<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1999
REGISTRATION NO. 333-85597
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
ALLIED RISER COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 75-2789492
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
1700 PACIFIC AVENUE
DALLAS, TEXAS 75201
(214) 210-3000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
-------------------------
MICHAEL R. CARPER
SENIOR VICE PRESIDENT
AND GENERAL COUNSEL
1700 PACIFIC AVENUE
SUITE 400
DALLAS, TEXAS 75201
(214) 210-3000
(Name, Address Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
COPIES TO:
<TABLE>
<S> <C>
PHYLLIS G. KORFF JAMES S. SCOTT, SR.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP SHEARMAN & STERLING
919 THIRD AVENUE 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022
(212) 735-3000 (212) 848-4000
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in a concurrent offering outside the United
States and Canada (the "International Prospectus" and, together with the U.S.
Prospectus, the "Prospectuses"). The Prospectuses are identical in all material
respects except for the front cover page. The U.S. Prospectus is included herein
and is followed by the alternate front cover page to be used in the
International Prospectus. The alternate page for the International Prospectus
included herein is labeled "Alternate Page for International Prospectus." Final
forms of each Prospectus will be filed with the Securities and Exchange
Commission under Rule 424(b).
<PAGE> 3
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK TO OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED OCTOBER 12, 1999.
14,750,000 Shares
LOGO
ALLIED RISER COMMUNICATIONS CORPORATION
Common Stock
---------------------
This is an initial public offering of shares of common stock of Allied
Riser Communications Corporation. This prospectus relates to an offering of
11,800,000 shares in the United States. In addition, 2,950,000 shares are being
offered outside the United States in an international offering.
It is currently estimated that the initial public offering price per share
will be between $16 and $18. Application has been made for quotation of the
common stock on the Nasdaq National Market under the symbol "ARCC".
See "Risk Factors" on page 8 to read about factors you should consider
before buying shares of the common stock.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Allied Riser.................. $ $
</TABLE>
---------------------
To the extent that the underwriters sell more than 14,750,000 shares of
common stock, the underwriters have the option to purchase up to an additional
2,212,500 shares from Allied Riser at the initial public offering price less the
underwriting discount.
---------------------
The underwriters expect to deliver the shares in New York, New York on
, 1999.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
---------------------
Prospectus dated , 1999.
<PAGE> 4
[EDGAR front cover description for ARC Prospectus]
Map of the Continental United States. Sixteen (16) small red dots representing
market cities in which the Company has completed buildings. Each market city has
an accompanying photograph of a building in that city representing the Company's
real estate portfolio, with accompanying text next to the respective
photographs:
Boston, 4 buildings completed, 79 buildings under contract
New York, 1 building completed, 52 buildings under contract
Philadelphia, 2 buildings completed, 16 buildings under contract
Washington, D.C., 6 buildings completed, 139 buildings under contract
Atlanta, 6 buildings completed, 32 buildings under contract
Houston, 2 buildings completed, 61 buildings under contract
Dallas, 7 buildings completed, 32 buildings under contract
Austin, 3 buildings completed, 4 buildings under contract
Orange County, 2 buildings completed, 5 buildings under contract
Los Angeles, 2 buildings completed, 63 buildings under contract
San Francisco, 3 buildings completed, 69 buildings under contract
Denver, 3 buildings completed, 34 buildings under contract
Seattle, 4 buildings completed, 12 buildings under contract
Chicago, 11 buildings completed, 73 buildings under contract
Cleveland, 1 building completed, 1 building under contract
Stamford, 4 buildings completed, 12 buildings under contract
Thirty-five (35) additional locations are denoted by small yellow dots,
representing markets in which the Company has buildings under contract; no
market is specifically identified, and yellow dots are distributed in the
following states:
New Jersey: 1 market
Maryland: 1 market
Virginia: 1 market
North Carolina: 1 market
South Carolina: 1 market
Florida: 3 markets
Alabama: 1 market
Louisiana: 1 market
Texas: 2 markets
Oklahoma: 2 markets
Missouri: 2 markets
Tennessee: 2 markets
Kentucky: 1 markets
Indiana: 1 market
Ohio: 2 markets
Pennsylvania: 1 market
Michigan: 1 market
Wisconsin: 1 market
Minnesota: 1 market
Oregon: 1 market
Utah: 1 market
New Mexico: 1 market
Arizona: 1 market
Nevada: 1 market
California: 4 markets
The Company logo is in the lower right corner.
<PAGE> 5
PROSPECTUS SUMMARY
We are a facilities-based provider of broadband data, video and voice
communications services to small- and medium-sized businesses in 16 major
metropolitan areas in the United States. We typically deliver our services over
fiber-optic networks that we design, construct, own and operate inside large-
and medium-sized office buildings. Today, over this infrastructure, we offer
ultra high-speed Internet access, business-oriented television for display on
computer desktops, enhanced conference calling services and other broadband data
services. Broadband data services are services that are enabled by high-speed
dedicated data transmission capacity. We own and operate in-building fiber-optic
networks inside 61 office buildings with more than 33.6 million rentable square
feet. We have agreements with building owners to install and operate fiber-optic
networks in more than 1,000 office buildings with more than 325 million rentable
square feet.
Our Internet access services provide a direct connection to the Internet at
speeds up to 175 times faster than standard dial-up service and are always-on.
We believe that our service offers a combination of price and performance to our
target customers that is superior to competing offerings. Our business-oriented
television is the first of many additional connectivity services and
broadband-enabled applications and content that we intend to offer using our in-
building broadband infrastructure. We intend to take advantage of our growing
market presence and brand by also offering similar broadband services to our
customers' branch offices and other businesses located in buildings in which we
have not installed our fiber-optic networks.
We use our in-building fiber-optic networks to transmit data to and from
each of our customers at speeds of ten million bits of data per second. Using
commercially available equipment, we can increase this transmission speed to one
billion bits of data per second. We connect each of our in-building networks to
a central facility in each metropolitan area, usually over fiber-optic lines we
lease from other carriers. At this metropolitan hub, we aggregate and
disseminate network traffic for Internet connectivity and our other broadband
services.
We have entered into agreements to obtain access to buildings owned or
managed by some of the largest commercial property companies in the United
States, including affiliates of Hines, Equity Office Properties, Trizec Hahn,
Whitehall and others. Upon completion of the offering, these real estate
companies and their affiliates will own more than 20% of our equity. These
entities, and our financial sponsors, including affiliates of Telecom Partners,
Crescendo Ventures, Norwest Venture Partners and Goldman Sachs, have invested
over $117 million in our equity.
THE MARKET OPPORTUNITY AND OUR SOLUTION
We own and operate advanced communications networks inside office
buildings, enabling us to provide a broad range of advanced data, video and
voice communications services that are tailored to meet the needs of all
business customers, especially those of small- and medium-sized businesses.
3
<PAGE> 6
BUSINESS STRATEGY
- - PARTNER WITH REAL ESTATE OWNERS. We provide real estate owners with a new
amenity to assist their leasing and tenant retention efforts and share with
them a modest portion of the revenue that we generate from tenants in their
buildings.
- - SELL BROADBAND CONNECTIONS AND BANDWIDTH-ENABLED APPLICATIONS. We seek to
provide solutions to end users that include both a broadband connection and
productivity enhancing data services that use that connection, such as
industry-specific Web pages and business-oriented television service to the
computer desktop.
- - OWN THE KEY ELEMENTS OF THE LOCAL BROADBAND NETWORK. We usually operate the
only fiber-optic network inside the buildings in which we provide services,
providing the critical first mile connection between local fiber networks and
end-users.
- - CