and service approach employing engineering and
sales professionals who design and implement cost-effective telecommunications
solutions, (ii) strong, regional presence, (iii) ongoing development and
integration of new telecommunications services and (iv) sophisticated
telecommunications and transmission networks.
RESIDENTIAL CUSTOMER STRATEGY
The Company believes that Tier III Markets present attractive opportunities
for the economical offering of telecommunications services to residential
customers. The Company believes that its bundled service offerings, high degree
of front office and back office automation and customer care, billing and
automated credit-checking systems and procedures enhance its ability to offer
services to residential customers in its target markets. The Company also
believes that, because it collocates its networks in all or substantially all of
the ILEC central offices, sales to residential end users can be pursued
economically. The Company targets creditworthy residential customers who the
Company believes are likely to have needs for multiple services with various
affinity and other cost-effective marketing programs and service packages
designed to appeal to such customers. The Company has developed affinity
programs with certain utilities in its markets, including programs in which
Company marketing materials are to be included with the utility's bills to its
own customers. The Company also participates in marketing partnerships with
minor league baseball teams and church groups. The Company believes that such
programs can be cost-effectively implemented in tandem with its other marketing
programs directed primarily toward business customers, including marketing its
residential services to employees of its business customers. See "Risk
Factors--Risks Related to Residential Business."
WHOLESALE STRATEGY
To further leverage its fixed costs, the Company intends to establish
selective channels for the sale of its services on a wholesale basis. For
example, the Company intends to offer its local and Internet access services on
a wholesale basis to ISPs in each of its selected markets. The Company also
intends to establish strategic alliances with and supply wholesale services to
electric utility companies and other selected telecommunications providers for
the bundling of services and billing to such entities' own customers.
INFORMATION SYSTEMS
The Company's operations support, customer care and billing systems have
either been acquired from or developed with third party vendors with proven
software and extensive knowledge of such systems. The Company has recently
implemented a new provisioning and order entry system acquired from a third
party vendor and is in the process of integrating this new system with its other
information and processing systems. The Company believes that its automated
information systems and procedures for operations support and customer care will
provide a significant cost advantage for the processing of large order volumes
and customer service. Unlike the legacy systems currently used by certain of the
ILECs, the Company's systems are designed to be scalable, to be employed either
centrally or in more than one location and to automate many of the functions
which previously have required multiple manual entries of customer information
to accomplish order management, provisioning, switch administration and billing.
The ILEC legacy systems are not only labor-intensive, but create numerous
opportunities for errors in provisioning services and billing, delays in
installation, service interruptions, poor customer service, increased customer
churn and significant added expenses due to duplicated efforts and the need to
correct service and billing problems. The Company's automated systems enter,
schedule, provision and track a customer's order from the point of sale to the
installation and testing of service and include automated interfaces with
trouble management, inventory, billing, collection and customer service systems.
In addition to cost advantages, the Company believes its automated system
approach will result in improved customer service relative to an ILEC that does
not have comparable systems. Specifically, the customer will benefit from more
rapid service activation and service changes, faster repairs and fewer errors.
To initiate service for a customer either on a resale basis or using
unbundled network elements, the Company must interface with the systems of the
ILECs and IXCs. The Company has established arrangements for "electronic
bonding" with approximately 85% to 90% of the ILEC central offices and certain
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of the IXC POPs in its target markets. Electronic bonding with an ILEC permits
the Company to provision customer service electronically on an "assume as is" or
"assume as specified" basis. Provisioning for the remaining ILEC central offices
and IXC POPs in the Company's target markets is currently accomplished via fax
or e-mail order entry. The Company plans to work actively to establish
electronic bonding between its automated operations support and customer care
systems and those of the remaining ILECs and IXCs to the fullest extent
possible.
The Company has developed a convergent billing system that interfaces with
its operations support systems and accommodates billing for local, long distance
and Internet services offered by the Company, as well as paging, cellular and
other services available from third party providers. Among other benefits, this
system generates a single billing statement that is designed to be "user
friendly" by providing the Company's customers with more enhanced billing detail
while being easier to read and understand. The Company's billing system has the
ability to provide multiple summary methodologies, handle multiple hierarchies
for commercial accounts and accommodate a variety of output media, including
paper, EDI datafile, Internet or diskette.
The Company believes that its automated, integrated operations support and
back office systems will allow the Company to provide faster customer service
initiation and changes, greater billing accuracy and customization, and a
superior level of customer service. See "Risk Factors--Dependence on Information
and Processing Systems."
COMPETITION
The telecommunications industry is highly competitive, and one of the
primary purposes of the Telecommunications Act is to foster additional
competition. In each of its markets, the Company competes principally with the
ILEC serving such market, which is generally one of the RBOCs or one of the GTE
Companies. The ILECs have long-standing relationships with their customers, have
financial, technical and marketing resources substantially greater than those of
the Company and have the potential to fund competitive services with cash flows
from a variety of businesses. ILECs presently have a near 100% market share in
each of the Company's target markets. The Company expects to face significant
competitive product and pricing pressure in each of its markets.
It is likely that the Company will also face competition from other
facilities-based CLECs in certain of its markets. After the investment and
expense of establishing a network and support services in a given market, the
marginal cost of carrying an additional call is negligible. Accordingly, in Tier
III Markets where there are other facilities-based CLECs, the Company expects
substantial price competition. The Company believes that Tier III Markets will
only support a limited number of competitors and that operations in Tier III
Markets with multiple competitive providers are likely to be unprofitable for
one or more of such providers.
CLEC competitors that provide local services or have started or announced
plans for either construction or solicitation activities in the Company's
current markets include: TDS and McLeod in Green Bay/Appleton, Wisconsin; TCG,
TWI, McLeod and OCI in Milwaukee, Wisconsin; KMC Telecom, TDS and McLeod in
Madison, Wisconsin; KMC Telecom in Ft. Wayne, Indiana; McLeod in Rockford,
Illinois; Climax Telephone Company in Kalamazoo, Michigan; and Brooks Fiber in
Grand Rapids, Michigan. The Company believes that there may be additional
competitors that have formulated plans to enter its target markets, including
the additional markets in its current development plans.
Other potential competitors in the Company's markets include resellers,
microwave, satellite and other wireless telecommunications providers, cable
television companies, electric utilities and RBOCs seeking to operate outside
their current local service areas. In particular, electric utilities and cable
companies are likely competitors given their existing rights of way. Electric
utilities using DLP technologies can transmit Internet and data services over
their power lines at speeds faster than those achievable by telephone companies
on their ADSL or ISDN lines. The development of networks utilizing new
technologies such as Internet telephony, cable modem service and wireless
networks utilizing LMDS and satellite transmission, which can be used to provide
high capacity wireless local loop, LAN, Internet access and interactive
services, might also create
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significant new competitors that may have a lower cost basis than the Company.
The Company believes that there may also be an increasing level of agent and
distributor resale initiatives in Tier III Markets.
Prices in both the long distance business and the data transmission
business have declined significantly in recent years and are expected to
continue to decline. The Company will face competition from large carriers such
as AT&T, MCI WorldCom and Sprint, as well as from other resellers and companies
offering Internet telephony services, which could create additional pricing
pressures. In addition, long distance carriers, including AT&T, MCI WorldCom and
Sprint, as well as smaller carriers, have begun to offer integrated local and
long distance telecommunications services. MCI WorldCom was recently formed by
the merger of WorldCom, Inc. and MCI Communications Corporation, and AT&T has
recently acquired TCG and announced a proposed combination with TCI, which
combinations should enhance its ability to offer bundled local and long distance
telecommunications services. The RBOCs are also making concerted efforts to gain
regulatory permission under the Telecommunications Act to offer their own
bundled local and long distance telecommunications services.
Increasing competition has led to consolidations among the original seven
RBOCs, including the recently announced agreements of SBC to acquire Ameritech
and SNET. Following these combinations, SBC would be a coast-to-coast local
telephone company with an estimated 30% of all United States local access lines.
SBC has also announced plans to enter an additional 30 markets outside the
territories of the combined entity. In addition, Bell Atlantic has reached an
agreement for the acquisition of GTE. Further consolidation of
telecommunications companies and the formation of additional strategic alliances
within the telecommunications industry could give rise to significant new
competitors.
While recent regulatory initiatives, which allow CLECs such as the Company
to interconnect with ILEC facilities and to obtain unbundled network elements
from the ILECs, provide increased business opportunities for the Company, such
regulatory initiatives have been accompanied by increased pricing flexibility
for, and relaxation of regulatory oversight of, the ILECs. This may present
ILECs with an opportunity to subsidize services that compete with the Company's
services with revenues generated from non-competitive services, thereby allowing
ILECs to offer competitive services at lower prices. There can be no assurance
that the Company will be able to obtain the interconnections and unbundled
network elements it requires at rates, and on terms and conditions, that will
permit the Company to offer switched and advanced, high speed digital services
at rates that are both competitive and profitable. See "Risk
Factors--Implementation Risks." If the ILECs engage in increased volume and
discount pricing practices or charge CLECs increased fees for interconnection or
unbundled network elements, or if the ILECs delay implementation of
interconnection or the provision of unbundled network elements, the Company
would be adversely affected.
The World Trade Organization ("WTO") agreement on basic telecommunications
could further increase the level of competition faced by the Company. Under this
agreement, the United States and 68 other World Trade Organization members
committed themselves to opening their respective telecommunications markets to
foreign ownership and/or to adopting regulatory measures to protect foreign
competitors against anticompetitive behavior by dominant telecommunications
companies, effective in some cases as early as January 1998.
Substantially all of the Company's current and potential competitors have
financial, technical, marketing, personnel and other resources, including brand
name recognition, substantially greater than those of the Company, as well as
other competitive advantages over the Company. The Company believes that the
principal competitive factors affecting its business operations are competitive
pricing, quality of services and products and innovative service and product
offerings. The Company expects to experience declining prices and increasing
price competition. The ability of the Company to compete effectively will depend
upon its ability to provide high quality, market-driven products and services
with excellent personalized customer service at prices generally below those
charged by its competitors. There can be no assurance that the Company will be
able to achieve or maintain adequate market share or margins, or compete
effectively, in any of its markets. See "Risk Factors--Competition."
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REGULATION
The Company's services are subject to varying degrees of federal, state and
local regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications common carriers to the extent those
facilities are used to provide, originate or terminate interstate or
international communications. The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they are used
to originate or terminate intrastate communications. Local governments also
sometimes impose franchise or licensing requirements on CLECs.
FEDERAL REGULATION
The Company is regulated at the federal level as a nondominant common
carrier subject to minimal regulation under Title II of the Communications Act
of 1934. The Communications Act of 1934 was substantially amended by the
Telecommunications Act, which was signed into law on February 8, 1996. This
legislation provides for comprehensive reform of the nation's telecommunications
laws and is designed to enhance competition in the local telecommunications
marketplace by: (i) removing state and local entry barriers, (ii) requiring
ILECs to provide interconnection to their facilities, (iii) facilitating end
users' choices to switch service providers from ILECs to competitive providers
such as the Company and (iv) requiring access to rights-of-way. Under the
Telecommunications Act, RBOCs have the opportunity to provide in-region long
distance services if they meet certain conditions, and they are no longer
prohibited from providing certain cable TV services. In addition, the
Telecommunications Act eliminates certain restrictions on utility holding
companies, thus clearing the way for them to diversify into telecommunications
services. See "Risk Factors--Competition."
The Telecommunications Act specifically requires all telecommunications
carriers (including ILECs and CLECs such as the Company): (i) not to prohibit or
unduly restrict resale of their services; (ii) to provide dialing parity and
nondiscriminatory access to telephone numbers, operator services, directory
assistance and directory listings; (iii) to afford access to poles, ducts,
conduits and rights-of-way; and (iv) to establish reciprocal compensation
arrangements for the transport and termination of telecommunications. It also
requires ILECs to provide interconnection for the transmission and routing of
local exchange services (a) at any technically feasible point within the ILEC's
network, (b) that is at least equal in quality to that provided by the ILEC to
itself, its affiliates or any other party to which the ILEC provides
interconnection and (c) at rates and on terms and conditions that are just,
reasonable and nondiscriminatory. ILECs also are required under the
Telecommunications Act to provide nondiscriminatory access to network elements
on an unbundled basis at any technically feasible point, to offer for resale at
wholesale rates their telecommunications services offered at retail to
subscribers who are not telecommunications carriers and to facilitate the
collocation of equipment necessary for competitors to interconnect with or
access the unbundled network elements. The term "network element" means a
facility or equipment used in the provision of telecommunications services and
includes features, functions and capabilities that are provided by means of such
facility or equipment (including subscriber numbers, databases, signaling
systems, and information sufficient for billing and collection or used in the
transmission, routing or other provision of telecommunications services). The
Telecommunications Act delegated authority to the FCC to determine which network
elements should be made available to competitive providers on an unbundled
basis, taking into consideration, at a minimum, whether competitive access to
proprietary elements is necessary and whether the failure to provide such access
would impair the ability of the competitive provider to provide the services it
seeks to offer. However, certain aspects of the FCC regulations designed to
implement these provisions are subject to litigation as discussed below.
The Telecommunications Act also removed on a prospective basis most
restrictions on the RBOCs resulting from the consent decree which provided for
divestiture of the RBOCs from AT&T in 1984. The Telecommunications Act
establishes procedures under which an RBOC can enter the market for inter-LATA
(i.e., long distance) services within the area where it provides local exchange
service (the Telecommunications Act permitted the RBOCs to enter the out-of
region long distance market immediately upon enactment). Before the RBOC can
provide in-region inter-LATA services, it must obtain FCC approval upon a
showing that facilities-based competition is present in its local market, that
the RBOC has entered into
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interconnection agreements in the states where it seeks authority, that the
interconnection agreements satisfy a 14-point "checklist" of competitive
requirements and that such entry is in the public interest. To date, such
authority has not been granted to any RBOC, but requests by RBOCs are the
subject of various pending petitions and appeals. The provision of in-region
inter-LATA services by RBOCs in the Company's target markets would permit them
to offer bundled local and long distance services, thereby eliminating the
marketing advantage currently enjoyed by the Company.
FCC Rules Implementing the Local Competition Provisions of the
Telecommunications Act. On August 8, 1996, the FCC issued an order which
established a framework of minimum, national rules enabling state public utility
commissions and the FCC to begin implementing many of the local competition
provisions of the Telecommunications Act. The order promulgated rules to
implement Congress' statutory directive concerning the interconnection
obligations of the ILECs. The FCC prescribed certain minimum points of
interconnection necessary to permit competing carriers to choose the most
efficient points at which to interconnect with the ILECs' networks. The FCC
adopted a minimum list of unbundled network elements that ILECs must make
available to competitors upon request and a methodology for states to use in
establishing rates for interconnection and the purchase of unbundled network
elements. The FCC also adopted a methodology for states to use when applying the
Telecommunications Act's "avoided cost standard" for setting wholesale prices
with respect to retail services.
On July 18, 1997, the Eighth Circuit vacated certain portions of the FCC's
rules, holding that, among other things:
- The FCC's pricing rules should be vacated because the FCC had exceeded
its jurisdiction in establishing rules governing the prices that ILECs
may charge competitors for interconnection, unbundled access and resale.
- The FCC's "pick and choose" rule, which allows competitors to select
terms of previously approved interconnection agreements for their own
use, conflicts with the purposes of the Telecommunications Act and should
be vacated.
- The FCC lacks authority to hear formal complaints which involve the
review and/or enforcement of certain terms of local interconnection
agreements approved by State commissions.
- The FCC may not adopt a blanket requirement that State interconnection
rules must be consistent with the FCC's regulations.
- The FCC correctly concluded that ILEC operations support systems,
operator services and signaling systems and various other facilities,
such as interoffice transmission facilities, qualify as network elements
that are subject to the unbundling requirements of the Telecommunications
Act.
- The FCC erred in deciding that ILECs could be required by competitors to
provide interconnection and unbundled network elements at levels of
quality which exceed those levels at which ILECs provide such services to
themselves.
- The FCC cannot require ILECs to recombine network elements for
competitors, but competitors may recombine such network elements
themselves as necessary to provide telecommunications services.
- FCC rules and policies regarding the ILECs' duty to provide for physical
collocation of equipment were upheld.
A companion appeal was decided on June 27, 1997 in which the court upheld
the FCC's decision that the term "interconnection" as used in the
Telecommunications Act relates to physical access and does not include
transmission and routing services as well. On January 26, 1998, the United
States Supreme Court agreed to consider appeals of the Eighth Circuit decisions.
The Company cannot predict whether these Eighth Circuit decisions will stand or
what further actions the FCC may or may not take in response to these appellate
decisions. However, in its decision denying Ameritech's application to provide
in-region inter-LATA services, the FCC indicated that it would not grant such
requests unless its pricing rules vacated by the Eighth Circuit are followed.
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On October 14, 1997, the Eighth Circuit issued a decision vacating
additional FCC rules that will likely have the effect of increasing the costs of
obtaining the use of combinations of an ILEC's unbundled network elements. The
Court ruled that ILECs need not provide combinations of network elements to
CLECs, even when the ILEC has already combined such elements within its network.
The Court's decision does not undermine the ILEC's obligation to provide
unbundled network elements but clarifies that the ILECs are not obligated to
offer bundled elements.
More recently, an Eighth Circuit panel denied an attempt by the FCC to make
an ILEC's compliance with the FCC's forward-looking pricing methodology--known
as total element long-run incremental cost, or TELRIC--a condition of FCC
approval of the ILEC's application under Section 271 of the Telecommunications
Act to provide in-region long distance service. The Court's February 1998 ruling
was issued with respect to Ameritech Michigan, which had applied to the FCC for
authority to provide in-region interLATA services in Michigan. The FCC denied
the application based on a determination that Ameritech Michigan had failed to
satisfy several of Section 271's checklist requirements. The FCC added,
however--in a statement that was not essential to the resolution of the case
before it--that it would require RBOCs to employ TELRIC in order to satisfy
Section 271's requirements in the future. Ameritech Michigan appealed the FCC's
decision to the Eighth Circuit. The Court held that the statement regarding
TELRIC violated the Court's July 1997 decision; that it appeared to be
calculated to avoid ordinary appellate review and to intimidate state PSCs; and
that, unless and until the Supreme Court reverses the Eight Circuit's July 1997
decision, the FCC simply may not reassert authority to mandate TELRIC pricing
under any of the local competition provisions of the Telecommunications Act. The
Court's decision renders unpredictable the pricing structure that the Company
will be able to obtain in its interconnection agreements with ILECs in any given
state.
On August 10, 1998, however, the Eighth Circuit upheld an FCC ruling of
August 18, 1997 that ILECs must treat shared transport as a network element
available for resale and must provide competitors access to unbundled transport
facilities on a shared basis between ILEC switches. The FCC had held, among
other things, that ILECs are required to provide competing carriers with access
to the same transport facilities that ILECs use to carry their own traffic for
transport between an end office switch and a tandem switch. The Court held that
shared transport is like any other feature, function or capability such as
Caller ID, call forwarding or operator service, and that the FCC therefore had
the authority to require ILECs to offer it to their competitors on an unbundled
basis. Nevertheless, the Court supported the arguments of ILECs that the FCC has
no authority to establish pricing for shared transport or any other network
element. While enabling the Company to make use of ILEC transport facilities on
a shared basis, the Court's decision once again will result in pricing
structures for such access that vary from state to state. On September 24, 1998,
the ILECs who were parties to this appeal asked the Eighth Circuit to reconsider
its decision.
Taken as a whole, the Eighth Circuit decisions create uncertainty about the
rules governing pricing, terms and conditions of agreements to obtain needed
interconnections and unbundled network elements and could make negotiating and
enforcing such agreements more difficult and protracted and may require
renegotiation of existing agreements, to the extent that existing agreements
include provisions requiring ILECs to bundle elements. There can be no assurance
that the Company will be able to obtain or enforce interconnection agreements on
terms acceptable to the Company.
On December 31, 1997, the U.S. District Court for the Northern District of
Texas (the "Texas District Court") issued a decision finding that Sections 271
through 275 of the Telecommunications Act are unconstitutional since they impose
restrictions on the RBOCs but do not impose comparable restrictions on other
ILECs such as the GTE Companies. These sections of the Telecommunications Act
impose restrictions on the lines of business in which the RBOCs may engage,
including establishing the conditions that the RBOCs must satisfy before they
may provide in region inter-LATA long distance telecommunications services. On
September 4, 1998, the United States Court of Appeals for the Fifth Circuit (the
"Fifth Circuit"), in a 2-to-1 ruling, reversed the Texas District Court's
decision, finding that these sections are constitutional. The RBOCs who were
parties to this appeal (Southwestern Bell, US WEST and Bell Atlantic) are
expected to appeal the Fifth Circuit's decision either to the full Fifth Circuit
or to the United States Supreme Court. If the Fifth Circuit's decision is not
upheld on appeal, the RBOCs would be able to provide in-region long distance
telecommunications services immediately without satisfying the statutory
conditions
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requiring competition at the local level. Reversal of the Fifth Circuit's
decision would likely have an unfavorable effect on the Company's business for
at least two reasons. First, RBOCs currently have an incentive to foster
competition within their service areas so that they can qualify to offer
in-region inter-LATA long distance services. The Texas District Court's decision
would have removed this incentive by allowing RBOCs to offer in-region
inter-LATA long distance service without regard to their progress in opening
their local markets to competition. Second, the Company is legally able to offer
its customers both long distance and local exchange services, which Ameritech
currently may not do in its regions. The Company believes that this ability to
offer "one-stop shopping" gives the Company a marketing advantage that it would
no longer enjoy if the Fifth Circuit's September 4 ruling is not upheld on
appeal.
On August 7, 1998, the FCC released a Memorandum Opinion and Order ("MO&O")
and Notice of Proposed Rule Making ("NPRM") proposing to ease regulations on the
deployment of advanced data services such as high-speed internet access and
video telephony by ILECs. In its MO&O, the FCC clarified that advanced
telecommunications facilities and services offered by ILECs are subject to
Sections 251 and 252 of the Telecommunications Act (regarding terms of and
procedures for interconnection with local exchange carriers), and that the
facilities and equipment used to provide advanced services are network elements
that must be provided to new entrants on an unbundled basis. The FCC also held
that ILECs must offer for resale, at wholesale rates, any advanced services that
they offer to subscribers that are not telecommunications carriers. SBC has
petitioned the Eighth Circuit to review the MO&O in an effort to obtain
permission to offer advanced services free of the unbundling and resale
requirements.
In its NPRM, however, the FCC proposed to permit ILECs to form separate
affiliates that could offer advanced services without giving competitors access
to network elements at discounted prices. Thus, the separate affiliates could
install new data equipment to upgrade ILEC networks to Digital Subscriber Line
standards without having to share the new networks with competitors. To the
extent that the affiliates provided interstate exchange access service, they
would be presumed to be nondominant and therefore not subject to price cap or
rate of return regulation for advanced services, and would not be required to
file tariffs for such services. The ILECS, however, would be required to give
their competitors and the new affiliates access on an equitable basis to the
ILECs' central offices to install data equipment, and would also have to provide
access on an equitable basis to local loops conditioned for data use. The FCC's
proposal would not change the existing prohibition on the provision of services
by ILECs across LATA boundaries, although the FCC stated that it would take
comments on easing LATA restrictions in special cases. At least one ILEC is
expected to seek reconsideration of the FCC's NPRM. It is unclear at this time
whether the FCC's proposal will ultimately be adopted in its present form or
what effect such adoption may have, and the NPRM's impact on the Company is
therefore uncertain.
Other Regulations. In general, the FCC has a policy of encouraging the
entry of new competitors, such as the Company, into the telecommunications
industry and preventing anti-competitive practices. Therefore, the FCC has
established different levels of regulation for dominant carriers and nondominant
carriers. For domestic common carrier telecommunications regulation, large ILECs
such as the GTE Companies and the RBOCs are currently considered dominant
carriers, while CLECs such as the Company are considered nondominant carriers.
As a nondominant carrier, the Company is subject to relatively minimal FCC
regulation.
- Tariffs. As a nondominant carrier, the Company may install and operate
facilities for the transmission of domestic interstate communications
without prior FCC authorization. Services of nondominant carriers have
been subject to relatively limited regulation by the FCC, primarily
consisting of the filing of tariffs and periodic reports concerning the
carrier's interstate circuits and deployment of network facilities.
However, nondominant carriers like the Company must offer interstate
services on a nondiscriminatory basis, at just and reasonable rates, and
remain subject to FCC complaint procedures.
In October 1996, the FCC adopted the Detariffing Order which eliminated
the requirement that nondominant interstate carriers maintain tariffs on
file with the FCC for domestic interstate services, and providing that,
after a nine-month transition period, relationships between interstate
carriers and their customers would be set by contract. Several parties
requested reconsideration and/or filed appeals
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of the Detariffing Order. On February 13, 1997, the District of Columbia
Circuit stayed implementation of the Detariffing Order. If the
Detariffing Order becomes effective, nondominant interstate services
providers will no longer be able to rely on the filing of tariffs with
the FCC as a means of providing notice to customers of prices, terms and
conditions under which they offer their interstate services. If the
Company cancels its FCC tariffs as a result of the Detariffing Order, it
will need to implement replacement contracts which could result in
substantial legal and administrative expense.
- ILEC Price Cap Regulation Reform. In 1991, the FCC replaced traditional
rate of return regulation for large ILECs with price cap regulation.
Under price caps, ILECs can change prices for certain services, including
interconnection services provided to CLECs, only within certain
parameters. On September 14, 1995, the FCC proposed a three-stage plan
that would substantially reduce ILEC price cap regulation as local
markets become increasingly competitive and ultimately would result in
granting ILECs nondominant status. Adoption of the FCC's proposal to
significantly reduce its regulation of ILEC pricing would greatly enhance
the ability of ILECs to compete against the Company and could have a
material adverse effect on the Company and its ability to meet its
obligations on the Notes. The FCC released an order on December 24, 1996
which adopted certain of these proposals, including the elimination of
the lower service band index limits on price reductions within the access
service category. The FCC's December 1996 order also eased the
requirements necessary for the introduction of new services. On May 21,
1997, the FCC took further action updating and reforming its price cap
plan for ILECs. The changes require ILECs subject to the price cap
regulations to reduce their price cap indices by 6.5 percent annually,
less an adjustment for inflation. The FCC also eliminated rules that
require ILECs earning more than certain specified rates of return to
"share" portions of the excess with their access customers during the
next year in the form of lower access rates. These actions could have a
significant impact on the interstate access prices charged by the ILECs
with which the Company competes. Review of these FCC decisions is
currently pending before the District of Columbia Circuit.
- Local Number Portability. In the Telecommunications Act, Congress sought
to remove a perceived barrier to local telecommunications competition by
requiring local telephone companies to enable customers to keep their
telephone numbers when switching local carriers. Local telephone
companies have already implemented such number portability in Chicago,
New York and Philadelphia, and the policy is scheduled to be implemented
in the rest of the 100 largest Metropolitan Statistical Areas by December
31, 1998. Thereafter, local telephone companies will be required to
implement number portability in other areas within six months of
receiving a request from a telecommunications carrier. In order to
facilitate long-term number portability, the FCC adopted requirements on
May 12, 1998 that the costs associated with number portability (such as
those associated with building and operating regional number portability
databases) will generally be allocated to all common carriers based on
carriers' intrastate, interstate and international end-user
telecommunications revenues for each region. ILECs will be permitted to
recover costs directly related to providing local number portability
through a monthly end-user charge that would be subject to FCC review.
Carriers other than ILECs, including wireless carriers and CLECs such as
the Company, may recover such costs in any lawful manner. While it
therefore appears that the FCC's policies regarding local number
portability will not have a negative impact on the Company's financial
condition, those policies could change in the future.
Access Charges. The FCC has granted the ILECs significant flexibility in
pricing their interstate special and switched access services on a specific
central office by central office basis. Under this pricing scheme, ILECs may
establish pricing zones based on access traffic density and charge different
prices for each zone. The Company anticipates that the FCC will grant ILECs
increasing pricing flexibility as the number of interconnections and competitors
increases. In two orders released on December 24, 1996 and May 16, 1997, the FCC
took action to reform the current interstate access charge system. The FCC
adopted an order which makes various reforms to the existing rate structure for
interstate access that are designed to move access charges, over time, to more
cost based rate levels and structures. These changes will reduce access charges
and will shift charges currently based on minutes of use to flat-rate, monthly
per line charges. As a result, the aggregate amount of access charges paid by
long distance carriers to access providers in the United States may
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decrease. The FCC also announced that it intends in the future to issue a Report
and Order providing detailed rules for implementing a market-based approach to
further access charge reform. That process will give ILECs progressively greater
flexibility in setting rates as competition develops, gradually replacing
regulation with competition as the primary means of setting prices. The FCC also
adopted a "prescriptive safeguard" to bring access rates to competitive levels
in the absence of competition. On June 18, 1997, the FCC denied petitions filed
by several ILECs asking the FCC to stay the effectiveness of its access charge
reform decision, although it subsequently granted petitions for reconsideration
by Sprint and various other parties and made relatively minor changes to, among
other things, its requirements regarding the information that ILECs must provide
to IXCs on the presubscribed interexchange carrier charges ("PICCs") that the
ILECs levy on their presubscribed customers. The FCC's access charge order was
appealed to the Eighth Circuit.
On August 19, 1998, the Eighth Circuit issued a unanimous decision
upholding the FCC's access charge order. The Eighth Circuit affirmed the new
access charge structure established by the FCC, including flat-rate PICCs and
increased subscriber line charges ("SLCs") for nonprimary residential and
multibusiness lines. In so doing, the Court denied challenges to the FCC's
decision both from ILECs and IXCs, finding that, contrary to the claims of
ILECs, the FCC had authority to exempt purchasers of unbundled network elements
from contributing to the federal universal service support program through
access charges (see discussion of universal service below). The Eighth Circuit
also rejected ILEC arguments that capping SLCs for primary residential lines
creates an implicit subsidy benefiting single-line consumers at the expense of
multiline businesses and consumers. In addition, the Eighth Circuit held that
the FCC had proceeded in accordance with the Telecommunications Act in
determining that competitive pressures in the local exchange market will not
threaten universal service during the period before the FCC has implemented an
explicit universal service support mechanism. The Eighth Circuit also supported
the FCC's finding that ISPs should be exempt from access charges, agreeing that
it is not clear that ISPs use the telephone network in the same manner as long
distance companies (which are subject to access charges). The Eighth Circuit
rejected the argument of IXCs that the FCC should have prescribed lower access
costs, and supported the FCC's choice of a market-based approach. It is not
possible at this time to assess accurately the impact that the Eight Circuit's
multi-faceted decision will have on the Company's business.
A number of ILECs throughout the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to telephone
calls received by their ISP customers. The ILECs claim that this traffic is
interstate in nature and therefore should be exempt from reciprocal compensation
arrangements applicable to local, intrastate calls. The FCC has requested public
and industry comments on a CLEC industry request for FCC confirmation that ISP
traffic should not be treated differently than other local traffic under
reciprocal compensation arrangements. To date, the FCC has not issued a decision
in response to such request. The Company anticipates that ISPs will be among its
target customers, and adverse decisions on this reciprocal compensation issue
could limit the Company's ability to serve this group of customers profitably.
To date, in each of the judicial and state public service commission proceedings
that have finally resolved the issue, including proceedings in Illinois,
Michigan and Wisconsin, the courts and state commissions have ruled that
reciprocal compensation is owed for telephone calls between end users and ISPs
within the same local calling area. However, states which have not resolved the
issue, including Indiana, could determine that no reciprocal compensation is due
with respect to calls made to ISPs. There can be no assurance that the payment
of reciprocal compensation for ISPs or other traffic types will be maintained. A
change in the type of traffic eligible for reciprocal compensation payments
would reduce the Company's ability to be compensated for the termination of ISP
destined traffic, and therefore could have a material adverse effect on the
Company and its ability to meet its obligations on the Notes.
Universal Service Reform. On May 8, 1997, the FCC issued an order to
implement the provisions of the Telecommunications Act relating to the
preservation and advancement of universal telephone service. The Universal
Service order affirmed Congress' policy principles for universal telephone
service, including quality of service, affordable rates, access to advanced
services, access in rural and high-cost areas, equitable and nondiscriminatory
contributions, specific and predictable support mechanisms and access to
advanced telecommunications services for schools, health care providers and
libraries. The order added "competitive neutrality" to the FCC's universal
service principles by providing that universal service support mechanisms
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<PAGE> 61
and rules should not unfairly advantage or disadvantage one provider or
technology over another. All telecommunications carriers providing interstate
telecommunications services, including the Company, must contribute to the
universal service support fund. These contributions became due beginning in 1998
for all providers of interstate telecommunications services. Such contributions
are assessed based on intrastate, interstate and international end user
telecommunications revenues. Contribution factors vary quarterly and carriers,
including the Company, are billed monthly. Currently, the FCC is assessing such
payments on the basis of a provider's revenue for the previous year. Since the
Company had no significant revenue in 1997, it will not be liable for subsidy
payments in any material amount during 1998. With respect to subsequent years,
however, the Company is currently unable to quantify the amount of subsidy
payments that it will be required to make and the effect that these required
payments will have on its financial condition and results of operation. In
addition, many state PSCs have instituted proceedings to revise state universal
support mechanisms to make them consistent with the requirements of the
Telecommunications Act. The Company will be subject to state, as well as
federal, universal service fund contribution requirements, which will vary from
state to state. Several parties have appealed the May 8th order. The appeals
have been consolidated in the United States Court of Appeals for the Fifth
Circuit where they are currently pending. In addition, on July 3, 1997, a number
of ILECs filed a petition for stay of the May 8th order with the FCC. That
petition is pending, as well as several petitions for administrative
reconsideration of the order.
International Settlements Policy Reform. On August 6, 1998, the FCC
released a proposal to make significant changes to the application of the
International Settlements Policy. The policy was developed to prevent foreign
monopoly carriers from playing U.S. carriers off against one another to the
disadvantage of those carriers and U.S. ratepayers. The policy requires (1) the
equal division of international accounting rates; (2) nondiscriminatory
treatment of U.S. carriers; and (3) the proportionate return of traffic inbound
to the United States from a particular foreign point among carriers transporting
outbound traffic to that foreign point. The FCC proposed not to apply the policy
to arrangements between U.S. carriers and foreign carriers that lack market
power in WTO Member Countries, and between U.S. carriers and foreign carriers in
WTO Member Countries in which U.S. carriers are authorized by the FCC to provide
switched service over international resold private lines. The FCC also proposed
to eliminate substantial reporting requirements for carriers entering into these
types of arrangements. In addition, the FCC proposed to permit carriers to
obtain authority to enter into flexible settlement arrangements for agreements
affecting less than 25 percent of the traffic on a particular international
route without naming the foreign correspondent and without filing the terms and
conditions of the actual agreement. If adopted, the FCC's proposed changes would
enhance the Company's ability to compete in the U.S. market for international
services, but would also intensify competition in that market.
STATE REGULATION
The Company believes that most, if not all, states in which it proposes to
operate will require a certification or other authorization to offer intrastate
services. Many of the states in which the Company operates or intends to operate
are in the process of addressing issues relating to the regulation of CLECs. The
Company will also be subject to tariff filing requirements.
The Company, through its subsidiaries, has obtained intrastate authority
for the provision of a full range of local switched services in Illinois,
Indiana, Michigan and Wisconsin. The Company, through its subsidiaries, plans to
obtain additional state authorities to accommodate its business and network
expansion. However, there can be no assurance that the Company will receive the
authorizations it may seek in the future to the extent it expands into other
states or seeks to provide additional services. In most states, the Company is
required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate.
Some states impose, in addition to tariff filing requirements, reporting,
customer service and quality requirements, as well as unbundling and universal
service requirements. In addition, the Company will be subject to the outcome of
generic proceedings held by state utility commissions to determine state
regulatory policies with respect to ILEC and CLEC competition, geographic
build-out, mandatory detariffing, etc. Certain states, including certain of the
Company's target states, have adopted or have pending proceedings to adopt
specific universal service funding obligations.
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The Company believes that, as the degree of intrastate competition
increases, the states will offer the ILECs increasing pricing flexibility. This
flexibility may present the ILECs with an opportunity to subsidize services that
compete with the Company's services with revenues generated from non-competitive
services, thereby allowing ILECs to offer competitive services at lower prices.
The Company cannot predict the extent to which this may occur, but it could have
a material adverse effect on the Company and its ability to meet its obligations
on the Notes.
The Company is also subject to requirements in certain states to obtain
prior approval for, or notify the state commission of, certain events such as
transfers of control, sales of assets, corporate reorganizations, issuances of
stock or debt instruments and related transactions.
LOCAL AUTHORIZATIONS
When constructing a network, the Company generally must obtain municipal
franchises and other permits. These rights are typically the subject of
non-exclusive agreements of finite duration and provide for the payment of fees
or the provision of services to the municipality with no or minimal
compensation. In addition, the Company must secure rights-of-way, pole
attachments and other access rights, which are typically provided under
non-exclusive multi-year agreements that generally contain renewal options. In
some municipalities where the Company has installed or anticipates constructing
networks, it will be required to pay license or franchise fees based on a
percentage of gross revenues or on a per linear foot basis, as well as post
performance bonds or letters of credit. The Company is actively pursuing, in a
number of cities, permits, franchises and other relevant authorities for use of
rights-of-way and utility and other facilities.
The Company installs its fiber optic cable over both aerial and underground
rights-of-way, which it obtains from electric and other utilities, state highway
departments and other governmental authorities, railroads and other providers.
The Telecommunications Act requires most utilities, including electric companies
and most ILECs, to provide access to rights-of-way to CLECs on
non-discriminatory terms and conditions and at reasonable rates. However, there
can be no assurance that delays and disputes will not occur in connection with
the Company's existing or planned rights-of-way. See "Risk
Factors--Implementation Risks."
EMPLOYEES
As of June 30, 1998, the Company had approximately 350 full-time employees
and plans to have approximately 600 full-time employees by the end of 1998. None
of the Company's employees is represented by a labor union or subject to a
collective bargaining agreement. The Company has not experienced any work
stoppages due to labor disputes and believes that its relations with its
employees are good.
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PROPERTIES
The Company is headquartered in Grand Rapids, Michigan and leases offices
and space in a number of locations, primarily for regional management and local
sales offices and network equipment installations. The table below lists the
Company's current facilities, all of which are leased, directly or indirectly,
by the Company:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION LEASE EXPIRATION(1) SQUARE FOOTAGE
-------- -------------------- --------------
<S> <C> <C>
Grand Rapids, Michigan.................................. December 2001(2) 7,800
August 2002(5) 32,200
Green Bay, Wisconsin.................................... July 2001(3) 6,600
February 2003(3) 6,600
January 2003(5) 1,200
Appleton, Wisconsin..................................... April 2003(3) 4,800
September 2002(5) 4,500
Oshkosh, Wisconsin...................................... September 2002(5) 1,100
Milwaukee, Wisconsin.................................... May 2008(5) 4,900
February 2003(3) 3,500
Madison, Wisconsin...................................... March 2003(5) 6,200
Month-to-Month(3) 700
South Bend, Indiana..................................... May 2003(4) 5,500
May 2003(3) 3,500
Bloomington, Indiana.................................... June 2003(4) 7,500
April 2003(3) 3,200
Ft. Wayne, Indiana...................................... May 2003(4) 12,800
June 2003(3) 3,800
Evansville, Indiana..................................... August 2008(4) 7,500
Rockford, Illinois...................................... June 2003(4) 6,500
</TABLE>
- ---------------
(1) Dates indicate expiration of original term of leases, certain of which also
include automatic or optional renewal terms of one or more years.
(2) Sublease of the Company's principal executive offices under a lease in which
an affiliated company is the lessee. See "Certain Relationships and Related
Transactions."
(3) Lease of office space only.
(4) Lease of network equipment facilities only.
(5) Lease of both office space and network equipment facilities.
The Company believes that its leased facilities are adequate to meet its
current needs in the markets in which it has deployed or begun to deploy its
networks and that additional facilities are available to meet its development
and expansion needs in existing and planned markets for the foreseeable future.
LEGAL PROCEEDINGS
On September 30, 1997, the U.S. Patent and Trademark Office refused to
grant an application for a registered service mark for the "US Xchange" name on
the grounds that it is merely geographically descriptive of telephone
communication services that are rendered in the United States. The decision of
the U.S. Patent and Trademark Office has been appealed. In the event that the
Company is unable to obtain a reversal of the U.S. Patent and Trademark Office's
decision, the "US Xchange" name will not be accorded the legal protection that a
registered service mark would have provided.
The Company is not a party to any material litigation or any other legal
proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers and other key management personnel of the Company, including their ages
as of September 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Ronald H. VanderPol 46 Co-Chairman
Richard Postma 47 Co-Chairman and Chief Executive Officer
David J. Easter 39 Executive Vice President of Planning & Business Development
Donald Offringa 48 Vice President of Finance
Barry Raterink 32 Vice President of Engineering & Network Operations
Lee Thibaudeau 46 Regional President of US Xchange of Wisconsin, L.L.C.
Daniel Fabry 35 Vice President of Marketing
Rick G. Pigeon 33 Vice President of Technology Development
</TABLE>
Ronald H. VanderPol, Co-Chairman and co-founder of the Company, has over 14
years of experience in forming and operating successful telecommunications
companies including Teledial America, Inc. (which he founded in 1983 and which
later became known as US Signal), a switch-based long distance reseller
headquartered in Grand Rapids, MI, which was acquired by LCI International, Inc.
in 1996. In 1989, Mr. VanderPol formed City Signal, Inc., one of the earliest
providers of competitive local exchange services in the United States with CLEC
operations in eight cities, the Michigan operations of which were acquired by
Brooks Fiber Properties, Inc. in 1996 and other components of which were
acquired by Nextlink Communications Inc. and Teleport Communications Group Inc.
Other telecommunications operations which were started by Mr. VanderPol and were
spun-off over the same period of time include Digital Signal, Inc., Teledial
America of North Carolina and ATS Network Services of Memphis, Tennessee.
Richard Postma, Co-Chairman, Chief Executive Officer and co-founder of the
Company, has over 14 years of experience in the telecommunications industry,
having served as the General Counsel to Teledial America, Inc., Teledial America
of North Carolina, Digital Signal, Inc., City Signal, Inc. and US Signal for
various periods between 1983 and 1996. As General Counsel, he served as the lead
individual in both the formation process and subsequent sale of those
operations. During the period from 1983 to December 1997, Mr. Postma was a
partner in the Grand Rapids, Michigan law firm of Miller, Johnson, Snell &
Cummiskey, P.L.C. Mr. Postma has extensive regulatory, legal and management
experience in the telecommunications arena and was instrumental in implementing
the first CAP/CLEC strategy in Michigan.
David J. Easter, Executive Vice President of Planning & Business
Development, has over 11 years of experience in the telecommunications industry.
Prior to joining the Company in September 1996, Mr. Easter was a principal of
Telecom Services, Inc., a telecommunications consultant, since February 1996.
From February 1994 to January 1996, Mr. Easter was the Vice President of Network
Services of US Signal and previously held the position of Director of Network
Services of US Signal since March 1993. Prior thereto, Mr. Easter was a director
of Consolidated Communications Inc., a telecommunications services provider.
Donald Offringa, CPA, Vice President of Finance, has overseen the
financial, tax and risk management matters of the Company and its affiliates
since the Company's inception in August 1996. In June 1995, Mr. Offringa joined
Mr. VanderPol's management team as the Vice President of Finance of RVP
Development Corporation, a position he currently holds. Prior to that time, Mr.
Offringa had been a partner with BDO Seidman, LLP since 1986, where he had
worked with US Signal on various financial advisory matters. He has over 23
years of accounting experience with both private and public companies.
Barry Raterink, Vice President of Engineering & Network Operations, has
over 11 years of experience in the telecommunications industry. Prior to joining
the Company in September 1997, Mr. Raterink was Manager of Engineering, Planning
and Provisioning for the Great Lakes regional operations of Brooks Fiber
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Properties, Inc. since February 1996. From 1986 to January 1996, Mr. Raterink
was Manager of the network planning and provisioning groups for Teledial
America, Inc., US Signal and City Signal, Inc., after having implemented and
managed long distance switch sites for Teledial America, Inc.
Lee Thibaudeau, Regional President of US Xchange of Wisconsin, L.L.C., a
wholly owned subsidiary of the Company, has over 13 years of experience in the
telecommunications industry. Prior to joining the Company in March 1997, Mr.
Thibaudeau was Director of Program Management of Schneider National, Inc., a
trucking company, since February 1996. Mr. Thibaudeau served as Vice
President--Operations of Schneider Communications Incorporated ("SCI"), a
regional facilities-based IXC that was headquartered in Wisconsin and is now a
part of Frontier Communications Corporation, a major IXC ("Frontier"), from 1983
to January 1996.
Daniel Fabry, Vice President of Marketing, has over 13 years of experience
in the telecommunications industry. Prior to joining the Company in March 1997,
Mr. Fabry held the position of Director of Marketing for Schneider Logistics,
Inc., a provider of transportation logistics services, since February 1996. From
December 1994 until February 1996, Mr. Fabry was the Vice President of Product
Development of SCI and Frontier. From February 1993 to December 1994, Mr. Fabry
was the Director of Product Development of SCI.
Rick G. Pigeon, Vice President of Technology Development, has over 12 years
of experience in the telecommunications industry. Prior to joining the Company
in March 1997, Mr. Pigeon was the Director of Product Development for Airadigm
Communications Inc. ("Airadigm"), a PCS provider, from April 1996. Prior to
joining Airadigm, Mr. Pigeon was Senior Manager, Local Operations for Frontier
from August 1995 to April 1996. From October 1993 to August 1995, Mr. Pigeon was
Product Manager at SCI. Prior thereto, Mr. Pigeon was Manager of Network Systems
at SCI.
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
The Operating Agreement of the Company (the "Operating Agreement") became
effective as of August 1, 1996, and provides that the Company's maximum duration
is until December 31, 2030. The Operating Agreement provides that the business
of the Company will be managed by the members of the Company (the "Members").
Messrs. VanderPol and Postma, Co-Chairmen and co-founders of the Company, are
currently the only Members of the Company, holding 99% and 1%, respectively, of
the membership interests in the Company. See "Principal Equity Holder." Members
must act collectively through meetings or written consents and vote in
proportion to their relative membership interests. Except as specifically
provided otherwise in the Operating Agreement, the Company's Articles of
Organization or applicable law, the affirmative vote of the Holders of a
majority in interest of the membership interests in the Company is required for
all decisions of the Members. The Operating Agreement provides for annual
meetings of the Members to be held at the dates, times and places that the
Members determine. Special meetings of the Members for any proper purpose may be
called at any time by the Holders of at least 25% of the membership interests in
the Company.
Except as otherwise specifically provided in the Operating Agreement, a
Member does not have the right to sell, assign, pledge, create a security
interest in, exchange or otherwise transfer all or any part of such Member's
membership interest in the Company without the prior written consent of all the
Members. A person or entity may be admitted as an additional Member in the
Company only with the unanimous consent of the then-current Members and upon
compliance with the conditions imposed, if any, by unanimous consent of the
then-current Members. Admission of a new Member may occur by (i) the Company's
issuance of additional membership interests for consideration to be unanimously
determined by the then-current Members or (ii) as a transferee of a Member's
membership interest or any portion thereof, subject to the terms and conditions
of the Operating Agreement.
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SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid to the Chief Executive
Officer of the Company and the three executive officers of the Company whose
total annual salary and bonus exceeded $100,000 during 1997.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) OPTIONS(#) ($)
------------------ ---- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Richard Postma................ 1997 --(1) --(1) -- -- --
Co-Chairman and
Chief Executive Officer
David J. Easter............... 1997 $111,667 $25,000 -- -- --
Executive Vice President of
Planning & Business
Development
Lee Thibaudeau................ 1997 $102,917 $20,000 -- -- --
Regional President of US
Xchange of Wisconsin, L.L.C.
Daniel Fabry.................. 1997 $ 90,461 $20,000 -- -- --
Vice President of Marketing
</TABLE>
- ---------------
(1) Mr. Postma did not receive any salary or bonus for his services as Chief
Executive Officer of the Company during 1997, during which time he was a
member of a law firm that provided legal services to the Company.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with each of Lee Thibaudeau,
Regional President of US Xchange of Wisconsin, L.L.C., a wholly-owned subsidiary
of the Company, Daniel Fabry, Vice President of Marketing, and Rick G. Pigeon,
Vice President of Technology Development (each, an "Employment Agreement"). The
terms of the Employment Agreements of Messrs. Thibaudeau, Fabry and Pigeon
expire on March 16, 2002, March 31, 2002 and April 20, 1999, respectively. The
term of each Employment Agreement is automatically renewable for successive
one-year periods unless terminated by either party by written notice at least 90
days prior to the applicable anniversary date of the agreement. In the event
that the Company terminates the employment of Mr. Thibaudeau or Mr. Fabry for
any reason other than "just cause" (as defined therein), the Company must
continue to pay the executive's salary and benefits for a period of one year
following the date of termination. Such continuing salary and benefits
obligations are personally guaranteed by Ronald H. VanderPol, the Company's
Co-Chairman and co-founder. See "Certain Relationships and Related
Transactions." The Employment Agreements contain customary confidentiality, non-
competition and non-solicitation provisions which are effective during the term
of the Employment Agreement and for a period of one year thereafter, unless the
executive's employment is terminated by the Company without "just cause."
Additionally, the Employment Agreements of Messrs. Thibaudeau and Fabry
provide that upon the first to occur of: (i) the sale of the Company's Wisconsin
region assets; (ii) the sale of all of the Company's assets or equity interests;
(iii) the completion of an initial public offering of the Company's equity
interests; or (iv) a merger of the Company with another entity in which the
Company is not the surviving entity (each, a "Triggering Event"), the Company
will pay Messrs. Thibaudeau and Fabry the first $1.5 million and $500,000,
respectively, of the net equity of the Wisconsin region (after subtracting the
Company's capitalization and outstanding debt related to the Wisconsin region)
("Equity Guarantee"). The Company will also pay Messrs. Thibaudeau, Fabry and
Pigeon a specified share (the "Equity Share") of the total net equity following
the occurrence of a Triggering Event, provided, however, that the respective
Equity Guarantee payments described above shall be included in calculating the
applicable Equity Share of Messrs. Thibaudeau and Fabry. Messrs. Thibaudeau,
Fabry and Pigeon's applicable Equity Shares are 5%, 2% and 1%, respectively.
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Notwithstanding the above, if the executive's employment is terminated for any
reason during the first five years of his Employment Agreement, the executive
will forfeit 20% of the Equity Guarantee and 20% of the Equity Share for each
year or partial year less than five that the executive is employed by the
Company. Upon the occurrence of a Triggering Event, the executive must execute
an employment agreement and non-compete agreement with the purchaser for a
period of not less than one year, provided that the salary to be paid Messrs.
Thibaudeau, Fabry and Pigeon during such period will not be less than such
executive's annual salary immediately prior to the sale, and further provided
that such employment agreement and non-compete agreement must be consistent with
the terms and conditions of such executive's Employment Agreement.
PRINCIPAL EQUITY HOLDER
Ronald H. VanderPol, the Company's Co-Chairman and co-founder, has provided
the Company with its initial $60 million of equity capital and beneficially owns
99% of the membership interests in the Company. Richard Postma, the Company's
Co-Chairman, Chief Executive Officer and co-founder, owns 1% of the membership
interests in the Company. See "Management--Limited Liability Company Operating
Agreement."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Ronald H. VanderPol, the Company's Co-Chairman and co-founder, has provided
the Company its initial equity capital of $60 million. Of such amount,
approximately $26 million was invested at December 31, 1997, and the balance was
invested during the first four months of 1998. These funds have been used for
the acquisition of capital assets and funding of operating costs. Of the amounts
invested by Mr. VanderPol, (i) approximately $257,000 and $425,825 represented
the value of management and administrative services provided to the Company
during 1997 and the first six months of 1998, respectively, by RVP Development
Corporation ("RVP"), a holding company wholly owned by Mr. VanderPol, pursuant
to an Expense Sharing Agreement dated February 1, 1997 between the Company and
RVP (the "RVP Agreement") and (ii) $3,283,750 represented securities contributed
by Mr. VanderPol to the Company. (Mr. VanderPol has agreed to make an additional
cash equity contribution to the Company to the extent, if any, that the Company
realizes less than $3,283,750 upon the disposition of such securities.) Pursuant
to the RVP Agreement, the Company was billed for its pro rata share of employee
compensation costs and facilities expenses for the Company's principal executive
offices in Grand Rapids, Michigan, which were funded by RVP in 1997. Richard
Postma, the Company's Co-Chairman and Chief Executive Officer, also serves as
Co-Chairman of RVP, and Donald Offringa, the Company's Vice President of
Finance, also serves as the Vice President of Finance of RVP. RVP has guaranteed
the payment by the Company of its Bank Credit Facility (see "Description of
Existing Indebtedness").
The Company also leases a corporate aircraft from an entity controlled by
Mr. VanderPol under a lease that is terminable by either party upon 10 days'
prior written notice. The Company made payments to such entity for such aircraft
totalling approximately $69,000 and $117,000 during 1997 and the first six
months of 1998, respectively.
The Company believes that the above transactions were on terms no less
favorable to the Company than could have been obtained in transactions with
independent third parties.
Pursuant to Employment Agreements between the Company and certain of its
executive officers, Mr. VanderPol has personally guaranteed the payment of
salary and continuation of benefits for a period of one year following the date
of termination of employment of any of such persons in the event that the
Company terminates such employment agreements for any reason other than "just
cause" (as defined therein). See "Management--Employment Agreements."
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DESCRIPTION OF EXISTING INDEBTEDNESS
In August 1997, the Company entered into its $4.0 million Bank Credit
Facility, which was fully utilized as of March 31, 1998. The proceeds of the
Bank Credit Facility have been used for the acquisition of office furniture,
equipment and computer software and for construction costs related to leasehold
improvements of office and switch site locations. At June 30, 1998, the Company
had $3.8 million of outstanding indebtedness under the Bank Credit Facility. The
borrowings bear interest at an annual rate equal to (i) the bank's prime lending
rate less 1/2% or (ii) 2% over the bank's costs of funds, at the Company's
option. The effective annual rate of the Bank Credit Facility was 7.66% at June
30, 1998. The borrowings are payable in monthly installments of $66,667 through
March 31, 2003 and are secured by specific assets of the Company and US Xchange
of Wisconsin, L.L.C., a wholly owned subsidiary of the Company, and the
guarantees of RVP and US Xchange of Wisconsin, L.L.C.
The Bank Credit Facility contains certain affirmative and restrictive
covenants, including, but not limited to, limitations on the Company's ability
to (i) enter into any merger or consolidation or sell, lease, transfer or
dispose of all, substantially all or any material part of its assets, except in
the ordinary course of business, (ii) guarantee, endorse or otherwise become
secondarily liable for or upon the obligations of others, except by endorsement
for deposit in the ordinary course of business or (iii) create, incur, assume or
suffer to exist any mortgage, pledge, encumbrance, security interest, lien or
charge of any kind upon any of its assets. All financial covenants under the
Bank Credit Facility are applicable to RVP and not the Company. At June 30,
1998, RVP was in compliance with all covenant requirements under the Bank Credit
Facility.
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DESCRIPTION OF THE NOTES
The Private Notes were, and the Exchange Notes will be, issued under the
Indenture dated as of June 25, 1998, between the Company, as issuer, and The
Bank of New York, as Trustee. A copy of the Indenture is available upon request
from the Company. The following summary of certain provisions of the Indenture
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended. Whenever particular defined terms of
the Indenture not otherwise defined herein are referred to, such defined terms
are incorporated herein by reference to the Indenture. For definitions of
certain capitalized terms used in the following summary, see "--Certain
Definitions" below.
GENERAL
The Notes are unsubordinated, unsecured (except to the extent described
below under "--Security") indebtedness of the Company, limited to $200.0 million
aggregate principal amount, and will mature on July 1, 2008. Interest on the
Notes accrues at the rate of 15% per annum from June 25, 1998, or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semi-annually (to Holders of record at the close of business on the
December 15 or June 15 immediately preceding the Interest Payment Date) on
January 1 and July 1 of each year, commencing January 1, 1999. Interest is be
computed on the basis of a 360-day year of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes is payable, and
the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which currently is
the corporate trust office of the Trustee at 101 Barclay Street, 21-W, New York,
New York 10286); provided that, at the option of the Company, payment of
interest may be made by check mailed to the Holders of the Notes at their
addresses as they appear in the Security Register.
The Notes are issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See "--Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
The Private Notes and the Exchange Notes will be treated as a single class
for all purposes under the Indenture.
NON-CALLABLE
The Notes are non-callable.
REDEMPTION UPON RECEIPT OF PUBLIC EQUITY OFFERING PROCEEDS
At any time prior to July 1, 2001, the Company may redeem up to 35% of the
aggregate principal amount of the Notes with the proceeds of one or more Public
Equity Offerings following which there is a Public Market, at any time or from
time to time in part, at a Redemption Price (expressed as a percentage of
principal amount) of 115%, plus accrued interest, if any, to the Redemption
Date; provided that (i) Notes representing at least 65% of the aggregate
principal amount of Notes originally issued remain outstanding after each such
redemption and (ii) notice of any such redemption is mailed within 60 days of
such Public Equity Offering.
The selection of the Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not listed on a
national securities exchange, by lot or by such other method as the Trustee in
its sole discretion shall deem to be fair and appropriate; provided that no Note
of $1,000 in principal amount or less shall be redeemed in part. If any Note is
to be redeemed in part only, the notice of redemption relating to such Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note in principal amount
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equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.
SINKING FUND
There are no sinking fund payments required for the Notes.
SECURITY
Pursuant to the Indenture, the Company has purchased and pledged to the
Trustee, as security for the benefit of the Holders of the Notes, approximately
$79.6 million of Pledged Securities which the Company believes will be
sufficient, upon receipt of scheduled interest and principal payments thereon,
to provide for payment in full of the first six scheduled interest payments due
on the Notes.
The Pledged Securities are held by the Trustee in the Pledge Account.
Interest earned on the Pledged Securities will be added to the Pledge Account.
Pursuant to the Pledge Agreement, immediately prior to an Interest Payment Date,
the Company may either deposit with the Trustee from funds otherwise available
to the Company cash sufficient to pay the interest scheduled to be paid on such
date or the Company may direct the Trustee to release from the Pledge Account
proceeds sufficient to pay interest then due on the Notes. In the event that the
funds or Pledged Securities held in the Pledge Account exceed the amount
sufficient, in the opinion of a nationally recognized firm of independent public
accountants selected by the Company, to provide for payment in full of the first
six scheduled interest payments due on the Notes (or, in the event any interest
payments have been made, an amount sufficient to provide for payment in full of
any interest payments remaining, up to and including the sixth scheduled
interest payment), the Trustee will be permitted to release to the Company, at
the Company's request, any such excess amount. A failure to pay interest on the
Notes in a timely manner through the first six scheduled Interest Payment Dates
will constitute an immediate Event of Default under the Indenture, with no grace
or cure period. The Pledged Securities and Pledge Account will also secure the
repayment of the principal amount of, and premium, if any, on the Notes.
Under the Pledge Agreement, once the Company makes the first six scheduled
interest payments on the Notes, all of the remaining funds or Pledged
Securities, if any, will be released from the Pledge Account and thereafter the
Notes will be unsecured.
RANKING
The Notes are unsubordinated, unsecured (except to the extent described
above under "--Security") indebtedness of the Company, rank pari passu in right
of payment with all unsubordinated, unsecured indebtedness of the Company, rank
senior in right of payment to all subordinated indebtedness of the Company and
are subordinated to the claims of holders of any secured indebtedness of the
Company with respect to the assets securing such secured indebtedness. As of
June 30, 1998, the total amount of outstanding indebtedness of the Company
(parent only) was $203.8 million, of which $3.8 million was secured. See
"Capitalization." Moreover, the Company is a holding company, and the Notes are
effectively subordinated to all existing and future liabilities (including trade
payables) of the Company's subsidiaries. As of June 30, 1998, the subsidiaries
of the Company had approximately $16.9 million in the aggregate of liabilities
(excluding intercompany payables). See "Risk Factors--Priority of Holders of
Secured Indebtedness" and "--Holding Company Structure; Structural Subordination
of the Notes."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not
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Incurred in connection with, or in anticipation of, such Person becoming a
Restricted Subsidiary or such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person that is not a Restricted Subsidiary,
except (x) with respect to net income, to the extent of the amount of dividends
or other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person during such period and (y) with respect to net
losses, to the extent of the amount of Investments made by the Company or any
Restricted Subsidiary in such Person during such period; (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below (and in such case, except to the extent
includable pursuant to clause (i) above), the net income (or loss) of any Person
accrued prior to the date it becomes a Restricted Subsidiary or is merged into
or consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Company or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Stock of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; (vi) all extraordinary gains
and extraordinary losses; and (vii) any compensation expense paid or payable
solely with Capital Stock (other than Disqualified Stock) of the Company or any
options, warrants or other rights to acquire Capital Stock (other than
Disqualified Stock) of the Company.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of Voting Stock, including, without limitation, membership interests,
by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided that such Person's
primary business is similar, related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company or
any of its Restricted Subsidiaries that constitute substantially all of a
division, operating unit or line of business of such Person; provided that the
property and assets acquired are similar, related, ancillary or complementary to
the businesses of the Company and its Restricted Subsidiaries on the date of
such acquisition.
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"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
all or substantially all of the assets of the Company; provided that "Asset
Sale" shall not include (a) sales, transfers or other dispositions of inventory,
receivables and other current assets, (b) sales, transfers or other dispositions
of assets constituting a Restricted Payment permitted to be made under the
"Limitation on Restricted Payments" covenant, (c) sales, transfers or other
dispositions of assets with a fair market value (as certified in an Officers'
Certificate) not in excess of $2 million in any transaction or series of related
transactions, (d) sales, transfers or other dispositions of assets for
consideration at least equal to the fair market value of the assets sold or
disposed of, to the extent that the consideration received would constitute
property or assets of the kind described in clause (B) of the first paragraph of
the "Limitation on Asset Sales" covenant, (e) a disposition of cash or Temporary
Cash Investments, (f) the lease, assignment of a lease or sublease of any real
or personal property in the ordinary course of business, (g) foreclosures on
assets, (h) pledges of assets or stock by the Company or any of its Restricted
Subsidiaries otherwise permitted under the Indenture, including such pledges
securing Indebtedness under the Credit Agreement or (i) sale-leaseback
transactions permitted to be made under the "Limitation on Sale-Leaseback
Transactions" covenant described below.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Board of Directors" means, with respect to any Person, the members, board
of directors or equivalent governing body of such Person.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock, Preferred Stock or Membership Interests.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means, as of any time, the liability in
respect of a Capitalized Lease that would at such time be required to be
capitalized and reflected as a liability on a balance sheet prepared in
accordance with GAAP.
"Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is beneficially owned by the Existing Controlling
Holder on such date and (b) after the occurrence of a Public Market, a "person"
or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of more than 35% of the total voting power of the Voting Stock of
the Company on a fully diluted basis and such ownership represents a greater
percentage of the total voting power of the Voting Stock of the Company, on a
fully diluted basis, than is held by the Existing Controlling Holder on such
date; or (ii) individuals who on the Closing Date constitute the Board of
Directors (together with any new Directors whose election by the Board of
Directors or whose nomination by the Board of Directors for election by the
Holders of the Company's
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Voting Stock was approved by a vote of at least two-thirds of the members of the
Board of Directors then in office who either were members of the Board of
Directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and (v)
all other non-cash items reducing Adjusted Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is, or
is required by GAAP to be, made), less all non-cash items increasing (or, in the
case of a loss, decreasing) Adjusted Consolidated Net Income, all as determined
on a consolidated basis for the Company and its Restricted Subsidiaries in
conformity with GAAP; provided that, if any Restricted Subsidiary is not a
Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the
extent not otherwise reduced in accordance with GAAP) or increased (in the case
of a loss) by an amount equal to (A) the amount of the Adjusted Consolidated Net
Income attributable to such Restricted Subsidiary multiplied by (B) the
percentage of the Capital Stock of such Restricted Subsidiary not "beneficially
owned" on the last day of such period by the Company or any of its Restricted
Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and interest
in respect of Indebtedness that is Guaranteed or secured by the Company or any
of its Restricted Subsidiaries) and the interest component of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by the
Company and its Restricted Subsidiaries during such period; excluding, however,
(i) any amount of such interest of any Restricted Subsidiary if the net income
of such Restricted Subsidiary is excluded in the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof (but
only in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses
(and any amortization thereof) payable in connection with the offering of the
Notes, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below (such four fiscal
quarter period being the "Four Quarter Period"); provided that, in making the
foregoing calculation, pro forma effect shall be given to the following events
which occur from the beginning of the Four Quarter Period through the
Transaction Date (the "Reference Period"): (A) the Incurrence of the
Indebtedness with respect to which the computation is being made and (if
applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred, and the
application of such proceeds occurred, at the beginning of the Four Quarter
Period; (B) the Incurrence, repayment or retirement of any other Indebtedness by
the Company and its Restricted Subsidiaries since the first day of the Four
Quarter Period as if such Indebtedness was incurred, repaid or retired at the
beginning of the Four Quarter Period; (C) in the case of Acquired Indebtedness,
the related acquisition, as if such acquisition occurred at the beginning of the
Four Quarter Period; and (D) any acquisition or disposition by the Company and
its Restricted Subsidiaries of any company or any business or any assets out of
the ordinary course of business, whether by merger, stock purchase or sale or
asset purchase or sale or any related
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repayment of Indebtedness, in each case since the first day of the Four Quarter
Period, assuming such acquisition or disposition had been consummated on the
first day of the Four Quarter Period and after giving pro forma effect to net
cost savings that the Company reasonably believes in good faith could have been
achieved during the Four Quarter Period as a result of such acquisition or
disposition (provided that both (1) such cost savings were identified and
quantified in an Officers' Certificate delivered to the Trustee at the time of
the consummation of the acquisition or disposition and (2) with respect to each
acquisition or disposition completed prior to the ninetieth day preceding such
date of determination, actions were commenced or initiated by the Company within
90 days of such acquisition or disposition to effect such cost savings
identified in such Officers' Certificate and with respect to any other
acquisition or disposition, such Officers' Certificate sets forth the specific
steps to be taken within the 90 days after such acquisition or disposition to
accomplish such cost savings); provided that for purposes of calculating this
ratio, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries shall be reduced by an amount equal to (X) the amount of
Indebtedness attributable to such Restricted Subsidiary multiplied by (Y) the
percentage of the Capital Stock of such Restricted Subsidiary not "beneficially
owned" on the last day of such period by the Company or any of its Restricted
Subsidiaries.
"Consolidated Net Worth" means, at any date of determination, Capital Stock
as set forth on the most recently available quarterly or annual consolidated
balance sheet of the Company and its Restricted Subsidiaries (which shall be as
of a date not more than 90 days prior to the date of such computation, and which
shall not take into account Unrestricted Subsidiaries), less any amounts
attributable to Disqualified Stock or any equity security convertible into or
exchangeable for Indebtedness, the cost of treasury stock, if any, and the
principal amount of any promissory notes receivable from the sale of the Capital
Stock of the Company or any of its Restricted Subsidiaries, each item to be
determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Credit Agreement" means the Credit Agreement, dated August 28, 1997,
between the Company and Comerica Bank.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Directors" means, with respect to any Person, the members of the Board of
Directors of such Person.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the Holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving Holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the Holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock, or the agreements or instruments governing the redemption
rights thereof, specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below.
"Excess Proceeds" has the meaning set forth in the final sentence of the
first paragraph of the "Limitation on Asset Sales" covenant.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Controlling Holder" means Ronald H. VanderPol and his Affiliates.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; provided that (x) the fair market value of any
security registered under the Exchange Act shall be the average of the closing
prices, regular way, of such security for the 20 consecutive trading days
immediately preceding the sale of Capital Stock and (y) in the event the
aggregate fair market value of any other property (other than cash or cash
equivalents) received by the Company exceeds $30 million, the fair market value
of such property shall be determined by a nationally recognized investment
banking firm or a nationally recognized firm having appraisal expertise in the
specific area which is the subject of such determination and set forth in their
written opinion which shall be delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as are approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Notes and (ii) except as otherwise provided,
the amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that a change in
GAAP that results in an obligation of such Person becoming Indebtedness shall be
deemed not to be an Incurrence of such Indebtedness by such Person and that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in clause (i) or (ii) above or
(v), (vi) or (vii) below) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or, if drawn
upon, to the extent such drawing is reimbursed no later than the third Business
Day following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such
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property in service or taking delivery and title thereto or the completion of
such services, except Trade Payables, (v) all Capitalized Lease Obligations of
such Person, (vi) all Indebtedness referred to in clauses (i) through (v) hereof
of other Persons secured by a Lien on any asset of such Person, whether or not
such Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise
included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date (or, in the case of a revolving credit or
other similar facility, the total amount of funds outstanding on the date of
determination) of all unconditional obligations as described above and, with
respect to contingent obligations, the maximum liability upon the occurrence of
the contingency giving rise to the obligation, provided that (A) the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the face amount of such Indebtedness less the remaining unamortized portion
of the original issue discount of such Indebtedness at the time of its issuance
as determined in conformity with GAAP, (B) money borrowed and set aside at the
time of the Incurrence of any Indebtedness in order to prefund the payment of
the interest on such Indebtedness shall not be deemed to be "Indebtedness" so
long as such money is held to secure the payment of such interest and (C)
Indebtedness shall not include any liability for federal, state, local or other
taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries and travel
and similar advances to Persons in the ordinary course of business) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant described below;
provided that the fair market value of the Investment remaining in any Person
that has ceased to be a Restricted Subsidiary shall not exceed the aggregate
amount of Investments previously made in such Person valued at the time such
Investments were made less any net reduction of such Investments. For purposes
of the definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described below, (i) "Investment" shall include the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Restricted Subsidiaries)) of any Restricted Subsidiary at
the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary, (ii) the fair market value of the assets (net of liabilities (other
than liabilities to the Company or any of its Restricted Subsidiaries)) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary shall be considered a reduction in
outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
"Investment Grade Securities" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Temporary Cash Investments), (ii) debt
securities or debt instruments with a rating of BBB+ or higher by S&P or Baa1 or
higher by Moody's or the equivalent of such rating organization, or, if no
rating of S&P or Moody's then exists, the equivalent of such rating by any other
nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Company and
its Subsidiaries, and
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(iii) investments in any fund that invests exclusively in investments of the
type described in clauses (i) and (ii) which fund may also hold cash pending
investment and/or distribution.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien,
adverse claim or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof or any agreement to give any security interest).
"Membership Interests" means, with respect to any Person, any and all
membership interests, participations or other equivalents (however designated,
whether voting or non-voting) in equity of such Person, whether outstanding on
the Closing Date or issued thereafter.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or Temporary Cash Investments, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or Temporary Cash Investments (except to the extent such obligations are
financed or sold with recourse to the Company or any Restricted Subsidiary) and
proceeds from the conversion of other property received when converted to cash
or Temporary Cash Investments, net of (i) brokerage commissions and other
commissions, fees and expenses (including fees and expenses of counsel,
accountants and investment bankers) related to such Asset Sale and any
relocation expenses incurred as a result thereof, (ii) provisions for all taxes
(whether or not such taxes will actually be paid or are payable) as a result of
such Asset Sale without regard to the consolidated results of operations of the
Company and its Restricted Subsidiaries, taken as a whole, (iii) payments made
to repay Indebtedness or any other obligation outstanding at the time of such
Asset Sale that either (A) is secured by a Lien on the property or assets sold
or (B) is required to be paid as a result of such sale and (iv) appropriate
amounts to be provided by the Company or any Restricted Subsidiary as a reserve
against any liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with GAAP and (b) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or Temporary Cash
Investments, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or Temporary Cash Investments (except to the
extent such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary) and proceeds from the conversion of other property
received when converted to cash or Temporary Cash Investments, net of attorney's
fees, accountants' fees, underwriters' or placement agent's fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection with
such issuance or sale and net of taxes paid or payable as a result thereof.
"Note Amount" has the meaning set forth in the second paragraph of the
"Limitation on Asset Sales" covenant described below.
"Offer to Purchase" means an offer to purchase Notes by the Company from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is
mailed)(the "Payment Date"); (iii) that any Note not tendered will continue to
accrue interest pursuant to its terms; (iv) that, unless the Company defaults in
the payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to the Offer to
Purchase will be required to surrender the Note, together with the form entitled
"Option of the Holder to Elect Purchase" on the reverse side of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a facsimile transmission or
letter setting forth the name of such Holder, the principal amount of Notes
delivered for purchase and a statement that such Holder is withdrawing its
election to have such Notes purchased; and (vii) that Holders
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whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; provided
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or an integral multiple thereof. On the Payment Date, the Company
shall (i) accept for payment on a pro rata basis Notes or portions thereof
tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent
money sufficient to pay the purchase price of all Notes or portions thereof so
accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes
or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
an integral multiple thereof. The Company will publicly announce the results of
an Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. The Company will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Notes pursuant to an
Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
similar, related, ancillary or complementary to the businesses of the Company
and its Restricted Subsidiaries on the date of such Investment; (ii) Temporary
Cash Investments and Investment Grade Securities; (iii) payroll, travel and
similar advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP; (iv) any
Investment acquired by the Company or any of its Restricted Subsidiaries (x) in
exchange for any other Investment or accounts receivable held by the Company or
any such Restricted Subsidiary in connection with or as a result of a
bankruptcy, workout, reorganization or recapitalization of the issuer of such
other Investment or accounts receivable or an Affiliate of such issuer, (y) as a
result of a foreclosure by the Company or any of its Restricted Subsidiaries
with respect to any secured Indebtedness or other transfer of title with respect
to any secured Indebtedness in default or (z) in satisfaction of a judgment; (v)
any Investment acquired in consideration for the issuance of Capital Stock
(other than Disqualified Stock) or the proceeds of the issuance of Capital Stock
(other than Disqualified Stock) to the extent such amounts have not been
previously used to support a Restricted Payment pursuant to clause (C)(2) of the
first paragraph of the "Limitation on Restricted Payments" covenant described
below or clause (iii) or (iv) of the second paragraph of the "Limitation on
Restricted Payments" covenant described below or used to support the Incurrence
of Indebtedness pursuant to clause (viii) of the second paragraph of part (a)
under the "Limitation on Indebtedness" covenant described below and Investments
acquired as a capital contribution; provided that such proceeds shall be used on
or prior to 60 days after their receipt by the Company; (vi) Guarantees
permitted by the "Limitation on Indebtedness" covenant described below; (vii)
loans or advances to employees of the Company or any Restricted Subsidiary that
do not in the aggregate exceed at any one time outstanding $2 million; (viii)
Currency Agreements and Interest Rate Agreements permitted under the "Limitation
on Indebtedness" covenant described below; (ix) Investments in prepaid expenses,
negotiable instruments held for collection and lease, utility and workers'
compensation, performance and other similar deposits; (x) Investments in debt
securities or other evidences of Indebtedness that are issued by companies
engaged in the Telecommunications Business; provided that when each Investment
pursuant to this clause (x) is made, the aggregate amount of Investments
outstanding under this clause (x) does not exceed $3 million; (xi) Strategic
Investments and Investments in any Permitted Joint Venture in an amount not to
exceed $20 million at any one time outstanding; (xii) an Investment in any
Person the primary business of which is similar, related, ancillary or
complementary to the businesses of the Company and its Subsidiaries on the date
of such Investment in an amount not to exceed at any time outstanding the sum of
(x) $23 million plus (y) 10% of the Company's Consolidated EBITDA, if positive,
for the immediately preceding four fiscal quarters (valued in each case as
provided in the definition of "Investments"); (xiii) securities received in
connection with Asset Sales to the extent constituting non-cash consideration
permitted under the "Asset
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Sale" covenant; (xiv) Investments in an amount not to exceed $5 million at any
time outstanding; and (xv) Investments existing on the Closing Date.
"Permitted Joint Venture" means any Unrestricted Subsidiary or any other
Person in which the Company or a Restricted Subsidiary owns, directly or
indirectly, an ownership interest (other than a Restricted Subsidiary) and whose
primary business is similar, related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries at the time of
determination.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, to finance the cost
(including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) of the item of
property or assets subject thereto and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the completion
of construction or the commencement of full operation of such property, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such cost and (c) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets and any improvements on such
item; (vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its Restricted
Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets
under construction arising from progress or partial payments by a customer of
the Company or its Restricted Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of Capital Stock or Indebtedness of, any Person existing at the
time such Person becomes, or becomes a part of, any Restricted Subsidiary;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets acquired;
(xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary that does not give rise to an Event of Default; (xiv)
Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely to protect
the Company or any of its Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities; (xvii) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business in accordance with the past practices of the
Company and its Restricted Subsidiaries prior to the
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Closing Date; (xviii) Liens on or sales of receivables; and (xix) Liens that
secure Indebtedness with an aggregate principal amount not in excess of $5
million at any time outstanding.
"Pledge Account" means the account established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the Pledged Securities
purchased by the Company with a portion of the net proceeds from the sale of the
Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of June 25, 1998, made by the Company in favor of the Trustee,
governing the disbursement of funds from the Pledge Account, as such agreement
may be amended, restated, supplemented or otherwise modified from time to time.
"Pledged Securities" means the U.S. government securities purchased by the
Company and held in the Pledge Account in accordance with the Pledge Agreement.
"Public Equity Offering" means an underwritten primary public offering of
Capital Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Capital Stock of the Company immediately prior to the consummation of such
Public Equity Offering has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, and its successors.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Specified Date" means any Redemption Date, any Payment Date for an Offer
to Purchase or any date on which the Notes first become due and payable after an
Event of Default.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Strategic Investments" means (A) Investments that the Board of Directors
has determined in good faith will enable the Company or any of its Restricted
Subsidiaries to obtain additional business that it might not be able to obtain
without making such Investment and (B) Investments in entities the principal
function of which is to perform research and development with respect to
products and services that may be used or useful in the Telecommunications
Business; provided that the Company or one of its Restricted Subsidiaries is
entitled or otherwise reasonably expects to obtain rights to such products or
services as a result of such Investment.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in a business that is
similar, related, ancillary or complementary to the businesses conducted by the
Company or any of its Restricted Subsidiaries, which Indebtedness by its terms,
or by the terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, (i) is expressly made subordinate in right of payment
to the Notes and (ii) provides that no payment of principal, premium or interest
on, or any other payment with respect to, such Indebtedness may be made prior to
the payment in full of all of the Company's obligations under the Notes;
provided that such Indebtedness may provide for and be repaid at any time from
the proceeds of a capital contribution or the sale of Capital Stock (other than
Disqualified Stock) of the Company after the Incurrence of such Indebtedness.
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"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which 50% or more of the voting power of
the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, fax, video or data
through owned or leased transmission facilities or the provision of Internet
related services, (ii) creating, developing or marketing communications related
network equipment, software and other devices for use in a Telecommunications
Business or (iii) evaluating, participating or pursuing any other activity or
opportunity that is primarily related to those identified in (i) or (ii) above;
provided that the determination of what constitutes a Telecommunications
Business shall be made in good faith by the Board of Directors, whose
determination shall be conclusive if evidenced by a Board Resolution.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clauses (i) and
(ii) above entered into with a bank meeting the qualifications described in
clause (ii) above, (iv) commercial paper, maturing not more than one year after
the date of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according
to S&P, (v) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by S&P or
Moody's, and (vi) investment funds investing 95% or more of their assets in
securities of the type described in clauses (i) through (v) above.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other Indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below; and (C) if applicable,
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the Incurrence of Indebtedness and the Investment referred to in clause (A) of
this proviso would be permitted under the "Limitation on Indebtedness" and
"Limitation on Restricted Payments" covenants described below. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that (i) no Default or Event of Default shall have occurred
and be continuing at the time of or after giving effect to such designation and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately after such designation would, if Incurred at such time, have been
permitted to be Incurred (and shall be deemed to have been Incurred) for all
purposes of the Indenture. Any such designation by the Board of Directors shall
be evidenced to the Trustee by promptly filing with the Trustee a copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of Directors of
such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any Director's qualifying investments or investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
COVENANTS
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur Indebtedness
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds therefrom, the Consolidated Leverage Ratio would
be greater than zero and less than 6:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $100.0 million, less any amount of such Indebtedness permanently repaid
as provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness owed (A) to the Company evidenced by a promissory note or (B) to
any Restricted Subsidiary; provided that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Indebtedness (other than Indebtedness Incurred under clause (i),
(ii), (iv), (vi) or (ix) of this paragraph) and any refinancings thereof in an
amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); provided that Indebtedness the proceeds of
which are used to refinance or refund the Notes or Indebtedness that is pari
passu with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (iii) if (A) in case the Notes are refinanced in
part or the Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced or refunded; provided that in no event may Indebtedness of the
Company be refinanced by means of any Indebtedness of any Restricted Subsidiary
pursuant to this clause (iii); (iv) Indebtedness (A) in respect of performance,
surety, appeal bonds and
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completion guaranties provided in the ordinary course of business, (B) under
Currency Agreements and Interest Rate Agreements; provided that such agreements
(a) are designed solely to protect the Company or its Restricted Subsidiaries
against fluctuations in foreign currency exchange rates or interest rates and
(b) do not increase the Indebtedness of the obligor outstanding at any time
other than as a result of fluctuations in foreign currency exchange rates or
interest rates or by reason of fees, indemnities and compensation payable
thereunder, and (C) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees or
letters of credit, surety bonds or performance bonds securing any obligations of
the Company or any of its Restricted Subsidiaries pursuant to such agreements,
in any case Incurred in connection with the disposition of any business, assets
or Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or Restricted
Subsidiary for the purpose of financing such acquisition), in a principal amount
not to exceed the gross proceeds actually received by the Company or any
Restricted Subsidiary in connection with such disposition; (v) Indebtedness of
the Company, to the extent the net proceeds thereof are promptly (A) used to
purchase Notes tendered in an Offer to Purchase made as a result of a Change in
Control or (B) deposited to defease the Notes as described below under
"Defeasance"; (vi) Guarantees of the Notes and Guarantees of Indebtedness of the
Company by any Restricted Subsidiary provided the Guarantee of such Indebtedness
is permitted by and made in accordance with the "Limitation on Issuance of
Guarantees by Restricted Subsidiaries" covenant described below; (vii)
Indebtedness (including Guarantees) Incurred to finance the cost (including the
cost of design, development, acquisition, construction, installation,
improvement, transportation or integration) to acquire equipment, inventory or
network assets (including acquisitions by way of acquisitions of real property,
leasehold improvements, Capitalized Leases and acquisitions of the Capital Stock
of a Person that becomes a Restricted Subsidiary to the extent of the fair
market value of the equipment, inventory or network assets so acquired) by the
Company or a Restricted Subsidiary after the Closing Date; (viii) Indebtedness
of the Company not to exceed, at any one time outstanding, two times (A) the Net
Cash Proceeds received by the Company after the Closing Date as a capital
contribution or from the issuance and sale of its Capital Stock (other than
Disqualified Stock) to a Person that is not a Subsidiary of the Company, to the
extent such capital contribution or Net Cash Proceeds have not been used
pursuant to clause (C)(2) of the first paragraph or clause (iii), (iv), (vi) or
(vii) of the second paragraph of the "Limitation on Restricted Payments"
covenant described below or clause (ix) of the definition of Permitted
Investments to support the making of a Restricted Payment and (B) 80% of the
fair market value of property (other than cash and Temporary Cash Investments)
received by the Company after the Closing Date from the sale of its Capital
Stock (other than Disqualified Stock) to a Person that is not a Subsidiary of
the Company, to the extent such capital contribution or sale of Capital Stock
has not been used pursuant to clause (iii), (iv), (vi) or (vii) of the second
paragraph of the "Limitation on Restricted Payments" covenant described below to
make a Restricted Payment, provided that such Indebtedness does not mature prior
to the Stated Maturity of the Notes and has an Average Life longer than the
remaining Average Life of the Notes; (ix) Indebtedness Incurred by the Company
or any of its Restricted Subsidiaries constituting reimbursement obligations
with respect to letters of credit in the ordinary course of business, including,
without limitation, letters of credit in respect of workers' compensation claims
or self insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; provided that upon the
drawing of such letters of credit or the Incurrence of such Indebtedness, such
obligations are reimbursed within 30 days following the earlier of such drawing
or Incurrence; (x) Acquired Indebtedness; (xi) Strategic Subordinated
Indebtedness; and (xii) Subordinated Indebtedness of the Company (in addition to
Indebtedness permitted under clauses (i) through (xi) above) in an aggregate
principal amount outstanding at any time not to exceed $100 million, less any
amount of such Indebtedness permanently repaid as provided under the "Limitation
on Asset Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting
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Indebtedness otherwise included in the determination of such particular amount
shall not be included and (2) any Liens granted pursuant to the equal and
ratable provisions referred to in the "Limitation on Liens" covenant described
below shall not be treated as Indebtedness. For purposes of determining
compliance with this "Limitation on Indebtedness" covenant, in the event that an
item of Indebtedness meets the criteria of more than one of the types of
Indebtedness described in the above clauses, the Company, in its sole
discretion, shall classify, and from time to time may reclassify, such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in its Capital Stock (other than Disqualified
Stock) or in options, warrants or other rights to acquire Capital Stock and (y)
pro rata dividends or distributions on Common Stock of Restricted Subsidiaries
held by Persons other than the Company or any of its Restricted Subsidiaries),
(ii) purchase, redeem, retire or otherwise acquire for value any Capital Stock
of (A) the Company or an Unrestricted Subsidiary (including options, warrants or
other rights to acquire such Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such Capital Stock) held by any Affiliate of the Company (other than a Wholly
Owned Restricted Subsidiary) or any Holder (or any Affiliate of such Holder) of
5% or more of the Capital Stock of the Company, (iii) make any voluntary or
optional principal payment, or voluntary or optional redemption, repurchase,
defeasance, or other acquisition or retirement for value, of Indebtedness of the
Company that is subordinated in right of payment to the Notes or (other than the
purchase, redemption, repurchase or other acquisition of such subordinated
Indebtedness purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within six months of
the date of acquisition), and (iv) make any Investment, other than a Permitted
Investment, in any Person (such payments or any other actions described in
clauses (i) through (iv) above being collectively "Restricted Payments") if, at
the time of, and after giving effect to, the proposed Restricted Payment: (A) a
Default or Event of Default shall have occurred and be continuing, (B) the
Company could not Incur at least $1.00 of Indebtedness under the first paragraph
of part (a) of the "Limitation on Indebtedness" covenant or (C) the aggregate
amount of all Restricted Payments (the amount, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) made after the Closing Date
shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of the amount of such loss) (determined by excluding income resulting
from transfers of assets by the Company or a Restricted Subsidiary to an
Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken
as one accounting period) beginning on the first day of the fiscal quarter
immediately following the Closing Date and ending on the last day of the last
fiscal quarter preceding the Transaction Date for which reports have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below plus (2) the aggregate
Net Cash Proceeds received by the Company after the Closing Date as a capital
contribution or from the issuance and sale permitted by the Indenture of its
Capital Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of the Company, including an issuance or sale permitted by the
Indenture of Indebtedness of the Company for cash subsequent to the Closing Date
upon the conversion of such Indebtedness into Capital Stock (other than
Disqualified Stock) of the Company, or from the issuance to a Person who is not
a Subsidiary of the Company of any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any Disqualified Stock
or any options, warrants or other rights that are redeemable at the option of
the Holder, or are required to be redeemed, prior to the Stated Maturity of the
Notes), in each case except to the extent such Net Cash Proceeds are used to
support the Incurrence of Indebtedness pursuant to clause (viii) of the second
paragraph under the "Limitation on Indebtedness" covenant, or the making of
Permitted Investments in accordance with clause (v) of the definition of such
term or pursuant to clause (vi) of the second paragraph of this "Limitation on
Restricted Payments" covenant, plus (3) an amount equal to the net reduction in
Investments (other than reductions in Permitted Investments and pursuant to
clause (vi) of the second paragraph of this covenant) in any Person
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resulting from payments of interest on Indebtedness, dividends, repayments of
loans or advances, or other transfers of assets, in each case to the Company or
any Restricted Subsidiary or from the Net Cash Proceeds from the sale of any
such Investment (except, in each case, to the extent any such payment or
proceeds are included in the calculation of Adjusted Consolidated Net Income),
or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investments"), not to
exceed, in each case, the amount of Investments previously made by the Company
or any Restricted Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company or
an Unrestricted Subsidiary (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a capital contribution
or a substantially concurrent offering of, Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (iv) the making of any principal payment or the
repurchase, redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to the
Notes in exchange for, or out of the proceeds of a capital contribution or a
substantially concurrent offering of, Capital Stock (other than Disqualified
Stock) of the Company (or options, warrants or other rights to acquire such
Capital Stock); (v) payments or distributions, to dissenting Holders of Capital
Stock pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; (vi) Investments in
any Person the primary business of which is similar, related, ancillary or
complementary to the businesses of the Company and its Restricted Subsidiaries
on the date of such Investments; provided that the aggregate amount of
Investments outstanding at any time pursuant to this clause (vi) does not exceed
the sum of (a) $20 million plus (b) the amount of Net Cash Proceeds received by
the Company after the Closing Date as a capital contribution or from the sale of
its Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, except to the extent such Net Cash Proceeds are used
to support the Incurrence of Indebtedness pursuant to clause (viii) of the
second paragraph of part (a) under the "Limitation on Indebtedness" covenant or
to support the making of Restricted Payments pursuant to clause (C)(2) of the
first paragraph, or clauses (iii) or (iv) of this paragraph, of this "Limitation
on Restricted Payments" covenant, plus (c) the net reduction in Investments made
pursuant to this clause (vi) resulting from distributions on or repayments of
such Investments or from the Net Cash Proceeds from the sale of any such
Investment (except in each case to the extent any such payment or proceeds is
included in the calculation of Adjusted Consolidated Net Income) or from such
Person becoming a Restricted Subsidiary (valued in each case as provided in the
definition of "Investments"), provided that the net reduction in any Investment
shall not exceed the amount of such Investment; (vii) Investments acquired in
exchange for Capital Stock (other than Disqualified Stock) of the Company;
(viii) the declaration or payment of dividends on the Capital Stock of the
Company following a Public Equity Offering of such Capital Stock, of up to 6%
per annum of the Net Cash Proceeds received by the Company in such Public Equity
Offering; (ix) prior to the occurrence of a Public Market, the purchase,
redemption, retirement or other acquisition for value of Capital Stock of the
Company or options to purchase such Capital Stock, held by any current or former
employee, Director or consultant of the Company or a Restricted Subsidiary (or
their estates or beneficiaries under their estates), upon the death, disability,
retirement, termination of employment or pursuant to the terms of any agreement
under which such Capital Stock or options were issued; provided that the
aggregate consideration paid for such purchase, redemption, retirement or other
acquisition for value of such Capital Stock or options after the Closing Date
does not exceed (A) in any calendar year, $2 million or (b) $5 million in the
aggregate (unless such repurchases are made with the proceeds of insurance
policies and the Capital Stock is purchased from the executors, administrators,
testamentary trustees, heirs, legatees or beneficiaries); (x) the declaration or
payment of dividends and other distributions to Members of the Company in an
amount
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equal to the income tax liability incurred by such Members as a result of any
amount of consolidated income or gain of the Company allocated to such Members
for federal income tax purposes, computed at the highest federal and state rates
applicable to such Members; and (xi) other Restricted Payments in an aggregate
amount not to exceed $2 million; provided that, except in the case of clauses
(i) and (iii), no Default or Event of Default shall have occurred and be
continuing or occur as a consequence of the actions or payments set forth
therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clauses (vi) and
(vii) thereof), and the Net Cash Proceeds from any capital contribution or any
issuance of Capital Stock referred to in clauses (iii) and (iv), shall be
included in calculating whether the conditions of clause (C)(2) of the first
paragraph of this "Limitation on Restricted Payments" covenant have been met
with respect to any subsequent Restricted Payments. In the event the proceeds of
an issuance of Capital Stock of the Company are used for the redemption,
repurchase or other acquisition of the Notes, or Indebtedness that is pari passu
with the Notes, then the Net Cash Proceeds of such issuance shall be included in
clause (C)(2) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
Any Restricted Payments made other than in cash shall be valued at fair
market value. The amount of any Investment "outstanding" at any time shall be
deemed to be equal to the amount of such Investment on the date made, less the
return of capital to the Company and its Restricted Subsidiaries with respect to
such Investment by distribution, sale or otherwise (up to the amount of such
Investment on the date made).
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Credit Agreement, the
Indenture or any other agreements in effect on the Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements; provided
that the encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material respect to the
Holders than those encumbrances or restrictions that are then in effect and that
are being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law, rule, regulation or order; (iii) existing with respect
to any Person or the property or assets of such Person acquired by the Company
or any Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than such
Person or the property or assets of such Person so acquired; (iv) in the case of
clause (iv) of the first paragraph of this "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that
restrict in a customary manner the subletting, assignment or transfer of any
property or asset that is a lease, license, conveyance or contract or similar
property or asset, (B) existing by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets of
the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture, (C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of property or assets of the Company or any Restricted
Subsidiary in any manner material to the Company or any Restricted Subsidiary or
(D) entered into in connection with purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature discussed in clause (iv) of the first paragraph of this "Limitation on
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries"
covenant on the
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property so acquired; (v) with respect to a Restricted Subsidiary and imposed
pursuant to an agreement that has been entered into for the sale or disposition
of all or substantially all of the Capital Stock of, or the property and assets
of, such Restricted Subsidiary; or (vi) contained in the terms of any
Indebtedness or any agreement pursuant to which such Indebtedness was issued if
(A) the encumbrance or restriction applies only in the event of a payment
default or a default with respect to a financial covenant contained in such
Indebtedness or agreement, (B) the encumbrance or restriction is not materially
more disadvantageous to the Holders of the Notes than is customary in comparable
financings (as determined in good faith by the Board of Directors, whose
determination shall be conclusive if evidenced by a Board Resolution) and (C)
the Board of Directors determines that any such encumbrance or restriction will
not materially affect the Company's ability to make principal or interest
payments on the Notes; (vii) restrictions on cash or other deposits imposed by
customers under contracts entered into in the ordinary course of business;
(viii) customary provisions in joint venture agreements and other similar
agreements entered into in the ordinary course of business; and (ix) any
encumbrances or restrictions of the type referred to in clauses (i) through (iv)
of the first paragraph of this covenant imposed by any amendments,
modifications, renewals, restatements, increases, supplements, refundings,
replacements or refinancings of the contracts referred to in clauses (i) through
(vi) above; provided that such amendments, modifications, renewals,
restatements, increases, supplements, refundings, replacements or refinancings
are, in the good faith judgment of the Board of Directors, not materially
disadvantageous to the Holders than those contained in the restriction prior to
such amendment, modification, renewal, restatement, increase, supplement,
refunding, replacement or refinancing. Nothing contained in this "Limitation on
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries"
covenant shall prevent the Company or any Restricted Subsidiary from (1)
creating, incurring, assuming or suffering to exist any Liens otherwise
permitted in the "Limitation on Liens" covenant described below or (2)
restricting the sale or other disposition of property or assets of the Company
or any of its Restricted Subsidiaries that secure Indebtedness of the Company or
any of its Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any Capital Stock of a Restricted
Subsidiary (including options, warrants or other rights to purchase such Capital
Stock) except (i) to the Company or a Wholly Owned Restricted Subsidiary; (ii)
issuances of Director's qualifying shares or sales to foreign nationals of
Capital Stock of foreign Restricted Subsidiaries, to the extent required by
applicable law; (iii) if, immediately after giving effect to such issuance or
sale, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary and any Investment in such Person remaining after giving effect to
such issuance or sale would have been permitted to be made under the "Limitation
on Restricted Payments" covenant if made on the date of such issuance or sale;
or (iv) issuances or sales of Common Stock or Membership Interests of a
Restricted Subsidiary, provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in accordance with
clause (A) or (B) of the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; provided that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary (x) that existed at the
time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary or (y) of Indebtedness Incurred under the Credit Agreement supporting
Indebtedness thereunder Incurred prior to the Closing Date. If the Guaranteed
Indebtedness is (A) pari passu with the Notes, then the Guarantee of such
Guaranteed Indebtedness shall be pari passu with, or
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subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any Holder (or any Affiliate of such
Holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a Holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm or a nationally recognized firm having appraisal expertise in the
specific area which is the subject of such determination stating that the
transaction is fair to the Company or such Restricted Subsidiary from a
financial point of view; (ii) any transaction solely between the Company and any
of its Restricted Subsidiaries or solely between Restricted Subsidiaries; (iii)
the payment of reasonable and customary regular fees to, and reasonable and
customary indemnity provided on behalf of, officers, Directors, employees or
consultants of the Company or any of its Subsidiaries; (iv) any payments or
other transactions pursuant to any tax-sharing agreement between the Company and
any other Person with which the Company files a consolidated tax return or with
which the Company is part of a consolidated group for tax purposes; (v) any
agreement as in effect as of the Closing Date or any amendment thereto (so long
as any such amendment is not disadvantageous to the Holders in any material
respect); (vi) the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under the terms of, any Limited
Liability Company Operating Agreement or Articles of Organization (including any
registration rights agreement or purchase agreement related thereto) to which it
is a party as of the Closing Date and any similar agreements which it may enter
into thereafter (so long as any such similar agreement is not disadvantageous to
the Holders in any material respect); or (vii) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding
the foregoing, any transaction or series of related transactions covered by the
first paragraph of this "Limitation on Transactions with Shareholders and
Affiliates" covenant and not covered by clauses (ii) through (vii) of this
paragraph, the aggregate amount of which exceeds $3 million in value, must be
approved or determined to be fair in the manner provided for in clause (i)(A) or
(B) above.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due under
the Indenture to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the Notes, prior to) the obligation or liability secured by such
Lien.
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The foregoing limitation does not apply to (i) Liens existing on the
Closing Date, including Liens securing obligations under the Credit Agreement;
(ii) Liens granted after the Closing Date on any assets or Capital Stock of the
Company or its Restricted Subsidiaries created in favor of the Holders; (iii)
Liens with respect to the assets of a Restricted Subsidiary granted by such
Restricted Subsidiary to the Company or a Restricted Subsidiary to secure
Indebtedness owing to the Company or such other Restricted Subsidiary; (iv)
Liens securing Indebtedness which is Incurred to refinance secured Indebtedness
which is permitted to be Incurred under clause (iii) of the second paragraph of
part (a) of the "Limitation on Indebtedness" covenant; provided that such Liens
do not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; (v) Liens on the Capital Stock of, or any
property or assets of, a Restricted Subsidiary securing Indebtedness of such
Restricted Subsidiary permitted under the "Limitation on Indebtedness" covenant;
(vi) Liens on the Capital Stock of Restricted Subsidiaries securing Indebtedness
Incurred under clause (vii) of the second paragraph of part (a) of the
"Limitation on Indebtedness" covenant; or (viii) Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of (x) cash or Temporary Cash Investments or the assumption of
Indebtedness of the Company or any Restricted Subsidiary of the Company (other
than Indebtedness that is subordinated to the Notes) and release from all
liability on the Indebtedness assumed (which release shall be in writing
executed by all creditors with respect thereto), or (y) Voting Stock of a Person
engaged in the Telecommunications Business that will upon receipt thereof be or
become a Restricted Subsidiary; provided that this clause (ii) shall not apply
to long-term assignments of capacity in a telecommunications network. In the
event and to the extent that the Net Cash Proceeds received by the Company or
any of its Restricted Subsidiaries from one or more Asset Sales occurring on or
after the Closing Date in any period of 12 consecutive months exceed 10% of
Adjusted Consolidated Net Tangible Assets (determined as of the date closest to
the commencement of such 12-month period for which a consolidated balance sheet
of the Company and its Subsidiaries has been filed with the Commission pursuant
to the "Commission Reports and Reports to Holders" covenant described below),
then the Company shall or shall cause the relevant Restricted Subsidiary to (i)
within 12 months after the date Net Cash Proceeds so received exceed 10% of
Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such
excess Net Cash Proceeds to permanently repay unsubordinated Indebtedness of the
Company, or any Restricted Subsidiary providing a Subsidiary Guarantee pursuant
to the "Limitation on Issuances of Guarantees by Restricted Subsidiaries"
covenant or Indebtedness of any other Restricted Subsidiary, in each case owing
to a Person other than the Company or any of its Restricted Subsidiaries or (B)
invest an equal amount, or the amount not so applied pursuant to clause (A) (or
enter into a definitive
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agreement committing to so invest within 12 months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar, related, ancillary or
complementary to the nature or type of the property and assets of, or the
businesses of, the Company and its Restricted Subsidiaries existing on the date
of such investment (as determined in good faith by the Board of Directors, whose
determination shall be conclusive if evidenced by a Board Resolution) and (ii)
apply (no later than the end of the 12-month period referred to in clause (i)
immediately above) such excess Net Cash Proceeds (to the extent not applied
pursuant to clause (i)) as provided in the following paragraph of this
"Limitation on Asset Sales" covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
12-month period as set forth in clause (i) of the preceding sentence and not
applied as so required by the end of such period shall constitute "Excess
Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate, an Offer to Purchase from the Holders on a pro rata basis, and an
offer to purchase any outstanding pari passu Indebtedness with similar
provisions requiring the Company to make an offer to purchase such Indebtedness,
in an aggregate principal amount of Notes and such pari passu Indebtedness equal
to (A) with respect to the Notes, the product of such Excess Proceeds multiplied
by a fraction, the numerator of which is the outstanding principal amount of the
Notes and the denominator of which is the sum of the outstanding principal
amount of the Notes and such pari passu Indebtedness (the product hereinafter
referred to as the "Note Amount"), and (B) with respect to the pari passu
Indebtedness, the excess of the Excess Proceeds over the Note Amount, at a
purchase price equal to 100% of the outstanding principal amount of the Notes or
such pari passu Indebtedness, as the case may be, on the relevant Payment Date
or such other date set forth in the documentation governing the pari passu
Indebtedness, plus, in each case, accrued interest (if any) to the Payment Date
or such other date set forth in the documentation governing the pari passu
Indebtedness. If the aggregate purchase price of the Notes and such pari passu
Indebtedness tendered pursuant to the Offer to Purchase is less than the Excess
Proceeds, the remaining Excess Proceeds will be available for use by the Company
for general corporate purposes. Upon the consummation of any Offer to Purchase
in accordance with the terms of the Indenture where the Excess Proceeds exceeds
the principal amount of the Notes, the amount of Net Cash Proceeds from Asset
Sales subject to any future Offer to Purchase shall be reset to zero.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of their outstanding principal amount, plus
accrued interest (if any), to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
Indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
The Company shall supply the Trustee and each Holder or shall supply to the
Trustee for forwarding to each Holder, without cost to such Holder, copies of
all reports and other information which it shall file from time to time with the
Commission.
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EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days;
provided that a failure to make any of the first six scheduled interest payments
on the Notes on the applicable Interest Payment Date will constitute an Event of
Default with no grace or cure period; (c) default in the performance or breach
of the provisions of the Indenture applicable to mergers, consolidations and
transfers of all or substantially all of the assets of the Company or the
failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or "Repurchase of Notes Upon a Change of Control"
covenants; (d) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indenture or under the Notes (other
than a default specified in clause (a), (b) or (c) above) and such default or
breach continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the Notes
then outstanding; (e) there occurs with respect to any other issue or issues of
Indebtedness of the Company or any Significant Subsidiary having an outstanding
principal amount of $5 million or more in the aggregate for all such issues of
all such Persons, whether such Indebtedness now exists or shall hereafter be
created, (I) an event of default that has caused the Holder thereof to declare
such Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 30 days of such acceleration and/or (II) the
failure to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or extended
within 30 days of such payment default; (f) any final judgment or order (not
covered by insurance) for the payment of money in excess of $5 million in the
aggregate for all such final judgments or orders against all such Persons
(treating any deductibles, self-insurance or retention as not so covered) shall
be rendered against the Company or any Significant Subsidiary and shall not be
paid or discharged, and there shall be any period of 30 consecutive days
following entry of the final judgment or order that causes the aggregate amount
for all such final judgments or orders outstanding and not paid or discharged
against all such Persons to exceed $5 million during which a stay of enforcement
of such final judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; (g) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (C) the
winding up or liquidation of the affairs of the Company or any Significant
Subsidiary and, in each case, such decree or order shall remain unstayed and in
effect for a period of 30 consecutive days; (h) the Company or any Significant
Subsidiary (A) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company or
any Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors; or (i) the Pledge Agreement shall cease
to be in full force and effect or enforceable in accordance with its terms.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes then outstanding by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on, the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the
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Holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(g) or (h) above occurs with respect to the Company, the principal of, premium,
if any, and accrued interest on, the Notes then outstanding shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder. The Holders of at least a majority in
principal amount of the outstanding Notes by written notice to the Company and
to the Trustee, may waive all past defaults and rescind and annul a declaration
of acceleration and its consequences if (i) all existing Events of Default,
other than the nonpayment of the principal of, premium, if any, and interest on,
the Notes that have become due solely by such declaration of acceleration, have
been cured or waived and (ii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. For information as to
the waiver of defaults, see "--Modification and Waiver" below.
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
The Indenture will require certain officers of the Company to certify, on
or before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant; provided that this clause (iv) shall
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not apply to (x) a consolidation, merger or sale of all (but not less than all)
of the assets of the Company if all Liens and Indebtedness of the Company or any
Person becoming the successor obligor on the Notes, as the case may be, and its
Restricted Subsidiaries outstanding immediately after such transaction would, if
Incurred at such time, have been permitted to be Incurred (and all such Liens
and Indebtedness, other than Liens and Indebtedness of the Company and its
Restricted Subsidiaries outstanding immediately prior to the transaction, shall
be deemed to have been Incurred) for all purposes of the Indenture or (y) a
consolidation, merger or sale of all or substantially all of the assets of the
Company if immediately after giving effect to such transaction on a pro forma
basis, the Company or any Person becoming the successor obligor of the Notes
shall have a Consolidated Leverage Ratio equal to or less than the Consolidated
Leverage Ratio of the Company immediately prior to such transaction; and (v) the
Company delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clauses (iii) and (iv)
above) and Opinion of Counsel, in each case stating that such consolidation,
merger or transfer and such supplemental indenture complies with this provision
and that all conditions precedent provided for herein relating to such
transaction have been complied with; provided, however, that clauses (iii) and
(iv) above do not apply if, in the good faith determination of the Board of
Directors, whose determination shall be conclusive if evidenced by a Board
Resolution, the principal purpose of such transaction is to change the state or
form of incorporation of the Company; and provided further that any such
transaction shall not have as one of its purposes the evasion of the foregoing
limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, cash or
Temporary Cash Investments and/or U.S. Government Obligations that through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the Notes on the Stated Maturity of
such payments in accordance with the terms of the Indenture and the Notes, (B)
the Company has delivered to the Trustee (i) either (x) an Opinion of Counsel to
the effect that Holders will not recognize income, gain or loss for federal
income tax purposes as a result of the Company's exercise of its option under
this "Defeasance" provision and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred, which Opinion
of Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the Closing Date such that a ruling is
no longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving
effect to such deposit on a pro forma basis, no Event of Default, or event that
after the giving of notice or lapse of time or both would become an Event of
Default, shall have occurred and be continuing on the date of such deposit or
during the period ending on the 123rd day after the date of such deposit, and
such deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound and (D) if at such time the Notes are listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of Counsel to the
effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge; provided that if simultaneously with the deposit of
the cash or Temporary Cash Investments and/or U.S. Government Obligations
referred to in (A) above, the Company has caused an irrevocable, transferrable,
standby letter of credit to be issued by a bank with capital and surplus
exceeding the principal amount of the Notes then outstanding, expiring not
earlier than 180 days
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from its issuance, in favor of the Trustee, which permits the Trustee to draw an
amount equal to the principal, premium, if any, and accrued interest on the
Notes through the expiry date of the letter of credit, then the Company will be
deemed to have paid and discharged any and all obligations in respect of the
Notes on the date of the deposit and issuance of the letter of credit.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clause (c) under "Events of Default" with respect to such clauses (iii) and (iv)
under "Consolidation, Merger and Sale of Assets," clause (d) under "Events of
Default" with respect to such other covenants and clauses (c), (d), (e), (f) and
(g) under "Events of Default" shall be deemed not to be Events of Default upon,
among other things, the deposit with the Trustee, in trust, of cash or Temporary
Cash Investments and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, the satisfaction of
the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of cash or
Temporary Cash Investments and/or U.S. Government Obligations on deposit with
the Trustee will be sufficient to pay amounts due on the Notes at the time of
their Stated Maturity but may not be sufficient to pay amounts due on the Notes
at the time of the acceleration resulting from such Event of Default. However,
the Company will remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal of, premium, if any, or
interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS OR EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any Director, officer, employee or controlling person of
the Company or of any successor Person thereof. Each Holder, by accepting the
Notes, waives and releases all such liability.
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CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred and
is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and the provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that, if it acquires any
conflicting interest, it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Notes are issued in definitive, fully
registered form without interest coupons. Exchange Notes issued in exchange for
Private Notes sold in reliance on Rule 144A under the Securities Act will be
evidenced by one or more Global Notes in definitive, fully registered form
without interest coupons and will be deposited with the Trustee as custodian
for, and registered in the name of, the nominee of DTC in New York., New York.
Exchange Notes issued in exchange for Private Notes sold in offshore
transactions pursuant to Regulation S under the Securities Act, will be
evidenced by one or more Global Notes which will be deposited with the Trustee
as custodian for, and registered in the name of a nominee of, DTC for the
accounts of Euroclear and Cedel Bank.
Global Notes transferred to Institutional Accredited Investors who are not
Qualified Institutional Buyers ("Non-Global Purchasers") will be in definitive,
fully registered form without interest coupons ("Certificated Notes"). Upon the
transfer of Certificated Notes to a Qualified Institutional Buyer or in
accordance with Regulation S under the Securities Act, such Certificated Notes
will, unless the relevant Global Note has previously been exchanged in whole for
Certificated Notes, be exchanged for an interest in a Global Note.
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Qualified Institutional Buyers may hold their
interests in a Restricted Global Note directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
Investors may hold their interests in a Regulation S Global Note directly
through Cedel Bank or Euroclear, if they are participants in such systems, or
indirectly through organizations that are participants in such systems. Cedel
Bank and Euroclear will hold interests in the Regulation S Global Notes on
behalf of their participants through DTC.
So long as DTC, or its nominee, is the registered owner or Holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or Holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture and, if applicable, those of Euroclear and Cedel Bank.
Payments of the principal of, and premium if any, and interest on, a Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. Neither the Company, the Trustee nor any Paying Agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
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The Company expects that DTC or its nominee, upon receipt of any payment of
principal of, premium, if any, or interest on a Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Note
held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel Bank will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
The Company expects that DTC will take any action permitted to be taken by
a Holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in a Global Note is credited and only in respect of such portion
of the aggregate principal amount of Notes as to which such participant or
participants has or have given such direction. However, if there is an Event of
Default under the Notes, DTC will exchange the applicable Global Note for
Certificated Notes, which it will distribute to its participants and which may
be legended as set forth below under the heading "Transfer Restrictions."
The Company understands that DTC is: a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in a Global Note among
participants of DTC, Euroclear and Cedel Bank, respectively, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the Trustee
will have any responsibility for the performance by DTC, Euroclear or Cedel Bank
or their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated Notes in exchange for the
Global Notes. Holders of an interest in a Global Note may receive Certificated
Notes in accordance with DTC's rules and procedures in addition to those
provided for under the Indenture.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Bryan Cave LLP, special counsel to the Company, has advised the Company
that the following discussion as to legal matters is its opinion as to the
material United States federal income tax consequences of an exchange of Private
Notes for Exchange Notes and the ownership of Notes, as well as certain
potential federal income tax consequences to the Company of the Notes. The
opinion of Bryan Cave LLP is based on current provisions of the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), applicable final, temporary and
proposed Treasury Regulations ("Treasury Regulations"), judicial authority, and
current administrative rulings and pronouncements of the Internal Revenue
Service (the "IRS") and is conditioned upon certain facts concerning the
Company, all as of the date hereof. There can be no assurance that the IRS will
not take a contrary view, and no ruling from the IRS has been or will be sought
by the Company. Legislative, judicial, or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conclusions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to Holders of the Notes.
The opinion does not purport to deal with all aspects of taxation that may
be relevant to particular Holders of the Notes in light of their personal
investment or tax circumstances, or to certain types of investors (including
individual retirement accounts and other tax deferred accounts, insurance
companies, financial institutions, broker-dealers, direct or indirect equity
owners in the Company or tax-exempt organizations) subject to special treatment
under the U.S. federal income tax laws. This discussion does not deal with
special tax situations, such as the holding of the Notes as part of a straddle
with other investments, or situations in which the functional currency of a
Holder of Notes is not the U.S. dollar. In addition, this discussion deals only
with Notes held as capital assets within the meaning of Section 1221 of the
Code.
For purposes of this discussion, the term "U.S. Holder" means an individual
citizen or resident of the U.S., a corporation, limited liability company or
partnership created or organized in the U.S. or under the law of the U.S. or any
state thereof (including the District of Columbia), an estate the income of
which is includible in gross income for U.S. federal income tax purposes
regardless of its source, or a trust if a court within the U.S. is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons has the authority to control all substantial decisions of the
trust (or, under certain circumstances, a trust the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source). The term "Non-U.S. Holder" means any person other than a U.S.
Holder.
THE TAX TREATMENT MAY VARY DEPENDING UPON A HOLDER'S PARTICULAR SITUATION.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF PURCHASING, EXCHANGING, HOLDING AND DISPOSING OF THE
NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX
LAWS.
THE EXCHANGE
The exchange of Private Notes for Exchange Notes should not be treated as a
taxable transaction for United States federal income tax purposes because the
Exchange Notes will not be considered to differ materially in kind or extent
from the Private Notes. Rather, the Exchange Notes received by a Holder of
Private Notes should be treated as a continuation of the Private Notes in the
hands of such Holder. As a result, there should be no material federal income
tax consequences to Holders exchanging Private Notes for Exchange Notes.
PERSONS CONSIDERING THE EXCHANGE OF THE PRIVATE NOTES FOR EXCHANGE NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL INCOME TAX
CONSEQUENCES AND THE TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION OF SUCH AN EXCHANGE.
THE NOTES
Under applicable authorities, the Notes should be treated as indebtedness
for U.S. federal income tax purposes. If the Notes are treated as equity, the
Company may be treated as a publicly traded partnership and,
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as such, be subject to U.S. federal income tax as a corporation. In such event,
the amount of any actual or constructive distributions on any such Note would
first be taxable to the Holder as dividend income to the extent, if any, of the
Company's current and accumulated earnings and profits, and next would be
treated as a nontaxable return of capital to the extent of the Holder's tax
basis in the Note, with any remaining amount treated as gain from the sale of a
Note. Further, payments on the Notes treated as equity to Non-U.S. Holders would
not be eligible for the portfolio interest exception from U.S. withholding tax,
and dividends thereon would be subject to United States withholding tax at a
flat rate of 30% (or lower applicable treaty rate) and gain from their sale or
other taxable disposition might also be subject to U.S. tax. In addition, in the
event of equity treatment, the Company would not be entitled to deduct interest
on the Notes for U.S. federal income tax purposes. Finally, the liability of the
Company for corporate income tax, if the Notes were treated as equity, could
affect the cash flow of the Company and, thus, its ability to meet its
obligations on the Notes. The remainder of this discussion assumes that the
Notes will constitute indebtedness of the Company for such tax purposes.
U.S. HOLDERS
INTEREST
Interest on the Notes generally will be includable in the income of a U.S.
Holder as ordinary income at the time such interest is received or accrued, in
accordance with such U.S. Holder's method of accounting for United States
federal income tax purposes. The Company expects that the Notes will not be
issued with original issue discount within the meaning of the Code.
SALE OR OTHER DISPOSITION
In general, upon the sale, exchange or redemption of a Note, a U.S. Holder
will generally recognize taxable gain or loss equal to the difference between
(i) the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (not including any amount
attributable to accrued but unpaid interest) and (ii) the U.S. Holder's adjusted
tax basis in the Note. A U.S. Holder's adjusted tax basis in a Note generally
will be equal to the cost of the Note to such U.S. Holder.
Gain or loss realized on the sale, exchange or redemption of a Note
generally will be capital gain or loss. Under recently enacted legislation, in
general, long-term capital gains recognized by an individual U.S. Holder will be
subject to a maximum federal income tax rate of 20% in respect of property held
for more than one year, effective for taxable years ending after December 31,
1997. The distinction between capital gain or loss and ordinary income or loss
is also relevant for purposes of, among other things, limitations with respect
to the deductibility of capital losses.
An exchange of Notes pursuant to the Exchange Offer should not be
considered a taxable event.
NON-U.S. HOLDERS
In general, subject to the discussion below concerning backup withholding:
(a) payments of principal or interest on the Notes by the Company or
any paying agent to a beneficial owner of a Note that is a Non-U.S. Holder
will not be subject to U.S. federal withholding tax, provided that, in the
case of interest, (i) such Non-U.S. Holder does not own, actually or
constructively, a 10% or more interest in the capital or profits of the
Company, within the meaning of Section 871(h)(3) of the Code, (ii) such
Non-U.S. Holder is not a "controlled foreign corporation" (within the
meaning of the Code) that is related, directly or indirectly, to the
Company through stock ownership, (iii) such Non-U.S. Holder is not a bank
receiving interest described in Section 881(c)(3)(A) of the Code, and (iv)
the certification requirements under Section 871(h) or Section 881(c) of
the Code and Treasury Regulations thereunder (summarized below) are
satisfied;
(b) a Non-U.S. Holder of a Note will not be subject to U.S. federal
income tax on gains realized on the sale, exchange or other disposition of
such Note, unless (i) such Non-U.S. Holder is an individual who is present
in the U.S. for 183 days or more in the taxable year of such sale, exchange
or other
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disposition, and certain conditions are met, (ii) such gain is effectively
connected with the conduct by the Non-U.S. Holder of a trade or business in
the U.S. and, if certain tax treaties apply, is attributable to a U.S.
permanent establishment maintained by the Non-U.S. Holder, or (iii) the
Non-U.S. Holder is subject to Code provisions applicable to certain U.S.
expatriates;
(c) a Note held by an individual who is not a citizen or resident of
the U.S. at the time of his death will not be subject to U.S. federal
estate tax as a result of such individual's death, provided that, at the
time of such individual's death, the individual does not own, actually or
constructively, a 10% or more interest in the capital or profits of the
Company and payments with respect to such Note would not have been
effectively connected with the conduct by such individual of a trade or
business in the U.S.
To satisfy the certification requirements referred to in (a)(iv) above,
Sections 871(h) and 881(c) of the Code and currently effective Treasury
Regulations thereunder require that either (i) the beneficial owner of a Note
must certify, under penalties of perjury, to the Company or its paying agent, as
the case may be, that such owner is a Non-U.S. Holder and must provide such
owner's name and address, and U.S. taxpayer identification number ("TIN"), if
any, or (ii) a securities clearing organization, bank or other financial
institution that holds customer's securities in the ordinary course of its trade
or business (a "Financial Institution") and holds the Note on behalf of the
beneficial owner thereof must certify, under penalties of perjury, to the
Company or its paying agent, as the case may be, that such certificate has been
received from the beneficial owner and must furnish the payor with a copy
thereof. A certificate described in this paragraph is effective only with
respect to payments of interest made to the certifying Non-U.S. Holder after
delivery of the certificate in the calendar year of its delivery and the two
immediately succeeding calendar years. Under temporary Treasury Regulations,
such requirement will be fulfilled if the beneficial owner of a Note certifies
on IRS Form W-8, under penalties of perjury, that it is a Non-U.S. Holder and
provides its name and address, and any Financial Institution holding the Note on
behalf of the beneficial owner files a statement with the withholding agent to
the effect that it has received such a statement from the beneficial owner (and
furnishes the withholding agent with a copy thereof).
Treasury Regulations released on October 6, 1997, as modified by Notice
98-16 dated March 27, 1998 (the "New Regulations"), and effective for payments
made after December 31, 1999, subject to transition rules, provide alternative
methods for satisfying the certification requirements described above. The New
Regulations require, in the case of Notes held by a foreign partnership, that
(i) the certification be provided by the partners rather than by the foreign
partnership and (ii) the partnership provide certain information, including a
U.S. taxpayer identification number. A look-through rule would apply in the case
of tiered partnerships.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
U.S. and if interest on the Note, or gain realized on the sale, exchange or
other disposition of the Note, is effectively connected with the conduct of such
trade or business and, if certain tax treaties apply, is attributable to a U.S.
permanent establishment maintained by the Non-U.S. Holder in the U.S., the
Non-U.S. Holder, although exempt from U.S. federal withholding tax (provided
that the certification requirements discussed in the next sentence are met),
will generally be subject to regular U.S. federal income tax on such interest or
gain in the same manner as if it were a U.S. Holder. In lieu of the certificate
described above, such a Non-U.S. Holder will be required, under currently
effective Treasury Regulations, to provide the Company with a properly executed
IRS Form 4224 in order to claim an exemption from withholding tax. In addition,
if such Non-U.S. Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30% (or such lower rate provided by an applicable treaty)
of its effectively connected earnings and profits for the taxable year, subject
to certain adjustments. For purposes of the branch profits tax, interest on a
Note and any gain recognized on the sale, exchange or other disposition of a
Note will be included in the earnings and profits of such Non-U.S. Holder if
such interest or gain is effectively connected with the conduct of a trade or
business in the U.S. In general, for payments made after December 31, 1999,
under the New Regulations a Non-U.S. Holder with effectively connected income
must provide to the Company, either directly or through an intermediary, a valid
IRS Form W-8 to claim an exemption from withholding.
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Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of U.S. federal income tax at a rate of 31% may apply to
payments made in respect of a Note to a Holder that is not an "exempt recipient"
and that fails to provide certain identifying information (such as the Holder's
TIN) in the manner required. Generally, individuals are not exempt recipients,
whereas corporations and certain other entities are exempt recipients. Payments
made in respect of a Note must be reported to the IRS, unless the Holder is an
exempt recipient or otherwise establishes an exemption.
In the case of payments of interest on a Note to a Non-U.S. Holder,
Treasury Regulations provide that backup withholding and information reporting
will not apply to payments with respect to which either requisite certification
has been received or an exemption has otherwise been established (provided that
neither the Company nor a paying agent has actual knowledge that the Holder is a
U.S. Holder or that the conditions of any other exemption are not in fact
satisfied).
Payments of the proceeds of the sale of a Note to or through a foreign
office of a broker that is a U.S. person, a "controlled foreign corporation"
(within the meaning of the Code), 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 date of payment was effectively connected with
the conduct of a trade or business within the U.S., or (pursuant to the New
Regulations, for payments made after December 31, 1999) a foreign partnership
with certain U.S. connections, are currently subject to certain information
reporting requirements, unless the payee is an exempt recipient or such broker
has evidence in its records that the payee is a Non-U.S. Holder and has no
actual knowledge that such evidence is false and certain other conditions are
met. Under current Treasury Regulations, payments of the proceeds of a sale of a
Note to or through the U.S. office of a broker will be subject to information
reporting and backup withholding unless the payee certifies under penalties of
perjury as to his or her status as a Non-U.S. Holder and satisfies certain other
qualifications (and no agent or broker who is responsible for receiving or
reviewing such statement has actual knowledge that it is incorrect) and provides
his or her name and address or the payee otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
Holder of a Note will be allowed as a refund or credit against such Holder's
U.S. federal income tax, provided that the required information is furnished to
the IRS.
In general, the New Regulations do not significantly alter the current
substantive withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the New
Regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. A Holder of a Note should consult with its tax
advisor regarding the application of the backup withholding rules to its
particular situation, the availability of an exemption therefrom, the procedure
for obtaining such an exemption, if available, and the impact of the New
Regulations on payments made with respect to Notes after December 31, 1999.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES IN LIGHT OF
ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. HOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
PURCHASE, EXCHANGE, OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN UNITED STATES OR OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of any Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer for its
own account as a result of market-making or other trading activities. Each such
broker-dealer that receives Exchange Notes for its own account in exchange for
such Private Notes pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Company has agreed that, for a period of up to 90 days after the Expiration
Date, it will make this Prospectus, as amended or supplemented, available to any
such broker-dealer that requests copies of this Prospectus in the Letter of
Transmittal for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions or through the writing of options on the Exchange Notes,
or a combination of such methods of resale, at market prices prevailing at the
time of resale or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer in exchange for Private Notes acquired by such broker-dealer as a result
of market-making or other trading activities and any broker-dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the Holders of Private Notes (including any broker-dealers), and
certain parties related to such Holders, against certain liabilities, including
liabilities under the Securities Act.
VALIDITY OF THE EXCHANGE NOTES
The validity of the Exchange Notes will be passed upon for the Company by
Bryan Cave LLP, St. Louis, Missouri.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The consolidated balance sheets of US Xchange, L.L.C. and subsidiaries as
of December 31, 1997 and 1996 and the related consolidated statements of
operations, members' deficit and cash flows for the year ended December 31, 1997
and the period from August 5, 1996 to December 31, 1996 have been audited by BDO
Seidman, LLP, independent certified public accountants, as set forth in their
report appearing elsewhere herein, and is included in reliance upon such report
given upon the authority of said firm as experts in auditing and accounting.
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GLOSSARY OF SELECTED TERMS
ACCESS CHARGES--The fees paid by long distance carriers to ILECs for
originating and terminating long distance calls on their local networks.
ACCESS TANDEMS--An interconnection point on an ILEC local network where
calls from central offices are aggregated for transmission to other central
offices and IXC facilities.
ADSL (ASYMMETRIC DIGITAL SUBSCRIBER LINE)--Technology currently being
deployed by RBOCs to increase the carrying capacity of their copper wire
networks to provide high speed Internet access, LAN interconnection and other
advanced data services. RBOCs can increase the speeds and capacity of these
networks by equipping them with high speed modems.
AIN (ADVANCED INTELLIGENT NETWORK)--A term indicating a network
architecture concept with three basic elements: (i) Signal Control Points, or
SCPs, which are computers that hold databases in which customer-specific
information is used by the network to route calls stored; (ii) Signal Switching
Points, or SSPs, which are digital telephone switches that can communicate with
SCPs and obtain customer-specific instructions as to how a call should be
completed; and (iii) Signal Transfer Points, or STPs, which are packet switches
that shuttle messages between SSPs and SCPs.
ATM (ASYNCHRONOUS TRANSFER MODE)--ATM is a high-speed data-packet switching
and transmission technology that allows the simultaneous transmission of voice,
data, and video over a single network. Information is organized into standard
53-byte cells, which allows ATM to be very efficient and to achieve high
throughput levels.
BACKBONE EXTENSIONS--Fiber optic connections to remote areas not within the
backbone ring network.
BANDWIDTH--The relative range of frequencies that can be passed without
distortion by a transmission medium. The amount of bandwidth determines the
information-carrying capability of the transmission medium, with large
bandwidths permitting increased transmission capacity.
BROADBAND--Broadband communications systems can transmit large quantities
of voice, data and video communications by way of digital or analog signals.
Examples of broadband communications systems include DS-3 fiber optic systems,
which can transmit at a rate of 45 megabits per second, or a broadcast
television station signal that transmits high resolution audio and video
signals. Broadband connectivity is also an essential element for interactive
multimedia applications.
CAP (COMPETITIVE ACCESS PROVIDER)--A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services. CAPs are the predecessor companies to the CLECs.
CENTRAL OFFICES--The switching centers or central switching facilities of
the ILECs.
CENTREX--Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the carrier's
premises and not at the premises of the customer. These features include direct
dialing within a given phone system, voice mail, direct dialing of incoming
calls, and automatic identification of outbound calls, among others. Carriers
with Centrex capabilities can provide these value-added services to a wide range
of customers who do not have the size or the funds to support their own on-site
PBX.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER)--A CAP that also provides
switched local telecommunications services.
COLLOCATION--The ability of a CLEC to connect to another LEC's central
office. Physical collocation describes the placing of network connection
equipment inside the LEC's central offices. Virtual collocation is an
alternative to physical collocation pursuant to which an LEC permits another LEC
to connect its network to its LEC's central offices on comparable terms, even
though the network connection equipment is not physically located inside the
ILEC's central offices.
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DEDICATED LINES--Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within an ILEC's public switched network).
DIALING PARITY--Allows customers to have 1+ and 0+ service no matter which
local or long distance carrier they choose. For example, when MCI Communications
Corporation first entered the long distance business, customers had to dial a
ten digit prefix before dialing the number they were calling.
DIGITAL--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a significant improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video and data.
DIVERSE ROUTING--A telecommunications network configuration in which
signals are transported simultaneously along two different paths so that if one
cable is cut, traffic can continue in the other direction without interruption
to its destination. The Company's fiber optic SONET ring networks generally
provide diverse routing.
DIVESTITURE--In 1982, the U.S. Department of Justice forced the breakup of
the old Bell telephone system. The divestiture of AT&T established seven
separate RBOCs and created two distinct segments of telecommunications service:
local and long distance. This laid the groundwork for intense competition in the
long distance industry, but essentially created seven separate regionally-based
local exchange service monopolies.
DOMINANT CARRIER--Carriers with the market power to raise prices, curtail
overall output or engage in predatory pricing.
DLP (DIGITAL LINE POWER)--A digital circuit that is powered from the
central office. DLP technologies permit the digital transmission over power
lines of Internet and data communications at higher speeds than are available in
ADSL or ISDN lines.
DS-0, DS-1, DS-3--Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits per
second. DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
DWDM (DENSE WAVELENGTH DIVISION MULTIPLEXING)--Equipment which expands the
carrying capacity of fiber optic networks by dividing the optical signal into
multiple colors or wavelengths. This enables carriers to expand the bandwidth of
their fiber optic networks without adding additional fibers.
FACILITIES-BASED CARRIER--A carrier that owns and operates its own
facilities and networks, as opposed to a non-facilities-based carrier that
aggregates or resells another provider's service. Resellers are present in every
segment of the telecommunications business and profit by buying excess capacity
of the facilities-based carriers at wholesale prices and selling it to the end
user at retail prices. Companies that lease capacity and provide their own
switching and network management are commonly referred to as facilities-based.
FCC--The Federal Communications Commission, an administrative agency of the
U.S. government.
FEATURE GROUP--In switched access tariffs, a "feature group" denotes a
specific and uniform type and quality of local exchange access available to
IXCs, CLECs and other telecommunications companies. There are four levels of
feature groups that are distinguished on the basis of the type of switched
access connection and the transmission quality and range of access features for
originating and terminating traffic.
FIBER MILE--The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "Route Miles" below.
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FIBER OPTICS--Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and many environmental factors that affect copper wiring and
satellite transmission. Fiber optic technology involves sending laser light
pulses across glass strands in order to transmit digital information. A strand
of fiber-optic cable is as thick as a human hair yet generally has more capacity
than copper cable the size of a telephone pole.
FIBER-OPTIC RING NETWORK--A network ring configuration that is designed to
ensure complete redundancy. If one segment of the network is damaged or cut, the
traffic is simply re-routed and sent to its destination in the opposite
direction. The Company uses a "self-healing" optical fiber ring architecture
known as SONET. See the definition of "SONET" below.
FRAME RELAY--A high-speed, data-packet switching service used to transmit
data between computers. Frame relay supports data units of variable lengths at
access speeds ranging from 56 kilobits per second to 1.5 megabits per second.
This service is well-suited for connecting LANs, but is not presently
well-suited for voice and video applications due to the variable delays which
can occur. Frame relay was designed to operate at high speeds on modern fiber
optic networks.
ILECS (INCUMBENT LOCAL EXCHANGE CARRIERS)--ILECs connect end users
inter-LATA and also provide the local portion for most long distance calls. The
ILECs are required to serve all residential and business users within a
restricted geographic area defined as a LATA. The market for local exchange
services consists of a number of services and related charges that include (i)
basic dial tone and private line services; (ii) the local origination or
termination of long distinct telephone calls; and (iii) the variable portion of
charges received by the ILECs for long distance calls originating and
terminating within a LATA or for intra-LATA toll services. The local access
business, until recently, has remained the domain of the RBOCs and approximately
1,000 ILECs, including GTE.
INTER-LATA CALLS--Inter-LATA calls are calls that pass from one LATA to
another. Typically, these calls are referred to as long distance calls.
Historically, the ILECs were prohibited from providing Inter-LATA long distance
service.
INTERNET--A global collection of interconnected computer networks which use
a packet-switched transmission technology to transmit or provide access to
information.
INTRA-LATA CALLS--Intra-LATA calls, also known as short haul calls, are
those local calls that originate and terminate within the same LATA. Although
most states allow some form of Intra-LATA competition, dialing parity still does
not exist, and very little ILEC Intra-LATA revenue has been won by competitors
to ILECs.
IP (INTERNET PROTOCOL)--An efficient transmission technology used on the
Internet that breaks voice, data, fax and video communications into packets for
transport so that multiple interspersed data packets can be transmitted over a
single circuit at the same time. The typical packet circuit requires only 8
kilobits of transmission capacity, whereas a standard voice circuit requires 64
kilobits of capacity.
ISDN (INTEGRATED SERVICES DIGITAL NETWORK)--A complex networking concept
designed to provide a variety of voice, data and digital interface standards.
Incorporated into ISDN are many new enhanced services, such as high speed data
file transfer, desk top videoconferencing, telepublishing, telecommuting,
distance learning, remote collaboration, data network linking and home
information services.
ISP (INTERNET SERVICE PROVIDER)--A company that provides subscribers basic
access to the Internet, along with additional services that may include e-mail,
site hosting, web page development, and other Internet- related services, along
with technical support of these services.
IXC--Inter-exchange Carriers, usually referred to as long distance
providers. There are many facilities-based IXCs including AT&T, MCI WorldCom,
Sprint and Frontier, as well as many CLECs that are authorized for IXC service.
KILOBIT--One thousand bits of information.
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LANS (LOCAL AREA NETWORKS)--The interconnection of computers for the
purpose of sharing files, programs and various devices such as work stations,
printers and high-speed modems. LANs may include dedicated computers or file
servers that provide a centralized source of shared files and programs.
LATAS--The geographically defined Local Access and Transport Areas in which
ILECs are authorized to provide local exchange services and between which they
are prohibited from providing long distance services.
LOCAL EXCHANGE CARRIER OR LEC--Provider of local exchange services,
includes the RBOCs, GTE and independent companies such as the Company.
LOCAL LOOP--A circuit that connects an end user to the ILEC central office
within a LATA.
LMDS (LOCAL MULTIPOINT DISTRIBUTION SERVICE)--A high frequency wireless
service that delivers voice, data and other services via cellular-like towers
and roof top receivers that has bandwidth characteristics that are well suited
for voice, data and video transmission.
LONG DISTANCE CARRIERS OR IXCS (INTEREXCHANGE CARRIERS)--Long distance
carriers provide services between local exchanges on an interstate or intrastate
basis. A long distance carrier may offer services over its own or another
carrier's facilities. Major long distance carriers include AT&T, MCI WorldCom,
Sprint and Frontier, but may also include resellers of long distance capacity.
MEGABIT--One million bits of information.
MICROWAVE--Microwave is a wireless transmission platform that has been
widely used for long-haul transmission. Microwave has also been used on a
smaller scale for local loop bypass. An alternative to standard fixed microwave
can be found in the 38GHz spectrum, which is ideal for short-haul local loop
bypass applications. The use of 38GHz is attractive since 38GHz links have
capacity, reliability and operational characteristics comparable to fiber optic
connection and can be set up in a short amount of time at a fraction of the
cost.
NETWORK UNBUNDLING--Unbundling involves the opening up of the various
segments of an ILEC's network for use by other carriers who desire
interconnection. Network unbundling would ensure that fair, cost-based prices
are assigned to each unbundled network element. In an environment such as the
local loop where one group of companies has a clear monopoly on infrastructure,
unbundling is essential in order to ensure that CLECs can provide attractive
services and pricing to potential customers.
NUMBER PORTABILITY--The ability of an end user to change local exchange
carriers while retaining the same telephone number. If number portability does
not exist, customers will have to change phone numbers when they change local
exchange carriers. This is considered to be anti-competitive because customers
are reluctant to change numbers, since they may lose business or confuse those
people trying to call them. It is currently being ascertained whether or not
number portability is technologically and economically feasible, and over what
time frame it can be implemented.
OSS (OPERATIONS SUPPORT SYSTEMS)--The systems which are required to enter,
schedule, provision and track a customer's order from the period of sale to the
installation and testing of service and which include and interface with trouble
management, inventory, billing, collection and customer service systems.
PBX (A PRIVATE BRANCH EXCHANGE)--A switching system within an office
building which allows calls from outside to be routed directly to the individual
instead of through a central number. This PBX also allows for calling within an
office by way of four digit extensions. Centrex is a service which can simulate
this service from an outside switching source, thereby eliminating the need for
a large capital expenditure on a PBX.
PCS (PERSONAL COMMUNICATIONS SERVICE)--A new generation of digital,
two-way, micro-cellular, wireless communications services in the 1.8 to 2.2 GHz
bands that will allow telephony with seamless roaming, high voice reproduction
quality and low cost to the consumer relative to analog cellular. PCS will
eventually support a wide range of services including telephony, voice mail,
e-mail, data transfer, and faxing capabilities.
G-4
<PAGE> 106
PEERING--The commercial practice under which certain ISPs exchange each
other's traffic on the Internet without payment of reciprocal compensation.
Peering relationships involve direct connections between ISP networks, as well
as connections via the conventional Internet backbone at Network Access Points.
POPS (POINTS OF PRESENCE)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PRIVATE LINE--A private, dedicated telecommunications connection to
different locations (excluding long distance carrier POPs).
RBOCS (REGIONAL BELL OPERATING COMPANIES)--The local telephone companies
established by the Divestiture. The RBOCs were historically prohibited from
providing inter-LATA services and from manufacturing telecommunications
equipment.
RECIPROCAL COMPENSATION--The compensation of a terminating local carrier
(either an ILEC or a CLEC) by the originating carrier (either an ILEC or a CLEC)
for the termination of local calls on its network.
RESELLER--A carrier that does not own transmission facilities, but obtains
communications services from another carrier for resale to the public.
ROUTE MILES--The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map. See the
definition of "Fiber Miles" above.
SONET (SYNCHRONOUS OPTICAL NETWORK)--The electronics and network
architecture which enables transmission of voice, video and data (multimedia) at
very high speeds. This state-of-the-art, self-healing ring network offers
advantages over older linear networks in that a cut line or equipment failure
can be overcome by rerouting calls within the network. If the line is cut, the
traffic can be simply reversed and sent to its destination around the other side
of the ring.
SPECIAL ACCESS--The lease of private, dedicated telecommunications lines or
"circuits" along the network of an ILEC or a CLEC (such as the Company), which
lines or circuits run to and from a long distance carrier's POPs. Examples of
special access services are telecommunications lines running between POPs of a
single long distance carrier, from one long distance carrier POP to the POP of
another long distance carrier or from an end user to its long distance carrier
POP. Special access services do not require the use of switches.
SWITCH--A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers tell
the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
SWITCHED ACCESS TRANSPORT SERVICES--Transportation of switched traffic
along dedicated lines between the ILEC central offices and long distance carrier
POPs.
SWITCHED SERVICES--These services are the greatest source of revenue for
carriers. While some CLEC networks simply provide special access capacity for
other carriers, those carriers authorized to provide switched service are in a
position to generate significantly greater revenue.
TELECOMMUNICATIONS ACT--The Telecommunications Act of 1996.
TIER I MARKET--Metropolitan markets in the United States with a population
greater than two million.
TIER II MARKET--Metropolitan markets in the United States with populations
ranging from 750,000 to two million.
G-5
<PAGE> 107
TIER III MARKET--Metropolitan markets in the United States with populations
ranging from 100,000 to 750,000.
UNIVERSAL SERVICE--Universal Service is a public policy that states that
all households should have access to basic telephone service at affordable
rates. Thus far only large ILECs and RBOCs have been bound by Universal Service
requirements to provide basic dial tone services to all residences in their
operating region and have thus qualified for subsidies. It has not yet been
determined whether CLECs and other entrants into the local arena will be
obligated to provide Universal Service.
G-6
<PAGE> 108
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS:
Consolidated Balance Sheets, June 30, 1998 and December 31,
1997...................................................... F-2
Consolidated Statements of Operations, Six Months Ended June
30, 1998 and 1997......................................... F-3
Consolidated Statements of Members' Capital (Deficit), Six
Months Ended June 30, 1998 and 1997....................... F-4
Consolidated Statements of Cash Flows, Six Months Ended June
30, 1998 and 1997......................................... F-5
Notes to Unaudited Consolidated Financial Statements........ F-6
CONSOLIDATED AUDITED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants.......... F-8
Consolidated Balance Sheets, December 31, 1997 and 1996..... F-9
Consolidated Statements of Operations, Year Ended December
31, 1997 and Period From August 5, 1996 (date of
inception) to December 31, 1996........................... F-10
Consolidated Statements of Members' Deficit, Year Ended
December 31, 1997 and Period From August 5, 1996 (date of
inception) to December 31, 1996........................... F-11
Consolidated Statements of Cash Flows, Year Ended December
31, 1997 and Period From August 5, 1996 (date of
inception) to December 31, 1996........................... F-12
Notes to Consolidated Financial Statements.................. F-13
</TABLE>
F-1
<PAGE> 109
US XCHANGE, L.L.C.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $111,837,895 $ 100,590
Restricted investments.................................... 24,569,509 --
Accounts receivable, net.................................. 944,744 145,235
Other current assets...................................... 561,106 160,608
------------ -----------
TOTAL CURRENT ASSETS................................... 137,913,254 406,433
------------ -----------
Networks and Equipment
Leasehold improvements.................................... 2,169,594 488,403
Furniture and equipment................................... 9,060,083 2,843,204
Network systems in process................................ 50,996,623 24,825,481
------------ -----------
62,226,300 28,157,088
Less accumulated depreciation and amortization............ 1,262,097 189,347
------------ -----------
Net Networks and Equipment.................................. 60,964,203 27,967,741
------------ -----------
Other Assets................................................ 64,803,460 11,096
------------ -----------
Restricted investments.................................... 57,976,407 --
Debt issuance costs, net.................................. 6,790,878 --
Miscellaneous............................................. 36,175 11,096
------------ -----------
TOTAL OTHER ASSETS..................................... 64,803,460 11,096
------------ -----------
TOTAL ASSETS........................................... $263,680,917 $28,385,270
============ ===========
LIABILITIES AND MEMBERS' DEFICIT
Current Liabilities
Accounts payable.......................................... $ 18,943,889 $ 5,318,493
Accrued liabilities....................................... 1,152,294 205,166
Current maturities of long-term debt...................... 800,000 600,000
------------ -----------
TOTAL CURRENT LIABILITIES.............................. 20,896,183 6,123,659
Advances from affiliated company............................ -- 21,038,789
Long-Term Debt
15% Senior Notes.......................................... 200,000,000 --
Note payable, less current maturities..................... 3,000,000 2,189,000
------------ -----------
TOTAL LIABILITIES...................................... 223,896,183 29,351,448
------------ -----------
Members' Deficit
Capital contributions..................................... 60,000,000 5,000,000
Accumulated deficit....................................... (20,215,266) (5,966,178)
------------ -----------
TOTAL MEMBERS' CAPITAL (DEFICIT)....................... 39,784,734 (966,178)
------------ -----------
$263,680,917 $28,385,270
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-2
<PAGE> 110
US XCHANGE, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1998 1997 1998 1997
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES.............................. $ 1,984,403 $ -- $ 1,419,200 $ --
------------ --------- ----------- ---------
Costs and Expenses
Costs of communication services..... 4,007,146 13,059 2,877,172 13,059
Selling, general and
administrative................... 10,723,009 792,089 6,240,263 599,366
Depreciation and amortization....... 1,084,805 25,846 871,558 21,063
------------ --------- ----------- ---------
TOTAL COSTS AND EXPENSES......... 15,814,960 830,994 9,988,993 633,488
------------ --------- ----------- ---------
Loss from operations................ (13,830,557) (830,994) (8,569,793) (633,488)
------------ --------- ----------- ---------
Interest Expense...................... (630,196) -- (569,398) --
------------ --------- ----------- ---------
Interest Income....................... 211,665 -- 211,602 --
------------ --------- ----------- ---------
NET LOSS......................... $(14,249,088) $(830,994) $(8,927,589) $(633,488)
============ ========= =========== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-3
<PAGE> 111
US XCHANGE, L.L.C.
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
CAPITAL ACCUMULATED
CONTRIBUTIONS DEFICIT TOTAL
------------- ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1997.......................... $ 5,000,000 $ (5,966,178) $ (966,178)
Members' capital contributions.................... 55,000,000 -- 55,000,000
Net loss.......................................... -- (14,249,088) (14,249,088)
----------- ------------ ------------
Balance, June 30, 1998.............................. $60,000,000 $(20,215,266) $ 39,784,734
=========== ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-4
<PAGE> 112
US XCHANGE, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1998 1997
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (14,249,088) $ (830,994)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,084,805 25,846
Provision for doubtful accounts........................... 52,500 --
Interest earned on restricted investments................. (76,132) --
Changes in assets and liabilities:
Accounts receivable.................................... (852,009) --
Other current assets................................... (400,498) (55,699)
Accounts payable....................................... 13,625,396 173,014
Accrued liabilities.................................... 947,128 --
------------- -----------
NET CASH USED IN OPERATING ACTIVITIES.................. 132,102 (687,833)
------------- -----------
INVESTING ACTIVITIES
Purchase of restricted investments........................ (82,469,784) --
Purchase of networks and equipment........................ (34,069,212) (3,364,089)
Increase in other assets.................................. (23,224) (1,100)
------------- -----------
NET CASH USED IN INVESTING ACTIVITIES.................. (116,562,220) (3,365,189)
------------- -----------
FINANCING ACTIVITIES
Proceeds from long-term debt, net of issuance costs....... 194,406,212 --
Repayment of long-term debt............................... (200,000) --
Advances from affiliated company.......................... 61,211 4,059,444
Members' capital contributions............................ 33,900,000 --
------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 228,167,423 4,059,444
------------- -----------
Net Increase in Cash...................................... 111,737,305 6,422
Cash, beginning of period................................. 100,590 --
------------- -----------
Cash, end of period....................................... $ 111,837,895 $ 6,442
------------- -----------
Supplemental Disclosure of Cash Flow Information Interest
paid (net of amounts capitalized)...................... $ 130,379 $ --
============= ===========
</TABLE>
During the six months ended June 30, 1998, affiliated company advances of
$21,100,000 were converted to members' capital contributions.
See accompanying notes to unaudited consolidated financial statements.
F-5
<PAGE> 113
US XCHANGE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet of US Xchange, L.L.C. (the "Company") at
December 31, 1997 was obtained from the Company's audited balance sheet as of
that date. All other financial statements contained herein are unaudited and, in
the opinion of management, contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation. Operating
results for the six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. The
Company's accounting policies and certain other disclosures are set forth in the
notes to the Company's audited consolidated financial statements as of and for
the year ended December 31, 1997.
2. LONG-TERM DEBT
SENIOR NOTES
On June 25, 1998, the Company completed a sale of $200 million principal
amount of 15% Senior Notes due 2008 (the "Notes"). Of the total net proceeds of
approximately $193.1 million, the Company placed approximately $82.5 million,
representing funds, together with interest thereon, sufficient to pay the first
six semi-annual interest payments on the Notes, into an escrow account for the
benefit of the holders. Issuance costs approximating $6.9 million are being
amortized ratably over the term of the debt. Interest accrues on the Notes at
the rate of 15%, payable in cash semi-annually, on January 1 and July 1,
commencing January 1, 1999. The Notes are non-callable and mature on July 1,
2008.
The Notes are unsubordinated, unsecured senior indebtedness of the Company.
The Company's subsidiaries have no obligation to pay amounts due on the Notes
and do not guarantee the Notes. Therefore, the Notes are effectively
subordinated to all existing and future liabilities (including trade payables)
of the Company's subsidiaries.
The Notes are subject to certain covenants that, among other things,
restrict the ability of the Company and certain subsidiaries to incur additional
indebtedness, pay dividends or make distributions or redemptions in respect of
membership interests.
NOTES PAYABLE
On August 28, 1997, the Company entered into a credit facility agreement
with a local bank that provided for borrowings of up to $4,000,000 for the
acquisition of office furniture, equipment and computer software and for
construction costs related to leasehold improvements of office and switch site
locations. In March 1998 the credit facility was fully utilized and converted
into a term note payable in 60 equal monthly installments commencing April 1998.
Amounts borrowed bear interest at 1/2% under the bank's prime rate or 2% over
the bank's cost of funds, at the Company's option. The effective rate was 7.66%
at June 30, 1998. Specific assets and the guarantee of an affiliated company
owned by the Company's majority member secure all borrowings. The credit
facility also requires the affiliated company to maintain minimum debt to
tangible net worth and current ratio levels. At June 30, 1998, the affiliated
company was in compliance with the covenant requirements.
F-6
<PAGE> 114
US XCHANGE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The aggregate principal repayments of such borrowings, is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998 (6 months)............................................. $400,000
1999........................................................ 800,000
2000........................................................ 800,000
2001........................................................ 800,000
2002........................................................ 800,000
2003........................................................ 200,000
</TABLE>
3. RELATED PARTY TRANSACTIONS
Under an expense sharing agreement with an affiliated company, the Company
incurred $425,825 relating to management and administrative services for the six
months ended June 30, 1998.
In June 1997, the Company entered into a lease agreement with another
affiliated company owned by the majority member for aircraft transportation
services. Total travel costs incurred under this agreement during the three
months ended June 30, 1998 were $54,957.
4. LEASES
The Company leases administrative and sales office facilities, operating
sites and certain equipment under operating leases having initial or remaining
terms of more than one year. Certain of the Company's facility leases include
renewal options, and most leases include provisions for rent escalation to
reflect increased operating costs and/or require the Company to pay certain
maintenance and utility costs. Rental expense under these operating leases
during the three months ended June 30, 1998 and 1997 was $425,443 and $4,434,
respectively.
One of the administrative office facilities is leased from an affiliated
company owned by the Company's majority member. Rents paid under this lease
agreement during the three months ended June 30, 1998 and 1997 were $36,174 and
$8,598, respectively.
Future minimum lease payments under operating leases (assuming renewal of
lease terms in accordance with automatic or optional renewal provisions under
such leases, as applicable) at June 30, 1998, were as follows:
<TABLE>
<CAPTION>
YEAR ENDING OFFICE OPERATING SITE
DECEMBER 31, FACILITIES FACILITIES EQUIPMENT TOTAL
- ------------ ---------- -------------- --------- ----------
<S> <C> <C> <C> <C>
1998 (6 months)................................ $ 386,784 $ 215,452 $ 50,863 $ 653,099
1999........................................... 766,691 480,650 102,963 1,350,304
2000........................................... 769,646 489,570 65,240 1,324,456
2001........................................... 778,665 496,985 8,862 1,284,512
2002........................................... 786,874 523,611 -- 1,310,485
2003-2007...................................... 3,751,298 2,644,119 -- 6,395,417
2008-2012...................................... 2,769,406 2,849,466 -- 5,618,872
2013-2017...................................... 61,149 531,763 -- 593,912
========== ========== ======== ==========
</TABLE>
F-7
<PAGE> 115
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
US Xchange, LLC
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of US Xchange,
LLC and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, members' deficit and cash flows for the
year ended December 31, 1997 and the period from August 5, 1996 to December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of US Xchange,
LLC and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for the year ended December 31, 1997 and the
period from August 5, 1996 to December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ BDO SEIDMAN, LLP
Grand Rapids, Michigan
February 6, 1998
F-8
<PAGE> 116
US XCHANGE, L.L.C.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 100,590 $ --
Accounts receivable, net.................................. 145,235 --
Other current assets...................................... 160,608 25,675
----------- ---------
TOTAL CURRENT ASSETS................................... 406,433 25,675
----------- ---------
Networks and Equipment
Leasehold improvements.................................... 488,403 --
Furniture and equipment................................... 2,843,204 --
Network systems in process................................ 24,825,481 --
----------- ---------
28,157,088 --
Less accumulated depreciation and amortization............ 189,347 --
----------- ---------
Net Networks and Equipment.................................. 27,967,741 --
----------- ---------
Other Assets................................................ 11,096 --
----------- ---------
TOTAL ASSETS........................................... $28,385,270 $ 25,675
=========== =========
LIABILITIES AND MEMBERS' DEFICIT
Current Liabilities
Accounts payable.......................................... $ 5,318,493 $ --
Accrued liabilities....................................... 205,166 --
Current maturities of long-term debt...................... 600,000 --
----------- ---------
TOTAL CURRENT LIABILITIES.............................. 6,123,659 --
Advances From Affiliated Company............................ 21,038,789 163,485
Long-Term Debt, less current maturities..................... 2,189,000 --
----------- ---------
TOTAL LIABILITIES...................................... 29,351,448 163,485
----------- ---------
Members' Deficit
Capital contributions..................................... 5,000,000 --
Accumulated deficit....................................... (5,966,178) (137,810)
----------- ---------
TOTAL MEMBERS' DEFICIT................................. (966,178) (137,810)
----------- ---------
$28,385,270 $ 25,675
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 117
US XCHANGE, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 5, 1996
YEAR ENDED (DATE OF INCEPTION)
DECEMBER 31, TO DECEMBER 31,
1997 1996
------------ -------------------
<S> <C> <C>
REVENUES.................................................... $ 206,682 $ --
----------- ---------
Costs and Expenses
Cost of communication services............................ 749,662 --
Selling, general and administrative....................... 5,065,589 137,810
Depreciation and amortization............................. 189,347 --
----------- ---------
TOTAL COSTS AND EXPENSES............................... 6,004,598 137,810
----------- ---------
Loss from operations...................................... (5,797,916) (137,810)
----------- ---------
Interest Expense............................................ 30,452 --
----------- ---------
NET LOSS............................................... $(5,828,368) $(137,810)
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 118
US XCHANGE, L.L.C.
CONSOLIDATED STATEMENTS OF MEMBERS' DEFICIT
<TABLE>
<CAPTION>
CAPITAL ACCUMULATED
CONTRIBUTIONS DEFICIT TOTAL
------------- ----------- -----------
<S> <C> <C> <C>
Balance, August 5, 1996 (date of inception)............ $ -- $ -- $ --
Net loss for the period........................... -- (137,810) (137,810)
---------- ----------- -----------
Balance, December 31, 1996............................. -- (137,810) (137,810)
Members' capital contributions....................... 5,000,000 -- 5,000,000
Net loss for the year............................. -- (5,828,368) (5,828,368)
---------- ----------- -----------
Balance, December 31, 1997............................. $5,000,000 $(5,966,178) $ (966,178)
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 119
US XCHANGE, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 5, 1996
YEAR ENDED (DATE OF INCEPTION)
DECEMBER 31, TO DECEMBER 31,
1997 1996
------------ -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (5,828,368) $(137,810)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 189,347 --
Provision for doubtful accounts........................... 2,000 --
Changes in assets and liabilities:
Accounts receivable.................................... (147,235) --
Other current assets................................... (134,933) (25,675)
Accounts payable....................................... 5,318,493 --
Accrued liabilities.................................... 205,166 --
------------ ---------
NET CASH USED IN OPERATING ACTIVITIES.................. (395,530) (163,485)
------------ ---------
INVESTING ACTIVITIES
Purchase of networks and equipment.......................... (28,157,088) --
Increase in other assets.................................... (11,096) --
------------ ---------
NET CASH USED IN INVESTING ACTIVITIES.................. (28,168,184) --
------------ ---------
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 2,789,000 --
Advances from affiliated company............................ 20,875,304 163,485
Members' capital contributions.............................. 5,000,000 --
------------ ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 28,664,304 163,485
------------ ---------
NET INCREASE IN CASH................................... 100,590 --
Cash, beginning of period................................... -- --
------------ ---------
Cash, end of period......................................... $ 100,590 $ --
============ =========
Supplemental Disclosure of Cash Flow Information
Interest paid (net of amounts capitalized)................ $ 12,334 $ --
============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 120
US XCHANGE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
US Xchange, LLC and its wholly-owned subsidiaries (Company) are a provider
of competitive local telecommunications services in selected cities of the north
central area of the United States. The Company competes with incumbent local
exchange carriers by offering business and residential customers innovative and
customized products, superior customer service and lower costs through the use
of an advanced telecommunications systems network.
The Company was formed August 5, 1996 as a limited liability company. The
Company was in the development stage until one of its subsidiaries began
operations on July 1, 1997. The majority member provided equity capital of
$5,000,000 and an affiliated company of the majority member has provided
advances to fund the Company's operational needs.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of US Xchange,
LLC and its wholly-owned subsidiaries. All significant intercompany transactions
and balances has been eliminated in consolidation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value.
CASH AND EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivables.
The risk is limited due to the large number of entities comprising the Company's
customer base and the dispersion of those entities across many different
industries and geographical areas. Credit is extended based on evaluation of the
customer's financial condition and generally collateral is not required.
Anticipated credit losses are provided for in the consolidated financial
statements and have been within management's expectations.
NETWORKS AND EQUIPMENT
Networks and equipment are stated at cost. Leasehold improvements are
amortized using the straight-line method over their useful life or lease term,
whichever is shorter. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Telecommunications equipment................................ 5-8
Fiber optic cable........................................... 20
Leasehold improvements...................................... 10-15
Office furniture and equipment.............................. 5-7
</TABLE>
Costs directly related to the construction of network systems and
facilities, including interest, are capitalized. Interest expense capitalized in
connection with construction projects amounted to $2,103 in 1997.
F-13
<PAGE> 121
US XCHANGE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had firm commitments for capital expenditures of approximately
$17,400,000 at December 31, 1997.
REVENUE RECOGNITION
Revenues are recognized as services are provided to customers.
INCOME TAXES
The Company is treated as a partnership for U.S. federal income tax
purposes. Income and losses are reported on the respective tax returns of the
members, therefore, no provision for federal income taxes has been made in these
consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. LONG-TERM DEBT
On August 28, 1997, the Company entered into a credit facility agreement
with a local bank that provides borrowings at any time within a one-year period
of up to $4,000,000. At December 31, 1997, borrowings under this line totaled
$2,789,000. Borrowings are to be used for the acquisition of office furniture,
equipment and computer software and for construction costs related to leasehold
improvements of office and switch site locations. Amounts borrowed bear interest
at 1/2% under the bank's prime rate or 2% over the bank's cost of funds, at the
Company's option. The effective rate was 8% at December 31, 1997. Terms of the
agreement provide that borrowings will mature in not more than 60 equal monthly
installments following conversion into a term note payable. The Company intends
to convert all borrowings under the credit facility agreement into a term note
payable during March 1998. Specific assets and the guarantee of an affiliated
company owned by the Company's majority member secure all borrowings. The credit
facility also provides that the affiliated company maintains minimum debt to
tangible net worth and current ratio levels. At December 31, 1997, the
affiliated company was in compliance with the covenant requirements.
The aggregate principal repayments of long-term debt over the next five
years assuming the full capacity under the line is borrowed by March 1998, is as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998........................................................ $600,000
1999........................................................ 800,000
2000........................................................ 800,000
2001........................................................ 800,000
2002........................................................ 800,000
</TABLE>
3. RELATED PARTY TRANSACTIONS
Since its inception, the Company has received $21,038,790 from an
affiliated company owned by the majority member for the acquisition of capital
assets and funding of operating costs. No repayment terms have been specified
for amounts advanced. Included in the above amount is $257,474 relating to
management and administrative services provided by the affiliated company under
an Expense Sharing Agreement. The Company is billed for its pro rata share of
employee compensation costs and facilities expenses.
F-14
<PAGE> 122
US XCHANGE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1997, the Company entered into a lease agreement with another
affiliated company owned by the majority member for aircraft transportation
services. Total travel costs incurred under this agreement for 1997 was $69,083.
4. EMPLOYEE BENEFIT PLAN
In May 1997, the Company established a 401(k) plan which covers
substantially all employees. Employees who are 21 years of age or older are
eligible to participate in the 401(k) plan upon completion of three months of
service, at which time they may voluntarily contribute a percentage of
compensation. Participants are eligible to receive Company matching
contributions after completion of 12 months of service. The Company will match
50% of the participant's contribution up to a maximum of 3% of such
participant's eligible annual compensation. Matching contributions vest to the
participant over a five-year period. The Company was not required to make a
contribution to the plan for 1997.
5. LEASES
The Company leases administrative and sales office facilities, operating
sites and certain equipment under operating leases having initial or remaining
terms of more than one year. Certain of the Company's facility leases include
renewal options, and most leases include provisions for rent escalation to
reflect increased operating costs and/or require the Company to pay certain
maintenance and utility costs. Rental expense under these operating leases was
$83,459 in 1997.
One of the administrative office facilities is leased from an affiliated
company owned by the Company's majority member. Rents paid under this lease
agreement during 1997 amounted to $25,000.
Future minimum lease payments under operating leases (assuming renewal of
lease terms in accordance with automatic or optional renewal provisions under
such leases, as applicable) at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
YEAR ENDING OFFICE OPERATING SITE
DECEMBER 31, FACILITIES FACILITIES EQUIPMENT TOTAL
------------ ---------- -------------- --------- ----------
<S> <C> <C> <C> <C>
1998........................................... $ 372,450 $ 160,648 $67,716 $ 600,814
1999........................................... 422,548 224,600 68,316 715,464
2000........................................... 423,903 228,539 33,832 686,274
2001........................................... 429,722 230,792 600 661,114
2002........................................... 436,331 233,037 -- 669,368
2003-2007...................................... 1,968,186 1,190,324 -- 3,158,510
2008-2012...................................... 1,229,094 1,199,705 -- 2,428,799
2013-2017...................................... 15,954 60,980 -- 76,934
========== ========== ======= ==========
</TABLE>
F-15
<PAGE> 123
[NETWORK ARCHITECTURE CHART OMITTED]
<PAGE> 124
---------------------------------------------------------------
---------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY OTHER THAN THE EXCHANGE NOTES OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL TO, OR THE SOLICITATION OF ANY OFFER TO BUY FROM,
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NETHER THE DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HERE IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary....................................... 6
Risk Factors.................................. 15
Use of Proceeds............................... 28
Capitalization................................ 29
Selected Consolidated Financial Data.......... 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 32
The Exchange Offer............................ 37
Business...................................... 44
Management.................................... 63
Principal Equity Holder....................... 66
Certain Relationships and Related
Transactions................................ 66
Description of Existing Indebtedness.......... 67
Description of the Notes...................... 68
Certain United States Federal Income Tax
Considerations.............................. 96
Plan of Distribution.......................... 100
Validity of the Exchange Notes................ 100
Independent Certified Public Accountants...... 100
Glossary of Selected Terms.................... G-1
Index to Consolidated Financial Statements.... F-1
</TABLE>
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE
EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
[USXCHANGE LOGO]
OFFER TO EXCHANGE
15% SENIOR NOTES DUE
JULY 1, 2008
FOR ALL OUTSTANDING
15% SENIOR NOTES DUE
JULY 1, 2008
US XCHANGE, L.L.C.
, 1998
---------------------------------------------------------------
---------------------------------------------------------------
<PAGE> 125
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 4408 of the Michigan Limited Liability Company Act (the "MLLCA")
provides that a limited liability company may indemnify and hold harmless a
manager from and against any and all losses, expenses, claims, and demands
sustained by reason of any acts or omissions or alleged acts or omissions as a
manager, including judgments, settlements, penalties, fines, or expenses
incurred in a proceeding to which the person is a party or threatened to be made
a party because he or she is or was a manager, to the extent provided for in an
operating agreement or in a contract with the person, or to the fullest extent
permitted by agency law subject to any restriction in an operating agreement or
contract, except that the company may not indemnify any person for liability for
the receipt of a financial benefit to which the manager is not entitled, for
voting for or assenting to a distribution to members in violation of the limited
liability company's operating agreement or the MLLCA or for a knowing violation
of law. The company may purchase insurance on behalf of any manager entitled to
indemnification by the company against any liability asserted against or
incurred by him or her in such capacity or arising out of his or her status as a
manager, whether or not the company could indemnify him or her against
liability.
The Operating Agreement of the Company provides that the Company shall
indemnify any member of the Company and may indemnify any employee or other
agent of the Company, 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, and whether formal or
informal, other than an action by or in the right of the Company, by reason of
the fact that the person is or was a member, employee or agent of the Company,
against expenses (including attorney's fees), judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection therewith, if such person acted in good faith, with the care any
ordinarily prudent person in a like position would exercise under similar
circumstances, and in a manner such person reasonably believed to be in the best
interests of the Company, and, in connection with any criminal action or
proceeding, had no reasonable cause to believe that such person's conduct was
unlawful. A person who is successful on the merits or otherwise in any suit or
matter, shall be indemnified. The determination and evaluation that the person
to be indemnified has met the applicable standard of conduct required shall be
made by a majority vote of the members who were not parties to such action, suit
or proceeding.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See Index to Exhibits.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate
II-1
<PAGE> 126
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein and the offering of such securities at this time shall be deemed to
be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 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.
(c) The undersigned Registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim of indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-2
<PAGE> 127
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Grand Rapids, State of
Michigan, on September 29, 1998.
US XCHANGE, L.L.C.
By: /s/ RICHARD POSTMA
------------------------------------
Richard Postma
Co-Chairman and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard Postma, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments (including post-effective amendments) to this registration
statement and any other documents and instruments incidental thereto, and any
registration statement filed pursuant to Rule 462 under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, to all intents and purposes as he might or could do in
person, hereby ratifying and confirming everything that said attorney-in-fact
and agent, or his substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RONALD H. VANDERPOL Co-Chairman and Member September 29, 1998
- ---------------------------------------------
Ronald H. VanderPol
/s/ RICHARD POSTMA Co-Chairman and Member (Chief September 29, 1998
- --------------------------------------------- Executive Officer)
Richard Postma
/s/ DONALD OFFRINGA Vice President of Finance September 29, 1998
- --------------------------------------------- (Chief Financial Officer and
Donald Offringa Principal Accounting Officer)
</TABLE>
II-3
<PAGE> 128
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1 Articles of Organization of the Company
3.2 Operating Agreement of the Company dated as of August 1,
1996
4.1 Form of Exchange Note
4.2 Registration Rights Agreement dated as of June 25, 1998
between the Company and Morgan Stanley & Co. Incorporated
4.3 Indenture dated as of June 25, 1998 between the Company and
The Bank of New York, as Trustee
4.4 Collateral Pledge and Security Agreement dated as of June
25, 1998 among the Company, as Pledgor, and The Bank of New
York, as Trustee and Collateral Agent
4.5 The Company has not filed certain instruments with respect
to long-term debt since the total amount of securities
authorized thereunder does not exceed 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company agrees to furnish a copy of any such
agreement to the Commission upon request.
5.1 Opinion of Bryan Cave LLP regarding the validity of the
Exchange Notes
8.1 Tax Opinion of Bryan Cave LLP (included in Exhibit 5.1)
10.1 Expense Sharing Agreement dated February 1, 1997 between the
Company and RVP Development Corporation
10.2 Employment Agreement dated March 3, 1997 between the Company
and Lee Thibaudeau
10.3 Employment Agreement dated February 22, 1997 between the
Company and Daniel Fabry
10.4 Employment Agreement dated March 29, 1997 between the
Company and Rick G. Pigeon
12.1 Statement re Computation of Ratio of Deficiency of Earnings
to Fixed Charges
21.1 List of Subsidiaries
23.1 Consent of Bryan Cave LLP (included in Exhibit 5.1)
23.2 Consent of BDO Seidman, LLP
24.1 Power of Attorney (included on signature page)
25.1 Statement of Eligibility and Qualification of Form T-1 of
The Bank of New York, as Trustee
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and other Nominees
99.4 Form of Letter to Clients of Brokers, Dealers, Commercial
Banks, Trust Companies and other Nominees
99.5 Form of Exchange Agent Agreement
</TABLE>
II-4
<PAGE> 1
EXHIBIT 3.1
- ------------------------------------------------------------------------------
STATE OF MICHIGAN
DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU
LANSING, MICHIGAN
- ------------------------------------------------------------------------------
Date Received (FOR BUREAU USE ONLY)
- -----------------------------------------------------------------------------
- ------------------------------------------
- ------------------------------------------
- ----------------------------------------------------------------------
Name
Jeffrey G. York
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Address
800 Calder Plaza Building
- ----------------------------------------------------------------------
City State Zip Code
Grand Rapids, MI 49503
- -----------------------------------------------------------------------------
EFFECTIVE DATE:
DOCUMENT WILL BE RETURNED TO THE NAME AND ADDRESS YOU ENTER ABOVE
ARTICLES OF ORGANIZATION
For use by Domestic Limited
Liability Companies
Pursuant to the provisions of Act 23, Public Acts of 1993, the
undersigned execute the following Articles:
ARTICLE I
The name of the limited liability company is:
US XCHANGE, L.L.C.
ARTICLE II
The purpose or purposes for which the limited liability
company is formed is to engage in any activity within the purposes for which a
limited liability company may
<PAGE> 2
be formed under the Limited Liability Company Act of Michigan.
ARTICLE III
The maximum duration of the limited liability company is until
December 31, 2030.
ARTICLE IV
1. The street address and mailing address of the registered office is 250
Monroe, N.W., Suite 800, Grand Rapids, Michigan 49503.
2. The name of the resident agent at the registered office is Richard Postma.
Signed this 1st day of August, 1996
/s/ Jeffrey G. York
-----------------------------
Jeffrey G. York
/s/ Marcia A. Streeter
-----------------------------
Marcia A. Streeter
Name of Person or Organization Remitting Fees: Miller, Johnson, Snell &
Cummiskey, P.L.C.
Preparer's Name and Business Telephone Number: Jeffrey G. York; (616) 459-8311
2
<PAGE> 3
INFORMATION AND INSTRUCTIONS:
1. Submit one original of this document. Upon filing, the document will be
added to the records of the Corporation, Securities and Land
Development Bureau. The original will be returned to the address you
enter in the box on the front as evidence of filing.
Since this document will be maintained on optical disc media, it is
important that the filing be legible. Documents with poor black and
white contrast, or otherwise illegible, will be rejected.
2. This document is to be used pursuant to the provisions of Act 23, P.A.
of 1993, by two or more persons for the purpose of forming a domestic
limited liability company.
3. This document is effective on the date endorsed "filed" by the Bureau.
A later effective date, no more than 90 days after the date of
delivery, may be stated as an additional article.
4. The articles must be signed in ink by two or more of the persons who
will be members. Names of person signing shall be stated beneath their
signatures.
5. FEES: Make remittance payable to the State of Michigan. Include limited
liability company name on check or money order. NONREFUNDABLE FILING
FEE $50.00
6. Mail form and fee to: The office is located at:
Department of Consumer and 6546 Mercantile Way
Industry Services Lansing, MI 48910
Corporation, Securities and Land (515) 334-6302
Development Bureau
P.O. Box 30054
Lansing, MI 48909-7554
<PAGE> 1
EXHIBIT 3.2
OPERATING AGREEMENT
OF
US XCHANGE, L.L.C.
(a Michigan limited liability company)
Effective as of August 1, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I DEFINITIONS...........................................................................1
ARTICLE II FORMATION OF COMPANY..................................................................2
Section 2.1 Formation of Company........................................................................2
Section 2.2 Effective Date of Operating Agreement.......................................................2
Section 2.3 Name........................................................................................2
Section 2.4 Principal Place of Business.................................................................3
Section 2.5 Registered Office and Resident Agent........................................................3
Section 2.6 Maximum Duration............................................................................3
Section 2.7 Purposes....................................................................................3
ARTICLE III BOOKS, RECORDS AND ACCOUNTING.........................................................3
Section 3.1 Records.....................................................................................3
Section 3.2 Fiscal Year; Accounting.....................................................................4
Section 3.3 Reports.....................................................................................4
ARTICLE IV CAPITAL CONTRIBUTIONS.................................................................4
Section 4.1 Initial Capital Contributions...............................................................4
Section 4.2 Additional Capital Contributions............................................................4
Section 4.3 Failure to Contribute.......................................................................4
ARTICLE V LIMITATION OF LIABILITY; INDEMNIFICATION..............................................5
Section 5.1 No Liability to Third Parties...............................................................5
Section 5.2 No Liability to Company.....................................................................5
Section 5.3 Indemnification.............................................................................6
ARTICLE VI ALLOCATIONS AND DISTRIBUTIONS.........................................................7
Section 6.1 Member's Accounts...........................................................................7
Section 6.2 Allocations.................................................................................7
Section 6.3 Distributions...............................................................................7
Section 6.4 Profit and Loss.............................................................................7
Section 6.5 Income Accounts.............................................................................7
Section 6.6 Salaries....................................................................................8
ARTICLE VII DISPOSITION OF MEMBERSHIP INTERESTS...................................................8
Section 7.1 Restrictions on Transfers...................................................................8
Section 7.2 Assignee Rights.............................................................................8
Section 7.3 Withdrawal; No Right to Receive Fair Value..................................................8
Section 7.4 Options to Purchase Upon Withdrawal.........................................................8
Section 7.5 Options to Purchase Upon Death..............................................................9
Section 7.6 Estate's Right to Require Purchase Upon Death...............................................9
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
Section 7.7 Valuation of Assets.........................................................................9
Section 7.8 Purchase Price.............................................................................10
Section 7.9 Terms of Payment...........................................................................10
Section 7.10 Insurance Proceeds........................................................................11
Section 7.11 Closing...................................................................................11
Section 7.12 Seller's Participation in Profits and Losses..............................................11
Section 7.13 Membership Interest Held by Grantor Trust.................................................11
ARTICLE VIII ADDITIONAL MEMBERS...........................................................................12
ARTICLE IX MANAGEMENT...........................................................................12
Section 9.1 Management by Members......................................................................12
Section 9.2 Company Decision; Voting...................................................................12
Section 9.3 Delegation of Authority....................................................................12
Section 9.4 Authority of Members.......................................................................13
Section 9.5 Time Devoted to Company Business; Other Business
Interests of Members.........................................................................13
ARTICLE X MEETINGS AND CONSENTS OF MEMBERS.....................................................13
Section 10.1 Meetings..................................................................................13
Section 10.2 Conference Call Meetings..................................................................13
Section 10.3 Written Consent...........................................................................13
ARTICLE XI DISSOLUTION AND WINDING UP...........................................................14
Section 11.1 Dissolution...............................................................................14
Section 11.2 Winding Up................................................................................14
ARTICLE XII GENERAL PROVISIONS...................................................................14
Section 12.1 Entire Agreement and Amendment............................................................14
Section 12.2 Severability..............................................................................14
Section 12.3 Notices...................................................................................15
Section 12.4 Binding Effect............................................................................15
Section 12.5 Governing Law.............................................................................15
Section 12.6 Investment Representations................................................................15
Section 12.7 Review by Legal Counsel...................................................................15
</TABLE>
ii
<PAGE> 4
ARTICLE I
DEFINITIONS
The following definitions shall apply to the terms in this
Operating Agreement unless otherwise expressly stated:
(a) "Act" shall mean the Michigan limited liability
company act, as may be amended.
(b) "Articles" shall mean the Articles of
Organization of the Company as filed with the Department of Consumer
and Industry Services, Corporation, Securities and Land Development
Bureau, as may be amended or restated.
(c) "Capital Account" as of any given date shall mean
the Capital Contribution to the Company by a Member as adjusted under
this Agreement.
(d) "Capital Contribution" shall mean any
contribution to the capital of the Company in cash or property by a
Member whenever made, including initial capital contributions as
described on Exhibit A and additional capital contributions, if any.
(e) "Capital Interest" shall mean the proportion that
a Member's positive Capital Account bears to the aggregate positive
Capital Accounts of all Members whose Capital Accounts have positive
balances as may be adjusted from time to time.
(f) "Code" shall mean the Internal Revenue Code of
1986 or corresponding provisions of superseding federal revenue laws.
(g) "Company" shall refer to US Xchange, L.L.C., a
Michigan limited liability company.
(h) "Distributable Cash" means all cash, revenues and
funds received by the Company from whatever source, less the sum of the
following to the extent paid or set aside by the Company: (i) all
principal and interest payments on indebtedness and all other sums paid
to lenders; (ii) all cash expenditures incurred incident to the normal
operation of the Company's business; and (iii) such reserves as the
Company deems reasonably necessary to the proper operation of the
Company's business.
(i) "Economic Interest" shall mean a Member's or
Economic Interest Owner's share of the Company's Net Profits, Net
Losses and distributions of the Company's assets pursuant to this
Operating Agreement and the Act, but
<PAGE> 5
shall not include any right to participate in the management or
affairs of the Company.
(j) "Economic Interest Owner" shall mean the owner of
an Economic Interest who is not a Member.
(k) "Initial Members" shall mean Richard Postma and
Ronald VanderPol.
(l) "Member" shall mean each of the Initial Members
and each of the parties who may be admitted as a Member after the
effective date of this Operating Agreement.
(m) "Membership Interest" shall mean a Member's
rights in the Company, including, but not limited to, the right to
receive distributions of the Company's assets and any right to vote or
participate in management.
(n) "Net Profits" and "Net Losses" shall mean the
income, gain, loss, deductions and credits of the Company in the
aggregate or separately stated, as appropriate, determined in
accordance with generally accepted accounting principles consistently
applied.
(o) "Operating Agreement" shall mean this Operating
Agreement as originally executed and as amended from time to time.
ARTICLE II
FORMATION OF COMPANY
Section 2.1 Formation of Company. The Initial Members
acknowledge that the Company was formed by filing the Articles.
Section 2.2 Effective Date of Operating Agreement. This
Operating Agreement shall be effective as of the date on which the last Initial
Member signs this Operating Agreement.
Section 2.3 Name. The name of the Company is US Xchange,
L.L.C.
Section 2.4 Principal Place of Business. The principal place
of business of the Company within the State of Michigan shall be 250 Monroe,
N.W., Suite 800, Grand Rapids, Michigan. The Company may locate its places of
business and registered office at any other place or places as the Members may
from time to time determine.
Section 2.5 Registered Office and Resident Agent. The
Company's initial registered office and resident agent shall be as designated in
the Articles. The registered office
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<PAGE> 6
and resident agent may be changed from time to time by filing the change with
the Department of Consumer and Industry Services, Corporation, Securities and
Land Development Bureau.
Section 2.6 Maximum Duration. The maximum duration of the
Company shall be until December 31, 2030, unless the Company is earlier
dissolved in accordance with either the provisions of this Operating Agreement
or the Act.
Section 2.7 Purposes. The purposes of the Company are to
engage in any activity for which limited liability companies may be formed under
the Act. The Company shall have all the powers necessary or convenient to effect
any purpose for which it is formed, including all powers granted by the Act.
ARTICLE III
BOOKS, RECORDS AND ACCOUNTING
Section 3.1 Records. The Company shall maintain records of the
Company's business as required by the Act or deemed appropriate by the Members.
As required by the Act, the Company shall keep at its registered office all of
the following:
(a) A current list of the full name and last known
address of each Member.
(b) A copy of the Articles.
(c) Copies of the Company's federal, state, and local
tax returns and reports, if any, for the three (3) most recent years.
(d) Copies of any financial statements of the Company
for the three (3) most recent years.
(e) Copies of this Operating Agreement and any
amendments.
(f) Copies of records that would enable a Member to
determine each Member's relative shares of the Company's distributions
and their relative voting rights.
Upon reasonable written request and during ordinary business
hours, a Member (or designated representative) may inspect and copy, at the
Member's expense, any of the above records.
Section 3.2 Fiscal Year; Accounting. The Company's fiscal year
shall be the calendar year. The particular accounting methods and principles to
be followed by the Company shall be selected by the Members from time to time.
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<PAGE> 7
Section 3.3 Reports. The Members shall receive reports
concerning the financial condition of the Company and their Capital Accounts in
the time, manner and form as they determine. These reports shall be provided at
least annually as soon as practicable after the end of each calendar year and
shall include a statement of each Member's share of profits and other items of
income, gain, loss, deduction and credit.
ARTICLE IV
CAPITAL CONTRIBUTIONS
Section 4.1 Initial Capital Contributions. The Initial Members
agree to make the Capital Contributions set forth in the attached Exhibit A
within sixty (60) days after the effective date of this Operating Agreement. No
interest shall accrue on any Capital Contribution and no Member shall have any
right to be repaid any Capital Contribution except as provided in this Operating
Agreement.
Section 4.2 Additional Capital Contributions. Additional
Capital Contributions may be required in amounts and on terms agreed to by all
Members.
Section 4.3 Failure to Contribute. If any Member fails to make
a Capital Contribution when required, the Company or the non-defaulting Members
may, in addition to the other rights and remedies they may have under the Act or
applicable law, take whatever enforcement action against that Member that the
non-defaulting Members consider appropriate. Each of the non-defaulting Members
may elect to contribute a portion of the amount of that required capital. The
contributions by the electing Members shall be made pro rata according to the
Capital Accounts of those electing Members. The additional contributions shall
be treated by each contributing Member as either of the following:
(a) As a demand loan from the contributing Member to
the Company which shall bear interest at the rate of two percent (2%)
over the rate published from time to time by The Wall Street Journal as
the "prime" rate of interest in effect on the date of contribution. All
such loans shall be repaid in full, together with accrued interest (if
demand has not already been made), from the first available funds of
the Company and prior to the distribution of any income to Members; or
(b) As an additional Capital Contribution in which
event the Membership Interests of all Members shall be redetermined and
adjusted in proportion to the total Capital Contributions made by all
Members. Any such adjustment shall be effective as of the date of the
contribution of the contributing Member.
Each defaulting Member jointly and severally guarantees
repayment and grants to each Member who makes a contribution in the form of a
demand loan, a security interest in the
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<PAGE> 8
defaulting Member's Membership Interest and agrees to execute whatever documents
are necessary to perfect that security interest.
ARTICLE V
LIMITATION OF LIABILITY; INDEMNIFICATION
Section 5.1 No Liability to Third Parties. Unless otherwise
provided by law, a Member shall not be liable for acts, debts, or obligations of
the Company.
Section 5.2 No Liability to Company. A Member shall not have
any monetary liability to the Company or any of its Members for breach of any
duty under Section 404 of the Act (relating to Member duties and liabilities in
managing the Company) except for liability for any of the following:
(a) The receipt of a financial benefit to which the
Member is not entitled.
(b) Liability under Section 308 of the Act for voting
for or assenting to a distribution in violation of this Operating
Agreement or the Act.
(c) A knowing violation of the law.
(d) A breach of the duty of loyalty.
Section 5.3 Indemnification.
(a) Except as otherwise provided in this Article, the
Company shall indemnify any Member and may indemnify any employee or
other agent of the Company who was or is a party or is threatened to be
made a party to a threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative,
and whether formal or informal, other than an action by or in the right
of the Company, by reason of the fact that the person is or was a
Member, employee or agent of the Company, against expenses, including
attorney fees, judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by such person in
connection with the action, suit or proceeding, if the person acted in
good faith, with the care an ordinarily prudent person in a like
position would exercise under similar circumstances, and in a manner
that the person reasonably believed to be in the best interests of the
Company and, with respect to a criminal action or proceeding, if such
person had no reasonable cause to believe that the person's conduct was
unlawful.
(b) To the extent that a Member of the Company has
been successful on the merits or otherwise in defense of an action,
suit or proceeding or in defense of any claim, issue or other matter in
the action, suit or proceeding, the
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<PAGE> 9
Member shall be indemnified and held harmless from and against actual
and reasonable expenses, including attorneys fees, incurred by such
person in connection with the action, suit or proceeding and any
action, suit or proceeding brought to enforce the mandatory
indemnification provided herein.
(c) Any indemnification permitted under this Article,
unless ordered by a court, shall be made by the Company only as
authorized in the specific case upon a determination that the
indemnification is proper under the circumstances because the person to
be indemnified has met the applicable standard of conduct and upon an
evaluation of the reasonableness of expenses and amounts paid in
settlement. This determination and evaluation shall be made by a
majority vote of the Members who are not parties or threatened to be
made parties to the action, suit or proceeding.
(d) Notwithstanding the foregoing to the contrary, no
indemnification shall be provided to any Member, employee or agent of
the Company in connection with the receipt of a financial benefit to
which the person is not entitled, voting for or assenting to a
distribution to Members in violation of this Operating Agreement or the
Act, or a knowing violation of law.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1 Member's Accounts. Separate Capital Accounts for
each Member shall be maintained by the Company. Each Member's Capital Account
shall reflect the Member's Capital Contributions and increases for the Member's
share of any net income or gain of the Company. Each Member's Capital Account
shall also reflect decreases for distributions made to the Member and the
Member's share of any losses and deductions of the Company.
Section 6.2 Allocations. Except as may be required by the Code
or this Operating Agreement, Net Profits, Net Losses, and other items of income,
gain, loss, deduction and credit of the Company shall be allocated among the
Members in accordance with their Capital Accounts.
Section 6.3 Distributions. Distributions may be made to
Members only after the holders of a majority in interest of the Capital
Interests in the Company reasonably determine that the Company has sufficient
cash on hand which exceeds the current and anticipated needs of the Company to
fulfill its business purposes (including, needs for operating expenses, debt
service, acquisitions, reserves and mandatory distributions, if any). All
distributions shall be made to the Members in accordance with their Capital
Accounts. Distributions shall be in cash or property or partially in both, as
determined by the Members. No distribution shall be made if, after giving it
effect, the Company would not be able to pay its debts as they become due in the
usual course of business or the Company's total assets would be less than the
sum of its total liabilities plus the amount that would be needed, if the
Company were to be dissolved at the time
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<PAGE> 10
of the distribution, to satisfy the preferential rights of other Members upon
dissolution that are superior to the rights of the Members receiving the
distribution.
Section 6.4 Profit and Loss. The Net Profits and Net Losses of
the Company shall be allocated among the Members in the same proportions as
their Capital Accounts.
Section 6.5 Income Accounts. A separate income account shall
be maintained for each Member. The Net Profit or Net Loss of the Company shall
be determined as of the last day of each fiscal year. The income account of each
Member shall be credited or debited, as the case may be, with that Member's
share of the Net Profit or Net Loss. If a Member's income account has no credit
balance, losses shall be charged to that Member's Capital Account. No interest
shall be paid on any income account.
Section 6.6 Salaries. Salaries may be set for any or all of
the Members. The amount of the salaries shall be determined by the holders of a
majority in interest of the Capital Interests in the Company.
ARTICLE VII
DISPOSITION OF MEMBERSHIP INTERESTS
Section 7.1 Restrictions on Transfers. Except as otherwise
specifically provided in this Operating Agreement, a Member shall not have the
right to sell, assign, pledge, create a security interest in, exchange or
otherwise transfer, with or without consideration, all or any part of its
Membership Interest without the prior written consent of all Members.
Section 7.2 Assignee Rights. An assignment, if permitted under
this Operating Agreement, entitles the assignee to an Economic Interest only,
and to receive, to the extent assigned, the distributions to which the assignor
would be entitled. In the absence of unanimous consent, an assignee is not
entitled to participate in the management and affairs of the Company or to
exercise any other rights of a Member. An assignee of a Membership Interest may
be admitted as a Member only as permitted under Article VIII.
Section 7.3 Withdrawal; No Right to Receive Fair Value. A
Member may withdraw from the Company by giving at least one hundred fifty (150)
days advance written notice to the Company and the other Members. The
withdrawing Member shall have no right to receive a distribution of the fair
value of that Member's Interest except as specifically provided otherwise under
this Operating Agreement.
Section 7.4 Options to Purchase Upon Withdrawal. If a Member
withdraws, the Company shall have a first option to purchase all, part or none
of the withdrawing Member's Membership Interest. This option may be exercised
only by delivering written notice of exercise to the withdrawing Member within
thirty (30) days after receiving notice of the final determination of the value
of the interest as set forth below. If the Company does not exercise its option,
the remaining Members shall have an option to purchase the withdrawing Member's
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<PAGE> 11
Membership Interest. Those remaining Members exercising their option to purchase
the withdrawing Member's Membership Interest shall do so on a pro rata basis
based upon their respective Capital Interests (disregarding the withdrawing
Member's Capital Interest). These options must be exercised by delivering
written notice of exercise to the withdrawing Member within thirty (30) days
after the expiration of the Company's option to purchase. Any purchase under
this Section shall be at the price and terms set forth below.
Section 7.5 Options to Purchase Upon Death. If a Member dies,
the Company shall have a first option to purchase the deceased Member's
Membership Interest. This option must be exercised by delivering written notice
of exercise to the deceased Member's personal representative within thirty (30)
days after the final determination of the purchase price as set forth below. If
the Company does not exercise its option, the surviving Members shall each have
an option to purchase the deceased Member's Membership Interest. Those other
Members exercising their option to purchase the deceased Member's Membership
Interest shall do so on a pro rata basis based upon their respective Capital
Interests (disregarding the deceased Member's Capital Interest). These options
must be exercised by delivering written notice of exercise to the deceased
Member's personal representative within thirty (30) days after the expiration of
the Company's option to purchase. Any purchase under this Section shall be at
the price and terms set forth below.
Section 7.6 Estate's Right to Require Purchase Upon Death. If
a Member dies, the deceased Member's personal representative has the option to
require the Company to purchase the deceased Member's entire Membership
Interest. This option must be exercised by delivering written notice of exercise
to the Company within thirty (30) days after the final determination of the
purchase price set forth below. If the option is exercised, the surviving
Members shall be jointly and severally obligated to purchase the deceased
Member's Membership Interest to the extent that the Company is prohibited from
making a distribution to pay for the deceased Member's Membership Interest under
Section 307(1) of the Act. Any purchase under this Section shall be at the price
and terms set forth below.
Section 7.7 Valuation of Assets. Within thirty (30) days after
(a) receipt of the written notice of a Member's withdrawal, or (b) the death of
a Member, the remaining Members shall use their best efforts to reach an
agreement with the withdrawing or deceased Member's personal representative on
the value of the Company's assets. If no agreement is made within that time, the
Company shall determine the value of the assets of the Company in the following
manner within sixty (60) days after expiration of the time to reach agreement on
the value of the assets:
(a) The fair market value of any real estate owned by
the Company shall be determined by an independent appraisal made by a
licensed real estate appraiser selected jointly by the Company and the
withdrawing Member, or the deceased Member's personal representative,
whichever is applicable. If the parties are unable to agree upon the
selection of an appraiser within ten (10) days after the expiration of
the time to agree on the value of the assets, each party shall select
an independent appraiser and the fair market value shall be the average
of the parties' appraisals. This determination shall be final and
binding on all parties.
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<PAGE> 12
(b) The fair market value of any items of tangible
personal property owned by the Company shall be determined by an
independent appraisal made by an appraiser selected jointly by the
Company and the withdrawing Member, or the deceased Member's personal
representative, whichever is applicable. If the parties are unable to
agree upon the selection of an appraiser within ten (10) days after the
expiration of the time to agree on the value of the assets, each party
shall select an independent appraiser and the fair market value shall
be the average of the parties' appraisals. This determination shall be
final and binding on all parties.
(c) All remaining assets shall be valued at book
value, using generally accepted accounting principles consistently
applied. The determination shall be made by the independent accountant
customarily used by the Company or otherwise retained for this purpose.
This determination shall be final and binding on all parties.
(d) The valuation shall be made as of the last day of
the month preceding the death of the deceased Member or preceding the
notice of withdrawal described above, whichever is applicable.
Section 7.8 Purchase Price. The purchase price of a Member's
Membership Interest purchased in the case of withdrawal or death shall be the
Member's share, determined in accordance with that Member's Capital Interest, of
the "net assets" of the Company. The "net assets" shall be the total value of
the Company assets, as determined above, reduced by the amount of Company
liabilities as determined using generally accepted accounting principles
consistently applied. No allowance shall be made for contingent liabilities,
except as otherwise provided under generally accepted accounting principles
consistently applied. If the parties are unable to agree upon the determination
of the amount of Company liabilities within ten (10) days after the expiration
of the time to agree on the value of the assets, the determination shall be made
by the independent accountant customarily used by the Company or otherwise
retained for this purpose. This determination shall be made within sixty (60)
days after the expiration of the time to agree on the Company liabilities and
shall be final and binding on all parties. Notice of the determination shall be
given by the Company to all Members and any withdrawing Member or deceased
Member's personal representative promptly upon receipt of the determination from
the accountant. For purposes of determining the purchase price in the event of
the death of a Member, the "net assets" shall not include any life insurance
proceeds paid or payable to the Company as a result of the Member's death.
Section 7.9 Terms of Payment. The purchase price for a
Member's Membership Interest shall be paid as follows:
(a) A down payment of ten percent (10%) of the
purchase price shall be paid at closing. In the event of a purchase of
a deceased Member's Membership Interest, the down payment shall be not
less than one hundred
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<PAGE> 13
percent (100%) of any net life insurance proceeds received by the
purchaser before the date of closing.
(b) The remaining balance of the purchase price shall
be paid over five (5) years in sixty (60) equal consecutive monthly
installments, including interest on the unpaid balance at the rate of
two percent (2%) over the rate published by The Wall Street Journal as
the "prime" rate of interest in effect on the date of closing. The
first installment shall be due on the first day of the second (2nd)
month after the month in which the down payment is made.
(c) The obligation on the remaining balance shall be
evidenced by a promissory note that shall permit prepayment without
penalty in whole or in part at any time.
(d) If, after closing, any purchaser receives life
insurance proceeds on any policy insuring the life of the deceased
Member whose Membership Interest is being sold, the purchaser shall pay
to the seller one hundred percent (100%) of any net life insurance
proceeds received as a mandatory prepayment of principal within thirty
(30) days after receiving the proceeds.
Section 7.10 Insurance Proceeds. If the Company is the
beneficiary of insurance proceeds on the life of a deceased Member, those
proceeds shall be applied toward payment of the purchase price to the extent
determined above. Any proceeds remaining shall be Company property.
Section 7.11 Closing. The closing shall occur not later than
thirty (30) days after the purchase price is determined and the time for
exercising any options has expired.
Section 7.12 Seller's Participation in Profits and Losses. The
interest of the withdrawing or deceased Member in the profits and losses of the
Company shall continue until the date of closing of the sale of that Member's
Membership Interest.
Section 7.13 Membership Interest Held by Grantor Trust. For
the purposes of this Operating Agreement, if a Membership Interest is held by a
grantor trust, the grantor of the trust shall be deemed to be the Member for
purposes of any Section referring to the death of a Member and any notices
required by this Operating Agreement shall be sent after the death of the
grantor to the trustee(s) of the grantor trust.
ARTICLE VIII
ADDITIONAL MEMBERS
Any person or entity may be admitted as an additional Member
in the Company only with the unanimous consent of the then-current Members and
upon compliance with conditions imposed, if any, by unanimous consent of the
then-current Members. Admission may
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<PAGE> 14
occur either by the issuance by the Company of additional Membership Interests
for consideration as the Members shall unanimously determine, or as a transferee
of a Member's Membership Interest or any portion thereof, subject to the terms
and conditions of this Operating Agreement. No new Members shall be entitled to
any retroactive allocation of losses, income or expense deductions incurred by
the Company.
ARTICLE IX
MANAGEMENT
Section 9.1 Management by Members. The business of the Company
shall be managed by the Members.
Section 9.2 Company Decision; Voting. In managing the business
of the Company and exercising its powers, the Members shall act collectively
through meetings or written consents as described in this Operating Agreement.
Members shall vote in proportion to their relative Capital Accounts. Decisions
of the Members shall be made by the affirmative vote of the holders of a
majority in interest of the Capital Interests in the Company except as
specifically provided otherwise in this Operating Agreement, the Articles, or by
applicable law.
Section 9.3 Delegation of Authority. The Members may, from
time to time, delegate to one or more Members specific authority to carry out
the decisions of the Members, as the Members may deem advisable. In addition,
the Members may assign titles (including, without limitation, president, vice
president, secretary, assistant secretary, treasurer and assistant treasurer) to
any Member with such authority the Members may designate. Any delegation under
this Section may be revoked at any time by the Members. Any delegation to a
Member under this Section shall be construed as a provision restricting or
enlarging the management rights and duties of a Member or group of Members under
Section 401 of the Act and shall not be effective to change the provision in
Section 401 that vests management of the Company in its Members.
Section 9.4 Authority of Members. Every Member is an agent of
the Company for the purpose of its business and the act of a Member, including
the execution in the name of the Company of any instrument, in apparently
carrying out the business of the Company in the usual way, binds the Company
unless the Member so acting does not have the authority to act for the Company
and the person with whom the Member is dealing has knowledge of the fact that
the Member has no such authority.
Section 9.5 Time Devoted to Company Business; Other Business
Interests of Members. Members shall not be required to devote their entire time
or attention to Company business, but only that time or attention necessary for
their proper management of the Company business. Each Member shall be allowed to
participate in any other activity, even though it competes with Company
business.
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ARTICLE X
MEETINGS AND CONSENTS OF MEMBERS
Section 10.1 Meetings. Annual meetings of Members shall be
held at the dates, times and places that the Members determine. Special meetings
of Members for any proper purpose may be called at any time by the holders of at
least twenty-five percent (25%) of the Capital Interests in the Company. Those
Members who call a special meeting shall give notice of the date, time, place
and purposes of the meeting to each Member. The notice shall be given not less
than ten (10) nor more than thirty (30) days before the date of the meeting. All
meetings of Members shall be run by the Member with the largest Capital Interest
in the Company or by such other person as the Members unanimously agree. Members
may attend each meeting in person or by written proxy. Proxy holders shall have
authority to vote only to the extent described in the written proxy.
Section 10.2 Conference Call Meetings. A Member may
participate in a meeting of Members by a conference telephone or similar
communications equipment through which all participants in the meeting may
communicate with the other participants. Participation in a meeting under this
Section constitutes presence in person at the meeting.
Section 10.3 Written Consent. Any action required or permitted
to be taken by the Members may be taken without a meeting, without prior notice,
and without a vote, if written consents describing the action are signed by all
of the Members.
ARTICLE XI
DISSOLUTION AND WINDING UP
Section 11.1 Dissolution. The Company shall dissolve and its
affairs shall be wound up on the first to occur of the following events:
(a) upon the happening of any event specified in the
Articles or this Operating Agreement;
(b) by the unanimous consent of all of the Members;
or
(c) upon the death, withdrawal, bankruptcy, or
dissolution of a Member or the occurrence of any other event that
terminates the continued membership of a Member in the Company, unless
within ninety (90) days after the termination of membership, the
remaining Members unanimously consent to continue the business of the
Company and to the admission of one or more Members as necessary.
Section 11.2 Winding Up. Upon dissolution, the Company shall
cease carrying on its business and
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affairs and shall commence the winding up of the Company's business and affairs
and complete the winding up as soon as practicable. Upon the winding up of the
Company, the assets of the Company shall be distributed first to creditors to
the extent permitted by law, in satisfaction of Company debts, liabilities and
obligations and then to Members and former Members first, in satisfaction of
liabilities for distributions and then, in accordance with their Capital
Interests. The proceeds shall be paid to the Members within ninety (90) days
after the date of winding up.
ARTICLE XII
GENERAL PROVISIONS
Section 12.1 Entire Agreement and Amendment. This Operating
Agreement contains the entire agreement among the parties with respect to its
subject matter and may be amended only in writing signed by the holders of a
majority in interest of the Capital Interests in the Company.
Section 12.2 Severability. The invalidity or unenforceability
of any term in this Operating Agreement shall not affect any other term in this
Operating Agreement.
Section 12.3 Notices. Any notice permitted or required under
this Operating Agreement will be deemed to have been given when delivered in
person or two (2) business days after being deposited in the United States mail,
postage paid, addressed to the party at its address on file in the Company's
registered office.
Section 12.4 Binding Effect. This Operating Agreement will be
binding upon and shall inure to the benefit of the parties and their respective
heirs, personal representatives, successors and assigns.
Section 12.5 Governing Law. This Operating Agreement shall be
governed in all respects by Michigan law.
Section 12.6 Investment Representations. The undersigned
Members understand (1) that the Membership Interests have not been registered
under the Securities Act of 1933, the Michigan Securities Act or any other
applicable securities laws (the "Securities Acts"), (2) that the Company has
relied upon the fact that the Membership Interests are to be held by each Member
for investment, (3) that exemption from registrations under the Securities Acts
would not be available if the Membership Interests were acquired by a Member
with a view to distribution, and (4) that the Company is under no obligation to
register the Membership Interests or to assist any Member in complying with any
exemption from registration under the Securities Acts if the Member should wish
to dispose of a Membership Interest.
Each Member agrees not to transfer, sell or offer for sale any
portion of a Membership Interest unless there is an effective registration or
other qualification under the Securities Acts or unless the holder of the
Membership Interest delivers to the Company an
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opinion of counsel, satisfactory to the Company, that registration or other
qualification is not required.
Each Member warrants and represents to the Company that (a)
the Member is acquiring a Membership Interest for the Member's own account, for
investment and not with a view to resale or distribution; (b) before acquiring a
Membership Interest, each Member has made an investigation of the Company and
its business and has had made available to the Member all information on the
Company that the Member deemed necessary to make an informed decision to acquire
the Membership Interest; and (c) each Member considers himself or herself to be
a person possessing sufficient experience and sophistication as an investor to
evaluate the merits and risks of the Member's investment in the Membership
Interest.
Section 12.7 Review by Legal Counsel. Each Member acknowledges
that this Operating Agreement and the Articles were prepared by legal counsel
for the Company; that conflicts may exist or arise between the individual
interests of the Members and that legal counsel for the Company is prohibited
from representing parties where a legal conflict exists; and that each Member is
advised to seek (and has had an adequate opportunity to seek) advice from
independent legal counsel with respect to investment in the Company and
execution of this Operating Agreement.
Dated: August 1, 1996 /s/ Richard Postma
---------------------------------------
Richard Postma
Dated: August 1, 1996 /s/ Ronald VanderPol
---------------------------------------
Ronald VanderPol
Attachments: Exhibit A
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<PAGE> 18
EXHIBIT A
<TABLE>
<CAPTION>
Member Initial Capital Contribution (to be made within the Capital
time described in Section 4.1) Interest
<S> <C> <C>
Richard Postma $ 1.00 1%
Ronald VanderPol $ 99.00 99%
======= -----
TOTAL $100.00 100%
</TABLE>
<PAGE> 1
Exhibit 4.1
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, TO THE COMPANY OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY
(AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS
IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE
BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE &
CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL
BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET
FORTH IN SECTION 2.08 OF THE INDENTURE.
<PAGE> 2
US XCHANGE, L.L.C.
15% Senior Note due 2008
CUSIP _________
No. ____ $____________
US XCHANGE, L.L.C., a Michigan limited liability company (the "Company,"
which term includes any successor under the Indenture hereinafter referred to),
for value received, promises to pay to CEDE & CO., or its registered assigns,
the principal sum of ____________________________ DOLLARS ($__________) on July
1, 2008.
Interest Payment Dates: July 1 and January 1, commencing January 1, 1999.
Regular Record Dates: June 15 and December 15.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
IN WITNESS WHEREOF, the Company has caused this Note to be signed manually
or by facsimile by its duly authorized officers.
Date: ___________, 1998
US XCHANGE, L.L.C.
By: ____________________________
Name:
Title:
By: ____________________________
Name:
Title:
(Trustee's Certificate of Authentication)
This is one of the 15% Senior Notes due 2008 described in the within-mentioned
Indenture.
Date: ____________, 1998
<PAGE> 3
______________________________
THE BANK OF NEW YORK,
as Trustee
By: __________________________
Authorized Signatory
<PAGE> 4
[REVERSE SIDE OF NOTE]
US XCHANGE, L.L.C.
15% Senior Note due 2008
1. Principal and Interest.
The Company will pay the principal of this Note on July 1, 2008.
The Company promises to pay interest on the principal amount of this Note
on each Interest Payment Date, as set forth below, at the rate per annum shown
above.
Interest will be payable semi-annually (to the holders of record of the
Notes at the close of business on the June 15 or December 15 immediately
preceding the Interest Payment Date) on each Interest Payment Date, commencing
January 1, 1999.
Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from June 25, 1998;
provided that, if there is no existing default in the payment of interest and
this Note is authenticated between a Regular Record Date referred to on the
face hereof and the next succeeding Interest Payment Date, interest shall
accrue from such Interest Payment Date. Interest will be computed on the basis
of a 360-day year of twelve 30-day months.
The Company shall pay interest on overdue principal and premium, if any,
and interest on overdue installments of interest, to the extent lawful, at a
rate per annum that is 2% in excess of the rate otherwise payable.
2. Method of Payment.
The Company will pay interest (except defaulted interest) on the principal
amount of the Notes as provided above on each July 1 and January 1, commencing
January 1, 1999 to the persons who are Holders (as reflected in the Security
Register at the close of business on the June 15 or December 15 immediately
preceding the Interest Payment Date), in each case, even if the Note is
cancelled on registration of transfer or registration of exchange after such
record date; provided that, with respect to the payment of principal, the
Company will make payment to the Holder that surrenders this Note to a Paying
Agent on or after July 1, 2008.
The Company will pay principal, premium, if any, and as provided above,
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. However, the Company may pay
principal, premium, if any, and interest by its check payable in such money.
It may mail an interest check to a Holder's registered address (as reflected in
the Security Register). If a payment date is a date other than a
<PAGE> 5
Business Day at a place of payment, payment may be made at that place on the
next succeeding day that is a Business Day and no interest shall accrue for the
intervening period.
3. Paying Agent and Registrar.
Initially, the Trustee will act as authenticating agent, Paying Agent and
Registrar. The Company may change any authenticating agent, Paying Agent or
Registrar without notice. The Company, any Subsidiary or any Affiliate of any
of them may act as Paying Agent, Registrar or co-Registrar.
4. Indenture; Limitations.
The Company issued the Notes under an Indenture dated as of June 25, 1998
(the "Indenture"), between the Company and The Bank of New York, trustee (the
"Trustee"). Capitalized terms herein are used as defined in the Indenture
unless otherwise indicated. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the TIA. The
Notes are subject to all such terms, and Holders are referred to the Indenture
and the TIA for a statement of all such terms. To the extent permitted by
applicable law, in the event of any inconsistency between the terms of this
Note and the terms of the Indenture, the terms of the Indenture shall control.
The Notes are general unsecured obligations of the Company (except as
provided in Section 15 hereof).
Except with respect to the Exchange Notes, the Company may not issue any
additional Notes under the Indenture.
5. Redemption Upon Receipt of Public Equity Offering Proceeds.
At any time and from time to time prior to July 1, 2001, the Company may
redeem up to 35% of the aggregate principal amount of the Notes with the
proceeds of one or more Public Equity Offerings following which there is a
Public Market, at any time or from time to time in part, at a Redemption Price
(expressed as a percentage of principal amount) of 115%, plus accrued and
unpaid interest, if any, to the Redemption Date (subject to the rights of
Holders of record on the relevant Regular Record Date that is on or prior to
the Redemption Date to receive interest due on an Interest Payment Date);
provided that (i) at least 65% of the aggregate principal amount of Notes
originally issued remains outstanding after each such redemption and (ii)
notice of such redemption shall be mailed within 60 days of the related Public
Equity Offering.
Notes in original denominations larger than $1,000 may be redeemed in
part. On and after the Redemption Date, interest ceases to accrue on Notes or
portions of Notes called for redemption, unless the Company defaults in the
payment of the Redemption Price.
<PAGE> 6
6. Repurchase upon Change of Control.
Upon the occurrence of any Change of Control, each Holder shall have the
right to require the repurchase of its Notes by the Company in cash pursuant to
the offer described in the Indenture at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (the "Payment Date").
A notice of such Change of Control will be mailed within 30 days after any
Change of Control occurs to each Holder at its last address as it appears in
the Security Register. Notes in original denominations larger than $1,000 may
be sold to the Company in part. On and after the Payment Date, interest ceases
to accrue on Notes or portions of Notes surrendered for purchase by the
Company, unless the Company defaults in the payment of the purchase price.
7. Denominations; Transfer; Exchange.
The Notes are in registered form without coupons in denominations of
$1,000 of principal amount and multiples of $1,000 in excess thereof. A Holder
may register the transfer or exchange of Notes in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar need not register
the transfer or exchange of any Notes selected for redemption. Also, it need
not register the transfer or exchange of any Notes for a period of 15 days
before the day of mailing of a notice of redemption of Notes selected for
redemption.
8. Persons Deemed Owners.
A Holder shall be treated as the owner of a Note for all purposes.
9. Unclaimed Money.
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee and the Paying Agent will pay the
money back to the Company at its written request. After that, Holders entitled
to the money must look to the Company for payment, unless an abandoned property
law designates another Person, and all liability of the Trustee and such Paying
Agent with respect to such money shall cease.
10. Discharge Prior to Redemption or Maturity.
If the Company deposits with the Trustee cash, Temporary Cash Investments
or U.S. Government Obligations sufficient to pay the then outstanding principal
of, premium, if any, and accrued interest on the Notes (a) to redemption or
maturity, the Company will be discharged from the Indenture and the Notes,
except in certain circumstances for certain provisions thereof, and (b) to the
Stated Maturity, the Company will be discharged from certain covenants set
forth in the Indenture, provided that if, simultaneously with the deposit of
the cash or Temporary Cash Investments and/or U.S. Government Obligations
referred to
<PAGE> 7
above, the Company has caused an irrevocable, transferable standby letter of
credit to be issued by a bank with capital and surplus exceeding the principal
of, premium, if any, and interest on the Notes then outstanding, expiring not
earlier than 180 days from its issuance, in favor of the Trustee, which permits
the Trustee to draw an amount equal to the principal, premium, if any, and
accrued interest on the Notes through the expiry date of the letter of credit,
then the Company will be deemed to have paid and discharged any and all
obligations under this clause on the date of the deposit and issuance of the
letter of credit.
11. Amendment; Supplement; Waiver.
Subject to certain exceptions, the Indenture, the Pledge Agreement or the
Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding, and any
existing default or compliance with any provision may be waived with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding. Without notice to or the consent of any Holder, the parties
thereto may amend or supplement the Indenture or the Notes to, among other
things, cure any ambiguity, defect or inconsistency and make any change that
does not materially and adversely affect the rights of any Holder.
12. Restrictive Covenants.
The Indenture imposes certain limitations on the ability of the Company
and its Restricted Subsidiaries, among other things, to Incur additional
Indebtedness, make Restricted Payments, suffer to exist restrictions on the
ability of Restricted Subsidiaries to make certain payments to the Company,
issue Capital Stock of Restricted Subsidiaries, Guarantee Indebtedness of the
Company, engage in transactions with Affiliates, suffer to exist or incur
Liens, enter into sale-leaseback transactions, use the proceeds from Asset
Sales, or merge, consolidate or transfer substantially all of its assets.
Within 45 days after the end of each fiscal quarter (90 days after the end of
the last fiscal quarter of each year), the Company shall deliver to the Trustee
an Officers' Certificate stating whether or not the signers thereof know of any
Default or Event of Default under such restrictive covenants.
13. Successor Persons.
When a successor person or other entity assumes all the obligations of its
predecessor under the Notes and the Indenture, the predecessor person will be
released from those obligations.
14. Defaults and Remedies.
Any of the following events constitutes an "Event of Default" under the
Indenture:
(a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable, upon acceleration,
redemption or otherwise;
<PAGE> 8
(b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30
days; provided that a failure to make any of the first six scheduled
interest payments on the Notes on the applicable Interest Payment Date
will constitute an Event of Default with no grace or cure period;
(c) default in the performance or breach of the provisions of
Article Five or the failure to make or consummate an Offer to Purchase in
accordance with Sections 4.11 and 4.12 of the Indenture;
(d) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indenture or under the Notes
(other than a default specified in clause (a), (b) or (c) above) and such
default or breach continues for a period of 30 consecutive days after
written notice by the Trustee or the Holders of 25% or more in aggregate
principal amount of the Notes;
(e) there occurs with respect to any issue or issues of Indebtedness
of the Company or any Significant Subsidiary having an outstanding
principal amount of $5 million or more in the aggregate for all such
issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created, (A) an event of default that has caused the holder
thereof to declare such Indebtedness to be due and payable prior to its
Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of
such acceleration and/or (B) the failure to make a principal payment at
the final (but not any interim) fixed maturity and such defaulted payment
shall not have been made, waived or extended within 30 days of such
payment default;
(f) any final judgment or order (not covered by insurance) for the
payment of money in excess of $5 million in the aggregate for all such
final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against the Company or any Significant Subsidiary and shall not
be paid or discharged, and there shall be any period of 30 consecutive
days following entry of the final judgment or order that causes the
aggregate amount for all such final judgments or orders outstanding and
not paid or discharged against all such Persons to exceed $5 million
during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant
Subsidiary or for all or substantially all of the property and assets of
the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary
and, in each case, such decree or order shall remain unstayed
<PAGE> 9
and in effect for a period of 30 consecutive days; or
(h) the Company or any Significant Subsidiary (A) commences a
voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B) consents
to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the
Company or any Significant Subsidiary or for all or substantially all of
the property and assets of the Company or any Significant Subsidiary or
(C) effects any general assignment for the benefit of creditors; or
(i) the Pledge Agreement shall cease to be in full force and effect
or enforceable other than in accordance with its terms.
If an Event of Default, as defined in the Indenture, occurs and is
continuing, the Trustee may, and at the direction of the Holders of at least
25% in aggregate principal amount of the Notes then outstanding shall, declare
all the Notes to be due and payable. If a bankruptcy or insolvency default
with respect to the Company occurs and is continuing, the Notes automatically
become due and payable. Holders may not enforce the Indenture or the Notes
except as provided in the Indenture. The Trustee may require indemnity
satisfactory to it before it enforces the Indenture or the Notes. Subject to
certain limitations, Holders of at least a majority in principal amount of the
Notes then outstanding may direct the Trustee in its exercise of any trust or
power.
15. Security.
The Company has entered into the Pledge Agreement and purchased and
pledged to the Trustee for the benefit of the Holders Pledged Securities in an
amount sufficient upon receipt of scheduled interest and principal payments on
such securities to provide for payment in full of the first six scheduled
interest payments due on the Notes. The Pledged Securities have been pledged
by the Company to the Trustee for the benefit of the Holders and will be held
by the Collateral Agent in the Pledge Account pending disbursement pursuant to
the Pledge Agreement.
16. Trustee Dealings with the Company.
The Trustee under the Indenture, in its individual or any other capacity,
may make loans to, accept deposits from and perform services for the Company or
its Affiliates and may otherwise deal with the Company or its Affiliates as if
it were not the Trustee.
17. No Recourse Against Others.
No founding member or any past, present or future partner, stockholder,
other equity-holder, officer, Director, employee or controlling person, as
such, of the Company or of any successor Person shall have any liability for
any obligations of the Company under the
<PAGE> 10
Notes or the Indenture or for any claim based on, in respect of or by reason
of, such obligations or their creation. Each Holder by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes.
18. Authentication.
This Note shall not be valid until the Trustee or authenticating agent
signs the certificate of authentication on the other side of this Note.
<PAGE> 11
19. Governing Law.
This Note shall be governed by the laws of the State of New York without
regard to the conflicts of laws principles thereof.
20. Abbreviations.
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
The Company will furnish a copy of the Indenture to any Holder upon
written request and without charge. Requests may be made to US XCHANGE,
L.L.C., 20 Monroe Avenue, N.W., Suite 450, Grand Rapids, Michigan 49503,
Attention: Chief Financial Officer.
<PAGE> 12
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
___________________________________________________________________________
(Please print or typewrite name and address including zip code of assignee)
___________________________________________________________________________
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing_________________________________________________________________
attorney to transfer said Note on the books of the Company with full power of
substitution in the premises.
Date:____________ ______________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the face
of the within-mentioned instrument in every
particular, without alteration or any change
whatsoever.
<PAGE> 13
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to Section
4.11 or 4.12 of the Indenture, check the Box: []
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 4.11 or 4.12 of the Indenture, state the amount:
$___________________.
Date:_____________
Your Signature:_________________________________________________________
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee: ______________________________
<PAGE> 1
EXHIBIT 4.2
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
Dated June 25, 1998
between
US XCHANGE, L.L.C.
and
MORGAN STANLEY & CO. INCORPORATED
- --------------------------------------------------------------------------------
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into June 25, 1998, between US XCHANGE, L.L.C., a Michigan limited
liability company (the "Company"), and MORGAN STANLEY & CO. INCORPORATED (the
"Placement Agent").
This Agreement is made pursuant to the Placement Agreement dated June
22, 1998, between the Company and the Placement Agent (the "Placement
Agreement"), which provides for the sale by the Company to the Placement Agent
of an aggregate of $150 million principal amount of the Company's 15% Senior
Notes due 2008 (the "Securities"). In order to induce the Placement Agent to
enter into the Placement Agreement, the Company has agreed to provide to the
Placement Agent and its direct and indirect transferees the registration rights
set forth in this Agreement. The execution of this Agreement is a condition to
the closing under the Placement Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. Definitions.
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"1933 Act" shall mean the Securities Act of 1933, as amended from time
to time.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"Closing Date" shall mean the Closing Date as defined in the Placement
Agreement.
"Company" shall have the meaning set forth in the preamble and shall
also include the Company's successors.
"Exchange Date" shall have the meaning set forth in Section 2(a)(ii)
hereof.
"Exchange Offer" shall mean the exchange offer by the Company of
Exchange Securities for Registrable Securities pursuant to Section 2(a)
hereof.
"Exchange Offer Registration" shall mean a registration under the 1933
Act effected pursuant to Section 2(a) hereof.
<PAGE> 3
2
"Exchange Offer Registration Statement" shall mean an
exchange offer registration statement on Form S-4 (or, if applicable,
on another appropriate form) and all amendments and supplements to such
registration statement, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by
reference therein.
"Exchange Securities" shall mean securities issued by the
Company under the Indenture containing terms identical to, and for a
like aggregate principal amount of, the Securities (except that (i)
interest thereon shall accrue from the last date on which interest was
paid on the Securities or, if no such interest has been paid, from
December 25, 1998 and (ii) the Exchange Securities will not contain
restrictions on transfer) and to be offered to Holders of Securities in
exchange for Securities pursuant to the Exchange Offer.
"Holder" shall mean the Placement Agent, for so long as it
owns any Registrable Securities, and each of its successors, assigns
and direct and indirect transferees who become registered owners of
Registrable Securities under the Indenture; provided that for purposes
of Sections 4 and 5 of this Agreement, the term "Holder" shall include
Participating Broker-Dealers (as defined in Section 4(a)).
"Indenture" shall mean the Indenture relating to the
Securities dated as of June 25, 1998 between the Company and The Bank
of New York, as trustee, and as the same may be amended from time to
time in accordance with the terms thereof.
"Majority Holders" shall mean the Holders of a majority of the
aggregate principal amount of outstanding Registrable Securities;
provided that whenever the consent or approval of Holders of a
specified percentage of Registrable Securities is required hereunder,
Registrable Securities held by the Company or any of its affiliates (as
such term is defined in Rule 405 under the 1933 Act) (other than the
Placement Agent or subsequent Holders of Registrable Securities if such
subsequent holders are deemed to be such affiliates solely by reason of
their holding of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the Holders
of such required percentage or amount.
"Participating Broker-Dealer" shall have the meaning set forth
in Section 4(a) hereof.
"Person" shall mean an individual, partnership, limited
liability company, corporation, trust or unincorporated organization,
or a government or agency or political subdivision thereof.
"Placement Agent" shall have the meaning set forth in the
preamble.
"Placement Agreement" shall have the meaning set forth in the
preamble.
<PAGE> 4
3
"Prospectus" shall mean the prospectus included in a
Registration Statement, including any preliminary prospectus, and any
such prospectus as amended or supplemented by any prospectus
supplement, including a prospectus supplement with respect to the terms
of the offering of any portion of the Registrable Securities covered by
a Shelf Registration Statement, and by all other amendments and
supplements to such prospectus, and in each case including all material
incorporated by reference therein.
"Registrable Securities" shall mean the Securities; provided,
however, that the Securities shall cease to be Registrable Securities
(i) when a Registration Statement with respect to such Securities shall
have been declared effective under the 1933 Act and such Securities
shall have been disposed of pursuant to such Registration Statement,
(ii) when such Securities have been sold, or are eligible to be sold,
to the public pursuant to Rule 144(k) (or any similar provision then in
force, but not Rule 144A) under the 1933 Act or (iii) when such
Securities shall have ceased to be outstanding.
"Registration Expenses" shall mean any and all expenses
incident to performance of or compliance by the Company with this
Agreement, including, without limitation: (i) all SEC, stock exchange
or National Association of Securities Dealers, Inc. registration and
filing fees, (ii) all fees and expenses incurred in connection with
compliance with state securities or blue sky laws (including reasonable
fees and disbursements of counsel for any underwriters in connection
with blue sky qualification of any Registrable Securities), (iii) all
expenses relating to preparing, printing and distributing any
Registration Statement, any Prospectus, any amendments or supplements
thereto, any underwriting agreements, securities sales agreements and
other documents relating to the performance of and compliance with this
Agreement, (iv) all rating agency fees, (v) all fees and disbursements
relating to the qualification of the Indenture under applicable
securities laws, (vi) the fees and disbursements of the Trustee and its
counsel, (vii) the fees and disbursements of counsel for the Company
and, in the case of a Shelf Registration Statement, the fees and
disbursements of one counsel for the Holders (which counsel shall be
selected by the Majority Holders and which counsel may also be counsel
for the Placement Agent) and (viii) the fees and disbursements of the
independent public accountants of the Company, including the expenses
of any special audits or "cold comfort" letters required by or incident
to such performance and compliance, but excluding fees and expenses of
counsel to the underwriters (other than fees and expenses set forth in
clause (ii) above) or the Holders and underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or
disposition of Registrable Securities by a Holder.
"Registration Statement" shall mean any registration statement
of the Company that covers any of the Exchange Securities or
Registrable Securities pursuant to the provisions of this Agreement and
all amendments and supplements to any such Registration Statement,
including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
<PAGE> 5
4
"SEC" shall mean the Securities and Exchange Commission.
"Semi-Annual Accrual Date" shall mean the Semi-Annual Accrual
Date as defined in the Indenture.
"Shelf Registration" shall mean a registration effected
pursuant to Section 2(b) hereof.
"Shelf Registration Statement" shall mean a "shelf"
registration statement of the Company pursuant to the provisions of
Section 2(b) of this Agreement which covers all of the Registrable
Securities (but no other securities unless approved by the Holders
whose Registrable Securities are covered by such Shelf Registration
Statement) on an appropriate form under Rule 415 under the 1933 Act, or
any similar rule that may be adopted by the SEC, and all amendments and
supplements to such registration statement, including post-effective
amendments, in each case including the Prospectus contained therein,
all exhibits thereto and all material incorporated by reference
therein.
"Trustee" shall mean the trustee with respect to the
Securities under the Indenture.
"Underwriter" shall have the meaning set forth in the final
paragraph of Section 3 hereof.
"Underwritten Registration" or "Underwritten Offering" shall
mean a registration or offering in which Registrable Securities are
sold to an Underwriter for reoffering to the public.
2. Registration Under the 1933 Act.
(a) To the extent not prohibited by any applicable law or
applicable interpretation of the staff of the SEC, the Company shall use its
reasonable best efforts to cause to be filed an Exchange Offer Registration
Statement covering the offer by the Company to the Holders to exchange all of
the Registrable Securities for Exchange Securities and to have such Registration
Statement remain effective until the Exchange Date. The Company shall commence
the Exchange Offer promptly after the Exchange Offer Registration Statement has
been declared effective by the SEC and use its reasonable best efforts to have
the Exchange Offer consummated not later than 60 days after such effective date.
The Company shall commence the Exchange Offer by mailing the related Exchange
Offer Prospectus and accompanying documents to each Holder stating, in addition
to such other disclosures as are required by applicable law:
(i) that the Exchange Offer is being made pursuant to this
Registration Rights Agreement and that all Registrable Securities
validly tendered will be accepted
<PAGE> 6
5
for exchange;
(ii) the last date of acceptance for exchange (which shall be
a period of at least 20 business days from the date such notice is
mailed and which may be extended by the Company) (the "Exchange Date");
(iii) that any Registrable Security not tendered will remain
outstanding and continue to accrue interest, but will not retain any
rights under this Registration Rights Agreement;
(iv) that Holders electing to have a Registrable Security
exchanged pursuant to the Exchange Offer will be required to surrender
such Registrable Security, together with the enclosed letters of
transmittal, to the institution and at the address (located in the
Borough of Manhattan, The City of New York) specified in the notice
prior to the close of business on the Exchange Date; and
(v) that Holders will be entitled to withdraw their election,
not later than the close of business on the Exchange Date, by sending
to the institution and at the address (located in the Borough of
Manhattan, The City of New York) specified in the notice a telegram,
telex, facsimile transmission or letter setting forth the name of such
Holder, the principal amount at maturity of Registrable Securities
delivered for exchange and a statement that such Holder is withdrawing
the election of such Holder to have such Securities exchanged.
As soon as practicable after the Exchange Date, the Company
shall:
(i) accept for exchange Registrable Securities or portions
thereof validly tendered and not validly withdrawn pursuant to the
Exchange Offer; and
(ii) deliver, or cause to be delivered, to the Trustee for
cancellation all Registrable Securities or portions thereof so accepted
for exchange by the Company and issue, and cause the Trustee to
promptly authenticate and mail to each Holder, an Exchange Security
equal in principal amount at maturity to the principal amount at
maturity of the Registrable Securities surrendered by such Holder.
The Company shall use its reasonable best efforts to complete the Exchange Offer
as provided above and shall comply with the applicable requirements of the 1933
Act, the 1934 Act and other applicable laws and regulations in connection with
the Exchange Offer. The Exchange Offer shall not be subject to any conditions,
other than that the Exchange Offer does not violate applicable law or any
applicable interpretation of the staff of the SEC. The Company shall inform the
Placement Agent of the names and addresses of the Holders to whom the Exchange
Offer is made, and the Placement Agent shall have the right, subject to
applicable law, to contact such Holders and otherwise facilitate the tender of
Registrable Securities in the Exchange Offer.
(b) In the event that (i) the Company determines that the
Exchange Offer
<PAGE> 7
6
Registration provided for in Section 2(a) above is not available
or may not be consummated as soon as practicable after the Exchange Date because
it would violate applicable law or the applicable interpretations of the Staff
of the SEC, (ii) the Exchange Offer is not for any other reason consummated by
December 25, 1998 or (iii) the Exchange Offer has been completed and in the
opinion of counsel for the Placement Agent a Registration Statement must be
filed and a Prospectus must be delivered by the Placement Agent in connection
with any offering or sale of Registrable Securities, the Company shall use its
reasonable best efforts to cause to be filed as soon as practicable after such
determination, date or notice of such opinion of counsel is given to the
Company, as the case may be, a Shelf Registration Statement providing for the
sale by the Holders of all of the Registrable Securities and to have such Shelf
Registration Statement declared effective by the SEC. In the event the Company
is required to file a Shelf Registration Statement solely as a result of the
matters referred to in clause (iii) of the preceding sentence, the Company shall
use its reasonable best efforts to file and have declared effective by the SEC
both an Exchange Offer Registration Statement pursuant to Section 2(a) with
respect to all Registrable Securities and a Shelf Registration Statement (which
may be a combined Registration Statement with the Exchange Offer Registration
Statement) with respect to offers and sales of Registrable Securities held by
the Initial Purchasers after completion of the Exchange Offer. The Company
agrees to use its reasonable best efforts to keep the Shelf Registration
Statement continuously effective until the expiration of the period referred to
in Rule 144(k) with respect to the Registrable Securities or such shorter period
that will terminate when all of the Registrable Securities covered by the Shelf
Registration Statement have been sold pursuant to the Shelf Registration
Statement. The Company further agrees to supplement or amend the Shelf
Registration Statement if required by the rules, regulations or instructions
applicable to the registration form used by the Company for such Shelf
Registration Statement or by the 1933 Act or by any other rules and regulations
thereunder for shelf registration or if reasonably requested by a Holder with
respect to information relating to such Holder, and to use its reasonable best
efforts to cause any such amendment to become effective and such Shelf
Registration Statement to become usable as soon as thereafter practicable. The
Company agrees to furnish to the Holders of Registrable Securities copies of any
such supplement or amendment promptly after its being used or filed with the
SEC.
(c) The Company shall pay all Registration Expenses in
connection with the registration of Securities pursuant to Section 2(a) and
Section 2(b). Each Holder shall pay all agency or brokerage fees and
commissions, underwriting discounts and commissions and transfer taxes, if any,
and the fees and disbursements of any counsel and experts retained by such
Holder (other than the one counsel for the Holders selected by the Majority
Holders), relating to the sale or disposition of such Holder's Registrable
Securities pursuant to the Shelf Registration Statement.
(d) An Exchange Offer Registration Statement pursuant to
Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b)
hereof will not be deemed to have become effective unless it has been declared
effective by the SEC; provided, however, that, if, after it has been declared
effective, the Exchange Offer or the offering of Registrable Securities pursuant
to a Shelf Registration Statement is interfered with by any stop order,
injunction or other order or requirement of the SEC or any other governmental
agency or
<PAGE> 8
7
court, such Registration Statement will not be deemed to have become
effective during the period of such interference until the Exchange Offer or the
offering of Registrable Securities pursuant to such Registration Statement may
legally resume. In the event the Exchange Offer is not consummated or, if
applicable, the Shelf Registration Statement is not declared effective on or
prior to December 25, 1998, interest on the Securities (in addition to interest
otherwise due on the Securities after such date) will accrue, at the rate of
0.5% per annum and be payable in cash semi-annually on July 1 and January 1 of
each year, commencing January 1, 1999 until either the Exchange Offer is
consummated or the Shelf Registration Statement is declared effective by the SEC
(after which time no such additional interest will accrue).
(e) The Company acknowledges that any failure by the Company
to comply with its obligations under Section 2(a) and Section 2(b) hereof may
result in material irreparable injury to the Placement Agent or the Holders for
which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of any such
failure, the Placement Agent or any Holder may obtain such relief as may be
required to specifically enforce the Company's obligations under Section 2(a)
and Section 2(b) hereof.
3. Registration Procedures.
In connection with the obligations of the Company with respect
to the Registration Statements pursuant to Section 2(a) and Section 2(b) hereof,
the Company shall as expeditiously as possible:
(a) prepare and file with the SEC a Registration Statement on
the appropriate form under the 1933 Act, which form (x) shall be
selected by the Company and (y) shall, in the case of a Shelf
Registration, be available for the sale of the Registrable Securities
by the selling Holders thereof and (z) shall comply as to form in all
material respects with the requirements of the applicable form and
include all financial statements required by the SEC to be filed
therewith, and use its reasonable best efforts to cause such
Registration Statement to become effective and remain effective in
accordance with Section 2 hereof;
(b) prepare and file with the SEC such amendments and
post-effective amendments to such Registration Statement as may be
necessary to keep such Registration Statement effective for the
applicable period and cause each Prospectus included therein to be
supplemented by any required prospectus supplement and, as so
supplemented, to be filed pursuant to Rule 424 under the 1933 Act; to
keep such Prospectus current during the period described under Section
4(3) and Rule 174 under the 1933 Act that is applicable to transactions
by brokers or dealers with respect to the Registrable Securities or
Exchange Securities;
(c) in the case of a Shelf Registration, furnish to each
Holder of Registrable Securities, to counsel for the Placement Agent,
to counsel for the Holders and to each Underwriter of an Underwritten
Offering of Registrable Securities, if any, without charge, as many
copies of each Prospectus, including each preliminary Prospectus, and
<PAGE> 9
8
any amendment or supplement thereto and such other documents as such
Holder or Underwriter may reasonably request, in order to facilitate
the public sale or other disposition of the Registrable Securities; and
the Company consents to the use of such Prospectus and any amendment or
supplement thereto in accordance with applicable law by each of the
selling Holders of Registrable Securities and any such Underwriters in
connection with the offering and sale of the Registrable Securities
covered by and in the manner described in such Prospectus or any
amendment or supplement thereto in accordance with applicable law;
(d) use its best reasonable efforts to register or qualify the
Registrable Securities under all applicable state securities or "blue
sky" laws of such jurisdictions as any Holder of Registrable Securities
covered by such Registration Statement shall reasonably request in
writing by the time such Registration Statement is declared effective
by the SEC, to cooperate with such Holders in connection with any
filings required to be made with the National Association of Securities
Dealers, Inc. and do any and all other acts and things which may be
reasonably necessary or advisable to enable such Holder to consummate
the disposition in each such jurisdiction of such Registrable
Securities owned by such Holder; provided, however, that the Company
shall not be required to (i) qualify as a foreign limited liability
company or as a dealer in securities in any jurisdiction where it would
not otherwise be required to qualify but for this Section 3(d), (ii)
file any general consent to service of process or (iii) subject itself
to taxation in any such jurisdiction in which it is not so subject;
(e) in the case of a Shelf Registration Statement, notify each
Holder of Registrable Securities, counsel for the Holders and counsel
for the Placement Agent promptly and, if requested by any such Holder
or counsel, confirm such advice in writing (i) when such Registration
Statement has become effective and when any post-effective amendment
thereto has been filed and becomes effective, (ii) of any request by
the SEC or any state securities authority for amendments and
supplements to such Registration Statement and Prospectus or for
additional information after the Registration Statement has become
effective, (iii) of the issuance by the SEC or any state securities
authority of any stop order suspending the effectiveness of such
Registration Statement or the initiation of any proceedings for that
purpose, (iv) if, between the effective date of such Registration
Statement and the closing of any sale of Registrable Securities covered
thereby, the representations and warranties of the Company contained in
any underwriting agreement, securities sales agreement or other similar
agreement, if any, relating to the offering cease to be true and
correct in all material respects or if the Company receives any
notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation
of any proceeding for such purpose, (v) of the happening of any event
during the period a Shelf Registration Statement is effective which
makes any statement made in such Registration Statement or the related
Prospectus untrue in any material respect or which requires the making
of any changes in such Registration Statement or Prospectus in order to
make the statements therein not misleading and (vi) of any
determination by the Company that a post-effective amendment to such
Registration
<PAGE> 10
9
Statement would be appropriate;
(f) make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of a Registration Statement at
the earliest possible moment and provide immediate notice to each
Holder of the withdrawal of any such order;
(g) in the case of a Shelf Registration Statement, furnish to
each Holder of Registrable Securities, without charge, at least one
conformed copy of each Registration Statement and any post-effective
amendment thereto (without documents incorporated therein by reference
or exhibits thereto, unless requested);
(h) in the case of a Shelf Registration, cooperate with the
selling Holders of Registrable Securities to facilitate the timely
preparation and delivery of certificates representing Registrable
Securities to be sold and not bearing any restrictive legends and
enable such Registrable Securities to be in such denominations
(consistent with the provisions of the Indenture) and registered in
such names as the selling Holders may reasonably request at least 3:00
p.m. New York city time two business days prior to the closing of any
sale of Registrable Securities;
(i) in the case of a Shelf Registration Statement, upon the
occurrence of any event contemplated by Section 3(e)(v) hereof, use its
reasonable best efforts to prepare and file with the SEC a supplement
or post-effective amendment to such Registration Statement or the
related Prospectus or any document incorporated therein by reference or
file any other required document so that, as thereafter delivered to
the purchasers of the Registrable Securities sold thereunder, such
Prospectus will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not
misleading. The Company agrees to notify the Holders to suspend use of
the Prospectus as promptly as practicable after the occurrence of such
an event, and the Holders hereby agree to suspend use of such
Prospectus until the Company has amended or supplemented the Prospectus
to correct such misstatement or omission;
(j) a reasonable time prior to the filing of any Registration
Statement, any Prospectus, any amendment to a Registration Statement or
amendment or supplement to a Prospectus or any document which is to be
incorporated by reference into a Registration Statement or a Prospectus
after initial filing of a Registration Statement, provide copies of
such document to the Placement Agent and its counsel (and, in the case
of a Shelf Registration Statement, the Holders and their counsel) and
make such of the representatives of the Company as shall be reasonably
requested by the Placement Agent or its counsel (and, in the case of a
Shelf Registration Statement, the Holders or their counsel) available
for discussion of such document, and shall not at any time file or make
any amendment to the Registration Statement, any Prospectus or any
amendment of or supplement to a Registration Statement or a Prospectus
or any document which is to be incorporated by reference into a
Registration Statement or a Prospectus, of which the Placement Agent
and its counsel (and, in the case of a Shelf
<PAGE> 11
10
Registration Statement, the Holders and their counsel) shall not have
previously been advised and furnished a copy or to which the Placement
Agent or its counsel (and, in the case of a Shelf Registration
Statement, the Holders or their counsel) shall object;
(k) obtain a CUSIP number for all Exchange Securities or
Registrable Securities, as the case may be, not later than the
effective date of a Registration Statement;
(l) use its reasonable best efforts to cause the Indenture to
be qualified under the Trust Indenture Act of 1939, as amended (the
"TIA"), in connection with the registration of the Exchange Securities
or Registrable Securities, as the case may be, cooperate with the
Trustee and the Holders to effect such changes to the Indenture as may
be required for the Indenture to be so qualified in accordance with the
terms of the TIA and execute, and cause the Trustee to execute all
documents as may be required to effect such changes and all other forms
and documents required to be filed with the SEC to enable the Indenture
to be so qualified in a timely manner;
(m) in the case of a Shelf Registration, make available for
inspection by a representative of the Holders of the Registrable
Securities, any Underwriter participating in any disposition pursuant
to such Shelf Registration Statement, and attorneys and accountants
designated by the Holders, at reasonable times and in a reasonable
manner, all financial and other records, pertinent documents and
properties of the Company, and cause the officers, members and
employees of the Company to supply all information reasonably requested
by any such representative, Underwriter, attorney or accountant in
connection with a Shelf Registration Statement;
(n) in the case of a Shelf Registration, use its reasonable
best efforts to cause all Registrable Securities to be listed on any
securities exchange or any automated quotation system on which similar
securities issued by the Company are then listed if requested by the
Majority Holders, to the extent such Registrable Securities satisfy
applicable listing requirements;
(o) if reasonably requested by any Holder of Registrable
Securities covered by a Shelf Registration Statement, (i) promptly
incorporate in a Prospectus supplement or post-effective amendment such
information with respect to such Holder as such Holder reasonably
requests to be included therein and (ii) make all required filings of
such Prospectus supplement or such post-effective amendment as soon as
the Company has received notification of the matters to be incorporated
in such filing; and
(p) in the case of a Shelf Registration, enter into such
customary agreements and take all such other actions in connection
therewith (including those requested by the Holders of a majority of
the aggregate principal amount of the Registrable Securities being
sold) in order to expedite or facilitate the disposition of such
Registrable Securities including, but not limited to, an Underwritten
Offering and in such connection, (i) to the extent possible, make such
representations and warranties to the
<PAGE> 12
11
Holders and any Underwriters of such Registrable Securities with
respect to the business of the Company and its subsidiaries, the
Registration Statement, Prospectus and documents incorporated by
reference or deemed incorporated by reference, if any, in each case, in
form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested, (ii) obtain opinions of counsel to the Company (which
counsel and opinions, in form, scope and substance, shall be reasonably
satisfactory to the Holders and such Underwriters and their respective
counsel) addressed to the selling Holders and such Underwriters of
Registrable Securities, covering the matters customarily covered in
opinions requested in underwritten offerings, (iii) obtain "cold
comfort" letters from the independent certified public accountants of
the Company (and, if necessary, any other certified public accountant
of any subsidiary of the Company, or of any business acquired by the
Company for which financial statements and financial data are or are
required to be included in the Registration Statement) addressed to the
selling Holders and such Underwriters of Registrable Securities, such
letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with
underwritten offerings, and (iv) deliver such documents and
certificates as may be reasonably requested by the Holders of a
majority of the aggregate principal amount of the Registrable
Securities being sold or the Underwriters, and which are customarily
delivered in underwritten offerings, to evidence the continued validity
of the representations and warranties of the Company made pursuant to
clause (i) above and to evidence compliance with any customary
conditions contained in an underwriting agreement.
In the case of a Shelf Registration Statement, the Company may
require each Holder of Registrable Securities to furnish to the Company such
information regarding the Holder and the proposed distribution by such Holder of
such Registrable Securities as the Company may from time to time reasonably
request in writing.
In the case of a Shelf Registration Statement, upon receipt of
any notice from the Company of the happening of any event of the kind described
in Section 3(e)(v) hereof, each Holder will forthwith discontinue disposition of
Registrable Securities pursuant to such Registration Statement until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 3(i) hereof, and, if so directed by the Company, such
Holder will deliver to the Company (at its expense) all copies in its
possession, other than permanent file copies then in such Holder's possession,
of the Prospectus covering such Registrable Securities current at the time of
receipt of such notice. If the Company shall give any such notice to suspend the
disposition of Registrable Securities pursuant to a Registration Statement, the
Company shall extend the period during which a Shelf Registration Statement
covering any unsold Registrable Securities shall be maintained effective
pursuant to this Agreement by the number of days during the period from and
including the date of the giving of such notice to and including the date when
the Holders shall have received copies of the supplemented or amended Prospectus
necessary to resume such dispositions, but not beyond the period referred to in
Rule 144(k). The Company may give such notice no more than five times during any
365-day period and may implement such suspensions for no more than an
<PAGE> 13
12
aggregate of 75 days during any 365-day period; provided, however, that
no such suspension may exceed 45 days.
The Holders of Registrable Securities covered by a Shelf
Registration Statement who desire to do so may sell such Registrable Securities
in an Underwritten Offering. In any such Underwritten Offering, the investment
banker or investment bankers and manager or managers (the "Underwriters") that
will administer the offering will be selected by the Majority Holders of the
Registrable Securities included in such offering; provided that such
Underwriters are reasonably acceptable to the Company.
4. Resales by Broker-Dealers of Exchange Securities.
(a) The Staff of the SEC has taken the position that any
broker-dealer that receives Exchange Securities for its own account in the
Exchange Offer in exchange for Registrable Securities that were acquired by such
broker-dealer as a result of market-making or other trading activities (a
"Participating Broker-Dealer"), may be deemed to be an "underwriter" within the
meaning of the 1933 Act and must deliver a prospectus meeting the requirements
of the 1933 Act in connection with any resale of such Exchange Securities.
The Company understands that it is the Staff's position that
if the Prospectus contained in the Exchange Offer Registration Statement
includes a plan of distribution containing a statement to the above effect and
the means by which Participating Broker-Dealers may resell any such Exchange
Securities, without naming the Participating Broker-Dealers or specifying the
amount of Exchange Securities owned by them, such Prospectus may be delivered by
Participating Broker-Dealers to satisfy their prospectus delivery obligation
under the 1933 Act in connection with resales of Exchange Securities for their
own accounts, so long as the Prospectus otherwise meets the requirements of the
1933 Act.
(b) In light of the above, notwithstanding the other
provisions of this Agreement, the Company agrees that the provisions of this
Agreement as they relate to a Shelf Registration shall also apply to an Exchange
Offer Registration to the extent, and with such reasonable modifications thereto
as may be, reasonably requested by the Placement Agent or by one or more
Participating Broker-Dealers, in each case as provided in clause (ii) below, in
order to expedite or facilitate the disposition of any Exchange Securities by
Participating Broker-Dealers consistent with the positions of the Staff recited
in Section 4(a) above; provided that:
(i) the Company shall not be required to amend or supplement
the Prospectus contained in the Exchange Offer Registration Statement,
as would otherwise be contemplated by Section 3(i), for a period
exceeding 90 days after the last Exchange Date (as such period may be
extended pursuant to the penultimate paragraph of Section 3 of this
Agreement) or after Participating Broker-Dealers no longer own any such
Exchange Securities and Participating Broker-Dealers shall not be
authorized by the Company to deliver and shall not deliver such
Prospectus after such period in connection with the resales
contemplated by this Section 4; and
<PAGE> 14
13
(ii) the application of the Shelf Registration procedures set
forth in Section 3 of this Agreement to an Exchange Offer Registration,
to the extent not required by the positions of the Staff of the SEC or
the 1933 Act and the rules and regulations thereunder, will be in
conformity with the reasonable request to the Company by the Placement
Agent or with the reasonable request in writing to the Company by one
or more broker-dealers who certify to the Placement Agent and the
Company in writing that they anticipate that they will be Participating
Broker-Dealers; and provided further that, in connection with such
application of the Shelf Registration procedures set forth in Section 3
to an Exchange Offer Registration, the Company shall be obligated (x)
to deal only with one entity representing the Participating
Broker-Dealers, which shall be Morgan Stanley & Co. Incorporated unless
it elects not to act as such representative, (y) to pay the fees and
expenses of only one counsel representing the Participating
Broker-Dealers, which shall be counsel to the Placement Agent unless
such counsel elects not to so act and (z) to cause to be delivered only
one, if any, "cold comfort" letter with respect to the Prospectus in
the form existing on the Exchange Date and with respect to each
subsequent amendment or supplement, if any, effected during the period
specified in clause (i) above, and shall not be obligated to effect an
Underwritten Offering as part of an Exchange Offer Registration for the
benefit of or on behalf of any Participating Broker-Dealers.
(c) The Placement Agent shall have no liability to the Company
or any Holder with respect to any request that it may make pursuant to Section
4(b) above.
5. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the
Placement Agent, each selling Holder and each Person, if any, who controls the
Placement Agent or any selling Holder within the meaning of either Section 15 of
the 1933 Act or Section 20 of the 1934 Act from and against all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred by the Placement Agent, any selling Holder or any
such controlling or affiliated Person in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement (or any amendment thereto) pursuant to which Exchange Securities or
Registrable Securities were registered under the 1933 Act, including all
documents incorporated therein by reference, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or caused by any
untrue statement or alleged untrue statement of a material fact contained in any
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact necessary to make the statements
therein in light of the circumstances under which they were made not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or omission or alleged untrue statement or omission based
upon information relating to the Placement Agent or any selling Holder furnished
to the Company in writing by
<PAGE> 15
14
Morgan Stanley & Co. Incorporated or any selling Holder expressly for use
therein. In connection with any Underwritten Offering permitted by Section 3,
the Company will also indemnify the Underwriters, if any, selling brokers,
dealers and similar securities industry professionals participating in the
distribution, their officers and directors and each Person who controls such
Persons (within the meaning of the 1933 Act and the 1934 Act) to the same extent
as provided above with respect to the indemnification of the Holders, if
requested in connection with any Registration Statement.
(b) Each Holder and the underwriters, if any, selling brokers
and dealers participating in the distribution shall agree, severally and not
jointly, to indemnify and hold harmless the Company, the Placement Agent and the
other selling Holders, and each of their respective directors, officers who sign
the Registration Statement and each Person, if any, who controls the Company,
the Placement Agent and any other selling Holder within the meaning of either
Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as
the foregoing indemnity from the Company to the Placement Agent and the Holders,
but only with reference to information relating to such Person furnished to the
Company in writing by such Person expressly for use in any Registration
Statement (or any amendment thereto) or any Prospectus (or any amendment or
supplement thereto).
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any Person in respect of which
indemnity may be sought pursuant to either paragraph (a) or paragraph (b) above,
such Person (the "indemnified party") shall promptly notify the Person against
whom such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for (a) the fees and expenses of more than one separate
firm (in addition to any local counsel to the extent required for effective
representation) for all such indemnified parties, and that all such fees and
expenses shall be reimbursed as they are incurred. Such firm shall be designated
in writing by Morgan Stanley & Co. Incorporated in the case of parties
indemnified pursuant to Section 5(a), and by the Company in the case of parties
indemnified pursuant to Section 5(b). The indemnifying party shall not be liable
for any settlement of any proceeding effected by an indemnified party without
its written consent, which consent shall not be unreasonably withheld, but, if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if
<PAGE> 16
15
at any time an indemnifying party is obligated, upon request by the indemnified
party, to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 90 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with its obligation prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(d) To the extent the indemnification provided for in
paragraph (a) or paragraph (b) of this Section 5 is unavailable to an
indemnified party or insufficient in respect of any losses, claims, damages or
liabilities, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities in such proportion as is appropriate to reflect the
relative fault of the indemnifying party or parties on the one hand and of the
indemnified party or parties on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative fault of the
indemnifying party, on the one hand, and the indemnified party, 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
indemnifying party or the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The selling Holders' respective obligations to contribute
pursuant to this Section 5(d) are several in proportion to the respective
principal amount of Registrable Securities of such Holder that were registered
pursuant to a Registration Statement.
(e) The Company and each Holder agree that it would not be
just or equitable if contribution pursuant to Section 5(d) were determined by
pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in paragraph (d) above shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 5(d), no selling Holder shall be required to
indemnify or contribute any amount in excess of the amount by which the total
price at which Registrable Securities were sold by such Holder exceeds the
amount of any damages that such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation. The remedies
provided for in this Section 5 are not exclusive and shall not
<PAGE> 17
16
limit any rights or remedies which may otherwise be available to any indemnified
party at law or in equity.
(f) The indemnity and contribution provisions contained in
this Section 5 shall remain operative and in full force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on
behalf of the Placement Agent, any Holder or any Person controlling the
Placement Agent or any Holder, or by or on behalf of the Company, its officers
or members or any Person controlling the Company, (iii) acceptance of any of the
Exchange Securities and (iv) any sale of Registrable Securities pursuant to a
Shelf Registration Statement.
6. Miscellaneous.
(a) No Inconsistent Agreements. The Company has not entered
into, and on or after the date of this Agreement will not enter into, any
agreement which is inconsistent with the rights granted to the Holders of
Registrable Securities in this Agreement or otherwise conflicts with the
provisions hereof. The rights granted to the Holders hereunder do not in any way
conflict with and are not inconsistent with the rights granted to the holders of
the Company's other issued and outstanding securities under any such agreements.
(b) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of Holders
of at least a majority in aggregate principal amount of the outstanding
Registrable Securities affected by such amendment, modification, supplement,
waiver or consent; provided, however, that no amendment, modification,
supplement, waiver or consent to any departure from the provisions of Section 5
hereof shall be effective as against any Holder of Registrable Securities unless
consented to in writing by such Holder.
(c) Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address given by such Holder to
the Company by means of a notice given in accordance with the provisions of this
Section 6(c), which address initially is, with respect to the Placement Agent,
the address set forth in the Placement Agreement; and (ii) if to the Company,
initially at the Company's address set forth in the Placement Agreement and
thereafter at such other address, notice of which is given in accordance with
the provisions of this Section 6(c).
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied; and
on the next business day if timely delivered to an air courier guaranteeing
overnight delivery.
<PAGE> 18
17
Copies of all such notices, demands, or other communications
shall be concurrently delivered by the Person giving the same to the Trustee, at
the address specified in the Indenture.
(d) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of each
of the parties, including, without limitation and without the need for an
express assignment, subsequent Holders; provided that nothing herein shall be
deemed to permit any assignment, transfer or other disposition of Registrable
Securities in violation of the terms of the Placement Agreement. If any
transferee of any Holder shall acquire Registrable Securities, in any manner,
whether by operation of law or otherwise, such Registrable Securities shall be
held subject to all of the terms of this Agreement and the Placement Agreement,
and by taking and holding such Registrable Securities each such Person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement and the Placement Agreement and such
Person shall be entitled to receive the benefits hereof and thereof. The
Placement Agent (in its capacity as Placement Agent) shall have no liability or
obligation to the Company with respect to any failure by a Holder to comply
with, or any breach by any Holder of, any of the obligations of such Holder
under this Agreement or the Placement Agreement.
(e) Purchases and Sales of Securities. The Company shall not,
and shall use its best efforts to cause its affiliates (as defined in Rule 405
under the 1933 Act) not to, purchase and then resell or otherwise transfer any
Securities.
(f) Third Party Beneficiary. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company, on the one
hand, and the Placement Agent, on the other hand, and each Holder shall have the
right to enforce such agreements directly to the extent it deems such
enforcement necessary or advisable to protect its rights or the rights of all
Holders hereunder.
(g) Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(i) Governing Law. This Agreement shall be governed by the
laws of the State of New York.
(j) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
<PAGE> 19
18
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
US XCHANGE, L.L.C.
By: /s/ Richard Postma
----------------------------------------
Name: Richard Postma
Title: Chief Executive Officer
Confirmed and accepted as of the date first above written:
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Gregory Attorri
-----------------------------
Name: Gregory Attorri
Title: Principal
<PAGE> 1
EXHIBIT 4.3
================================================================================
US XCHANGE, L.L.C.,
Issuer
and
THE BANK OF NEW YORK,
Trustee
_________________
Indenture
Dated as of June 25, 1998
_________________
15% Senior Notes due 2008
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA Sections Indenture Sections
<S> <C>
Section 310(a)(1)............................................................ 7.10
(a)(2)............................................................ 7.10
(b)............................................................... 7.03; 7.08
Section 311(a)............................................................... 7.03
(b)............................................................... 7.03
Section 312(a)............................................................... 2.04
(b)............................................................... 11.02
(c)............................................................... 11.02
Section 313(a)............................................................... 7.06
(b)(1)............................................................ 10.01
(b)(2)............................................................ 7.07
(c)............................................................... 7.05; 7.06; 11.02
(d)............................................................... 7.06
Section 314(a)............................................................... 4.16; 4.17; 4.18; 7.05; 11.02
(b)............................................................... 10.01
(c)(1)............................................................ 11.03
(c)(2)............................................................ 11.03
(d)............................................................... 10.01
(e)............................................................... 4.17; 11.04
Section 315(a)............................................................... 7.01; 7.02
(b)............................................................... 7.05; 11.02
(c)............................................................... 7.02
(d)............................................................... 7.02
(e)............................................................... 6.11
Section 316(a)(1)(A)......................................................... 6.05
(a)(1)(B)......................................................... 6.04
(b)............................................................... 6.07
(c)............................................................... 9.03
Section 317(a)(1)............................................................ 6.08
(a)(2)............................................................ 6.09
(b)............................................................... 2.05
Section 318(a)............................................................... 11.01
(c)............................................................... 11.01
</TABLE>
Note: The Cross-Reference Table shall not for any purpose be deemed to be a
part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE ONE DEFINITIONS; INCORPORATION BY REFERENCE; AND RULES OF
CONSTRUCTION
<S> <C>
SECTION 1.01. Definitions....................................................................................1
SECTION 1.02. Incorporation by Reference of Trust Indenture Act.............................................23
SECTION 1.03. Rules of Construction.........................................................................24
ARTICLE TWO THE NOTES
SECTION 2.01. Form and Dating...............................................................................24
SECTION 2.02. Restrictive Legends...........................................................................26
SECTION 2.03. Execution, Authentication and Denominations...................................................28
SECTION 2.04. Registrar and Paying Agent....................................................................28
SECTION 2.05. Paying Agent to Hold Money in Trust...........................................................29
SECTION 2.06. Transfer and Exchange.........................................................................30
SECTION 2.07. Book-Entry Provisions for Global Notes........................................................31
SECTION 2.08. Special Transfer Provisions...................................................................32
SECTION 2.09. Replacement Notes.............................................................................35
SECTION 2.10. Outstanding Notes.............................................................................36
SECTION 2.11. Temporary Notes...............................................................................36
SECTION 2.12. Cancellation..................................................................................37
SECTION 2.13. CUSIP Numbers.................................................................................37
SECTION 2.14. Defaulted Interest............................................................................37
SECTION 2.15. Issuance of Additional Notes..................................................................37
ARTICLE THREE REDEMPTION
SECTION 3.01. Redemption Upon Receipt of Public Equity Offering Proceeds....................................38
SECTION 3.02. Notices to Trustee............................................................................38
SECTION 3.03. Selection of Notes to Be Redeemed.............................................................38
SECTION 3.04. Notice of Redemption..........................................................................38
SECTION 3.05. Effect of Notice of Redemption................................................................39
SECTION 3.06. Deposit of Redemption Price...................................................................40
SECTION 3.07. Payment of Notes Called for Redemption........................................................40
SECTION 3.08. Notes Redeemed in Part........................................................................40
ARTICLE FOUR - COVENANTS
SECTION 4.01. Payment of Notes..............................................................................40
Note: The Table of Contents shall not for any purposes be deemed to be a part
Indenture.
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
SECTION 4.02. Maintenance of Office or Agency...............................................................41
SECTION 4.03. Limitation on Indebtedness....................................................................41
SECTION 4.04. Limitation on Restricted Payments.............................................................44
SECTION 4.05. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries.......47
SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries...............48
SECTION 4.07. Limitation on Issuances of Guarantees by Restricted Subsidiaries..............................48
SECTION 4.08. Limitation on Transactions with Stockholders and Affiliates...................................49
SECTION 4.09. Limitation on Liens...........................................................................50
SECTION 4.10. Limitation on Sale-Leaseback Transactions.....................................................50
SECTION 4.11. Limitation on Asset Sales.....................................................................51
SECTION 4.12. Repurchase of Notes upon a Change of Control..................................................52
SECTION 4.13. Existence.....................................................................................52
SECTION 4.14. Payment of Taxes and Other Claims.............................................................53
SECTION 4.15. Maintenance of Properties and Insurance.......................................................53
SECTION 4.16. Notice of Defaults............................................................................53
SECTION 4.17. Compliance Certificates.......................................................................54
SECTION 4.18. Commission Reports and Reports to Holders.....................................................54
SECTION 4.19. Waiver of Stay, Extension or Usury Laws.......................................................55
ARTICLE FIVE - SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge, Etc...................................................................55
SECTION 5.02. Successor Substituted.........................................................................56
ARTICLE SIX - DEFAULT AND REMEDIES
SECTION 6.01. Events of Default.............................................................................56
SECTION 6.02. Acceleration..................................................................................58
SECTION 6.03. Other Remedies................................................................................59
SECTION 6.04. Waiver of Past Defaults.......................................................................59
SECTION 6.05. Control by Majority...........................................................................59
SECTION 6.06. Limitation on Suits...........................................................................60
SECTION 6.07. Rights of Holders to Receive Payment..........................................................60
SECTION 6.08. Collection Suit by Trustee....................................................................60
SECTION 6.09. Trustee May File Proofs of Claim..............................................................61
SECTION 6.10. Priorities....................................................................................61
SECTION 6.11. Undertaking for Costs.........................................................................61
SECTION 6.12. Restoration of Rights and Remedies............................................................62
SECTION 6.13. Rights and Remedies Cumulative................................................................62
SECTION 6.14. Delay or Omission Not Waiver..................................................................62
ARTICLE SEVEN - TRUSTEE
SECTION 7.01. General.......................................................................................62
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
SECTION 7.02. Certain Rights of Trustee.....................................................................63
SECTION 7.03. Individual Rights of Trustee..................................................................64
SECTION 7.04. Trustee's Disclaimer..........................................................................64
SECTION 7.05. Notice of Default.............................................................................64
SECTION 7.06. Reports by Trustee to Holders.................................................................64
SECTION 7.07. Compensation and Indemnity....................................................................64
SECTION 7.08. Replacement of Trustee........................................................................65
SECTION 7.09. Successor Trustee by Merger, Etc..............................................................67
SECTION 7.10. Eligibility...................................................................................67
SECTION 7.11. Money Held in Trust...........................................................................67
ARTICLE EIGHT - DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations..........................................................67
SECTION 8.02. Defeasance and Discharge of Indenture.........................................................68
SECTION 8.03. Defeasance of Certain Obligations.............................................................70
SECTION 8.04. Application of Trust Money....................................................................72
SECTION 8.05. Repayment to Company..........................................................................73
SECTION 8.06. Reinstatement.................................................................................73
ARTICLE NINE - AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders....................................................................73
SECTION 9.02. With Consent of Holders.......................................................................74
SECTION 9.03. Revocation and Effect of Consent..............................................................75
SECTION 9.04. Notation on or Exchange of Notes..............................................................76
SECTION 9.05. Trustee to Sign Amendments, Etc...............................................................76
SECTION 9.06. Conformity with Trust Indenture Act...........................................................76
ARTICLE TEN - SECURITY
SECTION 10.01. Security.....................................................................................76
ARTICLE ELEVEN - MISCELLANEOUS
SECTION 11.01. Trust Indenture Act of 1939..................................................................79
SECTION 11.02. Notices......................................................................................79
SECTION 11.03. Certificate and Opinion as to Conditions Precedent...........................................80
SECTION 11.04. Statements Required in Certificate or Opinion................................................80
SECTION 11.05. Rules by Trustee, Paying Agent or Registrar..................................................81
SECTION 11.06. Payment Date Other Than a Business Day.......................................................81
SECTION 11.07. Governing Law................................................................................81
SECTION 11.08. No Adverse Interpretation of Other Agreements................................................81
SECTION 11.09. No Recourse Against Others...................................................................81
SECTION 11.10. Successors...................................................................................82
SECTION 11.11. Duplicate Originals..........................................................................82
SECTION 11.12. Separability.................................................................................82
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
SECTION 11.13. Table of Contents, Headings, Etc.............................................................82
EXHIBIT A Form of Note.........................................................................................A-1
EXHIBIT B Form of Certificate..................................................................................B-1
EXHIBIT C Form of Certificate to Be Delivered in Connection with
Transfers Pursuant to Non-QIB Accredited Investors...........................................C-1
EXHIBIT D Form of Certificate to Be Delivered in Connection with
Transfers Pursuant to Regulation S...........................................................D-1
</TABLE>
<PAGE> 7
INDENTURE, dated as of June 25, 1998, between US XCHANGE, L.L.C., a
Michigan limited liability company (the "Company"), and THE BANK OF NEW YORK, a
New York banking corporation, trustee (the "Trustee").
RECITALS
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance initially of up to $200,000,000 aggregate
principal amount of the Company's 15% Senior Notes due 2008 (the "Notes")
issuable as provided in this Indenture. All things necessary to make this
Indenture a valid agreement of the Company, in accordance with its terms, have
been done, and the Company has done all things necessary to make the Notes, when
executed by the Company and authenticated and delivered by the Trustee hereunder
and duly issued by the Company, valid obligations of the Company as hereinafter
provided.
The Notes will be partially secured pursuant to the terms of a Pledge
Agreement (as defined herein) by Pledged Securities as provided by Article Ten
of this Indenture.
This Indenture is subject to, and shall be governed by, the provisions
of the Trust Indenture Act of 1939, as amended, that are required to be a part
of and to govern indentures qualified under the Trust Indenture Act of 1939, as
amended.
AND THIS INDENTURE FURTHER WITNESSETH
For and in consideration of the premises and the purchase of the Notes
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders, as follows.
ARTICLE ONE
DEFINITIONS; INCORPORATION BY REFERENCE;
AND RULES OF CONSTRUCTION
SECTION 1.01. Definitions.
"Acquired Indebtedness" means Indebtedness of a Person existing at the
time such Person becomes a Restricted Subsidiary or assumed in connection with
an Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate
net income (or loss) of the Company and its Restricted Subsidiaries for such
period determined in conformity
<PAGE> 8
2
with GAAP; provided that the following items shall be excluded in computing
Adjusted Consolidated Net Income (without duplication): (i) the net income (or
loss) of any Person that is not a Restricted Subsidiary, except (x) with respect
to net income, to the extent of the amount of dividends or other distributions
actually paid to the Company or any of its Restricted Subsidiaries by such
Person during such period and (y) with respect to net losses, to the extent of
the amount of Investments made by the Company or any Restricted Subsidiary in
such Person during such period; (ii) solely for the purposes of calculating the
amount of Restricted Payments that may be made pursuant to clause (C) of the
first paragraph of Section 4.04 (and in such case, except to the extent
includable pursuant to clause (i) above), the net income (or loss) of any Person
accrued prior to the date it becomes a Restricted Subsidiary or is merged into
or consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Company or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of Section 4.04, any amount paid or accrued as
dividends on Preferred Stock of the Company or any Restricted Subsidiary owned
by Persons other than the Company and any of its Restricted Subsidiaries; (vi)
all extraordinary gains and extraordinary losses; and (vii) any compensation
expense paid or payable solely with Capital Stock (other than Disqualified
Stock) of the Company or any options, warrants or other rights to acquire
Capital Stock (other than Disqualified Stock) of the Company.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to Section 4.18.
"Affiliate" means, as applied to any Person, any other Person directly
or indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of Voting Stock, including, without limitation, membership interests,
by contract or otherwise.
<PAGE> 9
3
"Agent" means any Registrar, Co-Registrar, Paying Agent or
authenticating agent.
"Agent Members" has the meaning provided in Section 2.07(a).
"Articles of Organization" means the Articles of Organization filed by
the Company in the state of Michigan on August 5, 1996.
"Asset Acquisition" means (i) an investment by the Company or any of
its Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries; provided that such
Person's primary business is similar, related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company or
any of its Restricted Subsidiaries that constitute substantially all of a
division, operating unit or line of business of such Person; provided that the
property and assets acquired are similar, related, ancillary or complementary to
the businesses of the Company and its Restricted Subsidiaries on the date of
such acquisition.
"Asset Sale" means any sale, transfer or other disposition (including
by way of merger, consolidation or sale-leaseback transaction) in one
transaction or a series of related transactions by the Company or any of its
Restricted Subsidiaries to any Person other than the Company or any of its
Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by Article
Five; provided that "Asset Sale" shall not include (a) sales, transfers or other
dispositions of inventory, receivables and other current assets, (b) sales,
transfers or other dispositions of assets constituting a Restricted Payment
permitted to be made under Section 4.04, (c) sales, transfers or other
dispositions of assets with a fair market value (as certified in an Officers'
Certificate) not in excess of $2 million in any transaction or series of related
transactions, (d) sales, transfers or other dispositions of assets for
consideration at least equal to the fair market value of the assets sold or
disposed of, to the extent that the consideration received would constitute
property or assets of the kind described in clause (B) of the first paragraph of
Section 4.11, (e) a disposition of cash or Temporary Cash Investments, (f) the
lease, assignment of a lease or sublease of any real or personal property in the
ordinary course of business, (g) foreclosures on assets, (h) pledges of assets
or stock by the Company or any of its Restricted Subsidiaries otherwise
permitted under this Indenture, including such pledges securing Indebtedness
under the Credit Agreement or (i) sale-leaseback transactions permitted
<PAGE> 10
4
to be made under Section 4.10.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing (i) the sum of the proceeds of
(a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment payment by (ii) the sum of all such principal
payments.
"Board of Directors" means, with respect to any Person, the members,
board of directors or equivalent governing body of such Person duly authorized
to act under this Indenture.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in The City of New York, or in the city of the Corporate
Trust Office of the Trustee, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock, Preferred Stock or Membership Interests.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means, as of any time, the liability in
respect of a Capitalized Lease that would at such time be required to be
capitalized and reflected as a liability on a balance sheet prepared in
accordance with GAAP.
"Change of Control" means such time as (i) (a) prior to the occurrence
of a Public Market, a "person" or "group" (within the meaning of Sections 13(d)
and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is beneficially owned by the Existing Controlling
Holder on such date and (b) after the occurrence of a Public Market, a "person"
or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of
<PAGE> 11
5
more than 35% of the total voting power of the Voting Stock of the Company on a
fully diluted basis and such ownership represents a greater percentage of the
total voting power of the Voting Stock of the Company, on a fully diluted basis,
than is held by the Existing Controlling Holder on such date; or (ii)
individuals who on the Closing Date constitute the Board of Directors (together
with any new Directors whose election by the Board of Directors or whose
nomination by the Board of Directors for election by the holders of the
Company's Voting Stock was approved by a vote of at least two-thirds of the
members of the Board of Directors then in office who either were members of the
Board of Directors on the Closing Date or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the members of the Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued
under this Indenture.
"Collateral Agent" means the party named as such in the first paragraph
of the Pledge Agreement until a successor replaces it in accordance with the
provisions therein and thereafter means such successor.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Exchange Act or, if at any time after the
execution of this instrument such Commission is not existing and performing the
duties now assigned to it under the TIA, then the body performing such duties at
such time.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether outstanding on the Closing Date or issued thereafter,
including, without limitation, all series and classes of such common stock.
"Company" means the party named as such in the first paragraph of this
Indenture until a successor replaces it pursuant to Article Five of this
Indenture and thereafter means the successor.
"Company Order" means a written request or order signed in the name of
the Company (i) by its Chairman or any Co-Chairman, a Vice Chairman, its Chief
Executive Officer, its President or a Vice President and (ii) by its Chief
Financial Officer or Principal Accounting Officer and delivered to the Trustee;
provided, however, that such written request or order may be signed by any two
of the officers or directors listed in clause (i) above in lieu of being signed
by one of such officers or directors listed in such clause (i) and one of the
officers listed in clause (ii) above.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for
<PAGE> 12
6
such period plus, to the extent such amount was deducted in calculating such
Adjusted Consolidated Net Income, (i) Consolidated Interest Expense, (ii) income
taxes (other than income taxes (either positive or negative) attributable to
extraordinary and non-recurring gains or losses or sales of assets), (iii)
depreciation expense, (iv) amortization expense and (v) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing (or, in the case of a loss,
decreasing) Adjusted Consolidated Net Income, all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries in conformity
with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned
Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not
otherwise reduced in accordance with GAAP) or increased (in the case of a loss)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the percentage of
the Capital Stock of such Restricted Subsidiary not "beneficially owned" on the
last day of such period by the Company or any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate
amount of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and interest
in respect of Indebtedness that is Guaranteed or secured by the Company or any
of its Restricted Subsidiaries) and the interest component of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by the
Company and its Restricted Subsidiaries during such period; excluding, however,
(i) any amount of such interest of any Restricted Subsidiary if the net income
of such Restricted Subsidiary is excluded in the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof (but
only in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses
(and any amortization thereof) payable in connection with the offering of the
Notes, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio
of (i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to Section 4.18 (such
four fiscal quarter period being the "Four Quarter Period"); provided that, in
making the foregoing calculation, pro forma effect shall be given to the
following events which occur from the beginning of the Four Quarter Period
through the
<PAGE> 13
7
Transaction Date (the "Reference Period"): (A) the Incurrence of the
Indebtedness with respect to which the computation is being made and (if
applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred, and the
application of such proceeds occurred, at the beginning of the Four Quarter
Period; (B) the Incurrence, repayment or retirement of any other Indebtedness by
the Company and its Restricted Subsidiaries since the first day of the Four
Quarter Period as if such Indebtedness was incurred, repaid or retired at the
beginning of the Four Quarter Period; (C) in the case of Acquired Indebtedness,
the related acquisition, as if such acquisition occurred at the beginning of the
Four Quarter Period; and (D) any acquisition or disposition by the Company and
its Restricted Subsidiaries of any company or any business or any assets out of
the ordinary course of business, whether by merger, stock purchase or sale or
asset purchase or sale or any related repayment of Indebtedness, in each case
since the first day of the Four Quarter Period, assuming such acquisition or
disposition had been consummated on the first day of the Four Quarter Period and
after giving pro forma effect to net cost savings that the Company reasonably
believes in good faith could have been achieved during the Four Quarter Period
as a result of such acquisition or disposition (provided that both (1) such cost
savings were identified and quantified in an Officers' Certificate delivered to
the Trustee at the time of the consummation of the acquisition or disposition
and (2) with respect to each acquisition or disposition completed prior to the
ninetieth day preceding such date of determination, actions were commenced or
initiated by the Company within 90 days of such acquisition or disposition to
effect such cost savings identified in such Officers' Certificate and with
respect to any other acquisition or disposition, such Officers' Certificate sets
forth the specific steps to be taken within the 90 days after such acquisition
or disposition to accomplish such cost savings); provided that for purposes of
calculating this ratio, if any Restricted Subsidiary is not a Wholly Owned
Restricted Subsidiary, the aggregate amount of Indebtedness of the Company and
its Restricted Subsidiaries shall be reduced by an amount equal to (X) the
amount of Indebtedness attributable to such Restricted Subsidiary multiplied by
(Y) the percentage of the Capital Stock of such Restricted Subsidiary not
"beneficially owned" on the last day of such period by the Company or any of its
Restricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination, Capital
Stock as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock,
if any, and the principal amount of any promissory notes receivable from the
sale of the Capital Stock of the Company or any of its Restricted Subsidiaries,
each item to be determined in conformity with GAAP (excluding the effects of
foreign currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Corporate Trust Office" means the office of the Trustee at which the
corporate trust
<PAGE> 14
8
business of the Trustee shall, at any particular time, be principally
administered, which office is, at the date of this Indenture, located at 101
Barclay Street, Floor 21 West, New York, New York 10286, Attention: Corporate
Trust Trustee Administration.
"Credit Agreement" means the Credit Agreement, dated August 28, 1997,
between the Company and Comerica Bank, as amended from time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Depositary" means The Depository Trust Company, its nominees, and
their respective successors.
"Directors" means, with respect to any Person, the members of the Board
of Directors of such Person.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in Sections 4.11 and 4.12 and such
Capital Stock, or the agreements or instruments governing the redemption rights
thereof, specifically provides that such Person will not repurchase or redeem
any such stock pursuant to such provision prior to the Company's repurchase of
such Notes as are required to be repurchased pursuant to Sections 4.11 and 4.12.
"Event of Default" has the meaning provided in Section 6.01.
"Excess Proceeds" has the meaning provided in the final sentence of the
first paragraph of Section 4.11.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
<PAGE> 15
9
"Exchange Notes" means any securities of the Company containing terms
identical to the Notes (except that such Exchange Notes shall be registered
under the Securities Act) that are issued and exchanged for the Notes pursuant
to the Registration Rights Agreement and this Indenture.
"Existing Controlling Holder" means Ronald H. VanderPol and his
Affiliates.
"fair market value" means the price that would be paid in an
arm's-length transaction between an informed and willing seller under no
compulsion to sell and an informed and willing buyer under no compulsion to buy,
as determined in good faith by the Board of Directors, whose determination shall
be conclusive if evidenced by a Board Resolution; provided that (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by the Company exceeds $30 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking firm or a nationally recognized firm having appraisal
expertise in the specific area which is the subject of such determination and
set forth in their written opinion which shall be delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Closing Date, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as are approved by a significant
segment of the accounting profession. All ratios and computations contained or
referred to in this Indenture shall be computed in conformity with GAAP applied
on a consistent basis, except that calculations made for purposes of determining
compliance with the terms of the covenants and with other provisions of this
Indenture shall be made without giving effect to (i) the amortization of any
expenses incurred in connection with the offering of the Notes and (ii) except
as otherwise provided, the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17.
"Global Notes" has the meaning provided in Section 2.01.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any other Person
and, without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of
<PAGE> 16
10
business), to take-or-pay, or to maintain financial statement conditions or
otherwise) or (ii) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part); provided that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Guaranteed Indebtedness" has the meaning provided in Section 4.07.
"Holder" or "Noteholder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided that
a change in GAAP that results in an obligation of such Person becoming
Indebtedness shall be deemed not to be an Incurrence of such Indebtedness by
such Person and that neither the accrual of interest nor the accretion of
original issue discount shall be considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in clause (i) or (ii) above or
(v), (vi) or (vii) below) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or, if drawn
upon, to the extent such drawing is reimbursed no later than the third Business
Day following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all Capitalized
Lease Obligations of such Person, (vi) all Indebtedness referred to in clauses
(i) through (v) hereof of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person; provided
that the amount of such Indebtedness shall be the lesser of (A) the fair market
value of such asset at such date of determination and (B) the amount of such
Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person
to the extent such Indebtedness is Guaranteed by such Person and (viii) to the
extent not otherwise included in this definition, obligations under Currency
Agreements and Interest Rate Agreements. The amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date (or, in the
case of a revolving credit or other similar facility, the total amount of funds
outstanding on the date of determination) of all
<PAGE> 17
11
unconditional obligations as described above and, with respect to contingent
obligations, the maximum liability upon the occurrence of the contingency giving
rise to the obligation, provided that (A) the amount outstanding at any time of
any Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at the time of its issuance as determined in
conformity with GAAP, (B) money borrowed and set aside at the time of the
Incurrence of any Indebtedness in order to prefund the payment of the interest
on such Indebtedness shall not be deemed to be "Indebtedness" so long as such
money is held to secure the payment of such interest and (C) Indebtedness shall
not include any liability for federal, state, local or other taxes.
"Indenture" means this Indenture as originally executed or as it may be
amended or supplemented from time to time by one or more indentures supplemental
to this Indenture entered into pursuant to the applicable provisions of this
Indenture.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
under the Securities Act.
"Interest Payment Date" means each semiannual interest payment date on
July 1 and January 1 of each year, commencing January 1, 1999.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan
or other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of the Company or its Restricted Subsidiaries
and travel and similar advances to Persons in the ordinary course of business)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall include
(i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and
(ii) the fair market value of the Capital Stock (or any other Investment), held
by the Company or any of its Restricted Subsidiaries, of (or in) any Person that
has ceased to be a Restricted Subsidiary, including without limitation, by
reason of any transaction permitted by clause (iii) of Section 4.06; provided
that the fair market value of the Investment remaining in any Person that has
ceased to be a Restricted Subsidiary shall not exceed the aggregate amount of
Investments previously made in such Person valued at the time such Investments
were made less any net reduction of such Investments. For purposes of the
<PAGE> 18
12
definition of "Unrestricted Subsidiary" and Section 4.04, (i) "Investment" shall
include the fair market value of the assets (net of liabilities (other than
liabilities to the Company or any of its Restricted Subsidiaries)) of any
Restricted Subsidiary at the time that such Restricted Subsidiary is designated
an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of
liabilities (other than liabilities to the Company or any of its Restricted
Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary shall be considered a reduction
in outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
"Investment Grade Securities" means (i) securities issued or directly
and fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Temporary Cash Investments), (ii) debt
securities or debt instruments with a rating of BBB+ or higher by S&P or Baa1 or
higher by Moody's or the equivalent of such rating by such rating organization,
or, if no rating of S&P or Moody's then exists, the equivalent of such rating by
any other nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Company and
its Subsidiaries, and (iii) investments in any fund that invests exclusively in
investments of the type described in clauses (i) and (ii) which fund may also
hold cash pending investment and/or distribution.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien, adverse claim or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof or any agreement to give any security interest).
"Membership Interests" means, with respect to any Person, any and all
membership interests, participations or other equivalents (however designated,
whether voting or non-voting) in equity of such Person, whether outstanding on
the Closing Date or issued thereafter.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or Temporary Cash Investments,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or Temporary Cash Investments (except to the extent
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary) and proceeds from the conversion of other property
received when converted to cash or Temporary Cash Investments, net of (i)
brokerage commissions and other commissions, fees and expenses (including fees
and expenses of counsel, accountants and investment bankers) related to such
Asset Sale and any relocation expenses incurred as a result thereof, (ii)
provisions for all taxes (whether or not such taxes will actually be paid or
<PAGE> 19
13
are payable) as a result of such Asset Sale without regard to the consolidated
results of operations of the Company and its Restricted Subsidiaries, taken as a
whole, (iii) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is secured by a Lien
on the property or assets sold or (B) is required to be paid as a result of such
sale and (iv) appropriate amounts to be provided by the Company or any
Restricted Subsidiary as a reserve against any liabilities associated with such
Asset Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale, all as determined in conformity with GAAP and (b) with respect to any
issuance or sale of Capital Stock, the proceeds of such issuance or sale in the
form of cash or Temporary Cash Investments, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or Temporary
Cash Investments (except to the extent such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or Temporary Cash
Investments, net of attorney's fees, accountants' fees, underwriters' or
placement agent's fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Non-U.S. Person" means a person who is not a "U.S. person" (as defined
in Regulation S).
"Note Amount" has the meaning set forth in the second paragraph of
Section 4.11.
"Notes" means any of the securities, as defined in the first paragraph
of the recitals hereof, that are authenticated and delivered under this
Indenture. For all purposes of this Indenture, the term "Notes" shall include
the Notes initially issued on the Closing Date, any Exchange Notes to be issued
and exchanged for any Notes pursuant to the Registration Rights Agreement and
this Indenture and any other Notes issued after the Closing Date under this
Indenture. For purposes of this Indenture, all Notes shall vote together as one
series of Notes under this Indenture.
"Offer to Purchase" means an offer to purchase Notes by the Company
from the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note
<PAGE> 20
14
purchased pursuant to the Offer to Purchase will be required to surrender the
Note, together with the form entitled "Option of the Holder to Elect Purchase"
on the reverse side of the Note completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
immediately preceding the Payment Date; (vi) that Holders will be entitled to
withdraw their election if the Paying Agent receives, not later than the close
of business on the third Business Day immediately preceding the Payment Date, a
facsimile transmission or letter setting forth the name of such Holder, the
principal amount of Notes delivered for purchase and a statement that such
Holder is withdrawing its election to have such Notes purchased; and (vii) that
Holders whose Notes are being purchased only in part will be issued new Notes
equal in principal amount to the unpurchased portion of the Notes surrendered;
provided that each Note purchased and each new Note issued shall be in a
principal amount of $1,000 or an integral multiple thereof. On the Payment Date,
the Company shall (i) accept for payment on a pro rata basis Notes or portions
thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee
all Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
an integral multiple thereof. The Company will publicly announce the results of
an Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. The Company will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Notes pursuant to an
Offer to Purchase.
"Officer" means, with respect to the Company, the Chairman or any
Co-Chairman, the Chief Executive Officer, the President, any Vice President,
Chief Financial Officer or the Principal Accounting Officer of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
Each Officers' Certificate (other than certificates provided pursuant to TIA
Section 314(a)(4)) shall include the statements provided for in TIA Section
314(e).
"Offshore Global Note" has the meaning provided in Section 2.01.
"Offshore Physical Notes" has the meaning provided in Section 2.01.
"Operating Agreement" means the limited liability operating agreement
of the Company between Richard Postma and Ronald VanderPol dated as of August 1,
1996.
<PAGE> 21
15
"Opinion of Counsel" means a written opinion signed by legal counsel,
who may be an employee of or counsel to the Company, that meets the requirements
of Section 11.04 hereof. Each such Opinion of Counsel shall include the
statements provided for in TIA Section 314(e).
"Paying Agent" has the meaning provided in Section 2.04, except that,
for the purposes of Article Eight, the Paying Agent shall not be the Company or
a Subsidiary of the Company or an Affiliate of any of them. The term "Paying
Agent" includes any additional Paying Agent.
"Payment Date" has the meaning provided in the definition of Offer to
Purchase.
"Permanent Offshore Global Notes" has the meaning provided in Section
2.01.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
similar, related, ancillary or complementary to the businesses of the Company
and its Restricted Subsidiaries on the date of such Investment; (ii) Temporary
Cash Investments and Investment Grade Securities; (iii) payroll, travel and
similar advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP; (iv) any
Investment acquired by the Company or any of its Restricted Subsidiaries (x) in
exchange for any other Investment or accounts receivable held by the Company or
any such Restricted Subsidiary in connection with or as a result of a
bankruptcy, workout, reorganization or recapitalization of the issuer of such
other Investment or accounts receivable or an Affiliate of such issuer, (y) as a
result of a foreclosure by the Company or any of its Restricted Subsidiaries
with respect to any secured Indebtedness or other transfer of title with respect
to any secured Indebtedness in default or (z) in satisfaction of a judgment; (v)
any Investment acquired in consideration for the issuance of Capital Stock
(other than Disqualified Stock) or the proceeds of the issuance of Capital Stock
(other than Disqualified Stock) to the extent such amounts have not been
previously used to support a Restricted Payment pursuant to clause (C)(2) of the
first paragraph of Section 4.04 or clause (iii) or (iv) of the second paragraph
of Section 4.04 or used to support the Incurrence of Indebtedness pursuant to
clause (viii) of the second paragraph of part (a) under Section 4.03 and
Investments acquired as a capital contribution; provided that such proceeds
shall be used on or prior to 60 days after their receipt by the Company; (vi)
Guarantees permitted by Section 4.03; (vii) loans or advances to employees of
the Company or any Restricted Subsidiary that do not in the aggregate exceed at
any one time outstanding $2 million; (viii) Currency Agreements and Interest
Rate Agreements permitted under Section 4.03; (ix) Investments in prepaid
expenses, negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar
<PAGE> 22
16
deposits; (x) Investments in debt securities or other evidences of Indebtedness
that are issued by companies engaged in the Telecommunications Business;
provided that when each Investment pursuant to this clause (x) is made, the
aggregate amount of Investments outstanding under this clause (x) does not
exceed $3 million; (xi) Strategic Investments and Investments in any Permitted
Joint Venture in an amount not to exceed $20 million at any one time
outstanding; (xii) an Investment in any Person the primary business of which is
similar, related, ancillary or complementary to the businesses of the Company
and its Subsidiaries on the date of such Investment in an amount not to exceed
at any time outstanding the sum of (x) $23 million plus (y) 10% of the Company's
Consolidated EBITDA, if positive, for the immediately preceding four fiscal
quarters (valued in each case as provided in the definition of "Investments");
(xiii) securities received in connection with Asset Sales to the extent
constituting non-cash consideration permitted under Section 4.11; (xiv)
Investments in an amount not to exceed $5 million at any time outstanding; and
(xv) Investments existing on the Closing Date.
"Permitted Joint Venture" means any Unrestricted Subsidiary or any
other Person in which the Company or a Restricted Subsidiary owns, directly or
indirectly, an ownership interest (other than a Restricted Subsidiary) and whose
primary business is similar, related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries at the time of
determination.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with Section
4.03, to finance the cost (including the cost
<PAGE> 23
17
of design, development, acquisition, construction, installation, improvement,
transportation or integration) of the item of property or assets subject thereto
and such Lien is created prior to, at the time of or within six months after the
later of the acquisition, the completion of construction or the commencement of
full operation of such property, (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such cost and (c) any such Lien
shall not extend to or cover any property or assets other than such item of
property or assets and any improvements on such item; (vii) leases or subleases
granted to others that do not materially interfere with the ordinary course of
business of the Company and its Restricted Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of the Company or its Restricted
Subsidiaries relating to such property or assets; (ix) any interest or title of
a lessor in the property subject to any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or becomes
a part of, any Restricted Subsidiary; provided that such Liens do not extend to
or cover any property or assets of the Company or any Restricted Subsidiary
other than the property or assets acquired; (xii) Liens in favor of the Company
or any Restricted Subsidiary; (xiii) Liens arising from the rendering of a final
judgment or order against the Company or any Restricted Subsidiary that does not
give rise to an Event of Default; (xiv) Liens securing reimbursement obligations
with respect to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds thereof; (xv)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in connection with the importation of goods;
(xvi) Liens encumbering customary initial deposits and margin deposits, and
other Liens that are within the general parameters customary in the industry and
incurred in the ordinary course of business, in each case, securing Indebtedness
under Interest Rate Agreements and Currency Agreements and forward contracts,
options, future contracts, futures options or similar agreements or arrangements
designed solely to protect the Company or any of its Restricted Subsidiaries
from fluctuations in interest rates, currencies or the price of commodities;
(xvii) Liens arising out of conditional sale, title retention, consignment or
similar arrangements for the sale of goods entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business in accordance
with the past practices of the Company and its Restricted Subsidiaries prior to
the Closing Date; (xviii) Liens on or sales of receivables; and (xix) Liens that
secure Indebtedness with an aggregate principal amount not in excess of $5
million at any time outstanding.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Physical Notes" has the meaning provided in Section 2.01.
<PAGE> 24
18
"Pledge Account" means an account established with the Collateral Agent
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities to be purchased by the Company with the net proceeds from the sale of
the Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the Closing Date, among the Company, the Trustee and the Collateral
Agent, governing the disbursement of funds from the Pledge Account maintained by
the Collateral Agent, as such agreement may be amended, restated, supplemented
or otherwise modified from time to time.
"Pledged Securities" means the U.S. Government Obligations to be
purchased by the Company and held in the Pledge Account in accordance with the
Pledge Agreement.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference equity,
whether outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred or preference stock.
"principal" of a debt security, including the Notes, means the
principal amount due on the Stated Maturity as shown on such debt security.
"Private Placement Legend" means the legend initially set forth on the
Notes in the form set forth in Section 2.02.
"Public Equity Offering" means an underwritten primary public offering
of Capital Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity
Offering has been consummated and (ii) at least 15% of the total issued and
outstanding Capital Stock of the Company immediately prior to the consummation
of such Public Equity Offering has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Redemption Date" means, when used with respect to any Note to be
redeemed, the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price" means, when used with respect to any Note to be
redeemed, the price at which such Note is to be redeemed pursuant to this
Indenture.
"Registrar" has the meaning provided in Section 2.04.
<PAGE> 25
19
"Registration" has the meaning provided in Section 4.18.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated June 25, 1998, between the Company and Morgan Stanley & Co.
Incorporated and permitted successors, assigns and transferees as specified
therein.
"Registration Statement" means the Registration Statement as defined
and described in the Registration Rights Agreement.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the June 15 or December 15 (whether or not a Business Day), as the
case may be, next preceding such Interest Payment Date.
"Regulation D" means Regulation D under the Securities Act.
"Regulation S" means Regulation S under the Securities Act.
"Responsible Officer," when used with respect to the Trustee, means any
vice president, any assistant vice president, any assistant secretary, any
assistant treasurer, any trust officer or assistant trust officer, or any other
officer of the Trustee in its corporate trust department customarily performing
functions similar to those performed by any of the above-designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of his or her knowledge of and
familiarity with the particular subject.
"Restricted Payments" has the meaning provided in Section 4.04.
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, and its successors.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Register" has the meaning provided in Section 2.04.
"Shelf Registration Statement" means the Shelf Registration Statement
as defined in the Registration Rights Agreement.
<PAGE> 26
20
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Stated Maturity" means, (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Strategic Investments" means (A) Investments that the Board of
Directors has determined in good faith will enable the Company or any of its
Restricted Subsidiaries to obtain additional business that it might not be able
to obtain without making such Investment and (B) Investments in entities the
principal function of which is to perform research and development with respect
to products and services that may be used or useful in the Telecommunications
Business; provided that the Company or one of its Restricted Subsidiaries is
entitled or otherwise reasonably expects to obtain rights to such products or
services as a result of such Investment.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in a business that is
similar, related, ancillary or complementary to the businesses conducted by the
Company or any of its Restricted Subsidiaries, which Indebtedness by its terms,
or by the terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, (i) is expressly made subordinate in right of payment
to the Notes and (ii) provides that no payment of principal, premium or interest
on, or any other payment with respect to, such Indebtedness may be made prior to
the payment in full of all of the Company's obligations under the Notes;
provided that such Indebtedness may provide for and be repaid at any time from
the proceeds of a capital contribution or the sale of Capital Stock (other than
Disqualified Stock) of the Company after the Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which 50% or more of the voting power of
the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Subsidiary Guarantee" has the meaning provided in Section 4.07.
<PAGE> 27
21
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting,
or providing services relating to the transmission of, voice, fax, video or data
through owned or leased transmission facilities or the provision of Internet
related services, (ii) creating, developing or marketing communications related
network equipment, software and other devices for use in a Telecommunications
Business or (iii) evaluating, participating or pursuing any other activity or
opportunity that is primarily related to those identified in (i) or (ii) above;
provided that the determination of what constitutes a Telecommunications
Business shall be made in good faith by the Board of Directors, whose
determination shall be conclusive if evidenced by a Board Resolution.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clauses (i) and
(ii) above entered into with a bank meeting the qualifications described in
clause (ii) above, (iv) commercial paper, maturing not more than one year after
the date of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according
to S&P, (v) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by S&P or
Moody's, and (vi) investment funds investing 95% or more of their assets in
securities of the type described in clauses (i) through (v) above.
"Temporary Offshore Global Notes" has the meaning provided in Section
2.01.
"TIA" or "Trust Indenture Act" means the Trust Indenture Act of
1939 (15 U.S. Code Sections 77aaa-77bbbb), as in effect on the date this
Indenture was executed (except as provided in
<PAGE> 28
22
Section 9.06).
"Trade Payables" means, with respect to any Person, any accounts
payable or any other Indebtedness or monetary obligation to trade creditors
created, assumed or Guaranteed by such Person or any of its Subsidiaries arising
in the ordinary course of business in connection with the acquisition of goods
or services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Trustee" means the party named as such in the first paragraph of this
Indenture until a successor replaces it in accordance with the provisions of
Article Seven of this Indenture and thereafter means such successor.
"United States Bankruptcy Code" means the Bankruptcy Reform Act of
1978, as amended and as codified in Title 11 of the United States Code, as
amended from time to time hereafter, or any successor federal bankruptcy law.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below; and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under Section 4.04; and (C) if
applicable, the Incurrence of Indebtedness and the Investment referred to in
clause (A) of this proviso would be permitted under Sections 4.03 and 4.04. The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that (i) no Default or Event of Default shall have occurred
and be continuing at the time of or after giving effect to such designation and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately after such designation would, if Incurred at such time, have been
permitted to be Incurred (and shall be deemed to have been Incurred) for all
purposes of the Indenture. Any such designation by the Board of Directors shall
be evidenced to the Trustee by promptly filing with the Trustee a copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
<PAGE> 29
23
"U.S. Global Notes" has the meaning provided in Section 2.01.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of the Notes, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such U.S.
Government Obligation or a specific payment of interest on or principal of any
such U.S. Government Obligation held by such custodian for the account of the
holder of a depository receipt; provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of interest on
or principal of the U.S. Government Obligation evidenced by such depository
receipt.
"U.S. Physical Notes" has the meaning provided in Section 2.01.
"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of Directors
of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any Director's qualifying investments or investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
SECTION 1.02. Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Notes;
"indenture security holder" means a Holder or a Noteholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee; and
"obligor" on the indenture securities means the Company or any
other obligor on the Notes.
<PAGE> 30
24
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by a rule of the
Commission and not otherwise defined herein have the meanings assigned to them
therein.
SECTION 1.03. Rules of Construction. Unless the context otherwise
requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined herein has
the meaning assigned to it in accordance with GAAP;
(iii) "or" is not exclusive;
(iv) words in the singular include the plural, and words in
the plural include the singular;
(v) provisions apply to successive events and
transactions;
(vi) "herein," "hereof" and other words of similar import
refer to this Indenture as a whole and not to any particular Article,
Section or other subdivision;
(vii) all ratios and computations based on GAAP contained in
this Indenture shall be computed in accordance with the definition of
GAAP set forth in Section 1.01; and
(viii) all references to Sections or Articles refer to
Sections or Articles of this Indenture unless otherwise indicated.
ARTICLE TWO
THE NOTES
SECTION 2.01. Form and Dating. The Notes and the Trustee's certificate
of authentication shall be substantially in the form annexed hereto as Exhibit A
with such appropriate insertions, omissions, substitutions and other variations
as are required or permitted by this Indenture. The Notes may have notations,
legends or endorsements required by law, stock exchange agreements to which the
Company is subject or usage. The Company shall approve the form of the Notes and
any notation, legend or endorsement on the Notes. Each Note shall be dated the
date of its authentication.
The terms and provisions contained in the form of the Notes annexed
hereto as Exhibit
<PAGE> 31
25
A shall constitute, and are hereby expressly made, a part of
this Indenture. To the extent applicable, the Company and the Trustee, by their
execution and delivery of this Indenture, expressly agree to such terms and
provisions and to be bound thereby.
Notes offered and sold in reliance on Rule 144A shall be issued
initially in the form of one or more permanent global Notes in registered form,
substantially in the form set forth in Exhibit A (the "U.S. Global Notes"),
registered in the name of the nominee of the Depositary, deposited with the
Trustee, as custodian for the Depositary, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. The aggregate principal
amount of the U.S. Global Notes may from time to time be increased or decreased
by adjustments made on the records of the Trustee, as custodian for the
Depositary or its nominee, in accordance with the instructions given by the
Holder thereof, as hereinafter provided.
Notes offered and sold in offshore transactions in reliance on
Regulation S shall be issued initially in the form of one or more temporary
global Notes in registered form substantially in the form set forth in Exhibit A
(the "Temporary Offshore Global Notes"), registered in the name of the nominee
of the Depositary, deposited with the Trustee, as custodian for the Depositary,
duly executed by the Company and authenticated by the Trustee as hereinafter
provided. At any time on or after August 4, 1998, upon receipt by the Trustee
and the Company of a certificate substantially in the form of Exhibit B hereto,
one or more permanent global Notes in registered form substantially in the form
set forth in Exhibit A (the "Permanent Offshore Global Notes"; and together with
the Temporary Offshore Global Notes, the "Offshore Global Notes") duly executed
by the Company and authenticated by the Trustee as hereinafter provided shall be
deposited with the Trustee, as custodian for the Depositary or its nominee, and
the Registrar shall reflect on its books and records the date and a decrease in
the principal amount of the Temporary Offshore Global Notes in an amount equal
to the principal amount of the beneficial interest in the Temporary Offshore
Global Notes transferred.
Notes offered and sold in reliance on Regulation D shall be issued in
the form of permanent certificated Notes in registered form in substantially the
form set forth in Exhibit A (the "U.S. Physical Notes").
Notes issued pursuant to Section 2.07 in exchange for interests in the
Offshore Global Notes shall be in the form of permanent certificated Notes in
registered form substantially in the form set forth in Exhibit A (the "Offshore
Physical Notes").
The Offshore Physical Notes and U.S. Physical Notes are sometimes
collectively herein referred to as the "Physical Notes." The U.S. Global Notes
and the Offshore Global Notes are sometimes referred to herein as the "Global
Notes."
The definitive Notes shall be typed, printed, lithographed or engraved
or produced by
<PAGE> 32
26
any combination of these methods or may be produced in any other manner
permitted by the rules of any securities depositary or of any securities
exchange on which the Notes may be listed or by usage, all as determined by the
Officers executing such Notes, as evidenced by their execution of such Notes.
SECTION 2.02. Restrictive Legends. Unless and until a Note is exchanged
for an Exchange Note or sold in connection with an effective Registration
Statement pursuant to the Registration Rights Agreement or until the period
referenced in Rule 144(k) under the Securities Act has expired, it shall bear
the legend set forth below on the face thereof.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED
STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS
SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER"
(AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2),
(3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL
ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING
THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S
UNDER THE SECURITIES ACT; (2) AGREES THAT IT WILL NOT, WITHIN THE TIME
PERIOD REFERRED TO UNDER RULE 144(k) UNDER THE SECURITIES ACT AS IN
EFFECT ON THE DATE OF TRANSFER OF THIS NOTE, TAKING INTO ACCOUNT THE
PROVISIONS OF RULE 144(d) UNDER THE SECURITIES ACT, IF APPLICABLE,
RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY
SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN
COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE
UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO
SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING
CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON
TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM
THE TRUSTEE), AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE
PRINCIPAL AMOUNT OF NOTES OF LESS THAN $100,000, AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE
SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER
THE SECURITIES ACT (IF
<PAGE> 33
27
AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON
TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THE
TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE
BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH
TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED
TRANSFEREE IS AN ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH
TRANSFER, FURNISH TO EACH OF THE TRUSTEE AND THE COMPANY SUCH
CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM
MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE
TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE
THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO
REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING
RESTRICTIONS.
Each Global Note, whether or not an Exchange Note, shall also bear the
following legend on the face thereof:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, TO THE COMPANY OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER ENTITY
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE
SHALL BE LIMITED TO TRANSFERS
<PAGE> 34
28
MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.08 OF
THE INDENTURE.
SECTION 2.03. Execution, Authentication and Denominations. Subject to
Article Four and applicable law, the aggregate principal amount of Notes which
may be authenticated and delivered under this Indenture is unlimited. The Notes
shall be executed by two Officers of the Company. The signature of these
Officers on the Notes may be by facsimile or manual signature in the name and on
behalf of the Company.
If an Officer whose signature is on a Note no longer holds that office
at the time the Trustee or authenticating agent authenticates the Note, the Note
shall be valid nevertheless.
A Note shall not be valid until the Trustee or authenticating agent
manually signs the certificate of authentication on the Note. The signature
shall be conclusive evidence that the Note has been authenticated under this
Indenture.
At any time and from time to time after the execution of this
Indenture, the Trustee or an authenticating agent shall upon receipt of a
Company Order authenticate for original issue Notes in the aggregate principal
amount specified in such Company Order; provided that the Trustee shall be
entitled to receive an Officers' Certificate and an Opinion of Counsel of the
Company in connection with such authentication of Notes. Such Company Order
shall specify the amount of Notes to be authenticated and the date on which the
original issue of Notes is to be authenticated and, in case of an issuance of
Notes pursuant to Section 2.15, shall certify that such issuance is in
compliance with Article Four.
The Trustee may appoint an authenticating agent to authenticate Notes.
An authenticating agent may authenticate Notes whenever the Trustee may do so.
Each reference in this Indenture to authentication by the Trustee includes
authentication by such authenticating agent. An authenticating agent has the
same rights as an Agent to deal with the Company or an Affiliate of the Company.
The Notes shall be issuable only in registered form without coupons and
only in denominations of $1,000 in principal amount and any integral multiple
thereof.
SECTION 2.04. Registrar and Paying Agent. The Company shall maintain an
office or agency where Notes may be presented for registration of transfer or
for exchange (the "Registrar"), an office or agency where Notes may be presented
for payment (the "Paying Agent") and an office or agency where notices and
demands to or upon the Company in respect of the Notes and this Indenture may be
served, which shall be in the Borough of Manhattan, The City of New York. The
Company shall cause the Registrar to keep a register of the Notes and of their
transfer and exchange (the "Security Register"). The Security Register shall be
in written form or any other form capable of being converted into written
<PAGE> 35
29
form within a reasonable time. The Company may have one or more co-Registrars
and one or more additional Paying Agents.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall give
prompt written notice to the Trustee of the name and address of any such Agent
and any change in the address of such Agent. If the Company fails to maintain a
Registrar, Paying Agent and/or agent for service of notices and demands, the
Trustee shall act as such Registrar, Paying Agent and/or agent for service of
notices and demands. The Company may remove any Agent upon written notice to
such Agent and the Trustee; provided that no such removal shall become effective
until (i) the acceptance of an appointment by a successor Agent to such Agent as
evidenced by an appropriate agency agreement entered into by the Company and
such successor Agent and delivered to the Trustee or (ii) notification to the
Trustee that the Trustee shall serve as such Agent until the appointment of a
successor Agent in accordance with clause (i) of this proviso. The Company, any
Subsidiary of the Company, or any Affiliate of any of them may act as Paying
Agent, Registrar or co-Registrar, and/or agent for service of notice and
demands.
The Company initially appoints the Trustee as Registrar, Paying Agent,
authenticating agent and agent for service of notice and demands. The Trustee
shall preserve in as current a form as is reasonably practicable the most recent
list available to it of the names and addresses of Holders and shall otherwise
comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company
shall furnish to the Trustee as of each Regular Record Date and at such other
times as the Trustee may reasonably request the names and addresses of Holders
as they appear in the Security Register, including the aggregate principal
amount of Notes held by each Holder.
SECTION 2.05. Paying Agent to Hold Money in Trust. Not later than 10:00
a.m. (New York City time) each due date of the principal, premium, if any, and
interest on any Notes, the Company shall deposit with the Paying Agent money in
immediately available funds sufficient to pay such principal, premium, if any,
and interest so becoming due. The Company shall require each Paying Agent other
than the Trustee to agree in writing that such Paying Agent shall hold in trust
for the benefit of the Holders or the Trustee all money held by the Paying Agent
for the payment of principal of, premium, if any, and interest on the Notes
(whether such money has been paid to it by the Company or any other obligor on
the Notes), and such Paying Agent shall promptly notify the Trustee of any
default by the Company (or any other obligor on the Notes) in making any such
payment. The Company at any time may require a Paying Agent to pay all money
held by it to the Trustee and account for any funds disbursed, and the Trustee
may at any time during the continuance of any payment default, upon written
request to a Paying Agent, require such Paying Agent to pay all money held by it
to the Trustee and to account for any funds disbursed. Upon doing so, the Paying
Agent shall have no further liability for the money so paid over to the Trustee.
If the Company or any
<PAGE> 36
30
Subsidiary of the Company or any Affiliate of any of them acts as Paying Agent,
it will, on or before each due date of any principal of, premium, if any, or
interest on the Notes, segregate and hold in a separate trust fund for the
benefit of the Holders a sum of money sufficient to pay such principal, premium,
if any, or interest so becoming due until such sum of money shall be paid to
such Holders or otherwise disposed of as provided in this Indenture, and will
promptly notify the Trustee of its action or failure to act.
SECTION 2.06. Transfer and Exchange. The Notes are issuable only in
registered form. A Holder may transfer a Note only by written application to the
Registrar stating the name of the proposed transferee and otherwise complying
with the terms of this Indenture. No such transfer shall be effected until, and
such transferee shall succeed to the rights of a Holder only upon, final
acceptance and registration of the transfer by the Registrar in the Security
Register. Prior to the registration of any transfer by a Holder as provided
herein, the Company, the Trustee, and any agent of the Company shall treat the
person in whose name the Note is registered as the owner thereof for all
purposes whether or not the Note shall be overdue, and neither the Company, the
Trustee, nor any such agent shall be affected by notice to the contrary.
Furthermore, any Holder of a Global Note shall, by acceptance of such Global
Note, agree that transfers of beneficial interests in such Global Note may be
effected only through a book entry system maintained by the Holder of such
Global Note (or its agent) and that ownership of a beneficial interest in the
Note shall be required to be reflected in a book entry. When Notes are presented
to the Registrar or a co-Registrar with a request to register the transfer or to
exchange them for an equal principal amount of Notes of other authorized
denominations (including an exchange of Notes for Exchange Notes), the Registrar
shall register the transfer or make the exchange as requested if its
requirements for such transactions are met (including that such Notes are duly
endorsed or accompanied by a written instrument of transfer in form satisfactory
to the Trustee and Registrar duly executed by the Holder thereof or by an
attorney who is authorized in writing to act on behalf of the Holder); provided
that no exchanges of Notes for Exchange Notes shall occur until a Registration
Statement shall have been declared effective by the Commission and that any
Notes that are exchanged for Exchange Notes shall be cancelled by the Trustee.
To permit registrations of transfers and exchanges, the Company shall execute
and the Trustee shall authenticate Notes at the Registrar's request. No service
charge shall be made for any registration of transfer or exchange or redemption
of the Notes, but the Company may require payment of a sum sufficient to cover
any transfer tax or similar governmental charge payable in connection therewith
(other than any such transfer taxes or other similar governmental charge payable
upon exchanges pursuant to Section 2.11, 3.08 or 9.04).
The Registrar shall not be required (i) to issue, register the transfer
of or exchange any Note during a period beginning at the opening of business 15
days before the day of the mailing of a notice of redemption of Notes selected
for redemption under Section 3.03 and ending at the close of business on the day
of such mailing, or (ii) to register the transfer of or exchange any Note so
selected for redemption in whole or in part, except the unredeemed
<PAGE> 37
31
portion of any Note being redeemed in part.
SECTION 2.07. Book-Entry Provisions for Global Notes. (a) The U.S.
Global Notes and Offshore Global Notes initially shall (i) be registered in the
name of the Depositary for such Global Notes or the nominee of such Depositary,
(ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear
legends as set forth in Section 2.02.
Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depositary, or the Trustee as its custodian, or under such
Global Note, and the Depositary may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of such Global
Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein
shall prevent the Company, the Trustee or any agent of the Company or the
Trustee, from giving effect to any written certification, proxy or other
authorization furnished by the Depositary or impair, as between the Depositary
and its Agent Members, the operation of customary practices governing the
exercise of the rights of a holder of any Note.
(b) Transfers of a Global Note shall be limited to transfers of such
Global Note in whole, but not in part, to the Depositary, its successors or
their respective nominees. Interests of beneficial owners in Global Notes may be
transferred in accordance with the rules and procedures of the Depositary and
the provisions of Section 2.08. In addition, U.S. Physical Notes and Offshore
Physical Notes shall be transferred to all beneficial owners in exchange for
their beneficial interests in the U.S. Global Notes or the Offshore Global
Notes, as the case may be, if (i) the Depositary notifies the Company that it is
unwilling or unable to continue as Depositary for the U.S. Global Notes or the
Offshore Global Notes, as the case may be, and a successor depositary is not
appointed by the Company within 90 days of such notice, (ii) an Event of Default
has occurred and is continuing and the Registrar has received a request from the
Depositary or (iii) in accordance with the rules and procedures of the
Depositary and the provisions of Section 2.08.
(c) Any beneficial interest in one of the Global Notes that is
transferred to a person who takes delivery in the form of an interest in another
Global Note will, upon transfer, cease to be an interest in such Global Note and
become an interest in such other Global Note and, accordingly, will thereafter
be subject to all transfer restrictions, if any, and other procedures applicable
to beneficial interests in such other Global Note for as long as it remains such
an interest.
(d) In connection with any transfer of a portion of the beneficial
interests in a Global Note to beneficial owners pursuant to paragraph (b) of
this Section 2.07, the Registrar shall reflect on its books and records the date
and a decrease in the principal amount of such Global Note in an amount equal to
the principal amount of the beneficial interest in such Global Note to be
transferred, and the Company shall execute, and the Trustee shall authenticate
and deliver, one or more U.S. Physical Notes or Offshore Physical Notes, as the
<PAGE> 38
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case may be, of like tenor and amount.
(e) In connection with the transfer of the U.S. Global Notes or the
Offshore Global Notes, in whole, to beneficial owners pursuant to paragraph (b)
of this Section 2.07, the U.S. Global Notes or Offshore Global Notes, as the
case may be, shall be deemed to be surrendered to the Trustee for cancellation,
and the Company shall execute, and the Trustee shall authenticate and deliver,
to each beneficial owner identified by the Depositary in exchange for its
beneficial interest in the U.S. Global Notes or Offshore Global Notes, as the
case may be, an equal aggregate principal amount of U.S. Physical Notes or
Offshore Physical Notes, as the case may be, of authorized denominations.
(f) Any U.S. Physical Note delivered in exchange for an interest in the
U.S. Global Notes pursuant to paragraph (b), (d) or (e) of this Section 2.07
shall, except as otherwise provided by paragraph (f) of Section 2.08, bear the
legend regarding transfer restrictions applicable to the U.S. Physical Note set
forth in Section 2.02.
(g) Any Offshore Physical Note delivered in exchange for an interest in
the Offshore Global Notes pursuant to paragraph (b), (d) or (e) of this Section
2.07 shall, except as otherwise provided by paragraph (f) of Section 2.08, bear
the legend regarding transfer restrictions applicable to the Offshore Physical
Note set forth in Section 2.02.
(h) The registered holder of a Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
SECTION 2.08. Special Transfer Provisions. Unless and until a Note is
exchanged for an Exchange Note or sold in connection with an effective
Registration Statement pursuant to the Registration Rights Agreement, the
following provisions shall apply:
(a) Transfers to Non-QIB Institutional Accredited Investors. The
following provisions shall apply with respect to the registration of any
proposed transfer of a Note to any Institutional Accredited Investor which is
not a QIB (excluding a transfer to a Non-U.S. Person outside the United States
in an Offshore Transaction in compliance with Regulation S):
(i) The Registrar shall register the transfer of any Note,
whether or not such Note bears the Private Placement Legend, if (x) the
requested transfer is after the time period referred to in Rule 144(k)
under the Securities Act or (y) the proposed transferee has delivered
to the Registrar (A) a certificate substantially in the form of Exhibit
C hereto and (B) if the aggregate principal amount of the Notes being
transferred is less than $100,000, an opinion of counsel acceptable to
the Company that such transfer is in compliance with the Securities
Act.
<PAGE> 39
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(ii) If the proposed transferor is an Agent Member holding a
beneficial interest in the Global Notes, upon receipt by the Registrar
of (x) the documents, if any, required by paragraph (i) above and (y)
instructions given in accordance with the Depositary's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and a decrease in the principal amount of the Global
Notes in an amount equal to the principal amount of the beneficial
interest in the Global Notes to be transferred, and the Company shall
execute, and the Trustee shall authenticate and deliver, one or more
U.S. Physical Notes of like tenor and amount.
(b) Transfers to QIBs. The following provisions shall apply with
respect to the registration of any proposed transfer of a Note to a QIB
(excluding a transfer to a Non-U.S. Person outside the United States in an
Offshore Transaction in compliance with Regulation S):
(i) The Registrar shall register the transfer of any Note,
whether or not such Note bears the Private Placement Legend, if (x) the
requested transfer is after the time period referred to in Rule 144(k)
under the Securities Act or (y) such transfer is being made by a
proposed transferor who has checked the box provided for on the form of
Note stating, or has otherwise advised the Company and the Registrar in
writing, that the sale has been made in compliance with the provisions
of Rule 144A to a transferee who has signed the certification provided
for on the form of Note stating, or has otherwise advised the Company
and the Registrar in writing, that it is purchasing the Note for its
own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a QIB within
the meaning of Rule 144A and is aware that the sale to it is being made
in reliance on Rule 144A and acknowledges that it has received such
information regarding the Company as it has requested pursuant to Rule
144A or has determined not to request such information and that it is
aware that the transferor is relying upon its foregoing representations
in order to claim the exemption from registration provided by Rule
144A.
(ii) A transfer of an interest in a Global Note may be
effected only through the book-entry system maintained by the
Depository upon receipt by the Registrar of the documents required by
clause (b)(i) above and instructions given in accordance with the
Depository and the Registrar's procedures.
(iii) If the proposed transferee is an Agent Member, and the
Note to be transferred consists of U.S. Physical Notes, upon receipt by
the Registrar of the documents referred to in paragraph (b)(i) above
and instructions given in accordance with the Depositary's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and an increase in the principal amount of U.S. Global
Notes in an amount equal to the principal amount of the Physical Notes
to be transferred, and the Trustee shall cancel the Physical Notes so
transferred.
[(c) Transfers of Interests in the Permanent Offshore Global Notes or
Unlegended
<PAGE> 40
34
Offshore Physical Notes. The following provisions shall apply with respect to
any transfer of interests in Permanent Offshore Global Notes or unlegended
Offshore Physical Notes. The Registrar shall register the transfer of any such
Note upon receipt of the certification listed in clause (d) below.]
(d) Transfers to Non-U.S. Persons in Compliance with Regulation S. The
following provisions shall apply with respect to any proposed transfer of any
Note, whether or not such Note bears the Private Placement Legend, to a Non-U.S.
Person outside the United States in an Offshore Transaction in compliance with
Regulation S:
(i) Prior to August 4, 1998, the Registrar shall register any
proposed transfer of a Note to a Non-U.S. Person in compliance with
Regulation S upon receipt of a certificate substantially in the form of
Exhibit D hereto from the proposed transferor.
(ii) On and after August 4, 1998, the Registrar shall register
any proposed transfer to any Non-U.S. Person in compliance with
Regulation S, upon receipt of a certificate substantially in the form
of Exhibit D hereto from the proposed transferor.
(iii) If the requested transfer is after the time period
referred to in Rule 144(k), without requiring any additional
certification.
(iv) (A) If the proposed transferor is an Agent Member holding
a beneficial interest in the Global Notes, upon receipt by the
Registrar of (x) the documents, if any, required by paragraph (ii) and
(y) instructions in accordance with the Depositary's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and a decrease in the principal amount of the U.S.
Global Notes in an amount equal to the principal amount of the
beneficial interest in the U.S. Global Notes to be transferred, and (B)
if the proposed transferee is an Agent Member, upon receipt by the
Registrar of instructions given in accordance with the Depositary's and
the Registrar's procedures, the Registrar shall reflect on its books
and records the date and an increase in the principal amount of the
Offshore Global Notes in an amount equal to the principal amount of the
Physical Notes or the Global Notes, as the case may be, to be
transferred, and the Trustee shall cancel the Physical Note, if any, so
transferred or decrease the amount of the Global Notes, as the case may
be.
(e) Private Placement Legend. Upon the transfer, exchange or
replacement of Notes not bearing the Private Placement Legend, the Registrar
shall deliver Notes that do not bear the Private Placement Legend. Upon the
transfer, exchange or replacement of Notes bearing the Private Placement Legend,
the Registrar shall deliver only Notes that bear the Private Placement Legend
unless either (i) the circumstances contemplated by paragraph (a)(i)(x) of this
Section 2.08 exist or (ii) there is delivered to the Registrar an Opinion of
<PAGE> 41
35
Counsel reasonably satisfactory to the Company and the Trustee to the effect
that neither such legend nor the related restrictions on transfer are required
in order to maintain compliance with the provisions of the Securities Act.
(f) General. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture. The Registrar shall not register a transfer of any Note unless such
transfer complies with the restrictions on transfer of such Note set forth in
this Indenture. In connection with any transfer of Notes, each Holder agrees by
its acceptance of the Notes to furnish the Registrar or the Company such
certifications, legal opinions or other information as either of them may
reasonably require to confirm that such transfer is being made pursuant to an
exemption from, or a transaction not subject to, the registration requirements
of the Securities Act; provided that the Registrar shall not be required to
determine (but may rely on a determination made by the Company with respect to)
the sufficiency of any such certifications, legal opinions or other information.
Each Holder of a Note agrees to indemnify the Company and the Trustee
against any liability that may result from the transfer, exchange or assignment
of such Holder's Note in violation of any provision of this Indenture.
The Trustee shall have no obligation or duty to monitor, determine or
inquire as to compliance with any restrictions on transfer imposed under this
Indenture or under applicable law with respect to any transfer of any interest
in any Note (including any transfers between or among Depositary participants or
beneficial owners of interests in any Global Note) other than to require
delivery of such certificates and other documentation or evidence as are
expressly required by, and to do so if and when expressly required by the terms
of, this Indenture, and to examine the same to determine substantial compliance
as to form with the express requirements hereof.
The Registrar shall retain copies of all letters, notices and other
written communications received pursuant to Section 2.07 or this Section 2.08.
The Company shall have the right to inspect and make copies of all such letters,
notices or other written communications at any reasonable time upon the giving
of reasonable written notice to the Registrar.
SECTION 2.09. Replacement Notes. If a mutilated Note is surrendered to
the Trustee or if the Holder claims that the Note has been lost, destroyed or
wrongfully taken, then, in the absence of notice to the Company or the Trustee
that such Note has been acquired by a bona fide purchaser, the Company shall
issue and the Trustee shall authenticate a replacement Note of like tenor and
principal amount and bearing a number not contemporaneously outstanding;
provided that the requirements of this Section 2.09 are met. An indemnity bond
must be
<PAGE> 42
36
furnished that is sufficient in the judgment of both the Trustee and the
Company to protect the Company, the Trustee or any Agent from any loss that any
of them may suffer if a Note is replaced. The Company may charge such Holder for
its expenses and the expenses of the Trustee in replacing a Note. In case any
such mutilated, lost, destroyed or wrongfully taken Note has become or is about
to become due and payable, the Company in its discretion may pay such Note
instead of issuing a new Note in replacement thereof.
Every replacement Note is an additional obligation of the Company and
shall be entitled to the benefits of this Indenture.
SECTION 2.10. Outstanding Notes. Notes outstanding at any time are all
Notes that have been authenticated by the Trustee except for those cancelled by
it, those delivered to it for cancellation and those described in this Section
2.10 as not outstanding.
If a Note is replaced or paid pursuant to Section 2.09, it ceases to be
outstanding unless and until the Trustee and the Company receive proof
satisfactory to them that the replaced or paid Note is held by a bona fide
purchaser.
If the Paying Agent (other than the Company or an Affiliate of the
Company) holds on the maturity date money sufficient to pay Notes payable on
that date, then on and after that date such Notes cease to be outstanding and
interest on them shall cease to accrue.
A Note does not cease to be outstanding because the Company or one of
its Affiliates holds such Note, provided, however, that in determining whether
the Holders of the requisite principal amount of the outstanding Notes have
given any request, demand, authorization, direction, notice, consent or waiver
hereunder, Notes owned by the Company or any other obligor upon the Notes or any
Affiliate of the Company or of such other obligor shall be disregarded and
deemed not to be outstanding, except that, in determining whether the Trustee
shall be protected in relying upon any such request, demand, authorization,
direction, notice, consent or waiver, only Notes which a Responsible Officer of
the Trustee has actual knowledge to be so owned shall be so disregarded. Notes
so owned which have been pledged in good faith may be regarded as outstanding if
the pledgee establishes to the satisfaction of the Trustee the pledgee's right
so to act with respect to such Notes and that the pledgee is not the Company or
any other obligor upon the Notes or any Affiliate of the Company or of such
other obligor.
SECTION 2.11. Temporary Notes. Until definitive Notes are ready for
delivery, the Company may prepare and execute and the Trustee shall authenticate
temporary Notes. Temporary Notes shall be substantially in the form of
definitive Notes but may have insertions, substitutions, omissions and other
variations determined to be appropriate by the Officers executing the temporary
Notes, as evidenced by their execution of such temporary Notes. If temporary
Notes are issued, the Company will cause definitive Notes to be prepared
<PAGE> 43
37
without unreasonable delay. After the preparation of definitive Notes, the
temporary Notes shall be exchangeable for definitive Notes upon surrender of the
temporary Notes at the office or agency of the Company designated for such
purpose pursuant to Section 4.02, without charge to the Holder. Upon surrender
for cancellation of any one or more temporary Notes the Company shall execute
and the Trustee shall authenticate and deliver in exchange therefor a like
principal amount of definitive Notes of authorized denominations. Until so
exchanged, the temporary Notes shall be entitled to the same benefits under this
Indenture as definitive Notes.
SECTION 2.12. Cancellation. The Company at any time may deliver to the
Trustee for cancellation any Notes previously authenticated and delivered
hereunder which the Company may have acquired in any manner whatsoever, and may
deliver to the Trustee for cancellation any Notes previously authenticated
hereunder which the Company has not issued and sold. The Registrar and the
Paying Agent shall forward to the Trustee any Notes surrendered to them for
transfer, exchange or payment. The Trustee shall cancel all Notes surrendered
for transfer, exchange, payment or cancellation and shall dispose of them in
accordance with its normal procedure.
SECTION 2.13. CUSIP Numbers. The Company in issuing the Notes may use
"CUSIP," "CINS" or "ISIN" numbers (if then generally in use), and the Company
and the Trustee shall use CUSIP, CINS or ISIN numbers, as the case may be, in
notices of redemption or exchange as a convenience to Holders; provided that any
such notice shall state that no representation is made as to the correctness of
such numbers either as printed on the Notes or as contained in any notice of
redemption or exchange and that reliance may be placed only on the other
identification numbers printed on the Notes. The Company shall promptly notify
the Trustee of any change in "CUSIP," "CINS" or "ISIN" numbers for the Notes.
SECTION 2.14. Defaulted Interest. If the Company defaults in a payment
of interest on the Notes, it shall pay, or shall deposit with the Paying Agent
money in immediately available funds sufficient to pay, the defaulted interest,
plus (to the extent lawful) any interest payable on the defaulted interest, to
the Persons who are Holders on a subsequent special record date. A special
record date, as used in this Section 2.14 with respect to the payment of any
defaulted interest, shall mean the 15th day next preceding the date fixed by the
Company for the payment of defaulted interest, whether or not such day is a
Business Day. At least 15 days before the subsequent special record date, the
Company shall mail to each Holder and to the Trustee a notice that states the
subsequent special record date, the payment date and the amount of defaulted
interest to be paid.
SECTION 2.15. Issuance of Additional Notes. Except for the Exchange
Notes, the Company may not issue any additional Notes under this Indenture. The
Notes issued on the Closing Date and any Exchange Notes subsequently issued
shall be treated as a single class for all purposes under this Indenture.
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ARTICLE THREE
REDEMPTION
SECTION 3.01. Redemption Upon Receipt of Public Equity Offering
Proceeds. At any time and from time to time prior to July 1, 2001, the Company
may redeem up to 35% of the principal amount of the Notes with the proceeds of
one or more Public Equity Offerings following which there is a Public Market, at
any time or from time to time in part, at a Redemption Price (expressed as a
percentage of principal amount) of 115%, plus accrued and unpaid interest, if
any, to the Redemption Date (subject to the right of Holders of record on the
relevant Regular Record Date that is on or prior to the Redemption Date to
receive interest due on an Interest Payment Date), provided that (i) Notes
representing at least 65% of the aggregate principal amount of Notes initially
issued remain outstanding after each such redemption and (ii) notice of any such
redemption is mailed within 60 days of such related Public Equity Offering.
SECTION 3.02. Notices to Trustee. If the Company elects to redeem Notes
pursuant to Section 3.01, it shall notify the Trustee in writing of the
Redemption Date and the principal amount of Notes to be redeemed and the clause
of this Indenture pursuant to which redemption shall occur.
The Company shall give each notice provided for in this Section 3.02 in
an Officers' Certificate at least 45 days before the Redemption Date (unless a
shorter period shall be satisfactory to the Trustee).
SECTION 3.03. Selection of Notes to Be Redeemed. The Trustee shall
select the Notes to be redeemed in compliance with the requirements, as
certified to it by the Company, of the principal national securities exchange or
automated quotation system, if any, on which the Notes are listed or, if the
Notes are not listed on a national securities exchange or automated quotation
system, by lot or by such other method as the Trustee in its sole discretion
shall deem fair and appropriate; provided that no Note of $1,000 in principal
amount or less shall be redeemed in part.
The Trustee shall make the selection from the Notes outstanding and not
previously called for redemption. Notes in denominations of $1,000 in principal
amount may only be redeemed in whole. The Trustee may select for redemption
portions (equal to $1,000 in principal amount or any integral multiple thereof)
of Notes that have denominations larger than $1,000 in principal amount.
Provisions of this Indenture that apply to Notes called for redemption also
apply to portions of Notes called for redemption. The Trustee shall notify the
Company and the Registrar promptly in writing of the Notes or portions of Notes
to be called for redemption.
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SECTION 3.04. Notice of Redemption. With respect to any redemption of
Notes pursuant to Section 3.01, at least 30 days but not more than 60 days
before a Redemption Date, the Company shall mail a notice of redemption by
first-class mail to each Holder whose Notes are to be redeemed.
The notice shall identify the Notes (including CUSIP, CINS or ISIN
number(s)) to be redeemed and shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the name and address of the Paying Agent;
(iv) that Notes called for redemption must be surrendered to
the Paying Agent in order to collect the Redemption Price;
(v) that, unless the Company defaults in making the redemption
payment, interest on Notes called for redemption ceases to accrue on
and after the Redemption Date and the only remaining right of the
Holders is to receive payment of the Redemption Price plus accrued
interest to the Redemption Date upon surrender of the Notes to the
Paying Agent;
(vi) that, if any Note is being redeemed in part, the portion
of the principal amount (equal to $1,000 in principal amount or any
integral multiple thereof) of such Note to be redeemed and that, on and
after the Redemption Date, upon surrender of such Note, a new Note or
Notes in principal amount equal to the unredeemed portion thereof will
be reissued; and
(vii) that, if any Note contains a CUSIP, CINS or ISIN number
as provided in Section 2.13, no representation is being made as to the
correctness of the CUSIP, CINS or ISIN number either as printed on the
Notes or as contained in the notice of redemption and that reliance may
be placed only on the other identification numbers printed on the
Notes.
At the Company's request (which request may be revoked by the Company
at any time prior to the time at which the Trustee shall have given such notice
to the Holders), made in writing to the Trustee at least 45 days (or such
shorter period as shall be satisfactory to the Trustee) before a Redemption
Date, the Trustee shall give the notice of redemption in the name and at the
expense of the Company. If, however, the Company gives such notice to the
Holders, the Company shall concurrently deliver to the Trustee an Officers'
Certificate stating that such notice has been given.
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40
SECTION 3.05. Effect of Notice of Redemption. Once notice of redemption
is mailed, Notes called for redemption become due and payable on the Redemption
Date and at the Redemption Price. Upon surrender of any Notes to the Paying
Agent, such Notes shall be paid at the Redemption Price, plus accrued interest,
if any, to the Redemption Date.
Notice of redemption shall be deemed to be given when mailed, whether
or not the Holder receives the notice. In any event, failure to give such
notice, or any defect therein, shall not affect the validity of the proceedings
for the redemption of Notes held by Holders to whom such notice was properly
given.
SECTION 3.06. Deposit of Redemption Price. On or prior to 10:00 a.m.,
New York City time, on any Redemption Date, the Company shall deposit with the
Paying Agent (or, if the Company is acting as its own Paying Agent, shall
segregate and hold in trust as provided in Section 2.05) money sufficient to pay
the Redemption Price of and accrued interest on all Notes to be redeemed on that
date other than Notes or portions thereof called for redemption on that date
that have been delivered by the Company to the Trustee for cancellation.
SECTION 3.07. Payment of Notes Called for Redemption. If notice of
redemption has been given in the manner provided above, the Notes or portion of
Notes specified in such notice to be redeemed shall become due and payable on
the Redemption Date at the Redemption Price stated therein, together with
accrued interest to such Redemption Date, and on and after such date (unless the
Company shall default in the payment of such Notes at the Redemption Price and
accrued interest to the Redemption Date, in which case the principal, until
paid, shall bear interest from the Redemption Date at the rate prescribed in the
Notes), such Notes shall cease to accrue interest. Upon surrender of any Note
for redemption in accordance with a notice of redemption, such Note shall be
paid and redeemed by the Company at the Redemption Price, together with accrued
interest, if any, to the Redemption Date; provided that installments of interest
whose Stated Maturity is on or prior to the Redemption Date shall be payable to
the Holders registered as such at the close of business on the relevant Regular
Record Date.
SECTION 3.08. Notes Redeemed in Part. Upon surrender of any Note that
is redeemed in part, the Company shall execute and the Trustee shall
authenticate and make available for delivery to the Holder without service
charge, a new Note equal in principal amount to the unredeemed portion of such
surrendered Note.
ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Notes. The Company shall pay the principal of,
premium, if any, and interest on the Notes on the dates and in the manner
provided in the
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41
Notes and this Indenture. An installment of principal, premium, if any, or
interest shall be considered paid on the date due if the Trustee or Paying Agent
(other than the Company, a Subsidiary of the Company, or any Affiliate of any of
them) holds on that date money designated for and sufficient to pay the
installment. If the Company or any Subsidiary of the Company or any Affiliate of
any of them acts as Paying Agent, an installment of principal, premium, if any,
or interest shall be considered paid on the due date if the entity acting as
Paying Agent complies with the last sentence of Section 2.05. As provided in
Section 6.09, upon any bankruptcy or reorganization procedure relative to the
Company, the Trustee shall serve as the Paying Agent, if any, for the Notes.
The Company shall pay interest on overdue principal and premium, if
any, and interest on overdue installments of interest, to the extent lawful, at
the rate per annum specified in the Notes.
SECTION 4.02. Maintenance of Office or Agency. The Company will
maintain in the Borough of Manhattan, The City of New York, an office or agency
where Notes may be surrendered for registration of transfer or exchange or for
presentation for payment and where notices and demands to or upon the Company in
respect of the Notes and this Indenture may be served. The Company will give
prompt written notice to the Trustee of the location, and any change in the
location, of such office or agency. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the Trustee
with the address thereof, such presentations, surrenders, notices and demands
may be made or served at the address of the Trustee set forth in Section 11.02.
The Company may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations; provided
that no such designation or rescission shall in any manner relieve the Company
of its obligation to maintain an office or agency in the Borough of Manhattan,
The City of New York, for such purposes. The Company shall give prompt written
notice to the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.
The Company hereby initially designates the Corporate Trust Office of
the Trustee as such office of the Company in accordance with Section 2.04.
SECTION 4.03. Limitation on Indebtedness. (a) The Company shall not,
and shall not permit any of its Restricted Subsidiaries to, Incur any
Indebtedness (other than the Notes and Indebtedness existing on the Closing
Date); provided that the Company may Incur Indebtedness if, after giving effect
to the Incurrence of such Indebtedness and the receipt and application of the
proceeds therefrom, the Consolidated Leverage Ratio would be greater than zero
and less than 6:1.
Notwithstanding the foregoing, the Company and any Restricted
Subsidiary (except as
<PAGE> 48
42
specified below) may Incur each and all of the following: (i) Indebtedness
outstanding at any time in an aggregate principal amount not to exceed $100.0
million, less any amount of such Indebtedness permanently repaid as provided
under Section 4.11; (ii) Indebtedness owed (A) to the Company evidenced by a
promissory note or (B) to any Restricted Subsidiary; provided that any event
which results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of such Indebtedness (other than to the
Company or another Restricted Subsidiary) shall be deemed, in each case, to
constitute an Incurrence of such Indebtedness not permitted by this clause (ii);
(iii) Indebtedness issued in exchange for, or the net proceeds of which are used
to refinance or refund, then outstanding Indebtedness (other than Indebtedness
Incurred under clause (i), (ii), (iv), (vi) or (ix) of this paragraph) and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, fees and expenses); provided that
Indebtedness the proceeds of which are used to refinance or refund the Notes or
Indebtedness that is pari passu with, or subordinated in right of payment to,
the Notes shall only be permitted under this clause (iii) if (A) in case the
Notes are refinanced in part or the Indebtedness to be refinanced is pari passu
with the Notes, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is outstanding,
is expressly made pari passu with, or subordinate in right of payment to, the
remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated
in right of payment to the Notes, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new Indebtedness is
issued or remains outstanding, is expressly made subordinate in right of payment
to the Notes at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes and (C) such new Indebtedness, determined as of the
date of Incurrence of such new Indebtedness, does not mature prior to the Stated
Maturity of the Indebtedness to be refinanced or refunded, and the Average Life
of such new Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; provided that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness of any
Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in
respect of performance, surety, appeal bonds and completion guaranties provided
in the ordinary course of business, (B) under Currency Agreements and Interest
Rate Agreements; provided that such agreements (a) are designed solely to
protect the Company or its Restricted Subsidiaries against fluctuations in
foreign currency exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by reason
of fees, indemnities and compensation payable thereunder, and (C) arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted Subsidiary
(other than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company, to
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43
the extent the net proceeds thereof are promptly (A) used to purchase Notes
tendered in an Offer to Purchase made as a result of a Change in Control or (B)
deposited to defease the Notes pursuant to Article Eight; (vi) Guarantees of the
Notes and Guarantees of Indebtedness of the Company by any Restricted Subsidiary
provided the Guarantee of such Indebtedness is permitted by and made in
accordance with Section 4.07; (vii) Indebtedness (including Guarantees) Incurred
to finance the cost (including the cost of design, development, acquisition,
construction, installation, improvement, transportation or integration) to
acquire equipment, inventory or network assets (including acquisitions by way of
acquisitions of real property, leasehold improvements, Capitalized Leases and
acquisitions of the Capital Stock of a Person that becomes a Restricted
Subsidiary to the extent of the fair market value of the equipment, inventory or
network assets so acquired) by the Company or a Restricted Subsidiary after the
Closing Date; (viii) Indebtedness of the Company not to exceed, at any one time
outstanding, two times (A) the Net Cash Proceeds received by the Company after
the Closing Date as a capital contribution or from the issuance and sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, to the extent such capital contribution or Net Cash
Proceeds have not been used pursuant to clause (C)(2) of the first paragraph or
clause (iii), (iv), (vi) or (vii) of the second paragraph of Section 4.04 or
clause (ix) of the definition of Permitted Investments to support the making of
a Restricted Payment and (B) 80% of the fair market value of property (other
than cash and Temporary Cash Investments) received by the Company after the
Closing Date from the sale of its Capital Stock (other than Disqualified Stock)
to a Person that is not a Subsidiary of the Company, to the extent such capital
contribution or sale of Capital Stock has not been used pursuant to clause
(iii), (iv), (vi) or (vii) of the second paragraph of Section 4.04 to make a
Restricted Payment, provided that such Indebtedness does not mature prior to the
Stated Maturity of the Notes and has an Average Life longer than the remaining
Average Life of the Notes; (ix) Indebtedness Incurred by the Company or any of
its Restricted Subsidiaries constituting reimbursement obligations with respect
to letters of credit in the ordinary course of business, including, without
limitation, letters of credit in respect of workers' compensation claims or self
insurance, or other Indebtedness with respect to reimbursement type obligations
regarding workers' compensation claims; provided that upon the drawing of such
letters of credit or the Incurrence of such Indebtedness, such obligations are
reimbursed within 30 days following the earlier of such drawing or Incurrence;
(x) Acquired Indebtedness; (xi) Strategic Subordinated Indebtedness; and (xii)
Subordinated Indebtedness of the Company (in addition to Indebtedness permitted
under clauses (i) through (xi) above) in an aggregate principal amount
outstanding at any time not to exceed $100 million, less any amount of such
Indebtedness permanently repaid as provided under Section 4.11.
(b) Notwithstanding any other provision of this Section 4.03, the
maximum amount of Indebtedness that the Company or a Restricted Subsidiary may
Incur pursuant to this Section 4.03 shall not be deemed to be exceeded, with
respect to any outstanding Indebtedness due solely to the result of fluctuations
in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness
under this
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Section 4.03, (1) Guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included and (2) any Liens granted pursuant to
the equal and ratable provisions referred to in Section 4.09 shall not be
treated as Indebtedness. For purposes of determining compliance with this
Section 4.03, in the event that an item of Indebtedness meets the criteria of
more than one of the types of Indebtedness described in the above clauses, the
Company, in its sole discretion, shall classify, and from time to time may
reclassify, such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses.
SECTION 4.04. Limitation on Restricted Payments. The Company shall not,
and shall not permit any Restricted Subsidiary to, directly or indirectly, (i)
declare or pay any dividend or make any distribution on or with respect to its
Capital Stock (other than (x) dividends or distributions payable solely in its
Capital Stock (other than Disqualified Stock) or in options, warrants or other
rights to acquire Capital Stock and (y) pro rata dividends or distributions on
Common Stock of Restricted Subsidiaries held by Persons other than the Company
or any of its Restricted Subsidiaries), (ii) purchase, redeem, retire or
otherwise acquire for value any Capital Stock of (A) the Company or an
Unrestricted Subsidiary (including options, warrants or other rights to acquire
such Capital Stock) held by any Person or (B) a Restricted Subsidiary (including
options, warrants or other rights to acquire such Capital Stock) held by any
Affiliate of the Company (other than a Wholly Owned Restricted Subsidiary) or
any holder (or any Affiliate of such holder) of 5% or more of the Capital Stock
of the Company, (iii) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance, or other acquisition
or retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Notes or (other than the purchase, redemption,
repurchase or other acquisition of such subordinated Indebtedness purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within six months of the date of acquisition),
and (iv) make any Investment, other than a Permitted Investment, in any Person
(such payments or any other actions described in clauses (i) through (iv) above
being collectively "Restricted Payments") if, at the time of, and after giving
effect to, the proposed Restricted Payment: (A) a Default or Event of Default
shall have occurred and be continuing, (B) the Company could not Incur at least
$1.00 of Indebtedness under the first paragraph of Section 4.03(a) or (C) the
aggregate amount of all Restricted Payments (the amount, if other than in cash,
to be determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution) made after the Closing
Date shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of the amount of such loss) (determined by excluding income resulting
from transfers of assets by the Company or a Restricted Subsidiary to an
Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken
as one accounting period) beginning on the first day of the fiscal quarter
immediately following the Closing Date and ending on the last day of the last
fiscal quarter preceding the Transaction Date for which reports have been filed
with the Commission or provided to the Trustee pursuant to Section 4.18 plus (2)
the aggregate Net Cash Proceeds
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received by the Company after the Closing Date as a capital contribution or from
the issuance and sale permitted by this Indenture of its Capital Stock (other
than Disqualified Stock) to a Person who is not a Subsidiary of the Company,
including an issuance or sale permitted by this Indenture of Indebtedness of the
Company for cash subsequent to the Closing Date upon the conversion of such
Indebtedness into Capital Stock (other than Disqualified Stock) of the Company,
or from the issuance to a Person who is not a Subsidiary of the Company of any
options, warrants or other rights to acquire Capital Stock of the Company (in
each case, exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Notes), in each case except to the
extent such Net Cash Proceeds are used to support the Incurrence of Indebtedness
pursuant to clause (viii) of the second paragraph under Section 4.03(a), or the
making of Permitted Investments in accordance with clause (v) of the definition
of such term or pursuant to clause (vi) of the second paragraph of this Section
4.04, plus (3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments and pursuant to clause (vi) of the second
paragraph of this Section 4.04) in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted Subsidiary or
from the Net Cash Proceeds from the sale of any such Investment (except, in each
case, to the extent any such payment or proceeds are included in the calculation
of Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case, the amount of
Investments previously made by the Company or any Restricted Subsidiary in such
Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the
payment of any dividend within 60 days after the date of declaration thereof if,
at said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment to
the Notes including premium, if any, and accrued and unpaid interest, with the
proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of the
second paragraph of Section 4.03(a); (iii) the repurchase, redemption or other
acquisition of Capital Stock of the Company or an Unrestricted Subsidiary (or
options, warrants or other rights to acquire such Capital Stock) in exchange
for, or out of the proceeds of a capital contribution or a substantially
concurrent offering of, Capital Stock (other than Disqualified Stock) of the
Company (or options, warrants or other rights to acquire such Capital Stock);
(iv) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness of the
Company which is subordinated in right of payment to the Notes in exchange for,
or out of the proceeds of a capital contribution or a substantially concurrent
offering of, Capital Stock (other than Disqualified Stock) of the Company (or
options, warrants or other rights to acquire such Capital Stock); (v) payments
or distributions, to dissenting holders of Capital Stock pursuant to applicable
law, pursuant to or in connection with a consolidation, merger or transfer of
assets that complies with the provisions of Article Five; (vi) Investments in
any Person the primary business of which is
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similar, related, ancillary or complementary to the businesses of the Company
and its Restricted Subsidiaries on the date of such Investments; provided that
the aggregate amount of Investments outstanding at any time pursuant to this
clause (vi) does not exceed the sum of (a) $20 million plus (b) the amount of
Net Cash Proceeds received by the Company after the Closing Date as a capital
contribution or from the sale of its Capital Stock (other than Disqualified
Stock) to a Person that is not a Subsidiary of the Company, except to the extent
such Net Cash Proceeds are used to support the Incurrence of Indebtedness
pursuant to clause (viii) of the second paragraph of Section 4.03(a) or to
support the making of Restricted Payments pursuant to clause (C)(2) of the first
paragraph, or clause (iii) or (iv) of this Section 4.04, plus (c) the net
reduction in Investments made pursuant to this clause (vi) resulting from
distributions on or repayments of such Investments or from the Net Cash Proceeds
from the sale of any such Investment (except in each case to the extent any such
payment or proceeds is included in the calculation of Adjusted Consolidated Net
Income) or from such Person becoming a Restricted Subsidiary (valued in each
case as provided in the definition of "Investments"), provided that the net
reduction in any Investment shall not exceed the amount of such Investment;
(vii) Investments acquired in exchange for Capital Stock (other than
Disqualified Stock) of the Company; (viii) the declaration or payment of
dividends on the Capital Stock of the Company following a Public Equity Offering
of such Capital Stock, of up to 6% per annum of the Net Cash Proceeds received
by the Company in such Public Equity Offering; (ix) prior to the occurrence of a
Public Market, the purchase, redemption, retirement or other acquisition for
value of Capital Stock of the Company or options to purchase such Capital Stock,
held by any current or former employee, Director or consultant of the Company or
a Restricted Subsidiary (or their estates or beneficiaries under their estates),
upon the death, disability, retirement, termination of employment or pursuant to
the terms of any agreement under which such Capital Stock or options were
issued; provided that the aggregate consideration paid for such purchase,
redemption, retirement or other acquisition for value of such Capital Stock or
options after the Closing Date does not exceed (A) in any calendar year, $2
million or (B) $5 million in the aggregate (unless such repurchases are made
with the proceeds of insurance policies and the Capital Stock is purchased from
the executors, administrators, testamentary trustees, heirs, legatees or
beneficiaries); (x) the declaration or payment of dividends and other
distributions to Members of the Company in an amount equal to the income tax
liability incurred by such Members as a result of any amount of consolidated
income or gain of the Company allocated to such Members for federal income tax
purposes, computed at the highest federal and state rates applicable to such
Members; and (xi) other Restricted Payments in an aggregate amount not to exceed
$2 million; provided that, except in the case of clauses (i) and (iii), no
Default or Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clauses (vi) and
(vii) thereof), and the Net Cash Proceeds from any capital contribution or any
issuance of Capital Stock referred to in clauses (iii) and (iv), shall be
included in calculating
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whether the conditions of clause (C)(2) of the first paragraph of this Section
4.04 have been met with respect to any subsequent Restricted Payments. In the
event the proceeds of an issuance of Capital Stock of the Company are used for
the redemption, repurchase or other acquisition of the Notes, or Indebtedness
that is pari passu with the Notes, then the Net Cash Proceeds of such issuance
shall be included in clause (C)(2) of the first paragraph of this Section 4.04
only to the extent such proceeds are not used for such redemption, repurchase or
other acquisition of Indebtedness.
Any Restricted Payments made other than in cash shall be valued at fair
market value. The amount of any Investment "outstanding" at any time shall be
deemed to be equal to the amount of such Investment on the date made, less the
return of capital to the Company and its Restricted Subsidiaries with respect to
such Investment by distribution, sale or otherwise (up to the amount of such
Investment on the date made).
SECTION 4.05. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries. The Company shall not, and shall not permit
any Restricted Subsidiary to, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary to (i) pay dividends or make any other
distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (iii) make loans or advances to the Company or any other Restricted
Subsidiary or (iv) transfer any of its property or assets to the Company or any
other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Credit Agreement, this
Indenture or any other agreements in effect on the Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements; provided
that the encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material respect to the
Holders than those encumbrances or restrictions that are then in effect and that
are being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law, rule, regulation or order; (iii) existing with respect
to any Person or the property or assets of such Person acquired by the Company
or any Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than such
Person or the property or assets of such Person so acquired; (iv) in the case of
clause (iv) of the first paragraph of this Section 4.05, (A) that restrict in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by this Indenture, (C) arising or
agreed to in the ordinary course of business, not relating to any Indebtedness,
and that do not, individually or in the aggregate, detract from the value of
property or assets of the Company or any Restricted Subsidiary in any manner
material to the Company or any Restricted Subsidiary or (D) entered
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into in connection with purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature discussed in
clause (iv) of the first paragraph of this Section 4.05 on the property so
acquired; (v) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or the property and assets of, such
Restricted Subsidiary; (vi) contained in the terms of any Indebtedness or any
agreement pursuant to which such Indebtedness was issued if (A) the encumbrance
or restriction applies only in the event of a payment default or a default with
respect to a financial covenant contained in such Indebtedness or agreement, (B)
the encumbrance or restriction is not materially more disadvantageous to the
Holders of the Notes than is customary in comparable financings (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
if evidenced by a Board Resolution) and (C) the Board of Directors determines
that any such encumbrance or restriction will not materially affect the
Company's ability to make principal or interest payments on the Notes; (vii) on
cash or other deposits imposed by customers under contracts entered into in the
ordinary course of business; (viii) constituting customary provisions in joint
venture agreements and other similar agreements entered into in the ordinary
course of business; or (ix) of the type referred to in clauses (i) through (iv)
of the first paragraph of this covenant imposed by any amendments,
modifications, renewals, restatements, increases, supplements, refundings,
replacements or refinancings of the contracts referred to in clauses (i) through
(vi) above; provided that such amendments, modifications, renewals,
restatements, increases, supplements, refundings, replacements or refinancings
are, in the good faith judgment of the Board of Directors, not materially
disadvantageous to the Holders than those contained in the restriction prior to
such amendment, modification, renewal, restatement, increase, supplement,
refunding, replacement or refinancing. Nothing contained in this Section 4.05
shall prevent the Company or any Restricted Subsidiary from (1) creating,
incurring, assuming or suffering to exist any Liens otherwise permitted in
Section 4.09 or (2) restricting the sale or other disposition of property or
assets of the Company or any of its Restricted Subsidiaries that secure
Indebtedness of the Company or any of its Restricted Subsidiaries.
SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of
Restricted Subsidiaries. The Company shall not sell, and shall not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell, any Capital
Stock of a Restricted Subsidiary (including options, warrants or other rights to
purchase such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of Director's qualifying shares or sales
to foreign nationals of Capital Stock of foreign Restricted Subsidiaries, to the
extent required by applicable law; (iii) if, immediately after giving effect to
such issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after giving
effect to such issuance or sale would have been permitted to be made under
Section 4.04 if made on the date of such issuance or sale; or (iv) issuances or
sales of Common Stock or Membership Interests of a Restricted Subsidiary,
provided that the Company or such Restricted Subsidiary applies the Net Cash
Proceeds, if any, of any such sale in accordance with clause (A) or (B) of
Section 4.11.
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SECTION 4.07. Limitation on Issuances of Guarantees by Restricted
Subsidiaries. The Company shall not permit any Restricted Subsidiary, directly
or indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to this Indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the Notes by such Restricted
Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall
not be applicable to any Guarantee of any Restricted Subsidiary (x) that existed
at the time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary or (y) of Indebtedness Incurred under the Credit Agreement supporting
Indebtedness thereunder Incurred prior to the Closing Date. If the Guaranteed
Indebtedness is (A) pari passu with the Notes, then the Guarantee of such
Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by this Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
SECTION 4.08. Limitation on Transactions with Stockholders and
Affiliates. The Company shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, enter into, renew or extend any
transaction (including, without limitation, the purchase, sale, lease or
exchange of property or assets, or the rendering of any service) with any holder
(or any Affiliate of such holder) of 5% or more of any class of Capital Stock of
the Company or with any Affiliate of the Company or any Restricted Subsidiary,
except upon fair and reasonable terms no less favorable to the Company or such
Restricted Subsidiary than could be obtained, at the time of such transaction
or, if such transaction is pursuant to a written agreement, at the time of the
execution of the agreement providing therefor, in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for
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which the Company or a Restricted Subsidiary delivers to the Trustee a written
opinion of a nationally recognized investment banking firm or a nationally
recognized firm having appraisal expertise in the specific area which is the
subject of such determination stating that the transaction is fair to the
Company or such Restricted Subsidiary from a financial point of view; (ii) any
transaction solely between the Company and any of its Restricted Subsidiaries or
solely between Restricted Subsidiaries; (iii) the payment of reasonable and
customary regular fees to, and reasonable and customary indemnity provided on
behalf of, officers, Directors, employees or consultants of the Company or any
of its Subsidiaries; (iv) any payments or other transactions pursuant to any
tax-sharing agreement between the Company and any other Person with which the
Company files a consolidated tax return or with which the Company is part of a
consolidated group for tax purposes; (v) any agreement as in effect as of the
Closing Date or any amendment thereto (so long as any such amendment is not
disadvantageous to the Holders in any material respect); (vi) the existence of,
or the performance by the Company or any of its Restricted Subsidiaries of its
obligations under the terms of, any Limited Liability Company Operating
Agreement or Articles of Organization (including any registration rights
agreement or purchase agreement related thereto) to which it is a party as of
the Closing Date and any similar agreements which it may enter into thereafter
(so long as any such similar agreement is not disadvantageous to the Holders in
any material respect); or (vii) any Restricted Payments not prohibited by
Section 4.04. Notwithstanding the foregoing, any transaction or series of
related transactions covered by the first paragraph of this Section 4.08 and not
covered by clauses (ii) through (vii) of this paragraph, the aggregate amount of
which exceeds $3 million in value, must be approved or determined to be fair in
the manner provided for in clause (i)(A) or (B) above.
SECTION 4.09. Limitation on Liens. The Company shall not, and shall not
permit any Restricted Subsidiary to, create, incur, assume or suffer to exist
any Lien on any of its assets or properties of any character (including, without
limitation, licenses), or any shares of Capital Stock or Indebtedness of any
Restricted Subsidiary, without making effective provision for all of the Notes
and all other amounts due under this Indenture to be directly secured equally
and ratably with (or, if the obligation or liability to be secured by such Lien
is subordinated in right of payment to the Notes, prior to) the obligation or
liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date, including Liens securing obligations under the Credit Agreement;
(ii) Liens granted after the Closing Date on any assets or Capital Stock of the
Company or its Restricted Subsidiaries created in favor of the Holders; (iii)
Liens with respect to the assets of a Restricted Subsidiary granted by such
Restricted Subsidiary to the Company or a Restricted Subsidiary to secure
Indebtedness owing to the Company or such other Restricted Subsidiary; (iv)
Liens securing Indebtedness which is Incurred to refinance secured Indebtedness
which is permitted to be Incurred under clause (iii) of the second paragraph of
Section 4.03(a); provided that such Liens do not extend to or cover any property
or assets of the Company or any Restricted Subsidiary other than the property or
assets securing the Indebtedness being refinanced; (v) Liens on the
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Capital Stock of, or any property or assets of, a Restricted Subsidiary securing
Indebtedness of such Restricted Subsidiary permitted under Section 4.03; (vi)
Liens on the Capital Stock of Restricted Subsidiaries securing Indebtedness
Incurred under clause (vii) of the second paragraph of Section 4.03(a); or (vii)
Permitted Liens.
SECTION 4.10. Limitation on Sale-Leaseback Transactions. The Company
shall not, and shall not permit any Restricted Subsidiary to, enter into any
sale-leaseback transaction involving any of its assets or properties whether now
owned or hereafter acquired, whereby the Company or a Restricted Subsidiary
sells or transfers such assets or properties and then or thereafter leases such
assets or properties or any part thereof or any other assets or properties which
the Company or such Restricted Subsidiary, as the case may be, intends to use
for substantially the same purpose or purposes as the assets or properties sold
or transferred.
The foregoing restriction does not apply to any sale-leaseback
transaction if (i) the lease is for a period, including renewal rights, of not
in excess of three years; (ii) the lease secures or relates to industrial
revenue or pollution control bonds; (iii) the transaction is solely between the
Company and any Wholly Owned Restricted Subsidiary or solely between Wholly
Owned Restricted Subsidiaries; or (iv) the Company or such Restricted
Subsidiary, within 12 months after the sale or transfer of any assets or
properties is completed, applies an amount not less than the net proceeds
received from such sale in accordance with clause (A) or (B) of the first
paragraph of Section 4.11.
SECTION 4.11. Limitation on Asset Sales. The Company shall not, and
shall not permit any Restricted Subsidiary to, consummate any Asset Sale, unless
(i) the consideration received by the Company or such Restricted Subsidiary is
at least equal to the fair market value of the assets sold or disposed of and
(ii) at least 75% of the consideration received consists of (x) cash or
Temporary Cash Investments or the assumption of Indebtedness of the Company or
any Restricted Subsidiary of the Company (other than Indebtedness that is
subordinated to the Notes) and release from all liability on the Indebtedness
assumed (which release shall be in writing executed by all creditors with
respect thereto), or (y) Voting Stock of a Person engaged in the
Telecommunications Business that will, upon receipt thereof, be or become a
Restricted Subsidiary; provided that this clause (ii) shall not apply to
long-term assignments of capacity in a telecommunications network. In the event
and to the extent that the Net Cash Proceeds received by the Company or any of
its Restricted Subsidiaries from one or more Asset Sales occurring on or after
the Closing Date in any period of 12 consecutive months exceed 10% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Company and its Subsidiaries has been filed with the Commission pursuant to
Section 4.18), then the Company shall or shall cause the relevant Restricted
Subsidiary to (i) within 12 months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an amount
equal to such excess Net Cash Proceeds to permanently repay unsubordinated
Indebtedness of the Company, or any Restricted Subsidiary providing a Subsidiary
Guarantee pursuant to Section 4.07 or Indebtedness of any other
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Restricted Subsidiary, in each case owing to a Person other than the Company or
any of its Restricted Subsidiaries or (B) invest an equal amount, or the amount
not so applied pursuant to clause (A) (or enter into a definitive agreement
committing to so invest within 12 months after the date of such agreement), in
property or assets (other than current assets) of a nature or type or that are
used in a business (or in a company having property and assets of a nature or
type, or engaged in a business) similar, related, ancillary or complementary to
the nature or type of the property and assets of, or the businesses of, the
Company and its Restricted Subsidiaries existing on the date of such investment
(as determined in good faith by the Board of Directors, whose determination
shall be conclusive if evidenced by a Board Resolution) and (ii) apply (no later
than the end of the 12-month period referred to in clause (i) immediately above)
such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i))
as provided in the following paragraph of Section 4.11. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
Section 4.11 totals at least $5 million, the Company must commence, not later
than the fifteenth Business Day of such month, and consummate, an Offer to
Purchase from the Holders on a pro rata basis, and an offer to purchase any
outstanding pari passu Indebtedness with similar provisions requiring the
Company to make an offer to purchase such Indebtedness, in an aggregate
principal amount of Notes and such pari passu Indebtedness equal to (A) with
respect to the Notes, the product of such Excess Proceeds multiplied by a
fraction, the numerator of which is the outstanding principal amount of the
Notes and the denominator of which is the sum of the outstanding principal
amount of the Notes and such pari passu Indebtedness (the product hereinafter
referred to as the "Note Amount"), and (B) with respect to the pari passu
Indebtedness, the excess of the Excess Proceeds over the Note Amount, at a
purchase price equal to 100% of the outstanding principal amount of the Notes or
such pari passu Indebtedness, as the case may be, on the relevant Payment Date
or such other date set forth in the documentation governing the pari passu
Indebtedness, plus, in each case, accrued interest (if any) to the Payment Date
or such other date set forth in the documentation governing the pari passu
Indebtedness. If the aggregate purchase price of the Notes and such pari passu
Indebtedness tendered pursuant to the Offer to Purchase is less than the Excess
Proceeds, the remaining Excess Proceeds will be available for use by the Company
for general corporate purposes. Upon the consummation of any Offer to Purchase
in accordance with the terms of this Indenture where the Excess Proceeds exceeds
the principal amount of the Notes, the amount of Net Cash Proceeds from Asset
Sales subject to any future Offer to Purchase shall be reset to zero.
SECTION 4.12. Repurchase of Notes upon a Change of Control. The Company
shall commence, within 30 days of the occurrence of a Change of Control, and
consummate an Offer to Purchase for all Notes then outstanding, at a purchase
price equal to 101% of their outstanding principal amount, plus accrued
interest, if any, to the Payment Date.
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SECTION 4.13. Existence. Subject to Articles Four and Five of this
Indenture, the Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its existence and the existence of
each of its Restricted Subsidiaries in accordance with the respective
organizational documents of the Company and each Restricted Subsidiary and the
rights (whether pursuant to charter, partnership certificate, agreement, statute
or otherwise), licenses and franchises of the Company and each Restricted
Subsidiary; provided that the Company shall not be required to preserve any such
right, license or franchise, or the existence of any Restricted Subsidiary, if
the maintenance or preservation thereof is no longer desirable in the conduct of
the business of the Company and its Restricted Subsidiaries taken as a whole (as
determined in good faith by the Board of Directors, whose determination shall be
conclusive if evidenced by a Board Resolution).
SECTION 4.14. Payment of Taxes and Other Claims. The Company will pay
or discharge and shall cause each of its Subsidiaries to pay or discharge, or
cause to be paid or discharged, before the same shall become delinquent (i) all
material taxes, assessments and governmental charges levied or imposed upon (a)
the Company or any such Subsidiary, (b) the income or profits of any such
Subsidiary which is a corporation or (c) the property of the Company or any such
Subsidiary and (ii) all material lawful claims for labor, materials and supplies
that, if unpaid, might by law become a Lien upon the property of the Company or
any such Subsidiary; provided that the Company shall not be required to pay or
discharge, or cause to be paid or discharged, any such tax, assessment, charge
or claim the amount, applicability or validity of which is being contested in
good faith by appropriate proceedings and for which adequate reserves have been
established to the extent required by GAAP.
SECTION 4.15. Maintenance of Properties and Insurance. The Company will
cause all properties used or useful in the conduct of its business or the
business of any of its Restricted Subsidiaries to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided that nothing in
this Section 4.15 shall prevent the Company or any Restricted Subsidiary from
discontinuing the use, operation or maintenance of any of such properties or
disposing of any of them, if such discontinuance or disposal is, in the judgment
of the Company, desirable in the conduct of the business of the Company or such
Restricted Subsidiary.
The Company will provide or cause to be provided, for itself and its
Restricted Subsidiaries, insurance (including appropriate self-insurance)
against loss or damage of the kinds customarily insured against by corporations
similarly situated and owning like properties, including, but not limited to,
products liability insurance and public liability insurance, with reputable
insurers or with the government of the United States of America, or an agency or
instrumentality thereof, in such amounts, with such deductibles and by such
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methods as shall be customary for corporations similarly situated in the
industry in which the Company or any such Restricted Subsidiary, as the case may
be, is then conducting business.
SECTION 4.16. Notice of Defaults. In the event that any Officer becomes
aware of any Default or Event of Default, the Company shall promptly deliver to
the Trustee an Officers' Certificate specifying such Default or Event of
Default.
SECTION 4.17. Compliance Certificates. (a) The Company shall deliver to
the Trustee, within 45 days after the end of each fiscal quarter (90 days after
the end of the last fiscal quarter of each year), an Officers' Certificate
stating whether or not the signers know of any Default or Event of Default. In
the case of the Officers' Certificate delivered within 90 days after the end of
the Company's fiscal year, such certificate shall contain a certification from
the Chief Executive Officer, Chief Financial Officer or Principal Accounting
Officer of the Company that a review has been conducted of the activities of the
Company and its Restricted Subsidiaries and the Company's and its Restricted
Subsidiaries' performance under this Indenture and that the Company has complied
with all conditions and covenants under this Indenture. For purposes of this
Section 4.17, such compliance shall be determined without regard to any period
of grace or requirement of notice provided under this Indenture. If any of the
officers of the Company signing such certificate has knowledge of such a Default
or Event of Default, the certificate shall describe any such Default or Event of
Default and its status. The first certificate to be delivered pursuant to this
Section 4.17(a) shall be for the first fiscal quarter beginning after the
execution of this Indenture.
(b) The Company shall deliver to the Trustee, within 90 days after the
end of each fiscal year, beginning with the fiscal year in which this Indenture
was executed, a certificate signed by the Company's independent certified public
accountants stating (i) that their audit examination has included a review of
the terms of this Indenture and the Notes as they relate to accounting matters,
(ii) that they have read the most recent Officers' Certificate delivered to the
Trustee pursuant to paragraph (a) of this Section 4.17 and (iii) whether, in
connection with their audit examination, anything came to their attention that
caused them to believe that the Company was not in compliance with any of the
terms, covenants, provisions or conditions of Article Four and Section 5.01 of
this Indenture as they pertain to accounting matters and, if any Default or
Event of Default has come to their attention, specifying the nature and period
of existence thereof; provided that such independent certified public
accountants shall not be liable in respect of such statement by reason of any
failure to obtain knowledge of any such Default or Event of Default that would
not be disclosed in the course of an audit examination conducted in accordance
with generally accepted auditing standards in effect at the date of such
examination.
SECTION 4.18. Commission Reports and Reports to Holders. At all times
from and after the earlier of (i) the date of the commencement of a registered
exchange offer for the Notes by the Company or the effectiveness of the Shelf
Registration Statement pursuant to and in accordance with the terms of the
Registration Rights Agreement (the "Registration") and (ii) the date that is six
months from the Closing Date, in either case, whether or not the Company
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is then required to file reports with the Commission, the Company shall file
with the Commission all such reports and other information as it would be
required to file with the Commission by Sections 13(a) or 15(d) under the
Exchange Act if it were subject thereto. The Company shall supply the Trustee
and each Holder or shall supply to the Trustee for forwarding to each Holder,
without cost to such Holder, copies of such reports and other information within
15 days after the date it would have been required to file such reports or other
information with the Commission had it been subject to such Sections. In
addition, at all times prior to the earlier of the date of the Registration and
the date that is six months after the Closing Date, the Company shall, at its
costs, deliver to each Holder of the Notes quarterly and annual reports
substantially equivalent to those which would be required by the Exchange Act.
In addition, at all times prior to the Registration, upon the request of any
Holder or any prospective purchaser of the Notes designed by a Holder, the
Company shall supply to such Holder or such prospective purchaser the
information required under Rule 144A(d)(4) under the Securities Act. The Company
also shall comply with the other provisions of TIA Section 314(a).
Delivery of such reports, information and documents to the Trustee is
for informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
SECTION 4.19. Waiver of Stay, Extension or Usury Laws. The Company
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law or any usury law or other law
that would prohibit or forgive the Company from paying all or any portion of the
principal of, premium, if any, or interest on the Notes as contemplated herein,
wherever enacted, now or at any time hereafter in force, or that may affect the
covenants or the performance of this Indenture; and (to the extent that it may
lawfully do so) the Company hereby expressly waives all benefit or advantage of
any such law and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge, Etc. The Company shall not
consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets (as an
entirety or substantially an entirety in one transaction or a series of related
transactions) to, any Person or permit any Person to merge with or into the
Company unless: (i) the Company shall be the continuing Person, or the Person
(if other than the Company) formed by such consolidation or into which the
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Company is merged or that acquired or leased such property and assets of the
Company shall be a corporation organized and validly existing under the laws of
the United States of America or any jurisdiction thereof and shall expressly
assume, by a supplemental indenture, executed and delivered to the Trustee, all
of the obligations of the Company on all of the Notes and under this Indenture;
(ii) immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis, the Company or any Person
becoming the successor obligor of the Notes shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction; (iv) immediately after giving effect to such
transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of Section 4.03(a); provided that this
clause (iv) shall not apply to (x) a consolidation, merger or sale of all (but
not less than all) of the assets of the Company if all Liens and Indebtedness of
the Company or any Person becoming the successor obligor on the Notes, as the
case may be, and its Restricted Subsidiaries outstanding immediately after such
transaction would, if Incurred at such time, have been permitted to be Incurred
(and all such Liens and Indebtedness, other than Liens and Indebtedness of the
Company and its Restricted Subsidiaries outstanding immediately prior to the
transaction, shall be deemed to have been Incurred) for all purposes of this
Indenture or (y) a consolidation, merger or sale of all or substantially all of
the assets of the Company if immediately after giving effect to such transaction
on a pro forma basis, the Company or any Person becoming the successor obligor
of the Notes shall have a Consolidated Leverage Ratio equal to or less than the
Consolidated Leverage Ratio of the Company immediately prior to such
transaction; and (v) the Company delivers to the Trustee an Officers'
Certificate and Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture complies with
this provision and that all conditions precedent provided for herein relating to
such transaction have been complied with; provided, however, that clauses (iii)
and (iv) above do not apply if, in the good faith determination of the Board of
Directors, whose determination shall be conclusive if evidenced by a Board
Resolution, the principal purpose of such transaction is to change the state or
form of incorporation of the Company; and provided further that any such
transaction shall not have as one of its purposes the evasion of the foregoing
limitations.
SECTION 5.02. Successor Substituted. Upon any consolidation or merger,
or any sale, conveyance, transfer, lease or other disposition of all or
substantially all of the property and assets of the Company in accordance with
Section 5.01 of this Indenture, the successor Person formed by such
consolidation or into which the Company is merged or to which such sale,
conveyance, transfer, lease or other disposition is made shall succeed to, and
be substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person had been named
as the Company herein; provided that the Company shall not be released from its
obligation to pay the principal of, premium, if any, or interest on the Notes in
the case of a lease of all or substantially all of its property and assets.
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ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default. Any of the following events shall
constitute an "Event of Default" hereunder:
(a) default in the payment of principal of (or premium, if
any, on) any Note when the same becomes due and payable , upon
acceleration, redemption or otherwise;
(b) default in the payment of interest on any Note when the
same becomes due and payable, and such default continues for a period
of 30 days; provided that a failure to make any of the first six
scheduled interest payments on the Notes on the applicable Interest
Payment Date will constitute an Event of Default with no grace or cure
period;
(c) default in the performance or breach of the provisions of
Article Five or the failure to make or consummate an Offer to Purchase
in accordance with Sections 4.11 and 4.12;
(d) the Company defaults in the performance of or breaches any
other covenant or agreement of the Company in this Indenture or under
the Notes (other than a default specified in clause (a), (b) or (c)
above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of
25% or more in aggregate principal amount of the Notes then
outstanding;
(e) there occurs with respect to any other issue or issues of
Indebtedness of the Company or any Significant Subsidiary having an
outstanding principal amount of $5 million or more in the aggregate for
all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (A) an event of default that has
caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or
annulled within 30 days of such acceleration and/or (B) the failure to
make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or
extended within 30 days of such payment default;
(f) any final judgment or order (not covered by insurance) for
the payment of money in excess of $5 million in the aggregate for all
such final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against the Company or any Significant Subsidiary and shall
not be paid or discharged, and there shall be any period of 30
consecutive days
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following entry of the final judgment or order that causes the
aggregate amount for all such final judgments or orders outstanding and
not paid or discharged against all such Persons to exceed $5 million
during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any
Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect,
(B) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property
and assets of the Company or any Significant Subsidiary or (C) the
winding up or liquidation of the affairs of the Company or any
Significant Subsidiary and, in each case, such decree or order shall
remain unstayed and in effect for a period of 30 consecutive days;
(h) the Company or any Significant Subsidiary (A) commences a
voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any Significant Subsidiary or for all or
substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the
benefit of creditors; or
(i) the Pledge Agreement shall cease to be in full force and
effect or enforceable other than in accordance with its terms.
SECTION 6.02. Acceleration. If an Event of Default (other than an Event
of Default specified in clause (g) or (h) of Section 6.01 that occurs with
respect to the Company) occurs and is continuing under this Indenture, the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Notes then outstanding by written notice to the Company (and to the Trustee if
such notice is given by the Holders), may, and the Trustee at the request of
such Holders shall, declare the outstanding principal of, premium, if any, and
accrued interest on the Notes to be immediately due and payable. Upon a
declaration of acceleration, such outstanding principal, premium, if any, and
accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
of Section 6.01 has occurred and is continuing, such declaration of acceleration
shall be automatically rescinded and annulled if the event of default triggering
such Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) of
Section 6.01 occurs with respect to the Company, the outstanding principal of,
premium, if any, and accrued interest on the Notes then outstanding shall ipso
facto become
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and be immediately due and payable without any declaration or other act on the
part of the Trustee or any Holder.
At any time after such declaration of acceleration, but before a
judgment or decree for the payment of the money due has been obtained by the
Trustee, the Holders of at least a majority in principal amount of the
outstanding Notes by written notice to the Company and to the Trustee, may waive
all past Defaults and rescind and annul a declaration of acceleration and its
consequences if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, (ii) all overdue interest on all Notes, (iii) the
principal of and premium, if any, on any Notes that have become due otherwise
than by such declaration or occurrence of acceleration and interest thereon at
the rate prescribed therefor by such Notes, and (iv) to the extent that payment
of such interest is lawful, interest upon overdue interest, if any, at the rate
prescribed therefor by such Notes, (b) all existing Events of Default, other
than the non-payment of the outstanding principal of, premium, if any, and
accrued interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived and (c) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction.
SECTION 6.03. Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may, and at the direction of the Holders of at least a
majority in principal amount of the outstanding Notes shall, pursue any
available remedy by proceeding at law or in equity to collect the payment of
principal of, premium, if any, or interest on the Notes or to enforce the
performance of any provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding.
SECTION 6.04. Waiver of Past Defaults. Subject to Sections 6.02, 6.07
and 9.02, the Holders of at least a majority in principal amount of the
outstanding Notes, by notice to the Trustee, may waive an existing Default or
Event of Default and its consequences, except a Default in the payment of
principal of, premium, if any, or interest on any Note as specified in clause
(a) or (b) of Section 6.01 or in respect of a covenant or provision of this
Indenture which cannot be modified or amended without the consent of the Holder
of each outstanding Note affected. Upon any such waiver, such Default shall
cease to exist, and any Event of Default arising therefrom shall be deemed to
have been cured, for every purpose of this Indenture; but no such waiver shall
extend to any subsequent or other Default or Event of Default or impair any
right consequent thereto.
SECTION 6.05. Control by Majority. The Holders of at least a majority
in aggregate principal amount of the outstanding Notes may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee; provided that
the Trustee may refuse to follow any direction
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that conflicts with law or this Indenture, that may involve the Trustee in
personal liability, or that the Trustee determines in good faith may be unduly
prejudicial to the rights of Holders of Notes not joining in the giving of such
direction; and provided further that the Trustee may take any other action it
deems proper that is not inconsistent with any such direction received from
Holders of Notes.
SECTION 6.06. Limitation on Suits. A Holder may not institute any
proceeding, judicial or otherwise, with respect to this Indenture or the Notes,
or for the appointment of a receiver or trustee, or for any other remedy
hereunder, unless:
(i) the Holder has previously given the Trustee written notice
of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount
of outstanding Notes shall have made a written request to the Trustee
to pursue such remedy;
(iii) such Holder or Holders offer the Trustee indemnity
satisfactory to the Trustee against any costs, liability or expense;
(iv) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of indemnity; and
(v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the
Trustee a direction that is inconsistent with the request.
For purposes of Section 6.05 of this Indenture and this Section 6.06,
the Trustee shall comply with TIA Section 316(a) in making any determination of
whether the Holders of the required aggregate principal amount of outstanding
Notes have concurred in any request or direction of the Trustee to pursue any
remedy available to the Trustee or the Holders with respect to this Indenture or
the Notes or otherwise under the law.
A Holder may not use this Indenture to prejudice the rights of another
Holder or to obtain a preference or priority over such other Holder.
SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding any
other provision of this Indenture, the right of any Holder of a Note to receive
payment of the principal of, premium, if any, or interest on, such Note or to
bring suit for the enforcement of any such payment, on or after the due date
expressed in the Notes, shall not be impaired or affected without the consent of
such Holder; provided that the Holders of not less than 75% of the aggregate
principal amount of Notes shall have the right to consent to postponement of
interest payments on the Notes, in accordance with TIA Section 316(a)(2).
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SECTION 6.08. Collection Suit by Trustee. If an Event of Default in
payment of principal, premium or interest specified in clause (a), (b) or (c) of
Section 6.01 occurs and is continuing, the Trustee may recover judgment in its
own name and as trustee of an express trust against the Company or any other
obligor of the Notes for the whole amount of principal, premium, if any, and
accrued interest remaining unpaid, together with interest on overdue principal,
premium, if any, and, to the extent that payment of such interest is lawful,
interest on overdue installments of interest, in each case at the rate specified
in the Notes, and such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee (including any claim for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07) and the Holders allowed in any judicial proceedings relative to
the Company (or any other obligor of the Notes), its creditors or its property
and shall be entitled and empowered to collect and receive any monies,
securities or other property payable or deliverable upon conversion or exchange
of the Notes or upon any such claims and to distribute the same, and any
custodian, receiver, assignee, trustee, liquidator, sequestrator or other
similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay to
the Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 7.07. Nothing herein contained shall be
deemed to empower the Trustee to authorize or consent to, or accept or adopt on
behalf of any Holder, any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder in any such
proceeding.
SECTION 6.10. Priorities. If the Trustee collects any money pursuant to
this Article Six, it shall pay out the money in the following order:
First: to the Trustee for all amounts due under Section 7.07;
Second: to Holders for amounts then due and unpaid for
principal of, premium, if any, and interest on the Notes in respect of
which or for the benefit of which such money has been collected,
ratably, without preference or priority of any kind, according to the
amounts due and payable on such Notes for principal, premium, if any,
and interest, respectively; and
Third: to the Company or any other obligors of the Notes, as
their interests may appear, or as a court of competent jurisdiction may
direct.
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The Trustee, upon prior written notice to the Company, may fix a record
date and payment date for any payment to Holders pursuant to this Section 6.10.
SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of
any right or remedy under this Indenture or in any suit against the Trustee for
any action taken or omitted by it as Trustee, a court may require any party
litigant in such suit to file an undertaking to pay the costs of the suit, and
the court may assess reasonable costs, including reasonable attorneys' fees and
expenses, against any party litigant in the suit having due regard to the merits
and good faith of the claims or defenses made by the party litigant. This
Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 6.07, or a suit by Holders of more than 10% in principal
amount of the outstanding Notes.
SECTION 6.12. Restoration of Rights and Remedies. If the Trustee or any
Holder has instituted any proceeding to enforce any right or remedy under this
Indenture and such proceeding has been discontinued or abandoned for any reason,
or has been determined adversely to the Trustee or to such Holder, then, and in
every such case, subject to any determination in such proceeding, the Company,
the Trustee and the Holders shall be restored severally and respectively to
their former positions hereunder and thereafter all rights and remedies of the
Company, Trustee and the Holders shall continue as though no such proceeding had
been instituted.
SECTION 6.13. Rights and Remedies Cumulative. Except as otherwise
provided with respect to the replacement or payment of mutilated, destroyed,
lost or wrongfully taken Notes in Section 2.09, no right or remedy herein
conferred upon or reserved to the Trustee or to the Holders is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to the
extent permitted by law, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
SECTION 6.14. Delay or Omission Not Waiver. No delay or omission of the
Trustee or of any Holder to exercise any right or remedy accruing upon any Event
of Default shall impair any such right or remedy or constitute a waiver of any
such Event of Default or an acquiescence therein. Every right and remedy given
by this Article Six or by law to the Trustee or to the Holders may be exercised
from time to time, and as often as may be deemed expedient, by the Trustee or by
the Holders, as the case may be.
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. General. The duties and responsibilities of the Trustee
shall be as
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provided by the TIA and as set forth herein. Notwithstanding the foregoing, no
provision of this Indenture shall require the Trustee to expend or risk its own
funds or otherwise incur any financial liability in the performance of any of
its duties hereunder, or in the exercise of any of its rights or powers, if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it. Whether or not herein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Article
Seven.
SECTION 7.02. Certain Rights of Trustee. Subject to TIA Sections 315(a)
through (d):
(i) the Trustee may conclusively rely, and shall be protected
in acting or refraining from acting, upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document believed by it to be genuine and to have
been signed or presented by the proper person;
(ii) before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel, which shall
conform to Section 11.03. The Trustee shall not be liable for any
action it takes or omits to take in good faith in reliance on such
certificate or opinion;
(iii) the Trustee may act through its attorneys and agents and
shall not be responsible for the misconduct or negligence of any
attorney or agent appointed with due care by it hereunder;
(iv) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the Holders, unless such Holders shall have
offered to the Trustee security or indemnity satisfactory to it against
the costs, expenses and liabilities that might be incurred by it in
compliance with such request or direction;
(v) the Trustee shall not be liable for any action it takes or
omits to take in good faith that it believes to be authorized or within
its rights or powers, provided that the Trustee's conduct does not
constitute negligence or bad faith;
(vi) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may,
in the absence of bad faith on its part, rely upon an Officers'
Certificate;
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(vii) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters
as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company personally or by agent or
attorney;
(viii) the Trustee may consult with counsel of its selection
and the advice of such counsel or any Opinion of Counsel shall be full
and complete authorization and protection in respect of any action
taken, suffered or omitted by it hereunder in good faith and in
reliance thereon; and
(ix) the Trustee shall not be deemed to have notice of any
Default or Event of Default unless a Responsible Officer of the Trustee
has actual knowledge thereof or unless written notice of any event
which is in fact such a Default is received by the Trustee at the
Corporate Trust Office of the Trustee, and such notice references the
Notes and this Indenture.
SECTION 7.03. Individual Rights of Trustee. The Trustee, in its
individual or any other capacity, may become the owner or pledgee of Notes and
may otherwise deal with the Company or its Affiliates with the same rights it
would have if it were not the Trustee. Any Agent may do the same with like
rights. However, the Trustee is subject to TIA Sections 310(b) and 311.
SECTION 7.04. Trustee's Disclaimer. The Trustee (i) makes no
representation as to the validity or adequacy of this Indenture or the Notes,
(ii) shall not be accountable for the Company's use or application of the
proceeds from the Notes and (iii) shall not be responsible for any statement in
the Notes other than its certificate of authentication.
SECTION 7.05. Notice of Default. If any Default or any Event of Default
occurs and is continuing and if such Default or Event of Default is known to the
Trustee, the Trustee shall mail to each Holder in the manner and to the extent
provided in TIA Section 313(c) notice of the Default or Event of Default within
45 days after it occurs, unless such Default or Event of Default has been cured;
provided, however, that, except in the case of a default in the payment of the
principal of, premium, if any, or interest on any Note, the Trustee shall be
protected in withholding such notice if and so long as the board of directors,
the executive committee or a trust committee of directors and/or Responsible
Officers of the Trustee in good faith determine that the withholding of such
notice is in the interest of the Holders.
SECTION 7.06. Reports by Trustee to Holders. Within 60 days after each
May 15, beginning with May 15, 1999, the Trustee shall mail to each Holder as
provided in TIA Section 313(c) a brief report dated as of such May 15, if
required by TIA Section 313(a).
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A copy of each report at the time of its mailing to the Holders of
Securities shall be mailed to the Company and filed with the Commission and each
stock exchange on which the Securities are listed in accordance with TIA Section
313(d). The Company shall promptly notify the Trustee when the Securities are
listed on any stock exchange or of any delisting thereof.
SECTION 7.07. Compensation and Indemnity. The Company shall pay to the
Trustee such compensation as shall be agreed upon in writing for its services
under this Indenture and the Pledge Agreement. The compensation of the Trustee
shall not be limited by any law on compensation of a trustee of an express
trust. The Company shall reimburse the Trustee upon request for all reasonable
disbursements, expenses and advances incurred or made by the Trustee without
negligence or bad faith on its part. Such expenses shall include the
compensation and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee for, and hold it harmless
against, any and all loss, damage, claim, liability or expense, including taxes
(other than taxes based on the income of the Trustee) incurred by it without
negligence or bad faith on its part in connection with the acceptance or
administration of this Indenture and the Pledge Agreement and its duties under
this Indenture, the Pledge Agreement and the Notes, including the costs and
expenses of defending itself against any claim or liability and of complying
with any process served upon it or any of its officers in connection with the
exercise or performance of any of its powers or duties under this Indenture, the
Pledge Agreement and the Notes. The Trustee shall notify the Company promptly of
any claim for which it may seek indemnity. Failure by the Trustee to so notify
the Company shall not relieve the Company of its obligations hereunder or
thereunder, unless the Company is materially prejudiced thereby. The Company
shall defend the claim and the Trustee shall cooperate in the defense. Unless
otherwise set forth herein, the Trustee may have separate counsel and the
Company shall pay the reasonable fees and expenses of such counsel. The Company
need not pay for any settlement made without its consent, which consent shall
not be unreasonably withheld.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a lien prior to the Notes on all money or property held or
collected by the Trustee, in its capacity as Trustee, except money or property
held in trust pursuant to the Pledge Agreement or otherwise to pay principal of,
premium, if any, and interest on particular Notes.
If the Trustee incurs expenses or renders services after the occurrence
of an Event of Default specified in clause (g) or (h) of Section 6.01, the
expenses and the compensation for the services will be intended to constitute
expenses of administration under Title 11 of the United States Bankruptcy Code
or any applicable federal or state law for the relief of debtors.
The provisions of this Section 7.07 shall survive the termination of
this Indenture.
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The Trustee shall comply with the provisions of TIA Section 313(b)(2)
to the extent applicable.
SECTION 7.08. Replacement of Trustee. A resignation or removal of the
Trustee and appointment of a successor Trustee shall become effective only upon
the successor Trustee's acceptance of appointment as provided in this Section
7.08.
The Trustee may resign at any time by so notifying the Company in
writing at least 30 days prior to the date of the proposed resignation. The
Holders of a majority in principal amount of the outstanding Notes may remove
the Trustee by so notifying the Trustee in writing and may appoint a successor
Trustee with the consent of the Company. The Company may remove the Trustee if:
(i) the Trustee is no longer eligible under Section 7.10; (ii) the Trustee is
adjudged a bankrupt or an insolvent; (iii) a receiver or other public officer
takes charge of the Trustee or its property; or (iv) the Trustee becomes
incapable of acting.
If the Trustee resigns or is removed, or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the outstanding Notes may appoint a
successor Trustee to replace the successor Trustee appointed by the Company. If
the successor Trustee does not deliver its written acceptance required by the
next succeeding paragraph of this Section 7.08 within 30 days after the retiring
Trustee resigns or is removed, the retiring Trustee, the Company or the Holders
of a majority in principal amount of the outstanding Notes may, at the expense
of the Company, petition any court of competent jurisdiction for the appointment
of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after the
delivery of such written acceptance, subject to the lien provided in Section
7.07, (i) the retiring Trustee shall transfer all property held by it as Trustee
to the successor Trustee, (ii) the resignation or removal of the retiring
Trustee shall become effective and (iii) the successor Trustee shall have all
the rights, powers and duties of the Trustee under this Indenture. A successor
Trustee shall mail notice of its succession to each Holder. No successor Trustee
shall accept its appointment unless at the time of such acceptance such
successor Trustee shall be qualified and eligible under this Article.
If the Trustee is no longer eligible under Section 7.10 or shall fail
to comply with TIA Section 310(b), any Holder who satisfies the requirements of
TIA Section 310(b) may petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee. If at any
time the Trustee shall cease to be eligible in accordance with the provisions of
this Section 7.08, the Trustee shall resign immediately in the manner and with
the effect provided in this Section.
The Company shall give notice of any resignation and any removal of the
Trustee and
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each appointment of a successor Trustee to all Holders. Each notice shall
include the name of the successor Trustee and the address of its Corporate Trust
Office.
Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligation under Section 7.07 shall continue for the benefit
of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger, Etc. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all of its corporate trust business to, another corporation or national banking
association, the resulting, surviving or transferee corporation or national
banking association without any further act shall be the successor Trustee with
the same effect as if the successor Trustee had been named as the Trustee
herein, provided such corporation shall be otherwise qualified and eligible
under this Article.
SECTION 7.10. Eligibility. This Indenture shall always have a Trustee
who satisfies the requirements of TIA Section 310(a)(1). The Trustee shall have
a combined capital and surplus of at least $25 million as set forth in its most
recent published annual report of condition that is subject to the requirements
of applicable Federal or state supervising or examining authority. If at any
time the Trustee shall cease to be eligible in accordance with the provisions of
this Section, the Trustee shall resign immediately in the manner and with the
effect specified in this Article.
SECTION 7.11. Money Held in Trust. The Trustee shall not be liable for
interest on any money received by it except as the Trustee may agree in writing
with the Company. Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law and except for money held in
trust under Article Eight or Ten of this Indenture.
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations. Except as otherwise
provided in this Section 8.01, the Company may terminate its obligations under
the Notes and this Indenture if:
(i) all Notes previously authenticated and delivered (other
than destroyed, lost or stolen Notes that have been replaced or Notes
that are paid pursuant to Section 4.01 or Notes for whose payment money
or securities have theretofore been held in trust and thereafter repaid
to the Company, as provided in Section 8.05) have been delivered to the
Trustee for cancellation and the Company has paid all sums payable by
it hereunder; or
(ii) (A) the Notes mature within one year or all of them are
to be called for
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redemption within one year under arrangements satisfactory to the
Trustee for giving the notice of redemption, (B) the Company
irrevocably deposits in trust with the Trustee during such one-year
period, under the terms of an irrevocable trust agreement in form and
substance satisfactory to the Trustee, as trust funds solely for the
benefit of the Holders for that purpose, cash, Temporary Cash
Investments or U.S. Government Obligations sufficient (in the opinion
of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee),
without consideration of any reinvestment of any interest thereon, to
pay principal, premium, if, any, and interest on the Notes to maturity
or redemption, as the case may be, and to pay all other sums payable by
it hereunder, (C) no Default or Event of Default with respect to the
Notes shall have occurred and be continuing on the date of such
deposit, (D) such deposit will not result in a breach or violation of,
or constitute a default under, this Indenture or any other agreement or
instrument to which the Company is a party or by which it is bound and
(E) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, in each case stating that all conditions
precedent provided for herein relating to the satisfaction and
discharge of this Indenture have been complied with.
With respect to the foregoing clause (i), the Company's obligations
under Section 7.07 shall survive. With respect to the foregoing clause (ii), the
Company's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08,
2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the
Notes are no longer outstanding. Thereafter, only the Company's obligations in
Sections 7.07, 8.04, 8.05 and 8.06 shall survive. After any such irrevocable
deposit, the Trustee upon request shall acknowledge in writing the discharge of
the Company's obligations under the Notes and this Indenture except for those
surviving obligations specified above.
SECTION 8.02. Defeasance and Discharge of Indenture. The Company will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the date of the deposit referred to
in clause (A) of this Section 8.02, and the provisions of this Indenture will no
longer be in effect with respect to the Notes, and the Trustee, at the expense
of the Company, shall execute proper instruments acknowledging the same if:
(A) with reference to this Section 8.02, the Company has
irrevocably deposited or caused to be irrevocably deposited with the
Trustee (or another trustee satisfying the requirements of Section
7.10) and conveyed all right, title and interest to the Trustee for the
benefit of the Holders, under the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee as trust
funds in trust, specifically pledged to the Trustee for the benefit of
the Holders as security for payment of the principal of, premium, if
any, and interest, if any, on the Notes, and dedicated solely to, the
benefit of the Holders, in and to (1) cash, Temporary Cash Investments
in an amount, (2) U.S. Government Obligations that, through the payment
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of interest, premium, if any, and principal in respect thereof in
accordance with their terms, will provide, not later than one day
before the due date of any payment referred to in this clause (A),
money in an amount or (3) a combination thereof in an amount
sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay and discharge, without
consideration of the reinvestment of such interest and after payment of
all federal, state and local taxes or other charges and assessments in
respect thereof payable by the Trustee, the principal of, premium, if
any, and interest on the outstanding Notes on the Stated Maturity of
such principal or interest; provided that the Trustee shall have been
irrevocably instructed to apply such cash, Temporary Cash Investments
or the proceeds of such U.S. Government Obligations to the payment of
such principal, premium, if any, and interest with respect to the
Notes, and provided further that, if simultaneously with the deposit of
the cash or Temporary Cash Investments and/or U.S. Government
Obligations referred to in (i) above, the Company has caused an
irrevocable, transferrable, standby letter of credit to be issued by a
bank with capital and surplus exceeding the principal of, premium, if
any, and interest on the Notes then outstanding, expiring not earlier
than 180 days from its issuance, in favor of the Trustee, which permits
the Trustee to draw an amount equal to the principal, premium, if any,
and accrued interest on the Notes through the expiry date of the letter
of credit, then the Company will be deemed to have paid and discharged
any and all obligations under this clause (A) on the date of the
deposit and issuance of the letter of credit;
(B) the Company has delivered to the Trustee (1) either (x) an
Opinion of Counsel to the effect that Holders will not recognize
income, gain or loss for federal income tax purposes as a result of the
Company's exercise of its option under this Section 8.02 and will be
subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such option had
not been exercised, which Opinion of Counsel shall be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to
the same effect unless there has been a change in applicable federal
income tax law after the Closing Date such that a ruling is no longer
required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned
Opinion of Counsel and (2) an Opinion of Counsel to the effect that the
creation of the defeasance trust does not violate the Investment
Company Act of 1940 and that after the passage of 123 days following
the deposit (except, with respect to any trust funds for the account of
any Holder who may be deemed to be an "insider" for purposes of the
United States Bankruptcy Code, after one year following the deposit),
the trust funds will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and
Creditor Law in a case commenced by or against the Company under either
such statute, and either (I) the trust funds will no longer remain the
property of the Company (and therefore will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors'
<PAGE> 76
70
rights generally) or (II) if a court were to rule under any such law in
any case or proceeding that the trust funds remained property of the
Company, (a) assuming such trust funds remained in the possession of
the Trustee prior to such court ruling to the extent not paid to the
Holders, the Trustee will hold, for the benefit of the Holders, a valid
and perfected security interest in such trust funds that is not
avoidable in bankruptcy or otherwise except for the effect of Section
552(b) of the United States Bankruptcy Code on interest on the trust
funds accruing after the commencement of a case under such statute and
(b) the Holders will be entitled to receive adequate protection of
their interests in such trust funds if such trust funds are used in
such case or proceeding;
(C) immediately after giving effect to such deposit, on a pro
forma basis, no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or during the period ending on
the 123rd day after such date of such deposit, and such deposit shall
not result in a breach or violation of, or constitute a default under,
this Indenture or any other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound;
(D) if the Notes are then listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of
Counsel to the effect that the Notes will not be delisted as a result
of such deposit, defeasance and discharge; and
(E) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.02 have been complied with.
Notwithstanding the foregoing, prior to the end of the 123-day (or
one-year) period referred to in clause (B)(2) of this Section 8.02, none of the
Company's obligations under this Indenture shall be discharged. Subsequent to
the end of such 123-day (or one year) period with respect to this Section 8.02,
the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08,
2.09, 2.14, 4.01, 4.02, 8.04, 8.05, 8.06 and the rights, powers, trusts, duties
and immunities of the Trustee hereunder shall survive until the Notes are no
longer outstanding. Thereafter, only the Company's obligations in Sections 7.07,
8.04, 8.05 and 8.06 shall survive. If and when a ruling from the Internal
Revenue Service or an Opinion of Counsel referred to in clause (B)(1) of this
Section 8.02 is able to be provided specifically without regard to, and not in
reliance upon, the continuance of the Company's obligations under Section 4.01,
then the Company's obligations under such Section 4.01 shall cease upon delivery
to the Trustee of such ruling or Opinion of Counsel and compliance with the
other conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.02.
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71
After any such irrevocable deposit, the Trustee upon request shall
acknowledge in writing the discharge of the Company's obligations under the
Notes and this Indenture except for those surviving obligations in the
immediately preceding paragraph.
SECTION 8.03. Defeasance of Certain Obligations. The Company may omit
to comply with any term, provision or condition set forth in clauses (iii) and
(iv) of Section 5.01 and Sections 4.03 through 4.11, clause (c) of Section 6.01
with respect to clauses (iii) and (iv) of Section 5.01, clause (d) of Section
6.01 with respect to Sections 4.01, 4.02 and 4.12 through 4.19 and clauses (c),
(d), (e), (f) and (g) of Section 6.01 shall be deemed not to be Events of
Default, in each case with respect to the outstanding Notes if:
(i) with reference to this Section 8.03, the Company has
irrevocably deposited or caused to be irrevocably deposited with the
Trustee (or another trustee satisfying the requirements of Section
7.10) and conveyed all right, title and interest to the Trustee for the
benefit of the Holders, under the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee as trust
funds in trust, specifically pledged to the Trustee for the benefit of
the Holders as security for payment of the principal of, premium, if
any, and interest, if any, on the Notes, and dedicated solely to, the
benefit of the Holders, in and to (A) cash or Temporary Cash
Investments in an amount, (B) U.S. Government Obligations that, through
the payment of interest, premium, if any, and principal in respect
thereof in accordance with their terms, will provide, not later than
one day before the due date of any payment referred to in this clause
(i), money in an amount or (C) a combination thereof in an amount
sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay and discharge, without
consideration of the reinvestment of such interest and after payment of
all federal, state and local taxes or other charges and assessments in
respect thereof payable by the Trustee, the principal of, premium, if
any, and interest on the outstanding Notes on the Stated Maturity of
such principal or interest; provided that the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such U.S.
Government Obligations to the payment of such principal, premium, if
any, and interest with respect to the Notes and provided further that,
if simultaneously with the deposit of the cash or Temporary Cash
Investments and/or U.S. Government Obligations referred to in this
clause (i), the Company has caused an irrevocable, transferrable,
standby letter of credit to be issued by a bank with capital and
surplus exceeding the principal of, premium, if any, and interest on
the Notes then outstanding, expiring not earlier than 180 days from its
issuance, in favor of the Trustee, which permits the Trustee to draw an
amount equal to the principal, premium, if any, and accrued interest on
the Notes through the expiry date of the letter of credit, then the
Company will be deemed to have paid and discharged any and all
obligations under this clause (i) on the date of the deposit and
issuance of the letter of credit;
(ii) the Company has delivered to the Trustee an Opinion of
Counsel to the
<PAGE> 78
72
effect that (A) the creation of the defeasance trust does not violate
the Investment Company Act of 1940, (B) after the passage of 123 days
following the deposit (except, with respect to any trust funds for the
account of any Holder who may be deemed to be an "insider" for purposes
of the United States Bankruptcy Code, after one year following the
deposit), the trust funds will not be subject to the effect of Section
547 of the United States Bankruptcy Code or Section 15 of the New York
Debtor and Creditor Law in a case commenced by or against the Company
under either such statute, and either (1) the trust funds will no
longer remain the property of the Company (and therefore will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally)
or (2) if a court were to rule under any such law in any case or
proceeding that the trust funds remained property of the Company, (x)
assuming such trust funds remained in the possession of the Trustee
prior to such court ruling to the extent not paid to the Holders, the
Trustee will hold, for the benefit of the Holders, a valid and
perfected security interest in such trust funds that is not avoidable
in bankruptcy or otherwise (except for the effect of Section 552(b) of
the United States Bankruptcy Code on interest on the trust funds
accruing after the commencement of a case under such statute) and (y)
the Holders will be entitled to receive adequate protection of their
interests in such trust funds if such trust funds are used in such case
or proceeding, (C) the Holders will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit and
defeasance of certain covenants and Events of Default and will be
subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such deposit and
defeasance had not occurred and (D) the Trustee, for the benefit of the
Holders, has a valid first-priority security interest in the trust
funds;
(iii) immediately after giving effect to such deposit on a pro
forma basis, no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or during the period ending on
the 123rd day after such date of such deposit, and such deposit shall
not result in a breach or violation of, or constitute a default under,
this Indenture or any other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound;
(iv) if the Notes are then listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of
Counsel to the effect that the Notes will not be delisted as a result
of such deposit, defeasance and discharge; and
(v) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.03 have been complied with; provided
that if simultaneously with the deposit of the cash or Temporary Cash
Investments and/or U.S. Government Obligations referred to in (i)
above, the Company
<PAGE> 79
73
has caused an irrevocable, transferrable, standby letter of credit to
be issued by a bank with capital and surplus exceeding the principal
amount of the Notes then outstanding, expiring not earlier than 180
days from its issuance, in favor of the Trustee, which permits the
Trustee to draw an amount equal to the principal, premium, if any, and
accrued interest on the Notes through the expiry date of the letter of
credit, then the Company will be deemed to have paid and discharged any
and all obligations in respect of the notes on the date of the deposit
and issuance of the letter of credit.
SECTION 8.04. Application of Trust Money; Miscellaneous. Subject to
Section 8.06, the Trustee or Paying Agent shall hold in trust money or U.S.
Government Obligations deposited with it pursuant to Section 8.01, 8.02 or 8.03,
as the case may be, and shall apply the deposited money and the money from U.S.
Government Obligations in accordance with the Notes and this Indenture to the
payment of principal of, premium, if any, and interest on the Notes; but such
money need not be segregated from other funds except to the extent required by
law.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the U.S. Government Obligations
deposited pursuant to Section 8.01, 8.02 or 8.03 or the principal and interest
received in respect thereof other than any such tax, fee or other charge which
by law is for the account of the Holders of outstanding Notes.
SECTION 8.05. Repayment to Company. Subject to Sections 7.07, 8.01,
8.02 and 8.03, the Trustee and the Paying Agent shall promptly pay to the
Company upon written request set forth in an Officers' Certificate any excess
money held by them at any time and thereupon shall be relieved from all
liability with respect to such money. The Trustee and the Paying Agent shall pay
to the Company upon request any money held by them for the payment of principal,
premium, if any, or interest that remains unclaimed for two years; provided that
the Trustee or Paying Agent before being required to make any payment may cause
to be published at the expense of the Company once in a newspaper of general
circulation in The City of New York, or mail to each Holder entitled to such
money at such Holder's address (as set forth in the Security Register) notice
that such money remains unclaimed and that after a date specified therein (which
shall be at least 30 days from the date of such publication or mailing) any
unclaimed balance of such money then remaining will be repaid to the Company.
After payment to the Company, Holders entitled to such money must look to the
Company for payment as general creditors unless an applicable law designates
another Person, and all liability of the Trustee and such Paying Agent with
respect to such money shall cease.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable
to apply any money or U.S. Government Obligations in accordance with Section
8.01, 8.02 or 8.03, as the case may be, by reason of any legal proceeding or by
reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, the Company's
obligations under this Indenture and the Notes shall be revived and reinstated
as though no deposit had occurred pursuant to Section 8.01, 8.02 or 8.03, as the
<PAGE> 80
74
case may be, until such time as the Trustee or Paying Agent is permitted to
apply all such money or U.S. Government Obligations in accordance with Section
8.01, 8.02 or 8.03, as the case may be; provided that, if the Company has made
any payment of principal of, premium, if any, or interest on any Notes because
of the reinstatement of its obligations, the Company shall be subrogated to the
rights of the Holders of such Notes to receive such payment from the money or
U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders. The Company, when authorized
by a resolution of its Board of Directors (as evidenced by a Board Resolution
delivered to the Trustee), and the Trustee may amend or supplement this
Indenture or the Notes without notice to or the consent of any Holder:
(1) to cure any ambiguity, defect or inconsistency in this
Indenture; provided that such amendments or supplements shall not, in
the good faith opinion of the Board of Directors as evidenced by a
Board Resolution, adversely affect the interests of the Holders in any
material respect;
(2) to comply with Article Five;
(3) to comply with any requirements of the Commission in
connection with the qualification of this Indenture under the TIA;
(4) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee;
(5) to provide for uncertificated Notes in addition to or in
place of certificated Notes;
(6) to add one or more subsidiary guarantees on the terms
required by this Indenture; or
(7) to make any change that, in the good faith opinion of the
Board of Directors as evidenced by a Board Resolution, does not
materially and adversely affect the rights of any Holder.
SECTION 9.02. With Consent of Holders. Subject to Sections 6.04 and
6.07 and without prior notice to the Holders, the Company, when authorized by
its Board of Directors (as evidenced by a Board Resolution), and the Trustee may
amend this Indenture, the Pledge Agreement and the Notes with the written
consent of the Holders of a majority in aggregate
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75
principal amount of the Notes then outstanding by written notice to the Trustee
may waive future compliance by the Company with any provision of this Indenture,
the Pledge Agreement or the Notes.
Notwithstanding the provisions of this Section 9.02, without the
consent of each Holder affected, an amendment or waiver, including a waiver
pursuant to Section 6.04, may not:
(i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note;
(ii) reduce the principal of, or premium, if any, or interest
on any Note;
(iii) change any place or currency of payment of principal of,
premium, if any, or interest on, any Note;
(iv) impair the right to institute suit for the enforcement of
any payment on or after the Stated Maturity (or, in the case of
redemption, on or after the Redemption Date) on any Note;
(v) reduce the percentage or principal amount of outstanding
Notes the consent of whose Holders is necessary to modify or amend this
Indenture or to waive compliance with certain provisions of or certain
Defaults under this Indenture;
(vi) waive a default in the payment of principal of, premium,
if any, or interest on, any Note;
(vii) modify any of the provisions of this Section 9.02,
except to increase any such percentage or to provide that certain other
provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each outstanding Note affected thereby; or
(viii) modify Article Ten or the Pledge Agreement in a manner
that adversely affects the interests of the Holders in any material
respect.
It shall not be necessary for the consent of the Holders under this
Section 9.02 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Company shall mail to the Holders affected thereby a
notice briefly describing the amendment, supplement or waiver. The Company will
mail supplemental indentures to Holders upon request. Any failure of the Company
to mail such notice, or any defect therein, shall not, however, in any way
impair or affect the validity of any such supplemental indenture
<PAGE> 82
or waiver.
SECTION 9.03. Revocation and Effect of Consent. Until an amendment or
waiver becomes effective, a consent to it by a Holder is a continuing consent by
the Holder and every subsequent Holder of a Note or portion of a Note that
evidences the same debt as the Note of the consenting Holder, even if notation
of the consent is not made on any Note. However, any such Holder or subsequent
Holder may revoke the consent as to its Note or portion of its Note. Such
revocation shall be effective only if the Trustee receives the notice of
revocation before the date the amendment, supplement or waiver becomes
effective. An amendment, supplement or waiver shall become effective on receipt
by the Trustee of written consents from the Holders of the requisite percentage
in principal amount of the outstanding Notes.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver. If a record date is fixed, then, notwithstanding the last
two sentences of the immediately preceding paragraph, those persons who were
Holders at such record date (or their duly designated proxies) and only those
persons shall be entitled to consent to such amendment, supplement or waiver or
to revoke any consent previously given, whether or not such persons continue to
be Holders after such record date. No such consent shall be valid or effective
for more than 90 days after such record date.
After an amendment, supplement or waiver becomes effective, it shall
bind every Holder unless it is of the type described in the second paragraph of
Section 9.02. In case of an amendment or waiver of the type described in the
second paragraph of Section 9.02, the amendment or waiver shall bind each Holder
who has consented to it and every subsequent Holder of a Note that evidences the
same indebtedness as the Note of the consenting Holder.
SECTION 9.04. Notation on or Exchange of Notes. If an amendment,
supplement or waiver changes the terms of a Note, the Trustee may require the
Holder to deliver such Note to the Trustee. At the Company's expense, the
Trustee may place an appropriate notation on the Note about the changed terms
and return it to the Holder and the Trustee may place an appropriate notation on
any Note thereafter authenticated. Alternatively, if the Company or the Trustee
so determines, the Company in exchange for the Note shall issue and the Trustee
shall authenticate a new Note that reflects the changed terms. Failure to make
the appropriate notation, or issue a new Note, shall not affect the validity and
effect of such amendment, supplement or waiver.
SECTION 9.05. Trustee to Sign Amendments, Etc. The Trustee shall be
entitled to receive, and shall be fully protected in relying upon, an Opinion of
Counsel stating that the execution of any amendment, supplement or waiver
authorized pursuant to this Article Nine is authorized or permitted by this
Indenture and that it will be valid and binding upon the Company. Subject to the
preceding sentence, the Trustee shall sign such amendment, supplement or waiver
if the same does not adversely affect the rights, duties, liabilities or
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77
immunities of the Trustee. The Trustee may, but shall not be obligated to,
execute any such amendment, supplement or waiver that affects the Trustee's own
rights, duties or immunities under this Indenture or otherwise.
SECTION 9.06. Conformity with Trust Indenture Act. Every supplemental
indenture executed pursuant to this Article Nine shall conform to the
requirements of the TIA as then in effect.
ARTICLE TEN
SECURITY
SECTION 10.01. Security. (a) On the Closing Date, the Company shall (i)
enter into the Pledge Agreement and comply with the terms and provisions thereof
and (ii) purchase the Pledged Securities to be pledged to the Trustee for the
benefit of the Holders in such amount as will be sufficient upon receipt of
scheduled interest and principal payments of such Pledged Securities, in the
opinion of a nationally recognized firm of independent public accountants
selected by the Company, to provide for payment in full of the first six
scheduled interest payments due on the Notes. The Pledged Securities shall be
pledged by the Company to the Trustee for the benefit of the Holders and shall
be held by the Collateral Agent in the Pledge Account pending disposition
pursuant to the Pledge Agreement.
(b) Each Holder, by its acceptance of a Note, consents and agrees to
the terms of the Pledge Agreement (including, without limitation, the provisions
providing for foreclosure and release of the Pledged Securities) as the same may
be in effect or may be amended from time to time in accordance with its terms,
and authorizes and directs the Trustee and the Collateral Agent to enter into
the Pledge Agreement and to perform its respective obligations and exercise its
respective rights thereunder in accordance therewith. The Company will do or
cause to be done all such acts and things as may be necessary or proper, or as
may be required by the provisions of the Pledge Agreement, to assure and confirm
to the Trustee the security interest in the Pledged Securities contemplated
hereby, by the Pledge Agreement or any part thereof, as from time to time
constituted, so as to render the same available for the security and benefit of
this Indenture and of the Notes secured hereby, according to the intent and
purposes herein expressed. The Company shall take, or shall cause to be taken,
upon request of the Trustee, any and all actions reasonably required to cause
the Pledge Agreement to create and maintain, as security for the obligations of
the Company under this Indenture and the Notes, valid and enforceable first
priority liens in and on all the Pledged Securities, in favor of the Trustee,
superior to and prior to the rights of third Persons and subject to no other
Liens.
(c) The release of any Pledged Securities pursuant to the Pledge
Agreement will not be deemed to impair the security under this Indenture in
contravention of the provisions hereof if and to the extent the Pledged
Securities are released pursuant to this Indenture and the Pledge Agreement. To
the extent applicable, the Company shall cause TIA Section 314(d)
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78
relating to the release of property or securities from the Lien and security
interest of the Pledge Agreement and relating to the substitution therefor of
any property or securities to be subjected to the Lien and security interest of
the Pledge Agreement to be complied with. Any certificate or opinion required by
TIA Section 314(d) may be made by an Officer of the Company, except in cases
where TIA Section 314(d) requires that such certificate or opinion be made by an
independent Person, which Person shall be an independent engineer, appraiser or
other expert selected by the Company.
(d) The Company shall cause TIA Section 314(b), relating to Opinions of
Counsel regarding the Lien under the Pledge Agreement, to be complied with. The
Trustee may, to the extent permitted by Sections 7.01 and 7.02 hereof, accept as
conclusive evidence of compliance with the foregoing provisions the appropriate
statements contained in such Opinions of Counsel.
(e) The Trustee may, in its sole discretion and without the consent of
the Holders, on behalf of the Holders, take all actions it deems necessary or
appropriate in order to (i) enforce any of the terms of the Pledge Agreement and
(ii) collect and receive any and all amounts payable in respect of the
obligations of the Company thereunder. The Trustee shall have the authority
necessary in order to institute and maintain such suits and proceedings as the
Trustee may deem expedient to preserve or protect its interests and the
interests of the Holders in the Pledged Securities (including the authority to
institute and maintain suits or proceedings to restrain the enforcement of or
compliance with any legislative or other governmental enactment, rule or order
that may be unconstitutional or otherwise invalid if the enforcement of, or
compliance with, such enactment, rule or order would impair the security
interest hereunder or be prejudicial to the interests of the Holders or of the
Trustee).
(f) Beyond the exercise of reasonable care in the custody and
preservation thereof, the Trustee shall have no duty as to any Pledged
Securities in its possession or control or in the possession or control of the
Collateral Agent or any income thereon or as to preservation of rights against
prior parties or any other rights pertaining thereto, and the Trustee shall not
be responsible for filing any financing or continuation statements or recording
any documents or instruments in any public office at any time or times or
otherwise perfecting or maintaining the perfection of any security interest in
the Pledged Securities. The Trustee shall be deemed to have exercised reasonable
care in the custody and preservation of the Pledged Securities in its possession
if the Pledged Securities are accorded treatment substantially equal to that
which it accords its own property or property held in similar accounts and shall
not be liable or responsible for any loss or diminution in the value of any of
the Pledged Securities, by reason of the act or omission of the Collateral
Agent, any carrier, forwarding agency or other agent or bailee selected by the
Trustee in good faith.
(g) The Trustee shall not be responsible for the existence, genuineness
or value of any of the Pledged Securities or for the validity, perfection,
priority or enforceability of the Liens in any of the Pledged Securities,
whether impaired by operation of law or by reason of any action or omission to
act on its part hereunder, except to the extent such action or omission
constitutes
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79
gross negligence, bad faith or wilful misconduct on the part of the Trustee, for
the validity or sufficiency of the Pledged Securities or any agreement or
assignment contained therein, for the validity of the title of the Company to
the Pledged Securities, for insuring the Pledged Securities or for the payment
of taxes, charges, assessments or Liens upon the Pledged Securities or otherwise
as to the maintenance of the Pledged Securities. The Trustee shall have no duty
to ascertain or inquire as to the performance or observance of any of the terms
of this Indenture or the Pledge Agreement by the Company or the Collateral
Agent.
ARTICLE ELEVEN
MISCELLANEOUS
SECTION 11.01. Trust Indenture Act of 1939. Prior to the effectiveness
of the Registration Statement, this Indenture shall incorporate and be governed
by the provisions of the TIA that are required to be part of and to govern
indentures qualified under the TIA. After the effectiveness of the Registration
Statement, this Indenture shall be subject to the provisions of the TIA that are
required to be a part of this Indenture and shall, to the extent applicable, be
governed by such provisions.
SECTION 11.02. Notices. Any notice or communication shall be
sufficiently given if in writing and delivered in person, mailed by first-class
mail or sent by telecopier transmission addressed as follows:
if to the Company:
US XCHANGE, L.L.C.
20 Monroe Avenue, N.W.
Suite 450
Grand Rapids, Michigan 49503
Telecopier No.: (616) 493-7007
Attention: Chief Financial Officer
if to the Trustee:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Telecopier No.: (212) 815-5915
Attention: Corporate Trust Trustee Administration
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
<PAGE> 86
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Any notice or communication mailed to a Holder shall be mailed to it at
its address as it appears on the Security Register by first-class mail and shall
be sufficiently given to him if so mailed within the time prescribed. Any notice
or communication shall also be so mailed to any Person described in TIA Section
313(c), to the extent required by the TIA. Copies of any such communication or
notice to a Holder shall also be mailed to the Trustee and each Agent at the
same time.
Failure to mail a notice or communication to a Holder as provided
herein or any defect in any such notice or communication shall not affect its
sufficiency with respect to other Holders. Except for a notice to the Trustee,
which is deemed given only when received, and except as otherwise provided in
this Indenture, if a notice or communication is mailed in the manner provided in
this Section 11.02, it is duly given, whether or not the addressee receives it.
Where this Indenture provides for notice in any manner, such notice may
be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Holders shall be filed with the Trustee, but such
filing shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and anyone else shall have the protection of
TIA Section 312(c).
SECTION 11.03. Certificate and Opinion as to Conditions Precedent. Upon
any request or application by the Company to the Trustee to take any action
under this Indenture, the Company shall furnish to the Trustee:
(i) an Officers' Certificate stating that, in the opinion of
the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(ii) an Opinion of Counsel stating that, in the opinion of
such Counsel, all such conditions precedent have been complied with.
SECTION 11.04. Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a condition or covenant
provided for in this Indenture
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81
shall include:
(i) a statement that each person signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statement or opinion
contained in such certificate or opinion is based;
(iii) a statement that, in the opinion of each such person, he
has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(iv) a statement as to whether or not, in the opinion of each
such person, such condition or covenant has been complied with;
provided, however, that, with respect to matters of fact, an Opinion of
Counsel may rely on an Officers' Certificate or certificates of public
officials.
SECTION 11.05. Rules by Trustee, Paying Agent or Registrar. The Trustee
may make reasonable rules for action by or at a meeting of Holders. The Paying
Agent or Registrar may make reasonable rules for its functions.
SECTION 11.06. Payment Date Other Than a Business Day. If an Interest
Payment Date, Redemption Date, Payment Date, Stated Maturity or date of maturity
of any Note shall not be a Business Day, then payment of principal of, premium,
if any, or interest on such Note, as the case may be, need not be made on such
date, but may be made on the next succeeding Business Day with the same force
and effect as if made on the Interest Payment Date, Payment Date or Redemption
Date, or at the Stated Maturity or date of maturity of such Note; provided that
no interest shall accrue for the period from and after such Interest Payment
Date, Payment Date, Redemption Date, Stated Maturity or date of maturity, as the
case may be.
SECTION 11.07. Governing Law. This Indenture and the Notes shall be
governed by the laws of the State of New York without regard to the conflicts of
laws principles thereof. The Trustee, the Company and the Holders agree to
submit to the jurisdiction of the courts of the State of New York in any action
or proceeding arising out of or relating to this Indenture or the Notes.
SECTION 11.08. No Adverse Interpretation of Other Agreements. This
Indenture may not be used to interpret another indenture, loan or debt agreement
of the Company or any Subsidiary of the Company. Any such indenture, loan or
debt agreement may not be used to interpret this Indenture.
<PAGE> 88
82
SECTION 11.09. No Recourse Against Others. No recourse for the payment
of the principal of, premium, if any, or interest on any of the Notes, or for
any claim based thereon or otherwise in respect thereof, and no recourse under
or upon any obligation, covenant or agreement of the Company contained in this
Indenture or in any of the Notes, or because of the creation of any Indebtedness
represented thereby, shall be had against any founding member or against any
past, present or future partner, stockholder, other equityholder, officer,
Director, employee or controlling person, as such, of the Company or of any
successor Person, either directly or through the Company or any successor
Person, whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise; it being expressly
understood that all such liability is hereby expressly waived and released as a
condition of, and as a consideration for, the execution of this Indenture and
the issue of the Notes.
SECTION 11.10. Successors. All agreements of the Company in this
Indenture and the Notes shall bind its successors. All agreements of the Trustee
in this Indenture shall bind its successors.
SECTION 11.11. Duplicate Originals. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
SECTION 11.12. Separability. In case any provision in this Indenture or
in the Notes shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
SECTION 11.13. Table of Contents, Headings, Etc. The Table of Contents,
Cross-Reference Table and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not to be
considered a part hereof and shall in no way modify or restrict any of the terms
and provisions hereof.
<PAGE> 89
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, all as of the date first written above.
US XCHANGE, L.L.C.
By: /s/ Richard Postma
------------------------------
Name: Richard Postma
Title: Chief Executive Officer
THE BANK OF NEW YORK, as Trustee
By: /s/ Mary La Gumina
------------------------------
Name: Mary La Gumina
Title: Assistant Vice President
<PAGE> 90
EXHIBIT A
[APPLICABLE LEGENDS]
[FACE OF NOTE]
US XCHANGE, L.L.C.
15% Senior Note due 2008
[CUSIP] [CINS] [ISIN] [__________]
No. ____ $_________
US XCHANGE, L.L.C., a Michigan limited liability company (the
"Company," which term includes any successor under the Indenture hereinafter
referred to), for value received, promises to pay to CEDE & CO., or its
registered assigns, the principal sum of ____________ ($____) on July 1, 2008.
Interest Payment Dates: July 1 and January 1, commencing January 1,
1999.
Regular Record Dates: June 15 and December 15.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers.
US XCHANGE, L.L.C.
By: ______________________________________
Name:
Title:
By: ______________________________________
Name:
Title:
<PAGE> 91
A-2
(Trustee's Certificate of Authentication)
This is one of the 15% Senior Notes due 2008 described in the within-mentioned
Indenture.
Date: June 24, 1998
__________________________________
THE BANK OF NEW YORK,
as Trustee
By:
____________________________________
Authorized Signatory
<PAGE> 92
A-3
[REVERSE SIDE OF NOTE]
US XCHANGE, L.L.C.
15% Senior Note due 2008
1. Principal and Interest.
The Company will pay the principal of this Note on July 1, 2008.
The Company promises to pay interest on the principal amount of this
Note on each Interest Payment Date, as set forth below, at the rate per annum
shown above.
Interest will be payable semiannually (to the holders of record of the
Notes at the close of business on the June 15 or December 15 immediately
preceding the Interest Payment Date) on each Interest Payment Date, commencing
January 1, 1999.
If an exchange offer (the "Exchange Offer") registered under the
Securities Act is not consummated and a Shelf Registration Statement under the
Securities Act with respect to resales of the Notes is not declared effective by
the Commission, on or before December 25, 1998 in accordance with the terms of
the Registration Rights Agreement, the annual interest rate borne by the Notes
shall be increased by 0.5% from the rate shown above accruing from December 25,
1998, payable in cash semiannually, in arrears, on each Interest Payment Date,
commencing January 1, 1999 until the Exchange Offer is consummated or the Shelf
Registration Statement is declared effective. The Holder of this Note is
entitled to the benefits of such Registration Rights Agreement.
Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from June 25, 1998;
provided that, if there is no existing default in the payment of interest and
this Note is authenticated between a Regular Record Date referred to on the face
hereof and the next succeeding Interest Payment Date, interest shall accrue from
such Interest Payment Date. Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
The Company shall pay interest on overdue principal and premium, if
any, and interest on overdue installments of interest, to the extent lawful, at
a rate per annum that is 2% in excess of the rate otherwise payable.
2. Method of Payment.
The Company will pay interest (except defaulted interest) on the
principal amount of
<PAGE> 93
A-4
the Notes as provided above on each July 1 and January 1, commencing January 1,
1999 to the persons who are Holders (as reflected in the Security Register at
the close of business on the June 15 or December 15 immediately preceding the
Interest Payment Date), in each case, even if the Note is cancelled on
registration of transfer or registration of exchange after such record date;
provided that, with respect to the payment of principal, the Company will make
payment to the Holder that surrenders this Note to a Paying Agent on or after
July 1, 2008.
The Company will pay principal, premium, if any, and as provided above,
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. However, the Company may pay
principal, premium, if any, and interest by its check payable in such money. It
may mail an interest check to a Holder's registered address (as reflected in the
Security Register). If a payment date is a date other than a Business Day at a
place of payment, payment may be made at that place on the next succeeding day
that is a Business Day and no interest shall accrue for the intervening period.
3. Paying Agent and Registrar.
Initially, the Trustee will act as authenticating agent, Paying Agent
and Registrar. The Company may change any authenticating agent, Paying Agent or
Registrar without notice. The Company, any Subsidiary or any Affiliate of any of
them may act as Paying Agent, Registrar or co-Registrar.
4. Indenture; Limitations.
The Company issued the Notes under an Indenture dated as of June 25,
1998 (the "Indenture"), between the Company and The Bank of New York, trustee
(the "Trustee"). Capitalized terms herein are used as defined in the Indenture
unless otherwise indicated. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the TIA. The
Notes are subject to all such terms, and Holders are referred to the Indenture
and the TIA for a statement of all such terms. To the extent permitted by
applicable law, in the event of any inconsistency between the terms of this Note
and the terms of the Indenture, the terms of the Indenture shall control.
The Notes are general unsecured obligations of the Company (except as
provided in Section 15 hereof).
The Company may, subject to Article Four of the Indenture and
applicable law, issue additional Notes under the Indenture.
5. Redemption Upon Receipt of Public Equity Offering Proceeds.
At any time and from time to time prior to July 1, 2001, the Company
may redeem up to 35% of the aggregate principal amount of the Notes with the
proceeds of one or more
<PAGE> 94
A-5
Public Equity Offerings following which there is a Public Market, at any time or
from time to time in part, at a Redemption Price (expressed as a percentage of
principal amount) of 115%, plus accrued and unpaid interest, if any, to the
Redemption Date (subject to the rights of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date); provided that (i) at least 65% of the
aggregate principal amount of Notes originally issued remains outstanding after
each such redemption and (ii) notice of such redemption shall be mailed within
60 days of the related Public Equity Offering.
Notes in original denominations larger than $1,000 may be redeemed in
part. On and after the Redemption Date, interest ceases to accrue on Notes or
portions of Notes called for redemption, unless the Company defaults in the
payment of the Redemption Price.
6. Repurchase upon Change of Control.
Upon the occurrence of any Change of Control, each Holder shall have
the right to require the repurchase of its Notes by the Company in cash pursuant
to the offer described in the Indenture at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (the "Payment Date").
A notice of such Change of Control will be mailed within 30 days after
any Change of Control occurs to each Holder at its last address as it appears in
the Security Register. Notes in original denominations larger than $1,000 may be
sold to the Company in part. On and after the Payment Date, interest ceases to
accrue on Notes or portions of Notes surrendered for purchase by the Company,
unless the Company defaults in the payment of the purchase price.
7. Denominations; Transfer; Exchange.
The Notes are in registered form without coupons in denominations of
$1,000 of principal amount and multiples of $1,000 in excess thereof. A Holder
may register the transfer or exchange of Notes in accordance with the Indenture.
The Registrar may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and to pay any taxes and fees required by
law or permitted by the Indenture. The Registrar need not register the transfer
or exchange of any Notes selected for redemption. Also, it need not register the
transfer or exchange of any Notes for a period of 15 days before the day of
mailing of a notice of redemption of Notes selected for redemption.
8. Persons Deemed Owners.
A Holder shall be treated as the owner of a Note for all purposes.
9. Unclaimed Money.
<PAGE> 95
A-6
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee and the Paying Agent will pay the
money back to the Company at its written request. After that, Holders entitled
to the money must look to the Company for payment, unless an abandoned property
law designates another Person, and all liability of the Trustee and such Paying
Agent with respect to such money shall cease.
10. Discharge Prior to Redemption or Maturity.
If the Company deposits with the Trustee cash, Temporary Cash
Investments or U.S. Government Obligations sufficient to pay the then
outstanding principal of, premium, if any, and accrued interest on the Notes (a)
to redemption or maturity, the Company will be discharged from the Indenture and
the Notes, except in certain circumstances for certain provisions thereof, and
(b) to the Stated Maturity, the Company will be discharged from certain
covenants set forth in the Indenture, provided that if, simultaneously with the
deposit of the cash or Temporary Cash Investments and/or U.S. Government
Obligations referred to above, the Company has caused an irrevocable,
transferrable, standby letter of credit to be issued by a bank with capital and
surplus exceeding the principal of, premium, if any, and interest on the Notes
then outstanding, expiring not earlier than 180 days from its issuance, in favor
of the Trustee, which permits the Trustee to draw an amount equal to the
principal, premium, if any, and accrued interest on the Notes through the expiry
date of the letter of credit, then the Company will be deemed to have paid and
discharged any and all obligations under this clause on the date of the deposit
and issuance of the letter of credit.
11. Amendment; Supplement; Waiver.
Subject to certain exceptions, the Indenture, the Pledge Agreement or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding, and any
existing default or compliance with any provision may be waived with the consent
of the Holders of at least a majority in principal amount of the Notes then
outstanding. Without notice to or the consent of any Holder, the parties thereto
may amend or supplement the Indenture or the Notes to, among other things, cure
any ambiguity, defect or inconsistency and make any change that does not
materially and adversely affect the rights of any Holder.
12. Restrictive Covenants.
The Indenture imposes certain limitations on the ability of the Company
and its Restricted Subsidiaries, among other things, to Incur additional
Indebtedness, make Restricted Payments, suffer to exist restrictions on the
ability of Restricted Subsidiaries to make certain payments to the Company,
issue Capital Stock of Restricted Subsidiaries, Guarantee Indebtedness of the
Company, engage in transactions with Affiliates, suffer to exist or incur Liens,
enter into sale-leaseback transactions, use the proceeds from Asset Sales, or
merge, consolidate or transfer substantially all of its assets. Within 45 days
after the end of each fiscal
<PAGE> 96
A-7
quarter (90 days after the end of the last fiscal quarter of each year), the
Company shall deliver to the Trustee an Officers' Certificate stating whether or
not the signers thereof know of any Default or Event of Default under such
restrictive covenants.
13. Successor Persons.
When a successor person or other entity assumes all the obligations of
its predecessor under the Notes and the Indenture, the predecessor person will
be released from those obligations.
14. Defaults and Remedies.
Any of the following events constitutes an "Event of Default" under the
Indenture:
(a) default in the payment of principal of (or premium, if
any, on) any Note when the same becomes due and payable, upon
acceleration, redemption or otherwise;
(b) default in the payment of interest on any Note when the
same becomes due and payable, and such default continues for a period
of 30 days; provided that a failure to make any of the first six
scheduled interest payments on the Notes on the applicable Interest
Payment Date will constitute an Event of Default with no grace or cure
period;
(c) default in the performance or breach of the provisions of
Article Five or the failure to make or consummate an Offer to Purchase
in accordance with Sections 4.11 and 4.12 of the Indenture;
(d) the Company defaults in the performance of or breaches any
other covenant or agreement of the Company in the Indenture or under
the Notes (other than a default specified in clause (a), (b) or (c)
above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of
25% or more in aggregate principal amount of the Notes;
(e) there occurs with respect to any issue or issues of
Indebtedness of the Company or any Significant Subsidiary having an
outstanding principal amount of $5 million or more in the aggregate for
all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (A) an event of default that has
caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or
annulled within 30 days of such acceleration and/or (B) the failure to
make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or
extended within 30 days of such payment default;
<PAGE> 97
A-8
(f) any final judgment or order (not covered by insurance) for
the payment of money in excess of $5 million in the aggregate for all
such final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against the Company or any Significant Subsidiary and shall
not be paid or discharged, and there shall be any period of 30
consecutive days following entry of the final judgment or order that
causes the aggregate amount for all such final judgments or orders
outstanding and not paid or discharged against all such Persons to
exceed $5 million during which a stay of enforcement of such final
judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect;
(g) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any
Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect,
(B) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property
and assets of the Company or any Significant Subsidiary or (C) the
winding up or liquidation of the affairs of the Company or any
Significant Subsidiary and, in each case, such decree or order shall
remain unstayed and in effect for a period of 30 consecutive days; or
(h) the Company or any Significant Subsidiary (A) commences a
voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any Significant Subsidiary or for all or
substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the
benefit of creditors; or
(i) the Pledge Agreement shall cease to be in full force and
effect or enforceable other than in accordance with its terms.
If an Event of Default, as defined in the Indenture, occurs and is
continuing, the Trustee may, and at the direction of the Holders of at least 25%
in aggregate principal amount of the Notes then outstanding shall, declare all
the Notes to be due and payable. If a bankruptcy or insolvency default with
respect to the Company occurs and is continuing, the Notes automatically become
due and payable. Holders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may require indemnity satisfactory to it
before it enforces the Indenture or the Notes. Subject to certain limitations,
Holders of at least a majority in principal amount of the Notes then outstanding
may direct the Trustee in its exercise of any trust or power.
<PAGE> 98
A-9
15. Security.
The Company has entered into the Pledge Agreement and purchased and
pledged to the Trustee for the benefit of the Holders Pledged Securities in an
amount sufficient upon receipt of scheduled interest and principal payments on
such securities to provide for payment in full of the first six scheduled
interest payments due on the Notes. The Pledged Securities will be pledged by
the Company to the Trustee for the benefit of the Holders and will be held by
the Collateral Agent in the Pledge Account pending disbursement pursuant to the
Pledge Agreement.
16. Trustee Dealings with the Company.
The Trustee under the Indenture, in its individual or any other
capacity, may make loans to, accept deposits from and perform services for the
Company or its Affiliates and may otherwise deal with the Company or its
Affiliates as if it were not the Trustee.
17. No Recourse Against Others.
No founding member or any past, present or future partner, stockholder,
other equityholder, officer, Director, employee or controlling person, as such,
of the Company or of any successor Person shall have any liability for any
obligations of the Company under the Notes or the Indenture or for any claim
based on, in respect of or by reason of, such obligations or their creation.
Each Holder by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for the issuance of the Notes.
18. Authentication.
This Note shall not be valid until the Trustee or authenticating agent
signs the certificate of authentication on the other side of this Note.
19. Governing Law.
This Note shall be governed by the laws of the State of New York
without regard to the conflicts of laws principles thereof.
20. Abbreviations.
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
The Company will furnish a copy of the Indenture to any Holder upon
written request
<PAGE> 99
A-10
and without charge. Requests may be made to US XCHANGE, L.L.C.,
20 Monroe Avenue, N.W., Suite 450, Grand Rapids, Michigan 49503, Attention:
Chief Financial Officer.
<PAGE> 100
A-11
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
________________________________________________________________________________
Please print or typewrite name and address including zip code of assignee
________________________________________________________________________________
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing ______________________________________________________ attorney
to transfer said Note on the books of the Company with full power of
substitution in the premises.
[THE FOLLOWING PROVISION TO BE INCLUDED
ON ALL NOTES OTHER THAN EXCHANGE NOTES,
AND UNLEGENDED NOTES]
In connection with any transfer of this Note occurring prior to the
date which is the earlier of (i) the date the Shelf Registration Statement is
declared effective or (ii) the end of the period referred to in Rule 144(k)
under the Securities Act, the undersigned confirms that without utilizing any
general solicitation or general advertising that:
[Check One]
[ ] (a) this Note is being transferred in compliance with the
exemption from registration under the Securities Act of 1933
provided by Rule 144A thereunder.
or
[ ] (b) this Note is being transferred other than in accordance
with (a) above and documents are being furnished which comply
with the conditions of transfer set forth in this Note and the
Indenture.
<PAGE> 101
A-12
If none of the foregoing boxes is checked, the Trustee or other Registrar shall
not be obligated to register this Note in the name of any Person other than the
Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 2.08 of the Indenture shall have
been satisfied.
Date:_____________________ ____________________________________
NOTICE: The signature to this
assignment must correspond with the
name as written upon the face of the
within-mentioned instrument in every
particular, without alteration or any
change whatsoever.
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this Note
for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933 and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as the
undersigned has requested pursuant to Rule 144A or has determined not to request
such information and that it is aware that the transferor is relying upon the
undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
Dated:__________________ ______________________________________
NOTICE: To be executed by an executive
officer
<PAGE> 102
A-13
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 4.11 or 4.12 of the Indenture, check the Box: [ ]
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 4.11 or 4.12 of the Indenture, state the amount:
$___________________.
Date: _____________
Your Signature:
______________________________________________________________
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee: ______________________________
<PAGE> 103
EXHIBIT B
Form of Certificate
________, ___
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Trustee Administration
Re: US Xchange, L.L.C. (the "Company")
15% Senior Notes due 2008 (the "Notes")
Dear Sirs:
This letter relates to U.S. $ _________ principal amount of Notes
represented by a Note (the "Legended Note") which bears a legend outlining
restrictions upon transfer of such Legended Note. Pursuant to Section 2.02 of
the Indenture dated as of June 25, 1998 (the "Indenture") relating to the Notes,
we hereby certify that we are (or we hold such securities on behalf of) a person
outside the United States to whom the Notes could be transferred in accordance
with Rule 904 of Regulation S promulgated under the U.S. Securities Act of 1933.
Accordingly, you are hereby requested to exchange the legended certificate for
an unlegended certificate representing an identical principal amount of Notes,
all in the manner provided for in the Indenture.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Holder]
By:
_____________________________
Authorized Signature
<PAGE> 104
'
EXHIBIT C
Form of Certificate to Be
Delivered in Connection with
Transfers to Non-QIB Accredited Investors
________, ___
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Trustee Administration
Re: US Xchange, L.L.C. (the "Company")
15% Senior Notes due 2008 (the "Notes")
Dear Sirs:
In connection with our proposed purchase of $ ________________
aggregate principal amount of the Notes, we confirm that:
1. We understand that any subsequent transfer of the Notes is subject to
certain restrictions and conditions set forth in the Indenture dated as of June
25, 1998 (the "Indenture") relating to the Notes and the undersigned agrees to
be bound by, and not to resell, pledge or otherwise transfer the Notes except in
compliance with such restrictions and conditions and the Securities Act of 1933,
amended (the "Securities Act").
2. We understand that the offer and sale of the Notes have not been
registered under the Securities Act, and that the Notes may not be offered or
sold except as permitted in the following sentence. We agree, on our own behalf
and on behalf of any accounts for which we are acting as hereinafter stated,
that if we should sell any Notes within the time period referred to in Rule
144(k) of the Securities Act, we will do so only (A) to the Company or any
subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act to
a "qualified institutional buyer" (as defined therein), (C) to an institutional
"accredited investor" (as defined below) that, prior to such transfer, furnishes
(or has furnished on its behalf by a U.S. broker-dealer) to you and to the
Company a signed letter substantially in the form of this letter and, if such
transfer is in respect of an aggregate principal amount of less than $100,000,
an opinion of counsel acceptable to the Company that such transfer is in
compliance with the Securities Act, (D) outside the United States in accordance
with Rule 904 of Regulation S under the Securities Act, (E) pursuant to the
exemption from registration provided by Rule 144 under the Securities Act (if
available) or (F) pursuant to an effective registration statement under the
Securities Act, and we further agree to provide to any person purchasing any of
the
<PAGE> 105
C-2
Notes from us a notice advising such purchaser that resales of the Notes are
restricted as stated herein.
3. We understand that, on any proposed resale of any Notes, we will be
required to furnish to you and the Company such certifications, legal opinions
and other information as you and the Company may reasonably require to confirm
that the proposed sale complies with the foregoing restrictions. We further
understand that the Notes purchased by us will bear a legend to the foregoing
effect.
4. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of our investment in the Notes, and we and
any accounts for which we are acting are each able to bear the economic risk of
our or its investment.
5. We are acquiring the Notes purchased by us for our own account or for
one or more accounts (each of which is an institutional "accredited investor")
as to each of which we exercise sole investment discretion.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby.
Very truly yours,
[Name of Transferee]
By
---------------------------------
Authorized Signature
<PAGE> 106
EXHIBIT D
Form of Certificate to Be Delivered in
Connection with Transfers Pursuant to Regulation S
--------------------------------------------------
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Trustee Administration
Re: US Xchange, L.L.C. (the "Company")
15% Senior Notes due 2008 (the "Notes")
Dear Sirs:
In connection with our proposed sale of U.S.$ aggregate principal amount
of the Notes, we confirm that such sale has been effected pursuant to and in
accordance with Regulation S under the Securities Act of 1933 and, accordingly,
we represent that:
(1) the offer of the Notes was not made to a person in the
United States;
(2) at the time the buy order was originated, the transferee was
outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United States;
(3) no directed selling efforts have been made by us in the
United States in contravention of the requirements of Rule 903(b) or
Rule 904(b) of Regulation S, as applicable; and
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the U.S. Securities Act of 1933.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
--------------------
Authorized Signature
<PAGE> 1
EXHIBIT 4.4
================================================================================
COLLATERAL PLEDGE AND
SECURITY AGREEMENT
Dated as of June 25, 1998
among
US XCHANGE, L.L.C.,
as Pledgor,
THE BANK OF NEW YORK,
as Trustee, and
THE BANK OF NEW YORK,
as Collateral Agent
================================================================================
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1. Definitions; Appointment; Deposit and Investment.............................2
1.1 Definitions.........................................................2
1.2 Appointment of the Collateral Agent.................................5
1.3 Pledge and Grant of Security Interest...............................5
SECTION 2. Establishment and Maintenance of Collateral Accounts.........................6
SECTION 3. Delivery and Control of Collateral...........................................7
SECTION 4. Delivery of Collateral Other than U.S. Government Obligations................9
SECTION 5. Investing of Amounts in the Collateral Accounts..............................9
SECTION 6. Disbursements...............................................................10
SECTION 7. Representations and Warranties..............................................12
SECTION 8. Further Assurances..........................................................14
SECTION 9. Covenants...................................................................14
SECTION 10. Power of Attorney; Agent May Perform........................................15
SECTION 11. No Assumption of Duties; Reasonable Care....................................16
SECTION 12. Indemnity...................................................................16
SECTION 13. Remedies upon Event of Default..............................................16
SECTION 14. Fees and Expenses...........................................................18
SECTION 15. Security Interest Absolute..................................................18
SECTION 16. Collateral Agent's Representations, Warranties and Covenants................19
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 17. Miscellaneous Provisions....................................................21
17.1. Notices............................................................21
17.2. No Adverse Interpretation of Other Agreements......................22
17.3. Severability.......................................................22
17.4. Headings...........................................................22
17.5. Counterpart Originals..............................................22
17.6. Benefits of Pledge Agreement.......................................22
17.7. Amendments, Waivers and Consents...................................22
17.8. [RESERVED].........................................................23
17.9. Continuing Security Interest; Termination..........................23
17.10. Survival Provisions................................................23
17.11. Waivers............................................................23
17.12. Authority of the Collateral Agent..................................23
17.13. Final Expression...................................................24
17.14. Rights of Holders..................................................24
17.15. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER
OF JURY TRIAL; WAIVER OF DAMAGES.................................24
17.16. Effectiveness......................................................26
SCHEDULE I: Pledged Securities.....................................................I-1
EXHIBIT A: Officer's Certificate..................................................A-1
EXHIBIT B: Independent Public Accountant's Opinion................................B-1
</TABLE>
<PAGE> 4
iii
Page
----
<PAGE> 5
This Collateral Pledge and Security Agreement (this "Pledge
Agreement") is made and entered into as of June 25, 1998 among US XCHANGE,
L.L.C., a Michigan limited liability company (the "Pledgor"), having its
principal offices at 20 Monroe Avenue NW, Suite 450, Grand Rapids, Michigan
49503, THE BANK OF NEW YORK, a New York banking corporation, having its
principal corporate trust office at 101 Barclay Street, Floor 21 West, New York,
New York 10286, Attention: Corporate Trust Trustee Administration, as trustee
(in such capacity, the "Trustee") for the holders (the "Holders") of the Notes
(as defined herein) issued by the Pledgor under the Indenture referred to below,
and THE BANK OF NEW YORK, as collateral agent and securities intermediary (in
such capacity, the "Collateral Agent")
W I T N E S S E T H:
WHEREAS, the Pledgor and Morgan Stanley & Co. Incorporated (the
"Placement Agent") are parties to a Placement Agreement dated June 22, 1998 (the
"Placement Agreement"), pursuant to which the Pledgor will issue and sell to the
Placement Agent $200 million aggregate principal amount of 15% Senior Notes due
2008 (the "Notes");
WHEREAS, the Pledgor and The Bank of New York, as Trustee, have
entered into that certain indenture dated as of the date hereof (as amended,
restated, supplemented or otherwise modified from time to time, the
"Indenture"), pursuant to which the Pledgor is issuing the Notes on the date
hereof;
WHEREAS, pursuant to the Indenture, the Pledgor is required to
purchase, or cause the purchase of, and pledge to the Trustee for the benefit of
the Holders, on the Closing Date (as defined in the Placement Agreement), U.S.
Government Obligations (as defined in the Indenture) in an amount that will be
sufficient upon receipt of scheduled interest and principal payments of such
securities, in the opinion of a nationally recognized firm of independent public
accountants selected by the Pledgor and delivered to the Trustee, to provide for
payment in full of the first six scheduled interest payments due on the Notes
(such obligation, together with the obligation to repay the principal, premium,
if any, interest, fees, expenses or otherwise on the Notes and under the
Indenture, this Agreement and any other transaction document related thereto in
the event that the Notes become due and payable prior to such time as the first
six scheduled interest payments thereon shall have been paid in full, being
collectively referred to herein as the "Obligations");
WHEREAS, the Pledgor has opened a securities account (the "Pledge
Account") with the Collateral Agent, as securities intermediary, at its office
at 101 Barclay Street, Floor 21 West, New York, New York 10286, Account No.
290527 (designated "Pledge Account pledged by US Xchange"), in the name of the
Pledgor;
WHEREAS, the Pledgor has opened a non-interest bearing cash
collateral account (the "Cash Collateral Account") with the Collateral Agent, at
its office at 101 Barclay Street, Floor 21 West, New York, New York 10286,
Account No. 066885 (designated "Collateral A/C pledged by US Xchange"), in the
name of the Pledgor but under the sole
<PAGE> 6
2
dominion and control of the Collateral Agent and subject to the terms of this
Pledge Agreement; and
WHEREAS, it is a condition precedent to the purchase of the Notes
by the Placement Agent pursuant to the Placement Agreement that the Pledgor
apply certain of the proceeds of the offering of the Notes to purchase the
Pledged Securities (as defined below) and deposit such Pledged Securities into
the Pledge Account to be held therein subject to the terms of this Pledge
Agreement and shall have granted the assignment and security interest and made
the pledge and assignment contemplated by this Pledge Agreement.
NOW, THEREFORE, in consideration of the premises herein
contained, and in order to induce the Placement Agent to purchase the Notes, the
Pledgor, the Trustee and the Collateral Agent hereby agree, for the benefit of
the Placement Agent and for the ratable benefit of the Holders, as follows:
SECTION 1. Definitions; Appointment; Deposit and Investment.
1.1 Definitions.
(a) Unless otherwise defined in this Pledge Agreement, terms
defined or referenced in the Indenture are used in this Pledge Agreement as such
terms are defined or referenced therein.
(b) Unless otherwise defined in the Indenture or in this Pledge
Agreement, terms defined in Article 8 or 9 of the Uniform Commercial Code in
effect in the State of New York ("N.Y. Uniform Commercial Code") from time to
time and/or in Section 357.2 of the Treasury Regulations (as defined in Section
1.1(c)) are used in this Pledge Agreement as such terms are defined in such
Article 8 or 9 and/or such Section 357.2.
(c) In this Pledge Agreement, the following terms have the
following meanings (such meanings to be equally applicable to both the singular
and plural forms of the terms defined):
"Cash Collateral Account" has the meaning specified in the
Preliminary Statements hereof.
"Cash Equivalents" means any of the following, to the extent
owned by the Pledgor free and clear of all Liens other than Liens created
hereunder: (a) U.S. Government Obligations, (b) insured certificates of deposit
of, or time deposits with, any commercial bank that (i) is a member of the
Federal Reserve System, (ii) issues (or the parent of which issues) commercial
paper rated as described in clause (c), (iii) is organized under the laws of the
United States of America or any State thereof and (iv) has combined capital and
surplus of at least $500 million, (c) commercial paper in an aggregate amount of
no more than $5 million
<PAGE> 7
3
per issuer outstanding at any time, issued by any corporation organized under
the laws of any State of the United States of America and rated at least
"Prime-1" (or the then equivalent grade) by Moody's or "A-1" (or the then
equivalent grade) by S&P or (d) overnight repurchase agreements secured by U.S.
Government Obligations.
"CFR" means U.S. Code of Federal Regulations.
"Closing Date" has the meaning specified in the Placement
Agreement.
"Collateral" has the meaning specified in Section 1.3 hereof.
"Collateral Accounts" means the Pledge Account and the Cash
Collateral Account.
"Collateral Agent" has the meaning specified in the recital of
the parties hereto.
"Collateral Investments" has the meaning specified in Section 5
hereof.
"Entitlement holder" has the meaning specified in N.Y. Uniform
Commercial Code Section 8-102(a)(7) or in respect of any Book-entry Security,
the meaning specified for "Entitlement Holder" in 31 C.F.R. Section 357.2 or
as applicable to such Book-entry Security, the corresponding federal banking
regulations.
"Event of Default" has the meaning specified in Section 13
hereof.
"FRBNY" means Federal Reserve Bank of New York.
"FRBNY Account" means the Participant's Securities Account
maintained in the name of the Collateral Agent by the FRBNY.
"FRBNY Member" means any Person that is eligible to maintain (and
that maintains) with the FRBNY one or more FRBNY Member Securities Accounts in
such Person's name.
"FRBNY Member Securities Account" means, in respect of any
Person, an account in the name of such Person at the FRBNY, to which account
U.S. Government Obligations held for such Person are or may be credited.
"Holders" has the meaning specified in the recital of the
parties hereto.
"Issuer Order" has the meaning specified in Section 6(a) hereof.
"Notes" has the meaning specified in the Preliminary Statements
hereof and shall include the Exchange Notes.
<PAGE> 8
4
"N.Y. Uniform Commercial Code" has the meaning specified in
Section 1.1(b).
"Obligations" has the meaning specified in the Preliminary
Statements hereof.
"Placement Agent" has the meaning specified in the Preliminary
Statements hereof.
"Placement Agreement" has the meaning specified in the
Preliminary Statements hereof.
"Pledge Account" has the meaning specified in the Preliminary
Statements hereof.
"Pledged Securities" has the meaning specified in Section 1.3
hereof.
"Pledgor" has the meaning specified in the recital of the parties
hereto.
"Pledgor's Designee" has the meaning specified in Section 6(b)
hereof.
"Pledgor's Fund" has the meaning specified in Section 6(b)
hereof.
"Securities intermediary" means a Person that is a "securities
intermediary" (as defined in N.Y. Uniform Commercial Code Section 8-102(a)(14))
and, in respect of any Book-entry Security, a "Securities Intermediary" (as
defined in 31 C.F.R. Section 357.2 or, as applicable to such Book-entry
Security, as defined in the corresponding federal book-entry regulations).
"Security" has the meaning specified in Section 8-102(a)(15) of
the N.Y. Uniform Commercial Code or, in respect of any Book-entry Security, has
the meaning specified for "Security" in 31 C.F.R. Section 357.2 (or as
applicable to such Book-entry Security, the corresponding federal book-entry
regulations).
"Security entitlement" has the meaning specified in N.Y. Uniform
Commercial Code Section 8-102(a)(17) or, in respect of any Book-entry Security,
has the meaning specified for "Security Entitlement" in 31 C.F.R. Section
357.2 (or, as applicable to such Book-entry Security, the corresponding federal
book-entry regulations).
"Settlement Date" means, as to any U.S. Government Obligations,
the date on which the purchase of such U.S. Government Obligations shall have
been settled.
"Termination Date" means the earlier of (a) the date of the
payment in full in cash of each of the first six scheduled interest payments due
on the Notes under the terms of the Indenture and (b) the date of the payment in
full in cash of all obligations due and owing
<PAGE> 9
5
under this Pledge Agreement, the Indenture and the Notes, in the event such
obligations become due and payable prior to the payment of the first six
scheduled interest payments on the Notes.
"Treasury Regulations" means (a) the federal regulations
contained in 31 CFR Part 357 (including, without limitation, Section 357.2,
Section 357.10 through Section 357.14 and Section 357.41 through Section 357.44
of 31 CFR) and (b) to the extent substantially identical to the federal
regulations referred to in clause (a) above (as in effect from time to time) the
federal regulations governing other U.S. Government Obligations.
"Trustee" has the meaning specified in the recital of parties
hereto.
"Uncertificated Security" has the meaning specified in Section
8-102(a)(18) of the N.Y. Uniform Commercial Code.
"U.S. Government Obligations" means securities (including,
without limitation, United States Treasury securities, including Treasury bills,
Treasury notes, Treasury bonds, STRIPS and CUBES) and the security entitlements
in, and financial assets based on such securities, maintained in the form of
entries in the commercial book-entry system of the FRBNY and held for the
related entitlement holder by a FRBNY Member pursuant to the Treasury
Regulations.
1.2 Appointment of the Collateral Agent. The Pledgor hereby
appoints the Collateral Agent as Collateral Agent in accordance with the terms
and conditions set forth herein and the Collateral Agent hereby accepts such
appointment.
1.3 Pledge and Grant of Security Interest. As security for the
prompt and complete payment and performance when due (whether at the stated
maturity, by acceleration or otherwise) of the Obligations, the Pledgor hereby
assigns and pledges to the Trustee for its benefit and the ratable benefit of
the Holders and hereby grants to the Trustee for its benefit and for the ratable
benefit of the Holders, a lien on and security interest in all of the Pledgor's
right, title and interest in, to and under the following property: (a) the U.S.
Government Obligations identified by CUSIP No. in Part I of Schedule I to this
Pledge Agreement (the "Pledged Securities") and the certificates representing
the Pledged Securities, the scheduled payments of principal and interest thereon
which will be sufficient to provide for payment in full of the first six
scheduled interest payments due on the Notes, (b) the security entitlements
described in Part II of said Schedule I with respect to the financial assets
described, the securities intermediary named, and the securities account
referred to therein, (c) the Pledge Account, all security entitlements from time
to time carried in the Pledge Account, all funds held therein and all
certificates and instruments, if any, from time to time representing or
evidencing the Pledge Account, (d) all Collateral Investments (as hereinafter
defined) from time to time and all certificates and instruments, if any,
representing or evidencing the Collateral Investments, and any and all security
entitlements to the Collateral Investments, and
<PAGE> 10
6
any and all related securities accounts in which any security entitlements to
the Collateral Investments is carried, (e) the Cash Collateral Account, all
funds held therein and all certificates or instruments, if any, from time to
time representing or evidencing the Cash Collateral Account, (f) all notes,
certificates of deposit, deposit accounts, checks and other instruments, if any,
from time to time hereafter delivered to or otherwise possessed by the
Collateral Agent for or on behalf of the Pledgor and specifically designated by
the Pledgor to be in substitution for any or all of the then existing
Collateral, (g) all interest, dividends, cash, instruments and other property,
if any, from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the then existing Collateral and (h)
all proceeds of any and all of the foregoing Collateral (including, without
limitation, proceeds that constitute property of the types described in clauses
(a) - (g) of this Section 1.3) and, to the extent not otherwise included, all
(i) payments under insurance (whether or not the Trustee is the loss payee
thereof) or any indemnity, warranty or guaranty, payable by reason of loss or
damage to or otherwise with respect to any of the foregoing Collateral and (ii)
cash proceeds of any and all of the foregoing Collateral (such property being
collectively referred to herein as the "Collateral"). Without limiting the
generality of the foregoing, this Pledge Agreement secures the payment of all
amounts that constitute part of the Obligations and would be owed by the Pledgor
to the Trustee under the Notes, the Indenture, this Pledge Agreement and any
other transaction documents related thereto but for the fact that they are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Pledgor.
SECTION 2. Establishment and Maintenance of Collateral Accounts.
(a) The Collateral Agent has established and at all times until the Termination
Date shall maintain each of the Cash Collateral Account and the Pledge Account.
The following provisions shall apply to the establishment and maintenance of
each such Collateral Account:
(i) The Collateral Agent shall cause each Collateral Account to
be, and each Collateral Account shall be, separate from all other
accounts maintained by the Collateral Agent.
(ii) The Collateral Agent shall, in accordance with all
applicable laws, have sole dominion and control over the Cash Collateral
Account.
(iii) It shall be a term and condition of each Collateral Account
and the Pledgor irrevocably instructs the Collateral Agent,
notwithstanding any other term or condition to the contrary in any other
agreement, that no amount (including interest on Collateral Investments)
shall be released to or for the account of, or withdrawn by or for the
account of, the Pledgor or any other Person except as expressly provided
in this Pledge Agreement.
(b) On the Closing Date, the Pledgor shall transfer, or cause to
be transferred, to the Collateral Agent an amount equal to $82,469,783.89 by
depositing all such funds into the Cash Collateral Account. The Cash Collateral
Account shall be subject to such
<PAGE> 11
7
applicable laws, and such applicable regulations of the Board of Governors of
the Federal Reserve System and of any other appropriate banking or governmental
authority, as may now or hereafter be in effect.
(c) As soon as possible after receipt of the amount referred to
in Section 2(b) (and not later than the Business Day following the Closing
Date), (i) the Collateral Agent shall apply such amount to purchase the U.S.
Government Obligations (in the name of the Trustee) listed on Schedule I hereto,
and credit such U.S. Government Obligations to the Pledge Account as Collateral
hereunder; and (ii) the Collateral Agent shall ensure that, on the Settlement
Date of such U.S. Government Obligations, the FRBNY indicates by book-entry that
those U.S. Government Obligations being settled on such date are credited to the
FRBNY Account.
(d) The Collateral Agent will, from time to time, reinvest the
proceeds of Collateral that may mature or be sold in such Collateral Investments
(in the name of the Trustee) as it may be directed in writing by the Pledgor,
and cause such Collateral Investments to be credited to the Pledge Account as
Collateral hereunder. Any such proceeds that the Pledgor directs the Collateral
Agent in writing not to reinvest in Collateral Investments shall be deposited
and held in the Cash Collateral Account.
SECTION 3. Delivery and Control of Collateral. (a) All
certificates or instruments representing or evidencing Collateral shall be
delivered to and held by or on behalf of the Collateral Agent pursuant hereto
and shall be in suitable form for transfer or delivery, or shall be accompanied
by duly executed instruments of transfer or assignment in blank, all in form and
substance satisfactory to the Collateral Agent. In addition, the Collateral
Agent shall have the right at any time to exchange certificates or instruments
representing or evidencing Collateral for certificates or instruments of smaller
or larger denominations.
(b) With respect to any Collateral that constitutes a security
and is not represented or evidenced by a certificate or instrument, the Pledgor
shall cause the issuer thereof either (i) to register the Trustee as the
registered owner of such security or (ii) to agree in writing with the Trustee
and the Pledgor that such issuer will comply with instructions with respect to
such security originated by the Trustee without further consent of the Pledgor,
such agreement to be in form and substance satisfactory to the Trustee.
(c) With respect to any Collateral that constitutes a security
entitlement, the Pledgor shall cause the Collateral Agent either (i) to identify
in its records the Trustee as having such security entitlement against the
Collateral Agent or (ii) to agree in writing with the Pledgor and the Trustee
that the Collateral Agent will comply with entitlement orders (that is,
notifications communicated to the Collateral Agent directing transfer or
redemption of the financial asset to which Pledgor has a security entitlement)
originated by the Trustee without further consent of the Pledgor, such agreement
to be in form and substance satisfactory to the Trustee.
<PAGE> 12
8
(d) With respect to any Collateral that constitutes a securities
account, the Pledgor will comply with subsection (c) of this Section 3 with
respect to all security entitlements carried in such securities account.
(e) Concurrently with the execution and delivery of this Pledge
Agreement, the Trustee is delivering to the Pledgor and the Placement Agent a
duly executed certificate, in the form of Exhibit A hereto, of an officer of the
Trustee.
(f) [RESERVED]
(g) Concurrently with the execution and delivery of this Pledge
Agreement, the Pledgor is delivering to the Collateral Agent financing
statements in form acceptable for filing under the N.Y. Uniform Commercial Code
and the Uniform Commercial Code of the State of Michigan, covering the
Collateral described in this Pledge Agreement.
SECTION 4. Delivery of Collateral Other than U.S. Government
Obligations. (a) Collateral consisting of cash will be deemed to be delivered to
the Collateral Agent (such that the Trustee will have an enforceable lien and
security interest thereon and therein) when it has been (and for so long as it
shall remain) deposited in or credited to the Cash Collateral Account.
(b) Collateral consisting of Cash Equivalents (other than U.S.
Government Obligations) will be deemed to be delivered to the Collateral Agent
(such that the Trustee will have an enforceable lien and security interest
thereon and therein) when they have been (and for so long as they shall remain)
deposited in or credited to either Collateral Account.
(c) Collateral consisting of uncertificated securities (other
than U.S. Government Obligations) will be deemed delivered to the Collateral
Agent when the Collateral Agent (A) shall indicate by book entry that such
securities have been credited to the Pledge Account or (B) shall receive such
security (or a financial asset based on such security) for the Trustee from or
at the direction of the Pledgor, and shall accept such security (or such
financial asset) for credit to such Collateral Account.
(d) Collateral consisting of securities, and represented or
evidenced by certificates or instruments, will be deemed delivered to the
Custodian when all such certificates or instruments representing or evidencing
the Collateral, including, without limitation, amounts invested as provided in
Section 5, shall be delivered to the Collateral Agent and held by or on behalf
of the Collateral Agent pursuant hereto and shall be in registered form and
specially indorsed to the Trustee by an effective indorsement, all in form and
substance sufficient to convey a valid security interest in such Collateral to
the Trustee or shall be credited to the Pledge Account.
SECTION 5. Investing of Amounts in the Collateral Accounts. The
Collateral
<PAGE> 13
9
Agent shall advise the Pledgor if, at any time, any amounts shall exist in the
Collateral Accounts uninvested, and if directed in writing by the Pledgor, the
Collateral Agent will, subject to the provisions of Section 6 and Section 13,
(a) invest such amounts on deposit in the Collateral Accounts in such Cash
Equivalents in the name of the Trustee as the Pledgor may select and (b) invest
interest paid on the Cash Equivalents referred to in clause (a) above, and
reinvest other proceeds of any such Cash Equivalents that may mature or be sold,
in each case in such Cash Equivalents in the name of the Trustee, as the Pledgor
may select (the Cash Equivalents referred to in clauses (a) and (b) above,
together with the Pledged Securities, being collectively referred to herein as
"Collateral Investments"); provided, however, that the amount in cash and
Pledged Securities on deposit in the Collateral Accounts, collectively, at any
time during the term of this Pledge Agreement, is sufficient to provide for the
payment in full of the remaining interest payments at such time on the Notes up
to and including the sixth scheduled interest payment. Interest and proceeds
that are not invested or reinvested in Collateral Investments as provided above
shall be deposited and held in the Cash Collateral Account. Except as otherwise
provided in Sections 11 and 12, the Collateral Agent shall not be liable for any
loss in the investment or reinvestment of amounts held in the Collateral
Accounts. The Collateral Agent is not at any time under any duty to advise or
make any recommendation for the purchase, sale, retention or disposition of the
Collateral Investments.
SECTION 6. Disbursements. The Collateral Agent shall hold the
Collateral in the Collateral Accounts and release the same, or a portion
thereof, only as follows:
(a) At least one Business Day prior to the due date of any of the
first six scheduled interest payments on the Notes, the Pledgor may,
pursuant to written instructions executed by the Pledgor (an "Issuer
Order"), direct the Collateral Agent to release from the Collateral
Accounts and pay to the Holders proceeds sufficient to provide for
payment in full of such interest then due on the Notes; provided,
however, that in the event any Collateral Investment is required to be
liquidated, the Pledgor will give the Collateral Agent at least three
Business Days' notice. Upon receipt of an Issuer Order, the Collateral
Agent will take any action necessary to provide for the payment of the
interest on the Notes to the Holders in accordance with the payment
provisions of the Indenture from (and to the extent of) proceeds of the
Collateral in the Collateral Accounts. Nothing in this Section 6 shall
affect the Collateral Agent's rights to apply the Collateral to the
payments of amounts due on the Notes upon acceleration thereof.
(b) If the Pledgor makes any interest payment or portion of an
interest payment for which the Collateral is security from a source of
funds other than the Collateral Accounts ("Pledgor Funds"), the Pledgor
may, after payment in full of such interest payment or portion thereof
from proceeds of the Collateral or such Pledgor Funds or both, direct
the Collateral Agent by Issuer Order to release to the Pledgor or to
another party at the direction of the Pledgor (the "Pledgor's Designee")
proceeds from the Collateral Accounts in an amount less than or equal to
the amount of Pledgor
<PAGE> 14
10
Funds applied to such interest payment. Upon receipt of such Issuer
Order by the Collateral Agent, the Collateral Agent shall pay over to
the Pledgor or the Pledgor's Designee, as the case may be, the requested
amount from proceeds in the Collateral Accounts. Concurrently with any
release of funds to the Pledgor pursuant to this Section 6(b), the
Pledgor shall deliver to the Collateral Agent a certificate signed by an
officer of the Pledgor stating that the Pledgor has made the interest
payment from a source of funds other than the Pledge Account, and that
such release has been duly authorized by the Pledgor and will not
contravene any provision of applicable law or the limited liability
company operating agreement or equivalent organizational instruments of
the Pledgor or any material agreement or other material instrument
binding upon the Pledgor or any of its subsidiaries or any judgment,
order or decree of any governmental body, agency or court having
jurisdiction over the Pledgor or any of its subsidiaries or result in
the creation or imposition of any Lien on any assets of the Pledgor,
except for the lien and security interest granted under this Pledge
Agreement.
(c) At least one Business Day prior to the due date of any of the
first six scheduled interest payments on the Notes, the Pledgor
covenants to give the Collateral Agent (by Issuer Order) notice as to
whether payment of interest will be made pursuant to Section 6(a) or
6(b) and as to the respective amounts of interest that will be paid
pursuant to Section 6(a) or 6(b); provided, however, that, in the event
any Collateral Investment is required to be liquidated, the Pledgor will
give the Collateral Agent at least three Business Days' notice. If no
such notice is given, the Collateral Agent will, subject to Section
6(d), act pursuant to Section 6(a) as if it had received an Issuer Order
pursuant thereto for the payment in full of the interest then due.
(d) The Collateral Agent shall not be required to liquidate any
Collateral Investments in order to make any scheduled payment of
interest or any release hereunder unless instructed to do so by Issuer
Order or pursuant to Section 13 hereof.
(e) In the event that the Collateral held in the Pledge Account
exceeds 100% of the amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants selected by the
Pledgor, to provide for payment in full of the first six scheduled
interest payments due on the Notes (or, in the event an interest payment
or payments have been made, an amount sufficient to provide for payment
in full of all interest payments remaining, up to and including the
sixth scheduled interest payment), the Collateral Agent shall release to
the Pledgor, at the Pledgor's written request, accompanied by an opinion
prepared by such nationally recognized firm of independent public
accountants, any such excess Collateral.
(f) Upon the release of any Collateral from the Pledge Account,
in accordance with the terms of this Pledge Agreement, the security
interest evidenced by this Pledge Agreement in such released Collateral
will automatically terminate and be of no further force and effect.
<PAGE> 15
11
(g) Nothing contained in this Pledge Agreement shall (i) afford
the Pledgor any right to issue entitlement orders with respect to any
security entitlement to the Pledged Securities or Collateral Investments
or any securities account in which any such security entitlement may be
carried, or otherwise afford the Pledgor control of any such security
entitlement or (ii) otherwise give rise to any rights of the Pledgor
with respect to the Collateral Investments, any security entitlement
thereto or any securities account in which any such security entitlement
may be carried, other than the Pledgor's rights under this Pledge
Agreement as the beneficial owner of Collateral pledged to and subject
to the exclusive dominion and control (including, without limitation,
securities control) (except as expressly provided in this Section 6) of
the Trustee in its capacity as such (and not as a securities
intermediary). The Pledgor acknowledges, confirms and agrees that the
Trustee holds a security entitlement to the Collateral Investments
solely as Trustee for the Holders and not as a securities intermediary
for the Pledgor.
SECTION 7. Representations and Warranties. The Pledgor hereby
represents and warrants, as of the date hereof, that:
(a) The execution and delivery by the Pledgor of, and the
performance by the Pledgor of its obligations under, this Pledge
Agreement will not contravene any provision of applicable law or the
limited liability company operating agreement or equivalent
organizational instruments of the Pledgor or any material agreement or
other material instrument binding upon the Pledgor or any of its
subsidiaries or any judgment, order or decree of any governmental body,
agency or court having jurisdiction over the Pledgor or any of its
subsidiaries, or result in the creation or imposition of any Lien on any
assets of the Pledgor, except for the Lien and security interests
granted under this Pledge Agreement; no consent, approval, authorization
or order of, or qualification with, and no notice to or filing with, any
governmental body or agency or other third party is required (i) for the
performance by the Pledgor of its obligations under this Pledge
Agreement, (ii) for the pledge by the Pledgor of the Collateral pursuant
to this Pledge Agreement or for the execution, delivery or performance
of this Agreement by the Pledgor or (iii) for the perfection or
maintenance of the pledge, assignment and security interest created
hereby (including the first priority nature of such pledge, assignment
or security interest), except for the filing of financing and
continuation statements under the Uniform Commercial Code of applicable
jurisdictions which financing statements have been delivered pursuant to
Section 3(g) hereof, or (iv) except for any such consents, approvals,
authorizations or orders required to be obtained by the Collateral Agent
(or the Holders) for reasons other than the consummation of this
transaction, for the exercise by the Collateral Agent of the rights
provided for in this Pledge Agreement or the remedies in respect of the
Collateral pursuant to this Pledge Agreement.
(b) The Pledgor is the legal and beneficial owner of the
Collateral, free and
<PAGE> 16
12
clear of any Lien or claims of any Person (except for the Lien and
security interests granted under this Pledge Agreement). No effective
financing statement or other instrument similar in effect covering all
or any part of the Collateral is on file in any public office other than
the financing statements, if any, to be filed pursuant to this Pledge
Agreement.
(c) This Pledge Agreement has been duly authorized, validly
executed and delivered by the Pledgor and (assuming the due
authorization and valid execution and delivery of this Pledge Agreement
by each of the Trustee and the Collateral Agent and enforceability of
the Pledge Agreement against each of the Trustee and the Collateral
Agent in accordance with its terms) constitutes a valid and binding
agreement of the Pledgor, enforceable against the Pledgor in accordance
with its terms, except as (i) the enforceability hereof may be limited
by bankruptcy, insolvency, fraudulent conveyance, preference,
reorganization, moratorium or similar laws now or hereafter in effect
relating to or affecting the rights or remedies of creditors generally,
(ii) the availability of equitable remedies may be limited by equitable
principles of general applicability and the discretion of the court
before which any proceeding therefor may be brought, (iii) the
exculpation provisions and rights to indemnification hereunder may be
limited by U.S. federal and state securities laws and public policy
considerations and (iv) the waiver of rights and defenses contained in
Section 13(b), Section 17.11 and Section 17.15 hereof may be limited by
applicable law.
(d) Upon the delivery to the Collateral Agent of the Collateral
in accordance with the terms hereof and the filing of the financing
statements referred to in Section 3(g) hereof, the pledge of and grant
of a security interest in the Collateral securing the payment of the
Obligations for the benefit of the Trustee and the Holders will
constitute a valid, first priority, perfected security interest in such
Collateral (except, with respect to proceeds, only to the extent
permitted by Section 9-306 of the N.Y. Uniform Commercial Code),
enforceable as such against all creditors of the Pledgor and any persons
purporting to purchase any of the Collateral from the Pledgor other than
as permitted by the Indenture. Upon filing of the financing statements
described in Section 3(g) hereof, all filings and other actions
necessary or desirable to perfect and protect such security interest
will have been duly taken.
(e) There are no legal or governmental proceedings pending or, to
the best of the Pledgor's knowledge, threatened to which the Pledgor or
any of its subsidiaries is a party or to which any of the properties of
the Pledgor or any of its subsidiaries is subject that would materially
adversely affect the power or ability of the Pledgor to perform its
obligations under this Pledge Agreement or to consummate the
transactions contemplated hereby.
(f) The pledge of the Collateral pursuant to this Pledge
Agreement is not prohibited by law or governmental regulation
(including, without limitation,
<PAGE> 17
13
Regulations G, T, U and X of the Board of Governors of the Federal
Reserve System) applicable to the Pledgor.
(g) No Event of Default exists.
(h) The chief place of business and chief executive office of the
Pledgor are located at the address first specified above for the
Pledgor.
SECTION 8. Further Assurances. The Pledgor will, promptly upon
the request by the Collateral Agent (which request the Collateral Agent may
submit at the direction of the Holders of a majority in aggregate principal
amount of the Notes then outstanding), execute and deliver or cause to be
executed and delivered, or use its reasonable best efforts to procure, all
assignments, instruments and other documents, all in form and substance
reasonably satisfactory to the Collateral Agent, deliver any instruments to the
Collateral Agent and take any other actions that are necessary or desirable to
perfect, continue the perfection of, or protect the first priority of the
Trustee's security interest in and to the Collateral, to protect the Collateral
against the rights, claims or interests of third persons (other than any such
rights, claims or interests created by or arising through the Trustee) or to
effect the purposes of this Pledge Agreement. Without limiting the generality of
the foregoing, the Pledgor will, if any Collateral shall be evidenced by a
promissory note or other instrument, deliver to the Collateral Agent and pledge
to the Trustee hereunder such note or instrument duly indorsed and accompanied
by duly executed instruments of transfer or assignment, all in form and
substance satisfactory to the Collateral Agent; and execute and file such
financing or continuation statements, or amendments thereto, and such other
instruments or notices, as may be necessary, or as the Collateral Agent may
reasonably request, in order to perfect and preserve the pledge, assignment and
security interest granted or purported to be granted hereby. The Pledgor also
hereby authorizes the Collateral Agent to file any financing or continuation
statements, and amendments thereto, in the United States with respect to the
Collateral without the signature of the Pledgor (to the extent permitted by
applicable law). A photocopy or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law. The Pledgor will
promptly pay all reasonable costs incurred in connection with any of the
foregoing within 45 days of receipt of an invoice therefor. The Pledgor also
agrees, whether or not requested by the Collateral Agent, to use its reasonable
best efforts to perfect or continue the perfection of, or to protect the first
priority of, the Trustee's security interest in and to the Collateral, and to
protect the Collateral against the rights, claims or interests of third persons
(other than any such rights, claims or interests created by or arising through
the Trustee).
SECTION 9. Covenants. The Pledgor covenants and agrees with the
Trustee and the Holders that from and after the date of this Pledge Agreement
until the Termination Date:
<PAGE> 18
14
(a) it will not (i) (and will not purport to) sell or otherwise
dispose of, or grant any option or warrant with respect to, any of the
Collateral nor (ii) create or permit to exist any Lien upon or with
respect to any of the Collateral (except for the Liens and security
interests granted under this Pledge Agreement and any Lien created by or
arising through the Trustee) and at all times will be the sole
beneficial owner of the Collateral;
(b) it will not (i) enter into any agreement or understanding
that restricts or inhibits or purports to restrict or inhibit the
Trustee's or the Collateral Agent's rights or remedies hereunder,
including, without limitation, the Collateral Agent's right to sell or
otherwise dispose of the Collateral or (ii) fail to pay or discharge any
tax, assessment or levy of any nature with respect to its beneficial
interest in the Collateral not later than three Business Days prior to
the date of any proposed sale under any judgment, writ or warrant of
attachment with respect to the Collateral; and
(c) it will keep its chief place of business and chief executive
office at the location therefor specified in Section 7(h), or upon 30
days' prior written notice to the Collateral Agent, at such other
locations in a jurisdiction where all actions required by Section 8 have
been taken with respect to the Collateral.
SECTION 10. Power of Attorney; Agent May Perform. (a) Subject to
the terms of this Pledge Agreement, the Pledgor hereby appoints and constitutes
the Collateral Agent as the Pledgor's attorney-in-fact (with full power of
substitution) to exercise to the fullest extent permitted by law all of the
following powers upon and at any time after the occurrence and during the
continuance of an Event of Default: (a) collection of proceeds of any
Collateral; (b) conveyance of any item of Collateral to any purchaser thereof;
(c) giving of any notices or recording of any Liens hereof; and (d) paying or
discharging taxes or Liens levied or placed upon the Collateral, the legality or
validity thereof and the amounts necessary to discharge the same to be
determined by the Collateral Agent in its sole reasonable discretion, and such
payments made by the Collateral Agent to become part of the Obligations of the
Pledgor to the Trustee, due and payable immediately upon demand. The Collateral
Agent's authority under this Section 10 shall include, without limitation, the
authority to endorse and negotiate any checks or instruments representing
proceeds of Collateral in the name of the Pledgor, execute and give receipt for
any certificate of ownership or any document constituting Collateral, transfer
title to any item of Collateral, sign the Pledgor's name on all financing
statements (to the extent permitted by applicable law) or any other documents
deemed necessary or appropriate by the Collateral Agent in its reasonable
discretion to preserve, protect or perfect the security interest in the
Collateral and to file the same, prepare, file and sign the Pledgor's name on
any notice of Lien (to the extent permitted by applicable law), and to take any
other actions arising from or incident to the powers granted to the Trustee or
the Collateral Agent in this Pledge Agreement. This power of attorney is coupled
with an interest and is irrevocable by the Pledgor.
<PAGE> 19
15
(b) If the Pledgor fails to perform any agreement contained
herein, the Collateral Agent may, after providing to the Pledgor notice of such
failure and five Business Days to effect such performance, itself perform, or
cause performance of, such agreement, and the expenses of the Collateral Agent
incurred in connection therewith shall be payable by the Pledgor under Section
14.
SECTION 11. No Assumption of Duties; Reasonable Care. The rights
and powers granted to the Collateral Agent hereunder are being granted in order
to preserve and protect the security interest of the Trustee and the Holders in
and to the Collateral granted hereby and shall not be interpreted to, and shall
not impose any duties on, the Collateral Agent in connection therewith other
than those expressly provided herein or imposed under applicable law. Except as
provided by applicable law or by the Indenture, the Collateral Agent shall be
deemed to have exercised reasonable care in the custody and preservation of the
Collateral in its possession if the Collateral is accorded treatment
substantially equal to that which the Collateral Agent accords similar property
held by the Collateral Agent for similar accounts, it being understood that the
Collateral Agent in its capacity as such (a) may consult with counsel of its
selection and the advice of such counsel or any Opinion of Counsel shall be full
and complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance thereon and
(b) shall not have any responsibility for (i) ascertaining or taking action with
respect to calls, conversions, exchanges, maturities or other matters relative
to any Collateral, whether or not the Collateral Agent has or is deemed to have
knowledge of such matters, (ii) taking any necessary steps for the existence,
enforceability or perfection of any security interest of the Trustee or to
preserve rights against any parties with respect to any Collateral or (iii)
except as otherwise set forth in Section 5, investing or reinvesting any of the
Collateral, provided, however, that in the case of clause (a) and clause (b) of
this sentence, nothing contained in this Pledge Agreement shall relieve the
Collateral Agent of any responsibilities as a securities intermediary under
applicable law. In no event shall the Collateral Agent be liable for the
existence, validity, enforceability or perfection of any security interest of
the Trustee, or for special indirect or consequential damages or lost profits or
loss of business, arising in connection with this Agreement.
SECTION 12. Indemnity. The Pledgor shall indemnify, hold harmless
and defend the Collateral Agent and its directors and officers from and against
any and all claims, actions, obligations, liabilities and expenses, including
reasonable defense costs, reasonable investigative fees and costs, and
reasonable legal fees, expenses, and damages arising from the Collateral Agent's
performance as Collateral Agent under this Pledge Agreement, except to the
extent that such claim, action, obligation, liability or expense is directly
attributable to the bad faith, gross negligence or willful misconduct of such
indemnified person. The provisions of this Section 12 shall survive termination
of this Pledge Agreement and the resignation and removal of the Collateral
Agent.
SECTION 13. Remedies upon Event of Default. If any Event of
Default under the Indenture or default hereunder (any such Event of Default or
default being referred to in
<PAGE> 20
16
this Pledge Agreement as an "Event of Default") shall have occurred and be
continuing:
(a) The Trustee, the Collateral Agent and the Holders shall have,
in addition to all other rights given by law or by this Pledge Agreement
or the Indenture, all of the rights and remedies with respect to the
Collateral of a secured party upon default under the N.Y. Uniform
Commercial Code (whether or not the N.Y. Uniform Commercial Code applies
to the affected Collateral) at that time. In addition, with respect to
any Collateral that shall then be in or shall thereafter come into the
possession or custody of the Collateral Agent, the Collateral Agent may
and, at the direction of the Holders of a majority in aggregate
principal amount of the Notes then outstanding, shall appoint a broker
or other expert to sell or cause the same to be sold at any broker's
board or at public or private sale, in one or more sales or lots, at
such price or prices such broker or other expert may deem commercially
reasonable, for cash or on credit or for future delivery, without
assumption of any credit risk. The purchaser of any or all Collateral so
sold shall thereafter hold the same absolutely, free from any claim,
encumbrance or right of any kind whatsoever created by or through the
Pledgor. Unless any of the Collateral threatens, in the reasonable
judgment of the Collateral Agent, to decline speedily in value, the
Collateral Agent will give the Pledgor reasonable notice of the time and
place of any public sale thereof, or of the time after which any private
sale or other intended disposition is to be made. Any sale of the
Collateral conducted in conformity with reasonable commercial practices
of banks, insurance companies, commercial finance companies, or other
financial institutions disposing of property similar to the Collateral
shall be deemed to be commercially reasonable. Any requirements of
reasonable notice shall be met if notice of the time and place of any
public sale or the time after which any private sale is to be made is
given to the Pledgor as provided in Section 17.1 hereof at least ten
(10) days before the time of the sale or disposition. The Collateral
Agent or any Holder may, in its own name or in the name of a designee or
nominee, buy any of the Collateral at any public sale and, if permitted
by applicable law, at any private sale. The Collateral Agent shall not
be obligated to make any sale of Collateral regardless of notice of sale
having been given. The Collateral Agent may adjourn any public or
private sale from time to time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned. All expenses (including
court costs and reasonable attorneys' fees, expenses and disbursements)
of, or incident to, the enforcement of any of the provisions hereof
shall be recoverable from the proceeds of the sale or other disposition
of the Collateral.
(b) The Pledgor further agrees to use its reasonable best efforts
to do or cause to be done all such other acts as may be necessary to
make such sale or sales of all or any portion of the Collateral pursuant
to this Section 13 valid and binding and in compliance with any and all
other applicable requirements of law. The Pledgor further agrees that a
breach of any of the covenants contained in this Section 13 will cause
irreparable injury to the Trustee and the Holders, that the Trustee and
the Holders have
<PAGE> 21
17
no adequate remedy at law in respect of such breach and, as a
consequence, that each and every covenant contained in this Section 13
shall be specifically enforceable against the Pledgor, and the Pledgor
hereby waives and agrees not to assert any defenses against an action
for specific performance of such covenants except for a defense that no
Event of Default has occurred.
(c) All cash proceeds received by the Collateral Agent in respect
of any sale of, collection from, or other realization upon all or any
part of the Collateral may, in the discretion of the Collateral Agent,
be held by the Collateral Agent as collateral for, and/or then or at any
time thereafter applied (after payment of any amounts payable to the
Collateral Agent or the Trustee pursuant to Section 14) in whole or in
part by the Collateral Agent for the ratable benefit of the Holders
against all or any part of the Obligations in such order as the
Collateral Agent shall elect. Any surplus of such cash or cash proceeds
held by the Collateral Agent and remaining after payment in full of all
of the Obligations shall be paid over the Pledgor or to whomsoever may
be lawfully entitled to receive such surplus.
(d) The Collateral Agent may exercise any and all rights and
remedies of the Pledgor in respect of the Collateral.
(e) Subject to and in accordance with the terms of this Pledge
Agreement, all payments received by the Pledgor in respect of the
Collateral shall be received in trust for the benefit of the Collateral
Agent, shall be segregated from other funds of the Pledgor and shall be
forthwith paid over to the Collateral Agent in the same form as so
received (with any necessary indorsement).
(f) The Collateral Agent may, without notice to the Pledgor
except as required by law and at any time or from time to time, charge,
set-off and otherwise apply all or any part of the Obligations against
the Cash Collateral Account or any part thereof.
SECTION 14. Fees and Expenses. Pledgor agrees to pay to
Collateral Agent the fees as may be agreed upon from time to time. The Pledgor
will upon demand pay to the Trustee and the Collateral Agent the amount of any
and all reasonable expenses, including, without limitation, the reasonable fees,
expenses and disbursements of its counsel, experts and agents retained by the
Trustee and the Collateral Agent, that the Trustee and the Collateral Agent may
incur in connection with (a) the review, negotiation and administration of this
Pledge Agreement, (b) the custody or preservation of, or the sale of, collection
from, or other realization upon, any of the Collateral, (c) the exercise or
enforcement of any of the rights of the Collateral Agent, the Trustee and the
Holders hereunder or (d) the failure by the Pledgor to perform or observe any of
the provisions hereof.
SECTION 15. Security Interest Absolute. All rights of the
Collateral Agent,
<PAGE> 22
18
the Trustee and the Holders and security interests hereunder, and all
obligations of the Pledgor hereunder, shall be absolute and unconditional
irrespective of:
(a) any lack of validity or enforceability of the Indenture or
any other agreement or instrument relating thereto;
(b) any change in the time, manner or place of payment of, or in
any other term of, all or any of the Obligations, or any other amendment
or waiver of or any consent to any departure from the Indenture;
(c) any exchange, surrender, release or non-perfection of any
Liens on any other collateral for all or any of the Obligations;
(d) any change, restructuring or termination of the corporate
structure or the existence of the Pledgor or any of its subsidiaries;
(e) to the extent permitted by applicable law, any other
circumstance which might otherwise constitute a defense available to, or
a discharge of, the Pledgor in respect of the Obligations or of this
Pledge Agreement; or
(f) any manner of application of other collateral, or proceeds
thereof, to all or any item of the Obligations, or any manner of sale or
other disposition of any item of Collateral for all or any of the
Obligations.
SECTION 16. Collateral Agent's Representations, Warranties and
Covenants. The Collateral Agent represents and warrants that it is as of the
date hereof, and it agrees that for so long as it maintains the Collateral
Accounts and acts as the securities intermediary pursuant to this Pledge
Agreement it shall be a securities intermediary and a FRBNY Member. In
furtherance of the foregoing, the Collateral Agent hereby:
(a) represents and warrants that it is a commercial bank that in
the ordinary course of its business maintains securities accounts for
others and is acting in that capacity hereunder and with respect to the
Pledge Account;
(b) represents and warrants that it maintains a FRBNY Member
Securities Account with the FRBNY;
(c) agrees that the Pledge Account shall be an account to which
financial assets may be credited, and the Collateral Agent undertakes to
treat the Trustee as entitled to exercise rights that comprise (and
entitled to the benefits of) such financial assets, and entitled to
exercise the rights of an entitlement holder in the manner contemplated
by the UCC;
<PAGE> 23
19
(d) hereby represents that it has not granted, and covenants that
so long as it acts as a securities intermediary hereunder it shall not
grant, control (including without limitation, securities control) over
or with respect to any Collateral credited to any Collateral Account
from time to time to any other Person other than the Trustee;
(e) covenants that in its capacity as Collateral Agent hereunder
and with respect to the Collateral Accounts, it shall not take any
action inconsistent with, and represents and covenants that it is not
and so long as this Pledge Agreement remains in effect will not become,
party to any agreement the terms of which are inconsistent with, the
provisions of this Pledge Agreement;
(f) agrees that any item of property credited to the Pledge
Account shall be treated as a financial asset;
(g) agrees that any item of Collateral credited to any Collateral
Account shall not be subject to any security interest, Lien or right of
set-off in favor of the Collateral Agent, except as may be expressly
permitted under the Indenture (and the Collateral Agent shall take such
actions as shall be necessary and appropriate to cause such Collateral
to remain free of any Lien or security interest of any underlying
securities intermediary through which the Collateral Agent holds such
Collateral or any security entitlement thereto);
(h) agrees, so long as it serves as Collateral Agent pursuant to
this Pledge Agreement, to maintain the Collateral Accounts and maintain
appropriate books and records in respect thereof in accordance with its
usual procedures and subject to the terms of this Pledge Agreement;
(i) hereby represents, that the Collateral Agent's jurisdiction,
for purposes of Section 8-110(e) of the N.Y. Uniform Commercial Code and
Section 357.11 of the Treasury Regulations or the corresponding U.S.
federal regulations as they pertain to this Pledge Agreement, the
Collateral Accounts and the security entitlements relating thereto,
shall be the State of New York;
(j) agrees that, with respect to any Collateral that constitutes
a security entitlement, it shall comply with the provisions of Section
3(c)(i) or (ii) of this Pledge Agreement and, with respect to any
Collateral that constitutes a securities account, it shall comply with
the provisions of Section 3(c)(i) or (ii) of this Pledge Agreement with
respect to all security entitlements carried in such securities account;
and
(k) agrees that if the jurisdiction of the Collateral Agent shall
change from that jurisdiction specified in Section 7(j), the Collateral
Agent will promptly notify the Trustee of such change and of such new
jurisdiction.
SECTION 17. Miscellaneous Provisions.
<PAGE> 24
20
17.1. Notices. Any notice, approval, consent or other
communication shall be sufficiently given if in writing and delivered in person
or mailed by first class mail, commercial courier service or telecopier
communication, addressed as follows:
if to the Pledgor:
US Xchange, L.L.C.
20 Monroe Avenue NW
Suite 450
Grand Rapids, Michigan 49503
Attention: Chief Financial Officer
Telecopier No.: (616) 493-7007
if to the Collateral Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Jason Gregory, Corporate Trust Trustee
Administration
Telecopier No.: (212) 815-5915
if to the Trustee:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Jason Gregory, Corporate Trust Trustee
Administration
Telecopier No.: (212) 815-5915
or, as to any such party, at such other address as shall be designated by such
party in a written notice to each other party complying as to delivery with the
terms of this Section. All such notices and other communications shall be deemed
to have been duly given: at the time delivered by hand, if personally delivered;
three Business Days after being deposited in the mail, postage prepaid, if
mailed; when receipt is confirmed, if telecopied; and on the next Business Day
if timely delivered to an air courier guaranteeing overnight delivery.
17.2. No Adverse Interpretation of Other Agreements. This Pledge
Agreement may not be used to interpret another pledge, security or debt
agreement of the Pledgor or any subsidiary thereof. No such pledge, security or
debt agreement (other than the Indenture) may
<PAGE> 25
21
be used to interpret this Pledge Agreement.
17.3. Severability. The provisions of this Pledge Agreement are
severable, and if any clause or provision shall be held invalid, illegal or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect in that jurisdiction only such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction or any other clause or provision of this
Pledge Agreement in any jurisdiction.
17.4. Headings. The headings in this Pledge Agreement have been
inserted for convenience of reference only, are not to be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof.
17.5. Counterpart Originals. This Pledge Agreement may be signed
in two or more counterparts, each of which shall be deemed an original, but all
of which shall together constitute one and the same agreement.
17.6. Benefits of Pledge Agreement. Nothing in this Pledge
Agreement, express or implied, shall give to any Person, other than the parties
hereto and their successors hereunder, and the Holders, any benefit or any legal
or equitable right, remedy or claim under this Pledge Agreement.
17.7. Amendments, Waivers and Consents. Any amendment or waiver
of any provision of this Pledge Agreement and any consent to any departure by
the Pledgor, the Trustee or the Collateral Agent or from any provision of this
Pledge Agreement shall be effective only if made or duly given in compliance
with all of the terms and provisions of the Indenture, and none of the Trustee,
the Collateral Agent, the Pledgor, or any Holder shall be deemed, by any act,
delay, indulgence, omission or otherwise, to have waived any right or remedy
hereunder or to have acquiesced in any default or Event of Default or in any
breach of any of the terms and conditions hereof. Failure of the Trustee, the
Pledgor, the Collateral Agent or any Holder to exercise, or delay in exercising,
any right, power or privilege hereunder shall not preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. A
waiver by the Trustee, the Pledgor, the Collateral Agent or any Holder of any
right or remedy hereunder on any one occasion shall not be construed as a bar to
any right or remedy that the Trustee, the Pledgor, the Collateral Agent or such
Holder would otherwise have on any future occasion. The rights and remedies
herein provided are cumulative, may be exercised singly or concurrently and are
not exclusive of any rights or remedies provided by law.
17.8. [RESERVED]
17.9. Continuing Security Interest; Termination. (a) This Pledge
Agreement shall create a continuing security interest in and to the Collateral
and shall, unless otherwise
<PAGE> 26
22
provided in the Indenture or in this Pledge Agreement, remain in full force and
effect until the Termination Date. This Pledge Agreement shall be binding upon
the parties hereto and their respective transferees, successors and assigns, and
shall inure, together with the rights and remedies of the Trustee and the
Collateral Agent hereunder, to the benefit of the Trustee, the Collateral Agent,
the Pledgor, the Holders and their respective successors, transferees and
assigns.
(b) Upon the Termination Date, the pledge, assignment and
security interest granted hereby shall terminate and all rights to the
Collateral shall revert to the Pledgor. At such time, the Collateral Agent
shall, pursuant to an Issuer Order, promptly reassign and redeliver to the
Pledgor all of the Collateral hereunder that has not been sold, disposed of,
retained or applied by the Collateral Agent in accordance with the terms of this
Pledge Agreement and the Indenture and execute and deliver to the Pledgor such
documents as the Pledgor shall reasonably request to evidence such termination.
Such reassignment and redelivery shall be without warranty by or recourse to the
Collateral Agent or the Trustee in its capacity as such, except as to the
absence of any Liens on the Collateral created by or arising through the
Collateral Agent or the Trustee, and shall be at the reasonable expense of the
Pledgor.
17.10. Survival Provisions. All representations, warranties and
covenants contained herein shall survive the execution and delivery of this
Pledge Agreement, and shall terminate only upon the termination of this Pledge
Agreement. The obligations of the Pledgor under Sections 12 and 14 hereof and
the obligations of the Collateral Agent under Section 17.9(b) hereof shall
survive the termination of this Pledge Agreement.
17.11. Waivers. The Pledgor waives presentment and demand for
payment of any of the Obligations, protest and notice of dishonor or default
with respect to any of the Obligations, and all other notices to which the
Pledgor might otherwise be entitled, except as otherwise expressly provided
herein or in the Indenture.
17.12. Authority of the Collateral Agent. (a) The Collateral
Agent shall have and be entitled to exercise all powers hereunder that are
specifically granted to the Collateral Agent by the terms hereof, together with
such powers as are reasonably incident thereto. The Collateral Agent may perform
any of its duties hereunder or in connection with the Collateral by or through
agents or employees and shall be entitled to retain counsel and to act in
reliance upon the advice of counsel concerning all such matters. Except as
otherwise expressly provided in this Pledge Agreement or the Indenture, neither
the Collateral Agent nor any director, officer, employee, attorney or agent of
the Collateral Agent shall be liable to the Pledgor for any action taken or
omitted to be taken by the Collateral Agent, in its capacity as Collateral
Agent, hereunder, except for its own bad faith, gross negligence or willful
misconduct, and the Collateral Agent shall not be responsible for the validity,
effectiveness or sufficiency hereof or of any document or security furnished
pursuant hereto. The Collateral Agent and its directors, officers, employees,
attorneys and agents shall be entitled to rely on
<PAGE> 27
23
any communication, instrument or document believed by it or them to be genuine
and correct and to have been signed or sent by the proper Person or Persons. The
Collateral Agent shall have no duty to cause any financing statement or
continuation statement to be filed in respect of the Collateral.
(b) The Pledgor acknowledges that the rights and responsibilities
of the Collateral Agent under this Pledge Agreement with respect to any action
taken by the Collateral Agent or the exercise or non-exercise by the Collateral
Agent of any option, right, request, judgment or other right or remedy provided
for herein or resulting or arising out of this Pledge Agreement shall, as
between the Collateral Agent and the Holders, be governed by the Indenture and
by such other agreements with respect thereto as may exist from time to time
among them, but, as between the Collateral Agent and the Pledgor, the Collateral
Agent shall be conclusively presumed to be acting as agent for the Trustee and
the Holders with full and valid authority so to act or refrain from acting, and
the Pledgor shall not be obligated or entitled to make any inquiry respecting
such authority.
17.13. Final Expression. This Pledge Agreement, together with the
Indenture and any other agreement executed in connection herewith, is intended
by the parties as a final expression of this Pledge Agreement and is intended as
a complete and exclusive statement of the terms and conditions thereof.
17.14. Rights of Holders. No Holder shall have any independent
rights hereunder other than those rights granted to individual Holders pursuant
to Section 607 of the Indenture; provided that nothing in this subsection shall
limit any rights granted to the Trustee under the Notes or the Indenture.
17.15. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY
TRIAL; WAIVER OF DAMAGES. (a) THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE
EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR
REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE
LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK, AND, EXCEPT TO THE
EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR
REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE
LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK, ANY DISPUTE ARISING OUT
OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED
BETWEEN THE PLEDGOR, THE TRUSTEE, THE COLLATERAL AGENT AND THE HOLDERS IN
CONNECTION WITH THIS PLEDGE AGREEMENT, AND WHETHER ARISING IN CONTRACT, TORT,
EQUITY OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK. NOTWITHSTANDING THE FOREGOING, THE MATTERS
<PAGE> 28
24
IDENTIFIED IN 31 C.F.R. SECTIONS 357.10 AND 357.11 (AS IN EFFECT ON THE DATE OF
THIS PLEDGE AGREEMENT) SHALL BE GOVERNED SOLELY BY THE LAWS SPECIFIED THEREIN.
(b) THE PLEDGOR HEREBY WAIVES PERSONAL SERVICE OF PROCESS IN ANY
SUIT, ACTION OR PROCEEDING WITH RESPECT TO THIS PLEDGE AGREEMENT AND FOR ACTIONS
BROUGHT UNDER THE U.S. FEDERAL OR STATE SECURITIES LAWS BROUGHT IN ANY FEDERAL
OR STATE COURT LOCATED IN THE CITY OF NEW YORK (EACH A "NEW YORK COURT") AND
CONSENTS THAT ALL SERVICE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING
SHALL BE MADE BY REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO THE
PLEDGOR AT THE ADDRESS INDICATED IN SECTION 17.1. EACH OF THE PARTIES HERETO
SUBMITS TO THE JURISDICTION OF ANY NEW YORK COURT AND TO THE COURTS OF ITS
CORPORATE DOMICILE WITH RESPECT TO ANY ACTIONS BROUGHT AGAINST IT AS DEFENDANT
IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF, CONNECTED WITH, RELATED TO, OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THE PLEDGOR, THE TRUSTEE, THE
COLLATERAL AGENT AND THE HOLDERS IN CONNECTION WITH THIS PLEDGE AGREEMENT, AND
EACH OF THE PARTIES HERETO WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LAYING
OF VENUE, INCLUDING ANY PLEADING OF FORUM NON CONVENIENS, WITH RESPECT TO ANY
SUCH ACTION AND WAIVES ANY RIGHT TO WHICH IT MAY BE ENTITLED ON ACCOUNT OF PLACE
OF RESIDENCE OR DOMICILE.
(c) THE PLEDGOR AGREES THAT THE TRUSTEE SHALL, IN ITS CAPACITY AS
TRUSTEE OR IN THE NAME AND ON BEHALF OF ANY HOLDER, HAVE THE RIGHT, TO THE
EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE PLEDGOR OR THE
COLLATERAL IN A COURT IN ANY LOCATION REASONABLY SELECTED IN GOOD FAITH (AND
HAVING PERSONAL OR IN REM JURISDICTION OVER THE PLEDGOR OR THE COLLATERAL, AS
THE CASE MAY BE) TO ENABLE THE TRUSTEE TO REALIZE ON SUCH COLLATERAL, OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF THE TRUSTEE. THE
PLEDGOR AGREES THAT IT WILL NOT ASSERT ANY COUNTERCLAIMS, SETOFFS OR CROSSCLAIMS
IN ANY PROCEEDING BROUGHT BY THE TRUSTEE TO REALIZE ON SUCH PROPERTY OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE TRUSTEE, EXCEPT FOR SUCH
COUNTERCLAIMS, SETOFFS OR CROSSCLAIMS WHICH, IF NOT ASSERTED IN ANY SUCH
PROCEEDING, COULD NOT OTHERWISE BE BROUGHT OR ASSERTED.
(d) THE PLEDGOR AGREES THAT NEITHER ANY HOLDER NOR (EXCEPT AS
OTHERWISE PROVIDED IN THIS PLEDGE AGREEMENT OR THE INDENTURE) THE COLLATERAL
AGENT IN ITS CAPACITY AS COLLATERAL
<PAGE> 29
25
AGENT SHALL HAVE ANY LIABILITY TO THE PLEDGOR (WHETHER ARISING IN TORT, CONTRACT
OR OTHERWISE) FOR LOSSES SUFFERED BY THE PLEDGOR IN CONNECTION WITH, ARISING OUT
OF, OR IN ANY WAY RELATED TO, THE TRANSACTIONS CONTEMPLATED AND THE RELATIONSHIP
ESTABLISHED BY THIS PLEDGE AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN
CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE
JUDGMENT OF A COURT THAT IS BINDING ON THE TRUSTEE OR SUCH HOLDER, AS THE CASE
MAY BE, THAT SUCH LOSSES WERE THE RESULT OF ACTS OR OMISSIONS ON THE PART OF THE
COLLATERAL AGENT OR SUCH HOLDERS, AS THE CASE MAY BE, CONSTITUTING BAD FAITH,
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
(e) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PLEDGOR WAIVES
THE POSTING OF ANY BOND OTHERWISE REQUIRED OF THE TRUSTEE, THE COLLATERAL AGENT
OR ANY HOLDER IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO ENFORCE
ANY JUDGMENT OR OTHER COURT ORDER PERTAINING TO THIS PLEDGE AGREEMENT OR ANY
RELATED AGREEMENT OR DOCUMENT ENTERED IN FAVOR OF THE TRUSTEE, THE COLLATERAL
AGENT OR ANY HOLDER, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY
RESTRAINING ORDER OR PRELIMINARY OR PERMANENT INJUNCTION, THIS PLEDGE AGREEMENT
OR ANY RELATED AGREEMENT OR DOCUMENT BETWEEN THE PLEDGOR, ON THE ONE HAND, AND
THE TRUSTEE, THE COLLATERAL AGENT AND/OR THE HOLDERS, ON THE OTHER HAND.
17.16. Effectiveness. This Pledge Agreement shall become
effective upon the effectiveness of the Indenture.
<PAGE> 30
IN WITNESS WHEREOF, the Pledgor, the Trustee and the Collateral
Agent have each caused this Pledge Agreement to be duly executed and delivered
as of the date first above written.
Pledgor:
US XCHANGE, L.L.C.
By: /s/ Richard Postma
------------------------------------
Name: Richard Postma
Title: Co-Chairman and Chief
Executive Officer
Trustee:
THE BANK OF NEW YORK,
as Trustee
By: /s/ Mary La Gumina
------------------------------------
Name: Mary La Gumina
Title: Assistant Vice President
THE BANK OF NEW YORK,
as Collateral Agent
By: /s/ Mary La Gumina
------------------------------------
Name: Mary La Gumina
Title: Assistant Vice President
<PAGE> 31
SCHEDULE I
PART I
PLEDGED SECURITIES
<TABLE>
<CAPTION>
Description Original Cost at
of Debt CUSIP No(s). Final Maturity Principal Amount Closing Date
------- ------------ -------------- ---------------- ------------
<S> <C> <C> <C> <C>
Treasury Note 912827N40 12/31/98 10,869,000 11,133,031.13
Treasury Note 9128272X9 6/30/99 12,963,000 13,414,064.06
Treasury Note 9128273RI 12/31/99 13,352,000 13,748,445.13
Treasury Strip 912827U42 6/30/00 13,727,000 14,228,478.69
Treasury Strip 912827W40 12/31/00 14,130,000 14,514,464.32
Treasury Strip 912827Y48 6/30/01 14,519,000 15,431,300.56
</TABLE>
PART II
<TABLE>
<CAPTION>
ISSUER OF DESCRIPTION OF SECURITIES INTERMEDIARY SECURITIES ACCOUNT
FINANCIAL ASSET FINANCIAL ASSET (NAME AND ADDRESS) (NUMBER AND LOCATION)
---------------- --------------- ------------------------ ------------------------
<S> <C> <C> <C>
U.S. Government Treasury Note The Bank of New York The Bank of New York,
Account No. 290527
U.S. Government Treasury Note The Bank of New York The Bank of New York,
Account No. 290527
U.S. Government Treasury Note The Bank of New York The Bank of New York,
Account No. 290527
U.S. Government Treasury Strip The Bank of New York The Bank of New York,
Account No. 290527
U.S. Government Treasury Strip The Bank of New York The Bank of New York,
Account No. 290527
U.S. Government Treasury Strip The Bank of New York The Bank of New York,
Account No. 290527
</TABLE>
I-1
<PAGE> 32
I-2
<PAGE> 33
EXHIBIT A
THE BANK OF NEW YORK
OFFICER'S CERTIFICATE
Pursuant to Section 3(e) of the Collateral Pledge and Security
Agreement (the "Pledge Agreement") dated as of June 25, 1998 among US Xchange,
L.L.C., a Michigan limited liability company (the "Pledgor"), The Bank of New
York, as trustee (the "Trustee") for the holders of the Pledgor's $200 million
aggregate principal amount of 15% Senior Notes Due 2008, and The Bank of New
York, as collateral agent and securities intermediary (the "Collateral Agent"),
the undersigned officer of the Trustee, on behalf of the Trustee, makes the
following certifications to the Pledgor and the Placement Agent. Capitalized
terms used and not defined in this Officer's Certificate have the meanings set
forth or referred to in the Pledge Agreement.
1. Substantially contemporaneously with the execution and
delivery of this Officer's Certificate, the Trustee has acquired its security
entitlement to the Pledged Securities or through a "securities account" (as
defined in Section 8-501(a) of the N.Y. Uniform Commercial Code) maintained by
the Collateral Agent, for value and without notice of any adverse claim thereto.
Without limiting the generality of the foregoing, the Pledge Account, the Cash
Collateral Account, the Pledged Securities and the other Collateral are not, and
the Trustee's security entitlement to the Collateral is not, to the actual
knowledge of the corporate trust officer having responsibility for the
administration of this Indenture on behalf of the Trustee, subject to any Lien
granted by or to or arising through or in favor of any securities intermediary
(including, without limitation, the Collateral Agent, or the FRBNY) through
which the Trustee derives its security entitlement to the Collateral.
2. The Trustee has not knowingly caused or permitted the
Collateral Account or its security entitlement thereto to become subject to any
Lien created by or arising through the Trustee.
A-1
<PAGE> 34
IN WITNESS WHEREOF, the undersigned officer has executed this
Officer's Certificate on behalf of The Bank of New York, as Trustee this 25th
day of June, 1998.
THE BANK OF NEW YORK, as Trustee
By:/s/ Mary La Gumina
----------------------------------
Name: Mary La Gumina
Title: Assistant Vice President
A-2
<PAGE> 1
EXHIBIT 5.1
September 30, 1998
US Xchange, L.L.C.
20 Monroe Avenue NW, Suite 450
Grand Rapids, Michigan 49503
Ladies and Gentlemen:
We are acting as special counsel for US Xchange, L.L.C., a Michigan
limited liability company (the "Company") in connection with various legal
matters relating to the filing with the Securities and Exchange Commission of a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), covering an offer to
exchange (the "Exchange Offer") $1,000 principal amount of the Company's 15%
Senior Notes due July 1, 2008 (the "Exchange Notes") for each $1,000 principal
amount of its outstanding 15% Senior Notes due July 1, 2008 (the "Private
Notes"), of which $200,000,000 aggregate principal amount is outstanding on the
date hereof. The Exchange Notes are to be issued pursuant to an Indenture, dated
as of June 25, 1998 (the "Indenture"), between the Company and The Bank of New
York, as Trustee, which is filed as an exhibit to the Registration Statement.
In connection herewith, we have examined and relied without
independent investigation as to matters of fact upon such certificates of public
officials, such statements and certificates of officers of the Company,
originals or copies certified to our satisfaction of the Registration Statement,
the Indenture, the Exchange Notes, the Registration Rights Agreement, dated as
of June 25, 1998, between the Company and Morgan Stanley & Co. Incorporated, the
Articles of Organization of the Company and the Operating Agreement dated as of
August 1, 1996 of the Company, proceedings of the Members of the Company and
such other Company records, documents, certificates and instruments as we have
deemed necessary or appropriate in order to enable us to render the opinions
expressed below. In rendering this opinion, we have assumed the genuineness of
all signatures on all documents examined by us, the authenticity of all
documents submitted to us as originals and the conformity to authentic originals
of all documents submitted to us as certified or photostatted copies.
We express no opinion as to the applicability or effect of (i) any
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, or (ii) general principles
of equity, including, without limitation, concepts of reasonableness,
materiality, good faith and fair dealing and the possible unavailability of
specific performance, injunctive relief or other equitable remedies, regardless
of whether enforceability is considered in a proceeding in equity or at law.
Based upon the foregoing and in reliance thereon and subject to the
qualifications and limitations stated herein, we are of the opinion that:
(1) The Company is a limited liability company validly existing in
good standing under the laws of the state of Michigan; and
(2) When,
(i) the Registration Statement, including any amendments
thereto, shall have become effective under the Securities
Act;
(ii) the Indenture has been duly qualified under the Trust
Indenture Act of 1939, as amended; and
(iii) the Exchange Notes shall have been duly executed and
authenticated in accordance with the provisions of the
Indenture and duly delivered to the holders thereof in
exchange for the Private Notes;
then the Exchange Notes will be valid and binding
obligations of the Company.
<PAGE> 2
US Xchange, L.L.C.
September 30, 1998
Page 2
In addition, based on the assumptions and subject to the qualifications set
forth therein, our opinion as to the material United States federal income tax
consequences of the Exchange Offer is set forth in the Prospectus included as
part of the Registration Statement (the "Prospectus") under the caption "Certain
United States Federal Income Tax Considerations" and we hereby confirm such
opinion as set forth therein.
In rendering the opinion expressed in the immediately preceding paragraph,
we have considered the applicable provisions of the Internal Revenue Code of
1986, as amended (the "Code"), applicable final, temporary and proposed
Treasury Regulations promulgated thereunder by the United States Treasury
Department (the "Regulations"), pertinent judicial authorities, rulings of the
Internal Revenue Service and such other authorities as we have considered
relevant. It should be noted that the Code, the Regulations and such judicial
decisions, administrative interpretations and authorities are subject to change
at any time and, in some circumstances, with retroactive effect. We have also
assumed that the Registration Statement reflects all of the material facts, and
our opinion is expressly conditioned on, among other things, the accuracy of
all such facts as of the date hereof, and the continuing accuracy of all such
facts through and as of the expiration date of the Exchange Offer. Any
variation or difference in the facts referred to, set forth or assumed herein
or in the Registration Statement or in any of the authorities upon which our
opinion is based could affect our opinion.
This opinion is not rendered with respect to any laws other than the
Michigan Limited Liability Company Act as reported in Prentice-Hall Information
Services Corporation Statutes, as supplemented through May 1, 1998, and the
federal laws of the United States.
We hereby consent to (i) the filing of this opinion as an exhibit to the
Registration Statement, (ii) the description of our opinion under the caption
"Certain United States Federal Income Tax Considerations" in the Prospectus and
(iii) the reference to our firm under the captions "Certain United States
Federal Income Tax Considerations" and "Validity of the Exchange Notes" in the
Prospectus. We also consent to your filing copies of this opinion as an exhibit
to the Registration Statement with agencies of such states as you deem necessary
in the course of complying with the laws of such states regarding the Exchange
Offer. In giving this consent, we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Bryan Cave LLP
Bryan Cave LLP
<PAGE> 1
EXHIBIT 10.1
EXPENSE SHARING AGREEMENT
This Expense Sharing Agreement ("Agreement") is made this 1st
day of February, 1997, by and between RVP Development Corporation, a Michigan
corporation, of 20 Monroe Avenue, N.W., Suite 450, Grand Rapids, Michigan 49503
("RVP") and U.S. Xchange, L.L.C., a Michigan limited liability company, of 20
Monroe Avenue, N.W., Suite 450, Grand Rapids, Michigan 49503 ("USX").
Statement of Facts
RVP and USX share common ownership. RVP has leased the
premises located at 20 Monroe Avenue, N.W., Grand Rapids, Michigan (the
"Premises") and has hired certain employees. USX wishes to utilize a portion of
the Premises and to utilize the expertise of certain employees of RVP. RVP has
agreed to allow USX to utilize a portion of the Premises and certain of RVP's
employees under the terms and conditions contained in this Agreement.
Agreement
In consideration of the facts stated above and the mutual
covenants of the parties contained in this Agreement, the parties agree as
follows:
1. Use of the Premises. RVP agrees to allow USX to occupy a
portion of the Premises as is mutually agreed upon by RVP and USX from time to
time. On a monthly basis, USX shall reimburse RVP for its proportionate share of
the previous month's rental costs, utility costs, janitorial costs, insurance
costs, telephone costs, office supplies costs and any other similar direct costs
based upon the percentage square footage of the Premises occupied by USX as
compared to the total square footage of the Premises. Such payment shall occur
on or before the 15th day of each month and shall be based upon an estimate of
such costs as determined by RVP.
2. Use of RVP Employees. RVP agrees to allow USX to utilize
the services of certain employees of RVP. Attached as Exhibit A is a list of
those employees and the estimated percentage of their time which will be devoted
to USX endeavors. It is contemplated that Exhibit A shall be updated from time
to time by the parties. On a monthly basis, USX shall reimburse RVP for its
proportionate share of the previous month's compensation and employee benefit
costs for such employees based upon the percentage contained on Exhibit A. Such
payment shall occur on or before the 15th day of each month and shall be based
upon an estimate of such costs as determined by RVP. Each employee listed on
Exhibit A shall continue solely as an employee of RVP and, other than as set
forth above, RVP shall be responsible for all salaries, taxes, employee benefits
and related costs and expenses in connection with such employees.
3. Term. This Agreement shall commence effective Feb 1, 1997
and shall have an initial term of one (1) year. Thereafter, this Agreement shall
renew for additional one (1) year terms unless either party provides the other
with at least thirty (30) days written notice of termination prior to the date
of renewal.
<PAGE> 2
4. Nature of Relationship. The parties agree that no provision
of this Agreement shall be construed to create a partnership, joint venture or
other relationship between the parties.
5. Miscellaneous Provisions.
(a) Assignment. This Agreement may not be assigned by
either party hereto without the consent of the other party.
(b) Successors Bound. Subject to the provisions of
Section 5(a), this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
permitted assigns.
(c) Notices. Any notice, request, instruction or
other document deemed by any party hereunder to be necessary or
desirable to be given to any other party shall be in writing and shall
be conclusively deemed given if delivered in person, if entrusted to a
reputable overnight courier service, or if mailed by registered mail or
certified mail, postage prepaid, with return receipt requested,
addressed to the party at their address set forth above or to such
other addresses as either party may designate in a written notice
served upon the other party in the manner provided herein.
(d) Section Headings. The section headings in this
Agreement are for reference purposes only and shall not affect the
interpretation of this Agreement.
(e) Entire Agreement. This Agreement represents the
entire agreement among the parties relating to the subject matter
hereof, and supersedes all prior agreements relating to the subject
matter hereof.
(f) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of
which shall constitute the same instrument.
(g) Governing Law. This Agreement shall be construed
in accordance with and governed by the internal laws, and not the law
of conflicts, of the State of Michigan.
(h) Severability. If any provision herein is found to
be unenforceable, invalid or illegal, such provision shall be deemed
deleted from this Agreement, and the remainder of this Agreement shall
not be affected or impaired thereby.
(i) Attorneys' Fees. If any action, including,
without limitation, arbitration, should arise among the parties hereto
under this Agreement, the prevailing party in such action shall be
reimbursed for all reasonable expenses incurred in connection with such
action, including reasonable attorneys' fees.
2
<PAGE> 3
(j) Pronouns and Numbers. Whenever the context so
requires, the masculine shall include the feminine and neuter, and the
singular shall include the plural, and conversely.
(k) Further Assurances. The parties hereto agree to
execute any and all such further agreements, instruments or documents,
and to take any and all such further action, as may be necessary or
desirable to carry into effect the purpose and intent of this
Agreement.
WHEREOF, the parties have set their hands effective as of the
date first written above.
RVP DEVELOPMENT CORPORATION
By /s/ Richard Postma
-------------------------------------
Richard Postma, Chairman
U.S. XCHANGE, L.L.C.
By /s/ Richard Postma
-------------------------------------
Richard Postma, Member
3
<PAGE> 4
EXHIBIT A
---------
Name of Employee Percentage of Time Devoted to USX
- ---------------- ---------------------------------
Ron VanderPol 20%
Randy Veltkamp 25%
Don Offringa 50%
Brian Keil 50%
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into
as of the 3rd day of March, 1997, by and between US Xchange, L.L.C., a Michigan
limited liability company, of 20 Monroe, N.W., Suite 450, Grand Rapids, Michigan
49503 ("Company") and Lee Thibaudeau, of 2731 Old Coach Road, Green Bay,
Wisconsin 54306-5167 ("Thibaudeau").
Statement of Facts
Company is a telecommunications corporation engaged in the
business of establishing regional competitive local exchanges. Thibaudeau has
significant management experience and expertise which can benefit Company.
Company wishes to employ Thibaudeau and Thibaudeau wishes to be employed by
Company. Therefore, this Agreement is being entered into by the parties to
provide the terms and conditions under which Thibaudeau shall be employed by
Company.
Agreement
IN CONSIDERATION OF THE FACTS STATED ABOVE AND THE MUTUAL
COVENANTS CONTAINED IN THIS AGREEMENT, THE PARTIES AGREE AS FOLLOWS:
1. Employment. Company hires and employs Thibaudeau as a key
employee in the operation by Company of its business. Thibaudeau accepts
employment and agrees to continue to render his expert services to Company
during the term of this Agreement. Thibaudeau shall have the title Chief
Operating Officer - Midwest Region.
2. Term. The term of this Agreement ("Employment Period")
shall be for a period of five (5) years, commencing on March 17, 1997, and
ending March 16, 2002; provided, however, that the term of this Agreement shall
automatically renew for successive one (1) year periods unless terminated by
either party providing the other with written notice of termination at least
ninety (90) days prior to the applicable anniversary of the date of this
Agreement.
(a) Termination by Company. Company may
terminate this Agreement at any time.
(b) Termination by Thibaudeau. Thibaudeau may
terminate this Agreement prior to the expiration of the Employment
Period by providing Company with one hundred eighty (180) days prior
written notice.
3. Compensation.
(a) Salary. For services rendered by Thibaudeau as an
employee
<PAGE> 2
pursuant to the provisions of this Agreement, Company shall
pay Thibaudeau an annual salary of not less than One Hundred Thirty
Thousand and 00/100 Dollars ($130,000.00). The annual salary shall be
paid bi-monthly with equal installments of Five Thousand Four Hundred
Sixteen and 67/100 Dollars ($5,416.67) payable on the fifteenth (15th)
and last day of each month during the Employment Period. There shall be
withheld from Thibaudeau's compensation such amount as Company is
required by law to withhold and such other deductions as Thibaudeau
shall authorize. Except as provided in Paragraph 3(d) below, in the
event of early termination of this Agreement pursuant to Paragraph 2(a)
or 2(b) above, or the death of Thibaudeau prior to the expiration of
the Employment Period or any extension of this Agreement, Company shall
have no obligation to make further payment of compensation to
Thibaudeau or his estate under this Paragraph. However, in the event of
early termination of this Agreement by Thibaudeau or due to any event
described in Paragraph 3(d)(i), 3(d)(ii) or 3(d)(iii) below, Thibaudeau
shall continue to be subject to the provisions of Paragraphs 6, 7 and 8
of this Agreement.
(b) Benefits. During the Employment Period, the
Company shall allow Thibaudeau to participate in the Company's health
insurance plan and pension plan, and receive an automobile allowance
and other benefits on the same basis and eligibility requirements as
other similar executives of Company.
(c) Bonus. During the Employment Period, Thibaudeau
shall be eligible to receive an annual bonus in such amount as is
approved by Company's management. It is anticipated that the yearly
bonus will be a minimum of Twenty Thousand Dollars ($20,000).
(d) Salary Guarantee. Notwithstanding Paragraph 3(a),
above, in the event Company terminates this Agreement for any reason
other than just cause, Company shall continue to pay Thibaudeau's
salary and provide Thibaudeau's benefits for a period of one (1) year
following the date of termination. Just cause for the purposes of this
Agreement shall be defined as any of the following (i) failure of
Thibaudeau to perform competently any duty assigned to him which
nonperformance rises, to the level of the industry standard for just
cause termination, (ii) failure of Thibaudeau to perform any provision
under this Agreement, or (iii) Thibaudeau's dishonesty or fraud.
Company may not terminate this Agreement for just cause under Paragraph
3(d)(i) or 3(d)(ii) without having provided Thibaudeau with written
notice of such cause and a period of sixty (60) days to take corrective
action. This salary guarantee shall also be personally guaranteed by
Ronald Vander Pol.
(e) Equity Guarantee. Upon the first to occur of: (i)
the sale of Company's Wisconsin Region assets; (ii) the sale of all of
Company's assets or equity interests; (iii) the completion of an
initial public offering of Company's equity interests; or (iv) a merger
of Company with another entity where Company is not the surviving
entity (individually, a "Triggering Event"), Company agrees to pay
Thibaudeau the first $1,500,000.00 of net equity of the Wisconsin
Region (after subtracting Company's capitalization and outstanding debt
related to the Wisconsin Region) ("Equity
2
<PAGE> 3
Guarantee"). Company also agrees to pay Thibaudeau a 5% share (the
"Equity Share") of the total net equity (as defined above) following
the occurrence of a Triggering Event, it being the parties' intent that
the $1,500,000.00 payment described above be included in calculating
the 5% share. Notwithstanding the above, if Thibaudeau's employment by
Company is terminated for any reason during the initial five (5) year
term of this Agreement, Thibaudeau shall forfeit twenty percent (20%)
of the Equity Guarantee and twenty percent (20%) of the Equity Share
for each year or partial year less than five (5) that Thibaudeau is
employed by Company.
4. Post-Sale Covenants. Upon the occurrence of a Triggering
Event, Thibaudeau agrees to execute an employment agreement and non-compete
agreement with the purchaser for a period of not less than one (1) year,
provided that the salary to be paid Thibaudeau during such period shall not be
less than Thibaudeau's annual salary immediately prior to the sale, and further
provided that the employment agreement and non-compete agreement shall be
consistent with the terms and conditions of this Agreement except for Paragraph
3(e) which shall be omitted.
5. Nature of Employment. Company is employing Thibaudeau as
one of its key employees. Thibaudeau will provide management services to Company
pursuant to Company's business requirements. Thibaudeau shall conscientiously
and competently perform all the duties of any position which he holds, including
any additional duties assigned to him. During the Employment Period, Thibaudeau
shall devote his time and efforts as required in the performance of his duties
under this Agreement and shall use his best efforts to promote the business and
interests of Company.
6. Non-Compete Agreement. Following termination of this
Agreement by expiration of the Employment Period, or in the event of termination
by Thibaudeau or due to any event described in Paragraph 3(d)(i), 3(d)(ii) or
3(d)(iii) above, Thibaudeau agrees as follows:
(a) That his services and responsibilities are unique
in character and are of particular significance to Company, that
Company is a competitive business and his continued and exclusive
service to the Company under this Agreement is of a high degree of
importance to the Company. Therefore, during the Employment Period and
for a period of one (1) year thereafter (the "Non-Compete Period"),
Thibaudeau shall not, directly or indirectly, as owner, partner, joint
venturer, employee, broker, agent, corporate officer, principal,
licensor, shareholder (unless as owner of no more than five percent
(5%) of the issued and outstanding capital stock of such entity if such
stock is traded on a major securities exchange) or in any other
capacity whatsoever, engage in or have any connection with any business
which is competitive with the Company, and which operates anywhere in
the Midwest Region as defined by Company. For purposes of this
Agreement, a business will be deemed to be competitive with the Company
if it is engaged in the same business that the Company is engaged in on
the date hereof or on the date of termination.
(b) During the Non-Compete Period, Thibaudeau shall
not:
3
<PAGE> 4
(i) directly or indirectly, by initiating
contact or otherwise, induce, influence, combine or conspire
with, any of the officers, employees or agents of Company to
terminate their employment or relationship with or to compete
against Company;
(ii) directly or indirectly, by initiating
contact or otherwise, divert or attempt to divert any or all
of any customers' or suppliers' business with Company.
7. Use of Information Obtained During Employment Period.
Without limiting the general provisions set forth in Paragraph 6, Thibaudeau
shall not for any reason, except in the ordinary course of business, use or
divulge to any other person or party, except an officer or director of Company,
any trade secrets or private business information of Company, including, without
limitation, the names and/or records of any customer of Company, the names of
any companies which are providing any services to Company, and correspondence or
any other confidential or proprietary information relating to Company's business
which may harm Company in any way.
8. Ownership of Documents, Inventions, Discoveries and
Improvements. All records, files, plans, sketches, notes, notebooks, letters or
the like relating to the business of Company, which Thibaudeau uses, prepares or
comes in contact with shall remain the sole property of Company. Upon
termination of employment, Thibaudeau shall promptly return all such materials
in Thibaudeau's possession or control to Company. Further, Thibaudeau shall
promptly inform Company of all inventions, discoveries and improvements made by
Thibaudeau individually or in conjunction with others during the course of
Thibaudeau's employment, which relate to Company's business. Thibaudeau shall
assign to Company all of Thibaudeau's rights to such inventions, discoveries and
improvements, and Company shall have a royalty-free right to use such
inventions, discoveries and improvements in its business.
9. Equitable Relief. The covenants of Thibaudeau contained in
this Agreement represent special, unique and extraordinary consideration of an
immeasurable value which cannot be reasonably or adequately compensated by
damages in an action at law, and a breach by Thibaudeau would cause Company
irreparable injury and damage. Thibaudeau agrees that Company will be entitled
to a remedy of injunction, specific performance or other equitable relief which
will prevent the breach or breaches of the covenants contained in this
Agreement, and this relief shall not constitute the waiver of any rights which
Company may have for other damages.
10. Location. During the Employment Period, Thibaudeau shall
not be required by Company to relocate his residence from Green Bay, Wisconsin.
11. Legal Expenses. In the event suit shall be brought by a
party due to the breach of any term or condition of this Agreement, all expense
incurred in connection with such suit (including attorney's fees) shall be
awarded to the prevailing party in such suit.
4
<PAGE> 5
12. Anticipation of Compensation. Thibaudeau shall have no
power to transfer, assign, anticipate or otherwise encumber any payment required
to be made under this Agreement, nor will any such payment be subject to seizure
for the payment of any debt or judgment or be transferable by operation of law
in the event of bankruptcy, insolvency or otherwise.
13. Assignment. This Agreement shall not be assignable by
Thibaudeau without the written consent of Company. This Agreement shall be
freely assignable by Company.
14. Miscellaneous. No waiver by either party of any breach of
this Agreement will be deemed a waiver of any preceding or succeeding breach of
the same or any other provision hereof. Each and all of the several rights,
remedies and options of either party under this Agreement will be construed as
cumulative and no one of them is exclusive of the other or of any right, remedy
or priority allowed by law or in equity.
15. Governing Law. This Agreement will be governed by and
construed under and in accordance with the laws of the State of Michigan.
16. Headings. Paragraph headings contained in this Agreement
are for convenience only and will not be considered for any purpose in
construing this Agreement.
17. Notices. All notices and other communications provided for
in this Agreement shall be in writing and shall be deemed to have been given
when delivered in person to the recipient or 48 hours after depositing the same
in the United States Mail, by certified mail, postage prepaid, addressed to the
party at its address set forth above.
18. Successors and Assigns. All the terms and provisions of
this Agreement shall be binding upon, shall inure to the benefit of, and shall
be enforceable by the respective heirs, beneficiaries, personal representative,
successors and assigns of the parties to this Agreement.
19. Third Parties. This Agreement is for the benefit of the
parties, their successors and assigns, and is not for the benefit of any third
party.
20. Entire Agreement. This Agreement cancels and supersedes
all prior negotiations and understandings between the parties relating to its
subject matter, and contains all of the terms, conditions and promises of the
parties in connection with Thibaudeau's employment by Company; no modification
or waiver of any of the provisions of this Agreement will be valid and binding
unless in writing.
21. Severability. The unenforceability of any provision of
this Agreement shall not affect the enforceability of the remaining provisions
of this Agreement.
5
<PAGE> 6
WHEREOF, THE PARTIES HAVE EXECUTED THIS AGREEMENT AS OF THE
DATE FIRST WRITTEN ABOVE.
US XCHANGE, L.L.C.
By /s/ Ronald VanderPol
-----------------------------
Its CEO
----------------------
/s/ Lee Thibaudeau
-------------------------------
Lee Thibaudeau
Personal Guarantee
The undersigned, Ronald VanderPol, is executing this
Agreement for the sole purpose of personally guaranteeing the payments required
by Paragraph 3(d).
/s/ Ronald VanderPol
-------------------------------
Ronald VanderPol
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as
of the 27th day of February, 1997, by and between US Xchange, L.L.C., a Michigan
limited liability company, of 20 Monroe, N.W., Suite 450, Grand Rapids, Michigan
49503 ("Company") and Daniel Fabry, of 808 Spooner Court, DePere, Wisconsin
54115 ("Fabry").
Statement of Facts
Company is a telecommunications corporation engaged in the
business of establishing regional competitive local exchanges. Fabry has
significant marketing experience and expertise which can benefit Company.
Company wishes to employ Fabry and Fabry wishes to be employed by Company.
Therefore, this Agreement is being entered into by the parties to provide the
terms and conditions under which Fabry shall be employed by Company.
Agreement
IN CONSIDERATION OF THE FACTS STATED ABOVE AND THE MUTUAL
COVENANTS CONTAINED IN THIS AGREEMENT, THE PARTIES AGREE AS FOLLOWS:
1. Employment. Company hires and employs Fabry as a key
employee in the operation by Company of its business. Fabry accepts employment
and agrees to continue to render his expert services to Company during the term
of this Agreement. Fabry shall have the title Vice-President of Marketing.
2. Term. The term of this Agreement ("Employment
Period") shall be for a period of five (5) years, commencing on
March 31, 1997, and ending March 31, 2002; provided, however,
that the term of this Agreement shall automatically renew for successive one (1)
year periods unless terminated by either party providing the other with written
notice of termination at least ninety (90) days prior to the applicable
anniversary of the date of this Agreement.
(a) Termination by Company. Company may terminate
this Agreement at any time.
(b) Termination by Fabry. Fabry may terminate this
Agreement prior to the expiration of the Employment Period by providing Company
with one hundred eighty (180) days prior written notice.
3. Compensation.
(a) Salary. For services rendered by Fabry as an
employee pursuant to the provisions of this Agreement, Company shall
pay Fabry an annual salary of not less
<PAGE> 2
than One Hundred Twenty Thousand and 00/100 Dollars ($120,000.00). The
annual salary shall be paid bi-monthly with equal installments of Five
Thousand Dollars ($5,000.00) payable on the fifteenth (15th) and last
day of each month during the Employment Period. There shall be withheld
from Fabry's compensation such amount as Company is required by law to
withhold and such other deductions as Fabry shall authorize. Except as
provided in Paragraph 3(d) below, in the event of early termination of
this Agreement pursuant to Paragraph 2(a) or 2(b) above, or the death
of Fabry prior to the expiration of the Employment Period or any
extension of this Agreement, Company shall have no obligation to make
further payment of compensation to Fabry or his estate under this
Paragraph. However, in the event of early termination of this Agreement
by Fabry or due to any event described in Paragraph 3(d)(i), 3(d)(ii)
or 3(d)(iii) below, Fabry shall continue to be subject to the
provisions of Paragraphs 6, 7 and 8 of this Agreement.
(b) Benefits. During the Employment Period, the
Company shall allow Fabry to participate in the Company's health
insurance plan and pension plan, and receive an automobile allowance
and other benefits on the same basis and eligibility requirements as
other similar executives of Company.
(c) Bonus. During the Employment Period, Fabry shall
be eligible to receive an annual bonus in such amount as is approved by
Company's management. It is anticipated that the yearly bonus will be a
minimum of Twenty Thousand and 00/100 Dollars ($20,000.00).
(d) Salary Guarantee. Notwithstanding Paragraph 3(a),
above, in the event Company terminates this Agreement for any reason
other than just cause, Company shall continue to pay Fabry's salary and
provide Fabry's benefits for a period of one (1) year following the
date of termination. Just cause for the purposes of this Agreement
shall be defined as any of the following (i) failure of Fabry to
perform competently any duty assigned to him which nonperformance
rises, to the level of the industry standard for just cause
termination, (ii) failure of Fabry to perform any provision under this
Agreement, or (iii) Fabry's dishonesty or fraud. Company may not
terminate this Agreement for just cause under Paragraph 3(d)(i) or
3(d)(ii) without having provided Fabry with written notice of such
cause and a period of sixty (60) days to take corrective action. This
salary guarantee shall also be personally guaranteed by Ronald Vander
Pol.
(e) Equity Guarantee. Upon the first to occur of: (i)
the sale of Company's Wisconsin Region assets; (ii) the sale of all of
Company's assets or equity interests; (iii) the completion of an
initial public offering of Company's equity interests; or (iv) a merger
of Company with another entity where Company is not the surviving
entity (individually, a "Triggering Event"), Company agrees to pay
Fabry the first $500,000.00 of net equity of the Wisconsin Region
(after subtracting Company's capitalization and outstanding debt
related to the Wisconsin Region) ("Equity Guarantee"). Company also
agrees to pay Fabry a 2% share (the "Equity share") of the total net
equity (as defined above) following the occurrence of a Triggering
Event, it being the parties' intent that the $500,000.00 payment
described above be included in
2
<PAGE> 3
calculating the 2% share. Notwithstanding the above, if Fabry's
employment by Company is terminated for any reason during the initial
five (5) year term of this Agreement, Fabry shall forfeit twenty
percent (20%) of the Equity Guarantee and twenty percent (20%) of the
Equity Share for each year or partial year less than five (5) that
Fabry is employed by Company.
4. Post-Sale Covenants. Upon the occurrence of a Triggering
Event, Fabry agrees to execute an employment agreement and non-compete agreement
with the purchaser for a period of not less than one (1) year, provided that the
salary to be paid Fabry during such period shall not be less than Fabry's annual
salary immediately prior to the sale, and further provided that the Employment
Agreement and Non-Compete Agreement shall be consistent with the terms and
conditions of this Agreement except for Paragraph 3(e) which shall be omitted.
5. Nature of Employment. Company is employing Fabry as one of
its key employees. Fabry will provide marketing management services to Company
pursuant to Company's business requirements. Fabry shall conscientiously and
competently perform all the duties of any position which he holds, including any
additional duties assigned to him. During the Employment Period, Fabry shall
devote his time and efforts as required in the performance of his duties under
this Agreement and shall use his best efforts to promote the business and
interests of Company.
6. Non-Compete Agreement. Following termination of this
Agreement by expiration of the Employment Period, or in the event of termination
by Fabry or due to any event described in Paragraph 3(d)(i), 3(d)(ii) or
3(d)(iii) above, Fabry agrees as follows:
(a) That his services and responsibilities are unique
in character and are of particular significance to Company, that
Company is a competitive business and his continued and exclusive
service to the Company under this Agreement is of a high degree of
importance to the Company. Therefore, during the Employment Period and
for a period of one (1) year thereafter (the "Non-Compete Period"),
Fabry shall not, directly or indirectly, as owner, partner, joint
venturer, employee, broker, agent, corporate officer, principal,
licensor, shareholder (unless as owner of no more than five percent
(5%) of the issued and outstanding capital stock of such entity if such
stock is traded on a major securities exchange) or in any other
capacity whatsoever, engage in or have any connection with any business
which is competitive with the Company, and which operates anywhere in
the Midwest Region as defined by Company. For purposes of this
Agreement, a business will be deemed to be competitive with the Company
if it is engaged in the same business that the Company is engaged in on
the date hereof or on the date of termination.
(b) During the Non-Compete Period, Fabry shall not:
(i) directly or indirectly, by initiating
contact or otherwise, induce, influence, combine or conspire
with, any of the officers, employees or agents of Company to
terminate their employment or relationship with or to
3
<PAGE> 4
compete against Company;
(ii) directly or indirectly, by initiating
contact or otherwise, divert or attempt to divert any or all
of any customers' or suppliers' business with Company.
7. Use of Information Obtained During Employment Period.
Without limiting the general provisions set forth in Paragraph 6, Fabry shall
not for any reason, except in the ordinary course of business, use or divulge to
any other person or party, except an officer or director of Company, any trade
secrets or private business information of Company, including, without
limitation, the names and/or records of any customer of Company, the names of
any companies which are providing any services to Company, and correspondence or
any other confidential or proprietary information relating to Company's business
which may harm Company in any way.
8. Ownership of Documents, Inventions, Discoveries and
Improvements. All records, files, plans, sketches, notes, notebooks, letters or
the like relating to the business of Company, which Fabry uses, prepares or
comes in contact with shall remain the sole property of Company. Upon
termination of employment, Fabry shall promptly return all such materials in
Fabry's possession or control to Company. Further, Fabry shall promptly inform
Company of all inventions, discoveries and improvements made by Fabry
individually or in conjunction with others during the course of Fabry's
employment, which relate to Company's business. Fabry shall assign to Company
all of Fabry's rights to such inventions, discoveries and improvements, and
Company shall have a royalty-free right to use such inventions, discoveries and
improvements in its business.
9. Equitable Relief. The covenants of Fabry contained in this
Agreement represent special, unique and extraordinary consideration of an
immeasurable value which cannot be reasonably or adequately compensated by
damages in an action at law, and a breach by Fabry would cause Company
irreparable injury and damage. Fabry agrees that Company will be entitled to a
remedy of injunction, specific performance or other equitable relief which will
prevent the breach or breaches of the covenants contained in this Agreement, and
this relief shall not constitute the waiver of any rights which Company may have
for other damages.
10. Location. During the Employment Period, Fabry shall not be
required by Company to relocate his residence from DePere, Wisconsin.
11. Legal Expenses. In the event suit shall be brought by a
party due to the breach of any term or condition of this Agreement, all expense
incurred in connection with such suit (including attorney's fees) shall be
awarded to the prevailing party in such suit.
12. Anticipation of Compensation. Fabry shall have no power to
transfer, assign, anticipate or otherwise encumber any payment required to be
made under this Agreement, nor will any such payment be subject to seizure for
the payment of any debt or judgment or be transferable by operation of law in
the event of bankruptcy, insolvency or otherwise.
4
<PAGE> 5
13. Assignment. This Agreement shall not be assignable by
Fabry without the written consent of Company. This Agreement shall be freely
assignable by Company.
14. Miscellaneous. No waiver by either party of any breach of
this Agreement will be deemed a waiver of any preceding or succeeding breach of
the same or any other provision hereof. Each and all of the several rights,
remedies and options of either party under this Agreement will be construed as
cumulative and no one of them is exclusive of the other or of any right, remedy
or priority allowed by law or in equity.
15. Governing Law. This Agreement will be governed by and
construed under and in accordance with the laws of the State of Michigan.
16. Headings. Paragraph headings contained in this Agreement
are for convenience only and will not be considered for any purpose in
construing this Agreement.
17. Notices. All notices and other communications provided for
in this Agreement shall be in writing and shall be deemed to have been given
when delivered in person to the recipient or 48 hours after depositing the same
in the United States Mail, by certified mail, postage prepaid, addressed to the
party at its address set forth above.
18. Successors and Assigns. All the terms and provisions of
this Agreement shall be binding upon, shall inure to the benefit of, and shall
be enforceable by the respective heirs, beneficiaries, personal representative,
successors and assigns of the parties to this Agreement.
19. Third Parties. This Agreement is for the benefit of the
parties, their successors and assigns, and is not for the benefit of any third
party.
20. Entire Agreement. This Agreement cancels and supersedes
all prior negotiations and understandings between the parties relating to its
subject matter, and contains all of the terms, conditions and promises of the
parties in connection with Fabry's employment by Company; no modification or
waiver of any of the provisions of this Agreement will be valid and binding
unless in writing.
21. Severability. The unenforceability of any provision of
this Agreement shall not affect the enforceability of the remaining provisions
of this Agreement.
WHEREOF, THE PARTIES HAVE EXECUTED THIS AGREEMENT AS OF THE
DATE FIRST WRITTEN ABOVE.
US XCHANGE, L.L.C.
By /s/ Ronald VanderPol
-------------------------
5
<PAGE> 6
Its CEO
--------------------------
/s/ Daniel Fabry
---------------------------------
Daniel Fabry
6
<PAGE> 7
Personal Guarantee
The undersigned, Ronald VanderPol, is executing this
Agreement for the sole purpose of personally guaranteeing the payments required
by Paragraph 3(d).
/s/ Ronald VanderPol
-----------------------------
Ronald VanderPol
7
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the
29 day of March, 1997, by and between US Xchange, L.L.C., a Michigan limited
liability company, of 20 Monroe, N.W., Suite 450, Grand Rapids, Michigan 49503
("Company") and Ricky G. Pigeon, of 2586 Main St., Green Bay, Wisconsin 54311
("Pigeon").
Statement of Facts
Company is a telecommunications corporation engaged in the business of
establishing regional competitive local exchanges. Pigeon has significant
management experience and expertise which can benefit Company. Company wishes to
employ Pigeon and Pigeon wishes to be employed by Company. Therefore, this
Agreement is being entered into by the parties to provide the terms and
conditions under which Pigeon shall be employed by Company.
Agreement
IN CONSIDERATION OF THE FACTS STATED ABOVE AND THE MUTUAL COVENANTS
CONTAINED IN THIS AGREEMENT, THE PARTIES AGREE AS FOLLOWS:
1. Employment. Company hires and employs Pigeon as a key employee
in the operation by Company of its business. Pigeon accepts employment and
agrees to continue to render his expert services to Company during the term of
this Agreement. Pigeon shall have the title Vice President, Product Development-
Midwest Region.
2. Term. The term of this Agreement ("Employment Period") shall be
for a one year period, commencing on April 21, 1997, and ending April 20, 1998;
provided, however, that the term of this Agreement shall automatically renew for
successive one (1) year periods unless terminated by either party providing the
other with written notice of termination at least ninety (90) days prior to the
applicable anniversary of the date of this Agreement.
(a) Termination by Company. Company may terminate this
Agreement at any time.
(b) Termination by Pigeon. Pigeon may terminate this
Agreement prior to the expiration of the Employment Period by providing
Company with one hundred eighty (180) days prior written notice.
3. Compensation.
(a) Salary. For services rendered by Pigeon as an employee
pursuant to the provisions of this Agreement, Company shall pay Pigeon an
annual salary of not
<PAGE> 2
less than Eighty-five Thousand and 00/100 Dollars ($85,000.00). The annual
salary shall be paid bi-monthly with equal installments of Three Thousand
Five Hundred Forty-one and 67/100 Dollars ($3,541.67) payable on the
fifteenth (15th) and last day of each month during the Employment Period.
There shall be withheld from Pigeon's compensation such amount as Company
is required by law to withhold and such other deductions as Pigeon shall
authorize. Company agrees to conduct annual salary reviews for Pigeon. In
the event of early termination of this Agreement pursuant to Paragraph 2(a)
or 2(b) above, or the death of Pigeon prior to the expiration of the
Employment Period or any extension of this Agreement, Company shall have no
obligation to make further payment of compensation to Pigeon or his estate
under this Paragraph. However, in the event of early termination of this
Agreement, Pigeon shall continue to be subject to the provisions of
Paragraphs 6, 7 and 8 of this Agreement.
(b) Benefits. During the Employment Period, the Company
shall allow Pigeon to participate in the Company's health insurance plan
and pension plan, and receive an automobile allowance and other benefits on
the same basis and eligibility requirements as other similar executives of
Company.
(c) Bonus. During the Employment Period, Pigeon shall be
eligible to receive an annual bonus in such amount as is approved by
Company's management. The yearly bonus will be a maximum of Fifteen
Thousand Dollars ($15,000.00).
(d) Equity Share. Upon the first to occur of: (i) the sale
of Company's Wisconsin Region assets; (ii) the sale of all of Company's
assets or equity interests; (iii) the completion of an initial public
offering of Company's equity interests; or (iv) a merger of Company with
another entity where Company is not the surviving entity, Company agrees
to pay Pigeon a one percent (1%) share (the "Equity Share") of the total
net equity of the Wisconsin Region (after subtracting Company's
capitalization and outstanding debt related to the Wisconsin Region).
Notwithstanding the above, if Pigeon's employment by Company is
terminated for any reason during the initial five (5) year term of this
Agreement, Pigeon shall forfeit twenty percent (20%) of the Equity Share
for each year or partial year less than five (5) that Pigeon is employed
by Company.
4. Post-Sale Covenants. Upon the occurrence of any of the events
as set forth in paragraph 3(d) above collectively referred to as a
Triggering Event, Pigeon agrees to execute an employment agreement and
non-compete agreement with the purchaser for a period of not less than one
(1) year, provided that the salary to be paid Pigeon during such period
shall not be less than Pigeon's annual salary immediately prior to the
sale, and further provided that the employment agreement and non-compete
agreement shall be consistent with the terms and conditions of this
Agreement except for Paragraph 3(d) which shall be omitted.
5. Nature of Employment. Company is employing Pigeon as one of its
key employees. Pigeon will provide management services to Company pursuant to
Company's business requirements. Pigeon shall conscientiously and competently
perform all the duties of any position which he holds, including any additional
duties assigned to him. During the
2
<PAGE> 3
Employment Period, Pigeon shall devote his time and efforts as required in the
performance of his duties under this Agreement and shall use his best efforts to
promote the business and interests of Company.
6. Non-Compete Agreement. Pigeon agrees as follows:
(a) That his services and responsibilities are unique in
character and are of particular significance to Company, that
Company is a competitive business and his continued and exclusive
service to the Company under this Agreement is of a high degree of
importance to the Company. Therefore, during the Employment Period and
for a period of one (1) year thereafter (the "Non-Compete Period"),
Pigeon shall not, directly or indirectly, as owner, partner, joint
venturer, employee, broker, agent, corporate officer, principal,
licensor, shareholder (unless as owner of no more than five percent
(5%) of the issued and outstanding capital stock of such entity if such
stock is traded on a major securities exchange) or in any other
capacity whatsoever, engage in or have any connection with any business
which is competitive with the Company, and which operates anywhere in
the Midwest Region as defined by Company. For purposes of this
Agreement, a business will be deemed to be competitive with the Company
if it is engaged in the same business that the Company is engaged in on
the date hereof or on the date of termination.
(b) During the Non-Compete Period, Pigeon shall not:
(i) directly or indirectly, by initiating
contact or otherwise, induce, influence, combine or conspire with,
any of the officers, employees or agents of Company to terminate
their employment or relationship with or to compete against Company;
(ii) directly or indirectly, by initiating
contact or otherwise, divert or attempt to divert any or all of any
customers' or suppliers' business with Company.
(c) This paragraph 6 shall not apply if Pigeon is
terminated by Company without cause.
7. Use of Information Obtained During Employment Period.
Without limiting the general provisions set forth in Paragraph 6, Pigeon shall
not for any reason, except in the ordinary course of business, use or divulge to
any other person or party, except an officer or director of Company, any trade
secrets or private business information of Company, including, without
limitation, the names and/or records of any customer of Company, the names of
any companies which are providing any services to Company, and correspondence or
any other confidential or proprietary information relating to Company's business
which may harm Company in any way.
8. Ownership of Documents, Inventions, Discoveries and
Improvements. All records, files, plans, sketches, notes, notebooks, letters or
the like relating to the business of
3
<PAGE> 4
Company, which Pigeon uses, prepares or comes in contact with shall remain the
sole property of Company. Upon termination of employment, Pigeon shall promptly
return all such materials in Pigeon's possession or control to Company. Further,
Pigeon shall promptly inform Company of all inventions, discoveries and
improvements made by Pigeon individually or in conjunction with others during
the course of Pigeon's employment, which relate to Company's business. Pigeon
shall assign to Company all of Pigeon's rights to such inventions, discoveries
and improvements, and Company shall have a royalty-free right to use such
inventions, discoveries and improvements in its business.
9. Equitable Relief. The covenants of Pigeon contained in this
Agreement represent special, unique and extraordinary consideration of an
immeasurable value which cannot be reasonably or adequately compensated by
damages in an action at law, and a breach by Pigeon would cause Company
irreparable injury and damage. Pigeon agrees that Company will be entitled to a
remedy of injunction, specific performance or other equitable relief which will
prevent the breach or breaches of the covenants contained in this Agreement, and
this relief shall not constitute the waiver of any rights which Company may have
for other damages.
10. Legal Expenses. In the event suit shall be brought by a
party due to the breach of any term or condition of this Agreement, all expense
incurred in connection with such suit (including attorney's fees) shall be
awarded to the prevailing party in such suit.
11. Anticipation of Compensation. Pigeon shall have no power to
transfer, assign, anticipate or otherwise encumber any payment required to be
made under this Agreement, nor will any such payment be subject to seizure for
the payment of any debt or judgment or be transferable by operation of law in
the event of bankruptcy, insolvency or otherwise.
12. Assignment. This Agreement shall not be assignable by
Pigeon without the written consent of Company. This Agreement shall be freely
assignable by Company.
13. Miscellaneous. No waiver by either party of any breach of this
Agreement will be deemed a waiver of any preceding or succeeding breach of the
same or any other provision hereof. Each and all of the several rights,
remedies and options of either party under this Agreement will be construed as
cumulative and no one of them is exclusive of the other or of any right, remedy
or priority allowed by law or in equity.
14. Governing Law. This Agreement will be governed by and
construed under and in accordance with the laws of the State of Michigan.
15. Headings. Paragraph headings contained in this Agreement are
for convenience only and will not be considered for any purpose in
construing this Agreement.
16. Notices. All notices and other communications provided for
in this Agreement shall be in writing and shall be deemed to have been given
when delivered in person to the recipient or 48 hours after depositing the same
in the United States Mail, by certified mail, postage prepaid, addressed to the
party at its address set forth above.
4
<PAGE> 5
17. Successors and Assigns. All the terms and provisions of this
Agreement shall be binding upon, shall inure to the benefit of, and shall be
enforceable by the respective heirs, beneficiaries, personal representative,
successors and assigns of the parties to this Agreement.
18. Third Parties. This Agreement is for the benefit of the
parties, their successors and assigns, and is not for the benefit of any third
party.
19. Entire Agreement. This Agreement cancels and supersedes all
prior negotiations and understandings between the parties relating to its
subject matter, and contains all of the terms, conditions and promises of the
parties in connection with Pigeon's employment by Company; no modification or
waiver of any of the provisions of this Agreement will be valid and binding
unless in writing.
20. Severability. The unenforceability of any provision of this
Agreement shall not affect the enforceability of the remaining provisions of
this Agreement.
WHEREOF, THE PARTIES HAVE EXECUTED THIS AGREEMENT AS OF THE
DATE FIRST WRITTEN ABOVE.
US XCHANGE, L.L.C.
By /s/ Richard Postma
---------------------------------
Its CEO
--------------------------
/s/ Ricky G. Pigeon
-----------------------------------
Ricky G. Pigeon
5
<PAGE> 1
EXHIBIT 12.1
US XCHANGE L.L.C
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1997 1996 1998 1997
----------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
SELECTED HISTORICAL DATA
Earnings were calculated as follows:
Income (loss) before taxes $(5,828,368) $(137,810) $(14,249,088) $(830,994)
Add: Fixed charges 91,043 - 822,277 2,922
Deduct: Capitalized interest - - 10,300 -
----------- --------- ------------ ---------
Earnings $(5,737,325) $(137,810) $(13,437,111) $(828,072)
----------- --------- ------------ ---------
Fixed charges were calculated as follows:
Interest expense 30,452 - 630,196 -
Amortization of debt issuance costs - - 13,910 -
Portion of rentals attributable to interest 60,591 - 167,871 2,922
Capitalized interest - - 10,300 -
----------- --------- ------------ ---------
Fixed charges $ 91,043 - $ 822,277 $ 2,922
----------- --------- ------------ ---------
Ratio of earnings to fixed charges - - - -
----------- --------- ------------ ---------
Deficiency $ 5,828,368 $ 137,810 $ 14,259,388 $ 830,994
----------- --------- ------------ ---------
</TABLE>
<PAGE> 1
EXHIBIT 21.1
US XCHANGE, L.L.C.
LIST OF SUBSIDIARIES(1)
<TABLE>
<CAPTION>
State of
Name (2) Organization
------------------------------- ------------
<S> <C>
US Xchange of Wisconsin, L.L.C. Wisconsin
US Xchange of Indiana, L.L.C. Indiana
US Xchange of Illinois, L.L.C. Illinois
</TABLE>
________
(1) The names of particular subsidiaries have been omitted since the unnamed
subsidiaries, considered in the aggregate as a single subsidiary, would
not constitute a "significant subsidiary" (as defined in Rule 1-02(w) of
Regulation S-X) as of December 31, 1997.
(2) The names listed are the names under which each of said subsidiaries does
business.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
US Xchange, LLC
Grand Rapids, Michigan
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement, of our report dated February 6, 1998, relating to the
consolidated financial statements of US Xchange, LLC, which is contained in
that Prospectus.
We also consent to the reference to us under the caption "Independent Certified
Public Accountants" in the Prospectus.
/s/ BDO SEIDMAN, LLP
Grand Rapids, Michigan
September 29, 1998
<PAGE> 1
EXHIBIT 25.1
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
--------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
--------------
US XCHANGE, L.L.C.
(Exact name of obligor as specified in its charter)
Michigan 38-3305418
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
20 Monroe Avenue NW, Suite 450
Grand Rapids, Michigan 49503
(Address of principal executive offices) (Zip code)
--------------
15% Senior Notes due July 1, 2008
(Title of the indenture securities)
================================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Name Address
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE> 3
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-3-
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 28th day of September, 1998.
THE BANK OF NEW YORK
By: /s/MARY BETH A. LEWICKI
--------------------------------
Name: MARY BETH A. LEWICKI
Title: ASSISTANT VICE PRESIDENT
-4-
<PAGE> 5
EXHIBIT 7
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286 And Foreign and Domestic
Subsidiaries, a member of the Federal Reserve System, at the close of
business March 31, 1998, published in accordance with a call made by the Federal
Reserve Bank of this District pursuant to the provisions of the Federal Reserve
Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin ................. $ 6,397,993
Interest-bearing balances .......... 1,138,362
Securities:
Held-to-maturity securities ........ 1,062,074
Available-for-sale securities ...... 4,167,240
Federal funds sold and Securities pur-
chased under agreements to resell... 391,650
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................36,538,242
LESS: Allowance for loan and
lease losses ..............631,725
LESS: Allocated transfer risk
reserve..........................0
Loans and leases, net of unearned
income, allowance, and reserve 35,906,517
Assets held in trading accounts ...... 2,145,149
Premises and fixed assets (including
capitalized leases) ................ 663,928
Other real estate owned .............. 10,895
Investments in unconsolidated
subsidiaries and associated
companies .......................... 237,991
Customers' liability to this bank on
acceptances outstanding ............ 992,747
Intangible assets .................... 1,072,517
Other assets ......................... 1,643,173
-----------
Total assets ......................... $55,830,236
===========
LIABILITIES
Deposits:
In domestic offices ................ $24,849,054
Noninterest-bearing ......10,011,422
Interest-bearing .........14,837,632
In foreign offices, Edge and
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
Agreement subsidiaries, and IBFs ... 15,319,002
Noninterest-bearing .........707,820
Interest-bearing .........14,611,182
Federal funds purchased and Securities
sold under agreements to repurchase. 1,906,066
Demand notes issued to the U.S.
Treasury ........................... 215,985
Trading liabilities .................. 1,591,288
Other borrowed money:
With remaining maturity of one year
or less .......................... 1,991,119
With remaining maturity of more than
one year through three years...... 0
With remaining maturity of more than
three years ...................... 25,574
Bank's liability on acceptances exe-
cuted and outstanding .............. 998,145
Subordinated notes and debentures .... 1,314,000
Other liabilities .................... 2,421,281
------------
Total liabilities .................... 50,631,514
------------
EQUITY CAPITAL
Common stock ......................... 1,135,284
Surplus .............................. 731,319
Undivided profits and capital
reserves ........................... 3,328,050
Net unrealized holding gains
(losses) on available-for-sale
securities ......................... 40,198
Cumulative foreign currency transla-
tion adjustments ................... ( 36,129)
------------
Total equity capital ................. 5,198,722
------------
Total liabilities and equity
capital ............................ $ 55,830,236
============
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Renyi |
Alan R. Griffith | Directors
J. Carter Bacot |
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1998.
</LEGEND>
<CIK> 0001070677
<NAME> US XCHANGE LLC
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 100,590 111,837,895
<SECURITIES> 0 24,569,509
<RECEIVABLES> 145,235 944,744
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 406,433 137,913,254
<PP&E> 28,157,088 62,226,300
<DEPRECIATION> 189,347 1,262,097
<TOTAL-ASSETS> 28,385,270 263,680,917
<CURRENT-LIABILITIES> 6,123,659 20,896,183
<BONDS> 2,189,000 203,000,000
0 0
0 0
<COMMON> 5,000,000 60,000,000
<OTHER-SE> (5,966,178) (20,215,266)
<TOTAL-LIABILITY-AND-EQUITY> 28,385,270 263,680,917
<SALES> 0 0
<TOTAL-REVENUES> 206,682 1,984,403
<CGS> 0 0
<TOTAL-COSTS> 6,004,598 4,007,146
<OTHER-EXPENSES> 0 11,807,814
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 30,452 630,196
<INCOME-PRETAX> (5,828,368) (14,249,088)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,828,368) (14,249,088)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,828,368) (14,249,088)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
US XCHANGE, L.L.C.
OFFER TO EXCHANGE ITS 15% SENIOR NOTES
DUE JULY 1, 2008 ("EXCHANGE NOTES") FOR ALL OF ITS OUTSTANDING
15% SENIOR NOTES DUE JULY 1, 2008 ("PRIVATE NOTES")
PURSUANT TO ITS PROSPECTUS DATED _________________, 1998
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON _____, 1998,
UNLESS EXTENDED BY THE COMPANY (THE "EXPIRATION DATE"). TENDERS MAY BE
WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
Delivery To: The Bank of New York, Exchange Agent
<TABLE>
<S> <C> <C>
By Mail By Overnight Courier or Hand: By Facsimile:
The Bank of New York The Bank of New York (212) 571-3080
One Wall Street - 27 One Wall Street - 27
New York, New York 10286 Corporate Trust & Agency Services Window Confirm by Telephone
Attention: Reorganization Section New York, New York 10286 (212) 815-2742
Attention: Reorganization Section
</TABLE>
List below the Private Notes to which this Letter of Transmittal
relates. If the space provided below is inadequate, the certificate numbers and
principal amount of Private Notes should be listed on a separate signed schedule
affixed hereto.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF PRIVATE NOTES 1 2 3
--------------------------------------------------------------------------------------------------------------------------------
Aggregate Principal
Name(s) and Address(es) of Registered Holder(s) Principal Amount
(Please fill in, if blank) Certificate Amount of Tendered**
Number(s)* Private
Note(s)
------------------------------------------------------------------------------------------------ -------------- ----------------
<S> <C> <C> <C>
--------------- -------------- ----------------
--------------- -------------- ----------------
--------------- -------------- ----------------
--------------- -------------- ----------------
--------------- -------------- ----------------
--------------- -------------- ----------------
--------------- -------------- ----------------
Total
------------------------------------------------------------------------------------------------ -------------- ----------------
</TABLE>
* Need not be completed if Private Notes are being tendered by book-entry
transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have
tendered ALL of the Private Notes represented by the Private Notes indicated
in column 2. See Instruction 2. Private Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple
thereof. See Instruction 1.
[ ] CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
----------------------------------------
Account Number Transaction Code Number
-------------- ----------------
[ ] CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s)
---------------------------------------
Widow Ticket Number (if any)
------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
--------------------
Name of Institution which guaranteed delivery
-------------------------
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number Transaction Code Number
--------------- ----------------
<PAGE> 2
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO HOLDS PRIVATE NOTES ACQUIRED
FOR YOUR OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES AND WISH TO RECEIVE COPIES OF THE PROSPECTUS AND COPIES OF
ANY AMENDMENTS OR SUPPLEMENTS THERETO FOR USE IN CONNECTION WITH
RESALES OF EXCHANGE NOTES RECEIVED FOR YOUR OWN ACCOUNT IN EXCHANGE FOR
SUCH PRIVATE NOTES.
Name:_________________________________________________________________
Address:______________________________________________________________
______________________________________________________________
Aggregate Principal Amount of Private Notes so held: $________________
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE,
OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE,
WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
The Company reserves the right, at any time or from time to time, to
extend the Exchange Offer at its sole discretion, in which event the term
"Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended. The Company shall notify the holders of the Private Notes of
any extension by means of a press release or other public announcement prior to
9:00 A.M., New York City time, on the next business day after the previously
scheduled Expiration Date.
This Letter of Transmittal is to be completed by a holder of Private Notes
either if certificates are to be forwarded herewith or if a tender of
certificates for Private Notes, if available, is to be made by book-entry
transfer to the account maintained by the Exchange Agent at The Depository Trust
Company (the "Book-Entry Transfer Facility") pursuant to the procedures set
forth in "The Exchange Offer-Book-Entry Transfer" section of the Prospectus.
Holders of Private Notes whose certificates are not immediately available, or
who are unable to deliver their certificates or confirmation of the book-entry
tender of their Private Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other
documents required by this Letter to the Exchange Agent on or prior to the
Expiration Date, must tender their Private Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery
Procedures" section of the Prospectus. See Instruction 1. Delivery of documents
to the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
2
<PAGE> 3
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to US Xchange, L.L.C., a Michigan
limited liability company (the "Company"), the aggregate principal amount of
Private Notes indicated in this Letter of Transmittal, upon the terms and
subject to the conditions set forth in the Company's Prospectus dated
_______________, 1998 (the "Prospectus"), receipt of which is hereby
acknowledged, and in this Letter of Transmittal, which together constitute the
Company's offer (the "Exchange Offer") to exchange $1,000 principal amount of
its 15% Senior Notes due July 1, 2008, which have been registered under the
Securities Act of 1933, as amended (the "Exchange Notes"), for each $1,000
principal amount of its issued and outstanding 15% Senior Notes due July 1,
2008, of which $200,000,000 aggregate principal amount was issued on June 25,
1998 and outstanding on the date of the Prospectus (the "Private Notes" and,
together with the Exchange Notes, the "Notes"). The capitalized terms which are
not defined herein are used herein as defined in the Prospectus.
Subject to, and effective upon, the acceptance for exchange of the
Private Notes tendered hereby, the undersigned hereby sells, assigns and
transfers to, or upon the order of, the Company all right, title and interest in
and to such Private Notes as are being tendered hereby and hereby irrevocably
constitutes and appoints the Exchange Agent the attorney-in-fact of the
undersigned with respect to such Private Notes, with full power of substitution
(such power of attorney being an irrevocable power coupled with an interest),
to:
(a) deliver such Private Notes in registered certificated form, or
transfer ownership of such Private Notes through book-entry transfer at
the Book-Entry Transfer Facility, to or upon the order of the Company,
upon receipt by the Exchange Agent, as the undersigned's agent, of the
same aggregate principal amount of Exchange Notes; and
(b) receive, for the account of the Company, all benefits and otherwise
exercise, for the account of the Company, all rights of beneficial
ownership of the Private Notes tendered hereby in accordance with the
terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Private Notes
tendered hereby and that the Company will acquire good, marketable and
unencumbered title thereto, free and clear of all security interests, liens,
restrictions, charges, encumbrances, conditional sale agreements or other
obligations relating to their sale or transfer, and not subject to any adverse
claim when the same are accepted by the Company. The undersigned hereby further
represents that any Exchange Notes acquired in exchange for Private Notes
tendered hereby will have been acquired in the ordinary course of business of
the person receiving such Exchange Notes, whether or not such person is the
undersigned, that neither the holder of such Private Notes nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such Exchange Notes and that neither the holder of such Private
Notes nor any such other person is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act"). The undersigned has read and agrees to all of the terms of
the Exchange Offer.
The undersigned also acknowledges that the Exchange Offer is being made
in reliance on interpretations by the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties, that the Exchange Notes issued in exchange for the Private Notes
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such Exchange
Notes. However, the Company does not intend to request the SEC to consider, and
the SEC has not considered, the Exchange Offer in the context of a no-action
letter, and there can be no assurance that the staff of the SEC would make a
similar determination with respect to the Exchange Offer as in other
circumstances. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes and has no arrangement or understanding to
participate in a distribution of Exchange Notes. If any holder is an affiliate
of the Company, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on the
applicable interpretations of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. If the undersigned is a broker-dealer
that will receive Exchange Notes for its own account in exchange for Private
Notes acquired as a result of market-making or other trading activities (a
"Participating Broker-Dealer"), it represents that the Private Notes to be
exchanged for the Exchange Notes were acquired by it as a result of
market-making or other trading activities and acknowledges that it will deliver
a prospectus in connection with any resale of such Exchange Notes; however, by
so acknowledging and by delivering a prospectus, such Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The Company has agreed that, subject to the provisions of the
Registration Rights Agreement, the Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of Exchange Notes received in exchange for Private Notes
which were acquired by such Participating Broker-Dealer for its own account as a
result of market-making or other trading activities, for a period ending 90 days
after the Expiration Date or, if earlier, when all such Exchange Notes have been
disposed of by such Participating Broker-Dealer. In that regard, each
Participating Broker-Dealer by tendering such Private Notes and executing this
Letter of Transmittal, agrees that, upon receipt of notice from the Company of
the occurrence of any event or the discovery of any fact which makes any
statement contained or incorporated by reference in the Prospectus untrue in any
material respect or which causes the Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
therein, in light of the circumstances under which they were made, not
misleading, such Participating Broker-Dealer will suspend the sale of Exchange
Notes pursuant to the Prospectus until the Company has amended or supplemented
the Prospectus to correct such misstatement or omission and has furnished copies
of the amended or supplemented Prospectus to the Participating Broker-Dealer or
the Company has given notice that the sale of the Exchange Notes may be resumed,
as the case may be. If the Company gives such notice to suspend the sale of the
Exchange Notes, it shall extend the 90-day period referred to above during which
Participating Broker-Dealers are entitled to use the Prospectus in connection
with the resale of Exchange Notes by the number of days during the period from
and including the date of the giving of such notice to and including the date
when Participating Broker-Dealers shall have received copies of the supplemented
or amended Prospectus necessary to permit resales of the Exchange Notes or to
and including the date on which the Company has given notice that the sale of
Exchange Notes may be resumed, as the case may be.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Private Notes tendered hereby. All
authority conferred or agreed to be conferred in this Letter of Transmittal and
every obligation of the undersigned hereunder shall be binding upon the
successors, assigns, heirs, executors, administrators, trustees in bankruptcy
and legal representatives of the undersigned and shall not be affected by, and
shall survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer--Withdrawal of Tenders" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the Exchange Notes (and, if applicable,
substitute certificates representing Private Notes for any Private Notes not
exchanged) in the name of the undersigned or, in the case of a book-entry
delivery of Private Notes, please credit the account indicated above maintained
at the Book-Entry Transfer
3
<PAGE> 4
Facility. Similarly, unless otherwise indicated under the box entitled "Special
Delivery Instructions" below, please send the Exchange Notes (and, if
applicable, substitute certificates representing Private Notes for any Private
Notes not exchanged) to the undersigned at the address shown above in the box
entitled "Description of Private Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF PRIVATE
NOTES" ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE
TENDERED THE PRIVATE NOTES AS SET FORTH IN SUCH BOX ABOVE.
4
<PAGE> 5
<TABLE>
<CAPTION>
- ---------------------------------------------------------------- -------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4) (SEE INSTRUCTIONS 3 AND 4)
<S> <C>
To be completed ONLY if certificates for Private To be completed ONLY if certificates for Private
Notes not exchanged and/or Exchange Notes are to be Notes not exchanged and/or Exchange Notes are to be
issued in the name of and sent to someone other than sent to someone other than the person or persons whose
the person or persons whose signature(s) appear(s) signature(s) appear(s) below on this Letter of
below on this Letter of Transmittal, or if Private Transmittal or to such person or persons at an address
Notes delivered by book-entry transfer which are not other than shown above in the box entitled "Description
accepted for exchange are to be returned by credit to of Private Notes" on this Letter of Transmittal.
an account maintained at the Book-Entry Transfer
Facility other than the account indicated above.
Issue: Exchange Notes and/or Private Notes to:
Mail: Exchange Notes and/or Private Notes to:
Name(s) ..................................................... Name(s) ....................................................
(PLEASE TYPE OR PRINT) (PLEASE TYPE OR PRINT)
.............................................................
(PLEASE TYPE OR PRINT) ............................................................
Address ..................................................... (PLEASE TYPE OR PRINT)
.............................................................
(ZIP CODE)
Address ...................................................
[ ] Credit unexchanged Private Notes delivered by
book-entry transfer to the Book-Entry Transfer Facility ...........................................................
account set forth below. (ZIP CODE)
.........................................................
(Book-Entry Transfer Facility
Account Number, if applicable)
- -------------------------------------------------------------- --------------------------------------------------------------
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR PRIVATE NOTES OR
A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED
BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON
THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETION.
- -----------------------------------------------------------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9 on reverse side)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ., 1998
Signature(s) of Owner Date
Area Code and Telephone Number ................................................................................
If a holder is tendering any Private Notes, this Letter of Transmittal must be signed by the registered holder(s)
as the name(s) appear(s) on the certificate(s) for the Private Notes or on a securities position listing or by any person(s)
authorized to become registered holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth
full title. See Instruction 3.
Name(s): .......................................................................................................................
.................................................................................................................................
(Please Type or Print)
Capacity: ......................................................................................................................
Address: .......................................................................................................................
.................................................................................................................................
(Including Zip Code)
SIGNATURE GUARANTEE
(If required by Instruction 3)
Signature(s) Guaranteed by
an Eligible Institution: .......................................................................................................
(Authorized Signature)
.................................................................................................................................
(Title)
.................................................................................................................................
(Name and Firm)
Dated: ..................................................................................................................., 1998
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER OF US XCHANGE, L.L.C.
TO EXCHANGE ITS 15% SENIOR NOTES DUE JULY 1, 2008 FOR ALL OF ITS OUTSTANDING
15% SENIOR NOTES DUE JULY 1, 2008
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND NOTES; GUARANTEED DELIVERY
PROCEDURES.
This Letter of Transmittal is to be completed by holders of
Private Notes either if certificates are to be forwarded herewith or if tenders
are to be made pursuant to the procedures for delivery by book-entry transfer
set forth in "The Exchange Offer--Book-Entry Transfer" section of the
Prospectus. Certificates for all physically tendered Private Notes, or
Book-Entry Confirmation, as the case may be, as well as a properly completed and
duly executed Letter of Transmittal (or manually signed facsimile hereof) and
any other documents required by this Letter of Transmittal, must be received by
the Exchange Agent at the address set forth herein on or prior to the Expiration
Date, or the tendering holder must comply with the guaranteed delivery
procedures set forth below. Private Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple thereof.
Holders of Private Notes whose certificates for Private Notes
are not immediately available or who cannot deliver their certificates and all
other required documents to the Exchange Agent on or prior to the Expiration
Date, or who cannot complete the procedure for book-entry transfer on a timely
basis, may tender their Private Notes pursuant to the guaranteed delivery
procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures"
section of the Prospectus. Pursuant to such procedures, (i) such tender must be
made through an Eligible Institution (as defined below), (ii) prior to the
Expiration Date, the Exchange Agent must receive from such Eligible Institution
a properly completed and duly executed Letter of Transmittal (or a facsimile
thereof) and Notice of Guaranteed Delivery, substantially in the form provided
by the Company (by telegram, telex, facsimile transmission, mail or hand
delivery), setting forth the name and address of the holder of Private Notes and
the amount of Private Notes tendered, stating that the tender is being made
thereby and guaranteeing that within five New York Stock Exchange ("NYSE")
trading days after the Expiration Date, the certificates for all physically
tendered Private Notes, or a Book-Entry Confirmation, and any other documents
required by this Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent, and (iii) the certificates for all
physically tendered Private Notes, in proper form for transfer, or Book-Entry
Confirmation, as the case may be, and all other documents required by this
Letter of Transmittal, are received by the Exchange Agent within five NYSE
trading days after the Expiration Date.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE
PRIVATE NOTES AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE TENDERING HOLDERS, BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY
INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO
THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE. DO NOT SEND THIS LETTER OF TRANSMITTAL OR ANY PRIVATE NOTES TO THE
COMPANY.
See "The Exchange Offer" section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF PRIVATE NOTES WHO TENDER
BY BOOK-ENTRY TRANSFER); WITHDRAWAL RIGHTS
Tenders of Private Notes will be accepted only in the
principal amount of $1,000 and integral multiples thereof. If less than all of
the Private Notes evidenced by a submitted certificate are to be tendered, the
tendering holder(s) should fill in the aggregate principal amount of Private
Notes to be tendered in the box above entitled "Description of Private
Notes--Principal Amount Tendered." A reissued certificate representing the
balance of nontendered Private Notes will be sent to such tendering holder,
unless otherwise provided in the appropriate box on this Letter of Transmittal,
promptly after the Expiration Date. ALL OF THE PRIVATE NOTES DELIVERED TO THE
EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE INDICATED.
Except as otherwise provided herein, tenders of Private Notes
may be withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written, telegraphic,
telex or facsimile transmission of such notice of withdrawal must be timely
received by the Exchange Agent at one of its addresses set forth above on or
prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Private Notes to be withdrawn, the aggregate
principal amount of Private Notes to be withdrawn and (if certificates for such
Private Notes have been tendered) the name of the registered holder of the
Private Notes as set forth on the certificate for the Private Notes, if
different from that of the person who tendered such Private Notes. If
certificates for the Private Notes have been delivered or otherwise identified
to the Exchange Agent, then prior to the physical release of such certificates
for the Private Notes, the tendering holder must submit the serial numbers shown
on the particular certificates for the Private Notes to be withdrawn and the
signature on the notice of withdrawal must be guaranteed by an Eligible
Institution, except in the case of Private Notes tendered for the account of an
Eligible Institution. If Private Notes have been tendered pursuant to the
procedures for book-entry transfer set forth in "The Exchange Offer--Book-Entry
Transfer" section of the Prospectus, the notice of withdrawal must specify the
name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawal of Private Notes, in which case a notice of
withdrawal will be effective if delivered to the Exchange Agent by written,
telegraphic, telex or facsimile transmission. Withdrawals of tenders of Private
Notes may not be rescinded. Private Notes properly withdrawn will not be deemed
to have been validly tendered for purposes of the Exchange Offer, and no
Exchange Notes will be issued with respect thereto unless the Private Notes so
withdrawn are validly retendered. Properly withdrawn Private Notes may be
retendered at any subsequent time on or prior to the Expiration Date by
following the procedures described in the Prospectus under "The Exchange
Offer--Procedures for Tendering."
All questions as to the validity, form and eligibility
(including time of receipt) of such withdrawal notices will be determined by the
Company, in its sole discretion, whose determination shall be final and binding
on all parties. Neither the Company, any employees, agents, affiliates or
assigns of the Company, the Exchange Agent nor any other person shall be under
any duty to give any notification of any irregularities in any notice of
withdrawal or incur any liability for failure to give such notification. Any
Private Notes which have been tendered but which are withdrawn will be returned
to the holder thereof without cost to such holder as promptly as practicable
after withdrawal.
3. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES
If this Letter of Transmittal is signed by the registered holder of
the Private Notes tendered hereby, the signature must correspond exactly with
the name as written on the face of the certificates or on a securities position
listing without any change whatsoever.
If any tendered Private Notes are owned of record by two or more joint
owners, all of such owners must sign this Letter of Transmittal.
If any tendered Private Notes are registered in different names on
several certificates or securities positions listings, it will be necessary to
complete, sign and submit as many separate copies of this Letter as there are
different registrations.
6
<PAGE> 7
When this Letter of Transmittal is signed by the registered
holder or holders of the Private Notes specified herein and tendered hereby, no
endorsements of certificates or separate bond powers are required. If, however,
the Exchange Notes are to be issued, or any untendered Private Notes are to be
reissued, to a person other than the registered holder, then endorsements of any
certificates transmitted hereby or separate bond powers are required. Signatures
on such certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than
the registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate bond powers, in
either case signed exactly as the name or names of the registered holder or
holders appear(s) on the certificate(s), and the signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificates or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
ENDORSEMENTS ON CERTIFICATES FOR PRIVATE NOTES OR SIGNATURES
ON BOND POWERS REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH
IS A MEMBER OF A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (EACH AN
"ELIGIBLE INSTITUTION").
SIGNATURES ON THIS LETTER OF TRANSMITTAL NEED NOT BE
GUARANTEED BY AN ELIGIBLE INSTITUTION, PROVIDED THE PRIVATE NOTES ARE TENDERED:
(i) BY A REGISTERED HOLDER OF PRIVATE NOTES (WHICH TERM, FOR PURPOSES OF THE
EXCHANGE OFFER, INCLUDES ANY PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY
SYSTEM WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE HOLDERS OF SUCH
PRIVATE NOTES) WHO HAS NOT COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE
INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS" ON THIS LETTER OR (ii) FOR THE
ACCOUNT OF AN ELIGIBLE INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Private Notes should indicate in the
applicable box the name and address to which Exchange Notes issued pursuant to
the Exchange Offer and/or substitute certificates evidencing Private Notes not
exchanged are to be issued or sent, if different from the name or address of the
person signing this Letter of Transmittal. In the case of issuance in a
different name, the employer identification or social security number of the
person named must also be indicated. A holder of Private Notes tendering Private
Notes by book-entry transfer may request that Private Notes not exchanged be
credited to such account maintained at the Book-Entry Transfer Facility as such
holder may designate hereon. If no such instructions are given, such Private
Notes not exchanged will be returned to the name or address of the person
signing this Letter of Transmittal or credited to the account maintained by such
person at the Book-Entry Transfer Facility, as the case may be.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering
holder whose Private Notes are accepted for exchange must provide the Company
(as payor) with such holder's correct Taxpayer Identification Number ("TIN") on
Substitute Form W-9 below, which, in the case of a tendering holder who is an
individual, is his or her social security number. If the Company is not provided
with the current TIN or an adequate basis for an exemption, such tendering
holder may be subject to a $50 penalty imposed by the Internal Revenue Service.
In addition, delivery to such tendering holder of Exchange Notes may be subject
to backup withholding in an amount equal to 31% of all reportable payments made
after the exchange. If withholding results in an overpayment of taxes, a refund
may be obtained.
Exempt holders of Private Notes (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. See the enclosed Guidelines of
Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9
Guidelines") for additional instructions.
To prevent backup withholding, each tendering holder of
Private Notes must provide its correct TIN by completing the Substitute Form W-9
set forth below, certifying that the TIN provided is correct (or that such
holder is awaiting a TIN) and that (i) the holder is exempt from backup
withholding, (ii) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of a
failure to report all interest or dividends or (iii) the Internal Revenue
Service has notified the holder that such holder is no longer subject to backup
withholding. If the tendering holder of Private Notes is a nonresident alien or
foreign entity not subject to backup withholding, such holder must give the
Company a completed Form W-8, Certificate of Foreign Status. These forms may be
obtained from the Exchange Agent. If the Private Notes are in more than one name
or are not in the name of the actual owner, such holder should consult the W-9
Guidelines for information on which TIN to report. If such holder does not have
a TIN, such holder should consult the W-9 Guidelines for instructions on
applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write
"applied for" in lieu of its TIN. Note: Checking this box and writing "applied
for" on the form means that such holder has already applied for a TIN or that
such holder intends to apply for one in the near future. If such holder does not
provide its TIN to the Company within 60 days, backup withholding will begin and
continue until such holder furnishes its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to
the transfer of Private Notes to it or its order pursuant to the Exchange Offer.
If, however, Exchange Notes and/or substitute Private Notes not exchanged are to
be delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Private Notes tendered hereby, or if
tendered Private Notes are registered in the name of any person other than the
person signing this Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the transfer of Private Notes to the Company or its order
pursuant to the Exchange Offer, the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted herewith, the amount of such transfer taxes will be
billed directly to such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE
NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE PRIVATE NOTES SPECIFIED
IN THIS LETTER OF TRANSMITTAL.
7
<PAGE> 8
7. DETERMINATION OF VALIDITY.
The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time of
receipt) and acceptance for exchange of any tender of Private Notes, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for which, may, in the view
of counsel to the Company, be unlawful. The Company also reserves the absolute
right, subject to applicable law, to waive any of the conditions of the Exchange
Offer set forth in the Prospectus under the caption "The Exchange Offer" or any
conditions or irregularity in any tender of Private Notes of any particular
holder whether or not similar conditions or irregularities are waived in the
case of other holders.
The Company's interpretation of the terms and conditions of
the Exchange Offer (including this Letter of Transmittal and the instructions
hereto) will be final and binding. No tender of Private Notes will be deemed to
have been validly made until all irregularities with respect to such tender have
been cured or waived. Although the Company intends to notify holders of defects
or irregularities with respect to tenders of Private Notes, neither the Company,
any employees, agents, affiliates or assigns of the Company, the Exchange Agent,
nor any other person shall be under any duty to give notification of any
irregularities in tenders or incur any liability for failure to give such
notification.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders
will be accepted. All tendering holders of Private Notes, by execution of this
Letter of Transmittal, shall waive any right to receive notice of the acceptance
of their Private Notes for exchange.
9. MUTILATED, LOST, STOLEN OR DESTROYED PRIVATE NOTES.
Any holder whose Private Notes have been mutilated, lost,
stolen or destroyed should contact the Exchange Agent at the address indicated
above for further instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as
requests for additional copies of the Prospectus and this Letter of Transmittal,
may be directed to the Exchange Agent, at the address and telephone number
indicated above.
8
<PAGE> 9
<TABLE>
<CAPTION>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: THE BANK OF NEW YORK
===================================================================================================================================
<S> <C> <C>
SUBSTITUTE PART 1-PLEASE PROVIDE YOUR TIN IN THE BOX AT TIN:____________________________
RIGHT AND CERTIFY BY SIGNING AND DATING BELOW SOCIAL SECURITY NUMBER OR
FORM W-9 EMPLOYER IDENTIFICATION NUMBER
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PAYOR'S REQUEST FOR
TAXPAYER
IDENTIFICATION NUMBER
("TIN") AND
CERTIFICATION
===========================================================================================
PART 2--TIN APPLIED FOR [ ]
===========================================================================================
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer Identification Number
(or I am waiting for a number to be issued to me).
(2) I am not subject to backup withholding either because: (a) I am exempt
from backup withholding, or (b) I have not been notified by the Internal
Revenue Service (the "IRS") that I am subject to backup withholding as a
result of a failure to report all interest or dividends, or (c) the IRS
has notified me that I am no longer subject to backup withholding, and
(3) any other information provided on this form is true and correct.
SIGNATURE DATE , 1998
------------------------------------ ---------------------
===================================================================================================================================
You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to backup
withholding because of underreporting of interest or dividends on your tax return and you have not been notified by the IRS
that you are no longer subject to backup withholding.
===================================================================================================================================
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
===================================================================================================================================
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have
mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service
Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the time of the exchange, 31 percent of all
reportable payments made to me thereafter will be withheld until I provide a number.
, 1998
- --------------------------------------------- --------------------------------------------
SIGNATURE DATE
===================================================================================================================================
</TABLE>
9
<PAGE> 1
EXHIBIT 99.2
------------
NOTICE OF GUARANTEED DELIVERY FOR
TENDER OF 15% SENIOR NOTES
DUE JULY 1, 2008 OF US XCHANGE, L.L.C.
This form or one substantially equivalent hereto must be used
to accept the Exchange Offer of US Xchange, L.L.C., a Michigan limited liability
company (the "Company"), made pursuant to the Prospectus, dated ______, 1998
(the "Prospectus"), if certificates for the outstanding 15% Senior Notes due
July 1, 2008 of the Company (the "Private Notes") are not immediately available
or if the procedure for book-entry transfer cannot be completed on a timely
basis or time will not permit all required documents to reach The Bank of New
York (the "Exchange Agent") on or prior to 5:00 p.m., New York City time, on the
Expiration Date of the Exchange Offer. This Notice of Guaranteed Delivery may be
delivered or transmitted by telegram, telex, facsimile transmission, mail or
hand delivery to the Exchange Agent as set forth below. See "The Exchange
Offer-Procedures for Tendering" in the Prospectus. In addition, in order to
utilize the guaranteed delivery procedure to tender Private Notes pursuant to
the Exchange Offer, a completed, signed and dated Letter of Transmittal (or a
manually signed facsimile thereof) must also be received by the Exchange Agent
on or prior to 5:00 p.m., New York City time, on the Expiration Date.
Capitalized terms used herein but not defined herein have the respective
meanings given to them in the Prospectus.
Delivery To:
THE BANK OF NEW YORK, Exchange Agent
<TABLE>
<CAPTION>
<S> <C> <C>
By Mail By Overnight Courier or Hand: By Facsimile:
The Bank of New York The Bank of New York (212) 571-3080
One Wall Street - 27 One Wall Street - 27
New York, New York 10286 Corporate Trust & Agency Services Window Confirm by Telephone
Attention: Reorganization New York, New York 10286 (212) 815-2742
Section Attention: Reorganization Section
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS
OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED
DELIVERY VIA FACSIMILE OTHER THEN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO
GUARANTEE SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO
BE GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THe
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and
the related Letter of Transmittal, the undersigned hereby tenders to the Company
the principal amount of Private Notes set forth below, pursuant to the
guaranteed delivery procedures described in the Prospectus under the caption
"The Exchange Offer-Guaranteed Delivery Procedures."
Principal Amount of Private Notes Tendered:*
$_________________________________________
Certificate Nos. (if available)
__________________________________________
If Private Notes will be
delivered by book-entry
transfer to The Depository Trust
Company, provide account number.
Total Principal Amount Represented by
Private Notes Certificate(s):
$__________________________________________ Account Number______________________
- --------
*Must be in denominations of principal amount of $1,000 and any integral
multiple thereof
<PAGE> 2
- --------------------------------------------------------------------------------
AN AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE
THE DEATH OR INCAPACITY OF THE UNDERSIGNED, AND EVERY OBLIGATION OF THE
UNDERSIGNED HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVeS,
SUCCESSORS AND ASSIGNS OF THE UNDERSIGNED.
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
X____________________________________ _______________
X____________________________________ _______________
Signature(s) of Owner(s) Date
or Authorized Signatory
Area Code and Telephone Number:_____________________________________
Must be signed by the holder(s) of Private Notes as their name(s)
appear(s) on certificates for Private Notes or on a security position listing,
or by person(s) authorized to become registered holder(s) by endorsement of
documents transmitted with this Notice of Guaranteed Delivery. If signature is
by trustee, executor, administrator, guardian, attorney-in-fact, officer or
other person acting in a fiduciary or representative capacity, such person must
set forth his or her full title below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s): __________________________________________________________________
__________________________________________________________________
__________________________________________________________________
Capacity: __________________________________________________________________
Address(es): __________________________________________________________________
GUARANTEE
The undersigned, a member of a registered national securities exchange,
or a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States, hereby guarantees that the certificates representing the principal
amount of Private Notes tendered hereby in proper form for transfer, or timely
confirmation of the book-entry transfer of such Private Notes into the Exchange
Agent's account at The Depository Trust Company pursuant to the procedures set
forth in "The Exchange Offer-Guaranteed Delivery Procedures" section of the
Prospectus, together with one or more properly completed and duly executed
Letter(s) of Transmittal (or a manually signed facsimile thereof) with any
required signature guarantee and any other documents required by the Letter of
Transmittal, will be received by the Exchange Agent at the address set forth
above, no later than five New York Stock Exchange trading days after the date of
execution hereof.
________________________________________ _____________________________
Name of Firm Authorized Signature
________________________________________ _____________________________
Address Title
________________________________________ Name:________________________
Zip Code (Please Type or Print)
Area Code and Tel. No.__________________ Dated:_______________________
NOTE: DO NOT SEND CERTIFICATES FOR PRIVATE NOTES WITH THIS NOTICE OF
GUARANTEED DELIVERY. ACTUAL SURRENDER OF PRIVATE NOTES MUST BE MADE
PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY
EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
<PAGE> 1
EXHIBIT 99.3
US XCHANGE, L.L.C.
OFFER TO EXCHANGE ITS 15% SENIOR NOTES
DUE JULY 1, 2008 FOR ALL ITS OUTSTANDING
15% SENIOR NOTES DUE JULY 1, 2008
To: Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
US Xchange, L.L.C., a Michigan limited liability company (the "Company"),
is offering, upon and subject to the terms and conditions set forth in the
Prospectus, dated ______________, 1998 (the "Prospectus"), and the enclosed
Letter of Transmittal (the "Letter of Transmittal"), to exchange (the "Exchange
Offer") its 15% Senior Notes due July 1, 2008 (the "Exchange Notes"), which
have been registered under the Securities Act of 1933, as amended, for any and
all of its outstanding 15% Senior Notes due July 1, 2008 (the "Private Notes"
and together with the Exchange Notes, the "Notes"). The Exchange Offer is
being made in order to satisfy certain obligations of the Company contained in
the Registration Rights Agreement dated June 25, 1998, between the Company and
Morgan Stanley & Co. Incorporated.
We are requesting that you contact your clients for whom you hold Private
Notes regarding the Exchange Offer. For your information and for forwarding to
your clients for whom you hold Private Notes registered in your name or in the
name of your nominee, or who hold Private Notes registered in their own names,
we are enclosing the following documents:
1. The Prospectus;
2. The Letter of Transmittal for your use and for
the information of your clients;
3. A Notice of Guaranteed Delivery to be used to
accept the Exchange Offer if certificates for Private Notes
are not immediately available or time will not permit all
required documents to reach the Exchange Agent prior to the
Expiration Date (as defined below) or if the procedure for
book-entry transfer cannot be completed on a timely basis;
4. A form of letter which may be sent to your
clients for whose account you hold Private Notes registered in
your name or the name of your nominee, with space provided for
obtaining such clients' instructions with regard to the
Exchange Offer;
5. Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9; and
6. Return envelopes addressed to The Bank of New
York, the Exchange Agent for the Private Notes.
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON _________________, 1998, UNLESS EXTENDED BY THE
COMPANY (THE "EXPIRATION DATE"). PRIVATE NOTES TENDERED PURSUANT TO THE
EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE THE EXPIRATION DATE.
To participate in the Exchange Offer, a duly executed and properly
completed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, should be sent to the
Exchange Agent and certificates representing Private Notes should be delivered
to the Exchange Agent, all in accordance with the instructions set forth in the
Letter of Transmittal and the Prospectus.
<PAGE> 2
If holders of Private Notes wish to tender, but it is impracticable for
them to forward their certificates for Private Notes prior to the expiration of
the Exchange Offer or to comply with the book-entry transfer procedures on a
timely basis, a tender may be effected by following the guaranteed delivery
procedures described in the Prospectus under "The Exchange Offer--Guaranteed
Delivery Procedures."
The Company will not pay any fees or commissions to brokers, dealers or
other persons for soliciting exchanges of Notes pursuant to the Exchange Offer.
The Company will, however, upon request, reimburse brokers, dealers,
commercial banks and trust companies for reasonable and necessary costs and
expenses incurred by them in forwarding the Prospectus and the related
documents to the beneficial owners of Private Notes held by them as nominee or
in a fiduciary capacity. The Company will pay or cause to be paid all stock
transfer taxes applicable to the exchange of Private Notes pursuant to the
Exchange Offer, except as set forth in Instruction 6 of the Letter of
Transmittal.
Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to The Bank
of New York, the Exchange Agent, at its address and telephone number set forth
on the front of the Letter of Transmittal.
Very truly yours,
US XCHANGE, L.L.C.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR
ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF EITHER
OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY
MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Enclosures
<PAGE> 1
EXHIBIT 99.4
US EXCHANGE, L.L.C.
OFFER TO EXCHANGE ITS 15% SENIOR NOTES
DUE JULY 1, 2008 FOR ALL ITS OUTSTANDING
15% SENIOR NOTES DUE JULY 1, 2008
To Our Clients:
Enclosed for your consideration is a Prospectus, dated _____________,
1998 (the "Prospectus"), and the associated Letter of Transmittal (the "Letter
of Transmittal"), relating to the offer (the "Exchange Offer") of US Xchange,
L.L.C., a Michigan limited liability company (the "Company"), to exchange its
15% Senior Notes due July 1, 2008, which have been registered under the
Securities Act of 1933, as amended (the "Exchange Notes"), for any and all of
its outstanding 15% Senior Notes due July 1, 2008 (the "Private Notes"), upon
the terms and subject to the conditions described in the Prospectus and the
Letter of Transmittal. The Exchange Offer is being made in order to satisfy
certain obligations of the Company contained in the Registration Rights
Agreement dated June 25, 1998, by and among the Company and Morgan Stanley & Co.
Incorporated.
This material is being forwarded to you as the beneficial owner of the
Private Notes carried by us in your account but not registered in your name. A
TENDER OF SUCH PRIVATE NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND
PURSUANT TO YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us to
tender on your behalf the Private Notes held by us for your account, pursuant to
the terms and conditions set forth in the enclosed Prospectus and Letter of
Transmittal.
Your instructions should be forwarded to us as promptly as possible in
order to permit us to tender the Private Notes on your behalf in accordance with
the provisions of the Exchange Offer. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON _______________ , 1998, UNLESS EXTENDED BY THE
COMPANY (THE "EXPIRATION DATE"). ANY PRIVATE NOTES TENDERED PURSUANT TO THE
EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE THE EXPIRATION DATE.
Your attention is directed to the following:
1. The Exchange Offer is for any and all Private Notes.
2. Any transfer taxes incident to the exchange of
Private Notes pursuant to the Exchange Offer will be
paid by the Company.
3. The Exchange Offer expires at 5:00 p.m., New York
City time, on ____________, 1998, unless extended by
the Company.
If you wish to have us tender your Private Notes, please so instruct us
by completing, executing and returning to us the instruction form enclosed
herein. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION ONLY AND
MAY NOT BE USED BY YOU TO TENDER PRIVATE NOTES.
<PAGE> 2
INSTRUCTIONS WITH RESPECT TO
THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer made by US Xchange,
L.L.C. with respect to its Private Notes.
This will instruct you to tender the Private Notes held by you for the
account of the undersigned, upon and subject to the terms and conditions set
forth in the Prospectus and the related Letter of Transmittal.
Please tender the Private Notes held by you for my account as indicated
below:
<TABLE>
Aggregate Principal Amount of Private Notes
___________________________________________
<C> <C>
15% Senior Notes due July 1, 2008... ___________________________________________
/ / Please do not tender any Private Notes held by
you for my account.
Dated:________________________, 1998 ____________________________________________
____________________________________________
Signature(s)
____________________________________________
____________________________________________
____________________________________________
Please print name(s) here
____________________________________________
____________________________________________
Address(es)
____________________________________________
Area Code and Telephone Number
____________________________________________
Tax Identification or Social Security No.(s)
</TABLE>
NONE OF THE PRIVATE NOTES HELD BY US FOR YOUR ACCOUNT WILL BE TENDERED
UNLESS WE RECEIVE WRITTEN INSTRUCTIONS FROM YOU TO DO SO. UNLESS A SPECIFIC
CONTRARY INSTRUCTION IS GIVEN IN THE SPACE PROVIDED, YOUR SIGNATURE(S) HEREON
SHALL CONSTITUTE AN INSTRUCTION TO US TO TENDER ALL THE PRIVATE NOTES HELD BY US
FOR YOUR ACCOuNT.
<PAGE> 1
EXHIBIT 99.5
________, 1998
EXCHANGE AGENT AGREEMENT
The Bank of New York
Corporate Trust Trustee Administration
101 Barclay Street - Floor 21 West
New York, New York 10286
Ladies and Gentlemen:
US Xchange L.L.C., a Michigan limited liability company (the
"Company"), proposes to make an offer (the "Exchange Offer") to exchange up to
$200,000,000 aggregate principal amount of its 15% Senior Notes due July 1, 2008
(the "Exchange Notes"), for a like principal amount of its outstanding 15%
Senior Notes due July 1, 2008 (the "Private Notes"). The terms and conditions of
the Exchange Offer are set forth in a prospectus (the "Prospectus") included in
the Company's registration statement on Form S-4 (File No. 333-_____), as
amended (the "Registration Statement"), filed with the Securities and Exchange
Commission (the "SEC"), proposed to be distributed to all record holders of the
Private Notes. The Private Notes and the Exchange Notes are collectively
referred to herein as the "Notes." Capitalized terms used herein and not defined
shall have the respective meanings ascribed to them in the Prospectus.
The Company hereby appoints The Bank of New York to act as
exchange agent (the "Exchange Agent") in connection with the Exchange Offer.
References hereinafter to "you" shall refer to The Bank of New York.
The Exchange Offer is expected to be commenced by the Company on
or about _______, 1998. The Letter of Transmittal accompanying the Prospectus is
to be used by the holders of the Private Notes to accept the Exchange Offer and
contains instructions with respect to the delivery of certificates for Private
Notes tendered.
The Exchange Offer shall expire at 5:00 P.M., New York City time,
on _______ 1998, or on such later date or time to which the Company may extend
the Exchange Offer (the "Expiration Date"). Subject to the terms and conditions
set forth in the Prospectus, the Company expressly reserves the right to extend
the Exchange Offer from time to time and may extend the Exchange Offer by giving
oral (confirmed in writing) or written notice to you before 9:00 A.M., New York
City time, on the next business day after the previously scheduled Expiration
Date.
The Company expressly reserves the right, in its sole discretion,
to amend or terminate the Exchange Offer, and not to accept for exchange any
Private Notes not theretofore accepted for exchange. The Company will give oral
(confirmed in writing) or written notice of any amendment, termination or
nonacceptance to you as promptly as practicable.
<PAGE> 2
In carrying out your duties as Exchange Agent, you are to act in
accordance with the following instructions:
1. You will perform such duties and only such duties as are
specifically set forth in the section of the Prospectus captioned "The Exchange
Offer" or as specifically set forth herein; provided, however, that in no way
will your general duty to act in good faith and without gross negligence or
willful misconduct be limited by the foregoing.
2. You will establish an account with respect to the Private
Notes at The Depository Trust Company (the "Book-Entry Transfer Facility") for
purposes of the Exchange Offer within two business days after the date of the
Prospectus, and any financial institution that is a participant in the
Book-Entry Transfer Facility's systems may make book-entry delivery of the
Private Notes by causing the Book-Entry Transfer Facility to transfer such
Private Notes into your account in accordance with the Book-Entry Transfer
Facility's procedures for such transfer.
3. You are to examine each of the Letters of Transmittal and
certificates for Private Notes (and confirmation of book-entry transfers of
Private Notes into your account at the Book-Entry Transfer Facility) and any
other documents delivered or mailed to you by or for holders of the Private
Notes, to ascertain whether: (i) the Letters of Transmittal, certificates and
any such other documents are duly executed and properly completed in accordance
with instructions set forth therein and that such book-entry confirmations are
in due and proper form and contain the information required to be set forth
therein, and (ii) the Private Notes have otherwise been properly tendered. In
each case where the Letter of Transmittal or any other document has been
improperly completed or executed, or where book-entry confirmations are not in
due and proper form or omit certain information, or any of the certificates for
Private Notes are not in proper form for transfer or some other irregularity in
connection with the acceptance of the Exchange Offer exists, you will endeavor
to inform the presenters of the need for fulfillment of all requirements and to
take any other action as may be necessary or advisable to cause such
irregularity to be corrected.
4. With the approval of the Co-Chairman and Chief Executive
Officer or Vice President of Finance of the Company (such approval, if given
orally, to be confirmed in writing) or any other party designated by such an
officer in writing, you are authorized to waive any irregularities in connection
with any tender of Private Notes pursuant to the Exchange Offer.
5. Tenders of Private Notes may be made only as set forth in the
Letter of Transmittal and in the section of the Prospectus captioned "The
Exchange Offer - Procedures for Tendering", and Private Notes shall be
considered properly tendered to you only when tendered in accordance with the
procedures set forth therein. Notwithstanding the provisions of this paragraph
5, Private Notes which the Co-Chairman and Chief Executive Officer or Vice
President of Finance or any other designated officer of the Company shall
approve as having been properly endered shall be considered to be properly
tendered (such approval, if given orally, shall be confirmed in writing).
6. You shall advise the Company with respect to any Private Notes
received subsequent to the Expiration Date and accept its instructions with
respect to disposition of such Private Notes.
7. You shall accept tenders:
(a) in cases where the Private Notes are registered in two or
more names only if signed by all named holders;
2
<PAGE> 3
(b) in cases where the signing person (as indicated on the
Letter of Transmittal) is acting in a fiduciary or a representative capacity
only when proper evidence of his or her authority so to act is submitted; and
(c) from persons other than the registered holder of Private
Notes provided that customary transfer requirements, including any applicable
transfer taxes, are fulfilled.
You shall accept partial tenders of Private Notes when so
indicated and as permitted in the Letter of Transmittal and deliver certificates
for Private Notes to the Trustee for split-up and return any untendered Private
Notes to the holder (or such other person as may be designated in the Letter of
Transmittal) as promptly as practicable after expiration or termination of the
Exchange Offer.
8. Upon satisfaction or waiver of all of the conditions to the
Exchange Offer, the Company will notify you (such notice if given orally, to be
confirmed in writing) of its acceptance, on or promptly after the Expiration
Date, of all Private Notes properly tendered and you, on behalf of the Company,
will exchange such Private Notes for Exchange Notes and cause such Private Notes
to be canceled. Delivery of Exchange Notes will be made on behalf of the Company
by you at the rate of $1,000 principal amount of Exchange Notes for each $1,000
principal amount of the Private Notes tendered promptly after notice (such
notice if given orally, to be confirmed in writing) of acceptance of said
Private Notes by the Company; provided, however, that in all cases, Private
Notes tendered pursuant to the Exchange Offer will be exchanged only after
timely receipt by you of certificates for such Private Notes (or confirmation of
book-entry transfer into your account at the Book-Entry Transfer Facility), a
properly completed and, except as described in the section of the Prospectus
captioned "The Exchange Offer - Procedures for Tendering", duly executed Letter
of Transmittal (or facsimile thereof) with any required signature guarantees and
any other required documents. Unless otherwise instructed by the Company, you
shall issue Exchange Notes only in denominations of $1,000 or any integral
multiple thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable, except
that, subject to the terms and upon the conditions set forth in the Prospectus
and the Letter of Transmittal, Private Notes tendered pursuant to the Exchange
Offer may be withdrawn at any time on or prior to the Expiration Date in
accordance with the terms of the Exchange Offer.
10. The Company shall not be required to exchange any Private
Notes tendered if any of the conditions set forth in the Exchange Offer are not
met. Notice of any decision by the Company not to exchange any Private Notes
tendered shall be given (and confirmed in writing) by the Company to you.
11. If, pursuant to the Exchange Offer, the Company does not
accept for exchange all or any part of the Private Notes tendered because of an
invalid tender, the occurrence of certain other events set forth in the
Prospectus or otherwise, you shall as soon as practicable after the expiration
or termination of the Exchange Offer return those certificates for unaccepted
Private Notes (or effect appropriate book-entry transfer), together with any
related required documents and the Letters of Transmittal relating thereto that
are in your possession, to the persons who deposited them (or effected such
book-entry transfer).
12. All certificates for reissued Private Notes, unaccepted
Private Notes or for Exchange Notes (other than those effected by book-entry
transfer) shall be forwarded by first-class
3
<PAGE> 4
mail under a blanket surety bond obtained by you protecting you and the Company
from loss or liability arising out of the nonreceipt or nondelivery of such
certificates.
13. You are not authorized to pay or offer to pay any
concessions, commissions or other solicitation fees to any broker, dealer,
commercial bank, trust company or other nominee or to engage or use any person
to solicit tenders.
14. As Exchange Agent hereunder, you:
(a) shall have no duties or obligations other than those
specifically set forth in the Prospectus, the Letter of Transmittal or herein or
as may be subsequently agreed to in writing by you and the Company;
(b) will be regarded as making no representations and having
no responsibilities as to the validity, sufficiency, value or genuineness of any
of the certificates for the Private Notes deposited with you pursuant to the
Exchange Offer, and will not be required to and will make no representation as
to the validity, value or genuineness of the Exchange Offer;
(c) shall not be obligated to take any legal action hereunder
which might in your reasonable judgment involve any expense or liability, unless
you shall have been furnished with reasonable indemnity;
(d) may reasonably rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter, telegram or
other document or security delivered to you and reasonably believed by you to be
genuine and to have been signed by the proper party or parties;
(e) may reasonably act upon any tender, statement, request,
comment, agreement or other instrument whatsoever not only as to its due
execution and validity and effectiveness of its provisions, but also as to the
truth and accuracy of any information contained therein, which you shall in good
faith believe to be genuine or to have been signed or represented by a proper
person or persons;
(f) may rely on and shall be protected in acting upon written
or oral instructions from any officer of the Company;
(g) may consult with your counsel with respect to any
questions relating to your duties and responsibilities, and the written opinion
of such counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted to be taken by you hereunder in
good faith and in accordance with the written opinion of such counsel; and
(h) shall not advise any person tendering Private Notes
pursuant to the Exchange Offer as to whether to tender or refrain from tendering
all or any portion of Private Notes or as to the market value, decline or
appreciation in market value of any Private Notes that may or not occur as a
result of the Exchange Offer or as to the market value of the Exchange Notes;
provided, however, that in no way will your general duty to act in good faith
and without gross negligence or willful misconduct be limited by the foregoing.
15. You shall take such action as may from time to time be
requested by the Company or its counsel (and such other action as you may
reasonably deem appropriate) to furnish
4
<PAGE> 5
copies of the Prospectus, Letter of Transmittal and the Notice of Guaranteed
Delivery (as defined in the Prospectus) or such other forms as may be approved
from time to time by the Company, to all persons requesting such documents and
to accept and comply with telephone requests for information relating to the
Exchange Offer, provided such information shall relate only to the procedures
for accepting (or withdrawing from) the Exchange Offer. The Company will furnish
you with copies of such documents at your request.
16. You shall advise by facsimile transmission or telephone, and
promptly thereafter confirm in writing to Donald Offringa, Executive Vice
President of Finance of the Company and such other person or persons as the
Company may request, daily (and more frequently during the week immediately
preceding the Expiration Date and if otherwise requested) up to and including
the Expiration Date, as to the aggregate principal amount of Private Notes which
have been duly tendered pursuant to the Exchange Offer and the items received by
you pursuant to the Exchange Offer and this Agreement, separately reporting and
giving cumulative totals as to items properly received and items improperly
received. In addition, you will also inform, and cooperate in making available
to, the Company or any such other person or persons upon oral request made from
time to time prior to the Expiration Date of such other information as it or he
or she reasonably requests. Such cooperation shall include, without limitation,
the granting by you to the Company and such person as the Company may request of
access to those persons on your staff who are responsible for receiving tenders,
in order to ensure that immediately prior to the Expiration Date the Company
shall have received information in sufficient detail to enable it to decide
whether to extend the Exchange Offer. You shall prepare a final list of all
persons whose tenders were accepted, the aggregate principal amount of Private
Notes tendered, the aggregate principal amount of Private Notes accepted and the
identity of any Participating Broker-Dealers and the aggregate principal amount
of Exchange Notes delivered to each, and deliver said list to the Company.
17. Letters of Transmittal, book-entry confirmations and Notices
of Guaranteed Delivery received by you shall be preserved by you for a period of
time at least equal to the period of time you preserve other records pertaining
to the transfer of securities, or one year, whichever is longer, and thereafter
shall be delivered by you to the Company. You shall dispose of unused Letters of
Transmittal and other surplus materials as instructed by the Company.
18. You hereby expressly waive any lien, encumbrance or right of
set-off whatsoever that you may have with respect to funds deposited with you
for the payment of transfer taxes by reasons of amounts, if any, borrowed by the
Company, or any of its subsidiaries or affiliates pursuant to any loan or credit
agreement with you or for compensation owed to you hereunder.
19. For services rendered as Exchange Agent hereunder, you shall
be entitled to such compensation as set forth on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus and the
Letter of Transmittal and further acknowledge that you have examined each of
them. Any inconsistency between this Agreement, on the one hand, and the
Prospectus and the Letter of Transmittal (as they may be amended from time to
time), on the other hand, shall be resolved in favor of the latter two
documents, except with respect to the duties, liabilities and indemnification of
you as Exchange Agent, which shall be controlled by this Agreement.
21. The Company covenants and agrees to indemnify and hold you
harmless in your capacity as Exchange Agent hereunder against any loss,
liability, cost or expense, including
5
<PAGE> 6
attorneys' fees and expenses arising out of or in connection with any act,
omission, delay or refusal made by you in reliance upon any signature,
endorsement, assignment, certificate, order, request, notice, instruction or
other instrument or document reasonably believed by you to be valid, genuine and
sufficient and in accepting any tender or effecting any transfer of Private
Notes reasonably believed by you in good faith to be authorized, and in delaying
or refusing in good faith to accept any tenders or effect any transfer of
Private Notes; provided, however, that anything in this Agreement to the
contrary notwithstanding, the Company shall not be liable for indemnification or
otherwise for any loss, liability, cost or expense to the extent arising out of
your gross negligence or willful misconduct. In no case shall the Company be
liable under this indemnity with respect to any claim against you unless the
Company shall be notified by you, by letter or cable or by facsimile which is
confirmed by letter, of the written assertion of a claim against you or of any
other action commenced against you, promptly after you shall have received any
such written assertion or notice of commencement of action. The Company shall be
entitled to participate, at its own expense, in the defense of any such claim or
other action, and, if the Company so elects, the Company may assume the defense
of any pending or threatened action against you in respect of which
indemnification may be sought hereunder, in which case the Company shall not
thereafter be responsible for the subsequently-incurred fees and disbursements
of legal counsel for you under this paragraph so long as the Company shall
retain counsel reasonably satisfactory to you to defend such suit; provided,
that the Company shall not be entitled to assume the defense of any such action
if the named parties to such action include both you and the Company and
representation of both parties by the same legal counsel would, in the written
opinion of your counsel, be inappropriate due to actual or potential conflicting
interests between you and the Company. You understand and agree that the Company
shall not be liable under this paragraph for the fees and expenses of more than
one legal counsel for you.
22. You shall arrange to comply with all requirements under the
tax laws of the United States, including those relating to missing Tax
Identification Numbers, and shall file any appropriate reports with the Internal
Revenue Service. The Company understands that you are required, in certain
instances, to deduct thirty-one percent (31%) with respect to interest paid on
the Exchange Notes and proceeds from the sale, exchange, redemption or
retirement of the Exchange Notes from holders who have not supplied their
correct Taxpayer Identification Number or required certification. Such funds
will be turned over to the Internal Revenue Service in accordance with
applicable regulations.
23. You shall notify the Company of the amount of any transfer
taxes payable in respect of the exchange of Private Notes for Exchange Notes
and, upon receipt of a written approval from the Company, shall deliver or cause
to be delivered, in a timely manner to each governmental authority to which any
transfer taxes are payable in respect of the exchange of Private Notes for
Exchange Notes, your check in the amount of all transfer taxes so payable, and
the Company shall reimburse you for the amount of any and all transfer taxes
payable in respect of the exchange of Private Notes for Exchange Notes For
Exchange Notes; provided, however, that you shall reimburse the Company for
amounts refunded to you in respect of your payment of any such transfer taxes,
at such time as such refund is received by you.
24. This Agreement and your appointment as Exchange Agent
hereunder shall be construed and enforced in accordance with the laws of the
State of New York applicable to agreements made and to be performed entirely
within such state, and without regard to its conflicts of law principles.
25. This Agreement shall be binding upon and inure solely to the
benefit of each party hereto and their respective successors and assigns, and
nothing in this Agreement, express or
6
<PAGE> 7
implied, is intended to or shall confer upon any other person any right, benefit
or remedy of any nature whatsoever under or by reason of this Agreement. Without
limitation of the foregoing, the parties hereto expressly agree that no holder
of Private Notes or Exchange Notes shall have any right, benefit or remedy of
any nature whatsoever under, or by reason of, this Agreement.
26. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, and all of which taken together
shall constitute one and the same agreement.
27. In case any provision of this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
28. This Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part, except by
a written instrument signed by a duly authorized representative of the party to
be charged. This Agreement may not be modified orally.
29. Unless otherwise provided herein, all notices, requests and
other communications to any party hereunder shall be in writing (including
facsimile or similar writing) and shall be given to such party, addressed to it,
at its address or telecopy number set forth below:
If to the Company:
US Xchange, L.L.C.
20 Monroe Avenue N.W., Suite 450
Grand Rapids, Michigan 49503
Facsimile: (616) 493-7007
Attention: Donald Offringa, Vice President of Finance
With a copy to:
Bryan Cave LLP
211 N. Broadway, Suite 3600
St. Louis, Missouri 63102-2750
Facsimile: (314) 259-2020
Attention: John P. Denneen, Esq.
If to the Exchange Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Facsimile (212) 815-5915
Attention: Corporate Trust Trustee Administration
30. Unless terminated earlier by the parties hereto, this
Agreement shall terminate 90 days following the Expiration Date. Notwithstanding
the foregoing, paragraphs 17, 19, 21 and 23 shall survive the termination of
this Agreement. Upon any termination of this Agreement, you shall promptly
deliver to the Company any certificates for Notes, funds or property then held
by you as Exchange Agent under this Agreement.
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31. This Agreement shall be binding and effective as of the date
hereof.
(the remainder of page intentionally left blank)
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Please acknowledge receipt of this Agreement and confirm the
arrangements herein provided by signing and returning the enclosed copy.
US XCHANGE, L.L.C.
By:________________________________
Name:
Title:
Accepted as the date
first above written:
THE BANK OF NEW YORK, as
Exchange Agent
By:___________________________________
Name:
Title:
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SCHEDULE I
FEE SCHEDULE FOR
EXCHANGE AGENT SERVICES
-----------------------
I. ACCEPTANCE FEE Waived
Our Acceptance Fee includes review of all relevant documentation,
closing of transaction, setting up records and opening accounts.
II. ADMINISTRATIVE FEE $2,500
Our administrative fee covers all duties of the Agent including
distributing exchange offer documents to DTC, receipt and examination of
required exchange offer documentation, reporting to Company, calculation
of and delivery to participants and DTC. Fees shall be billed upon
closing.
III. OUT OF POCKET EXPENSES
All out-of-pocket expenses including but not limited to postage, express
mail, telecopier, long distance telephone, wire transfer charges,
courier expenses, or other expense incurred by the Bank during its
acceptance and administration shall be billed at cost as incurred.
IV. EXTRAORDINARY SERVICES
Charges for the performance of any service not of a routine
administrative nature or not contemplated at closing and specifically
covered elsewhere in this schedule of fees will be determined by
appraisal in amounts commensurate with the service rendered.
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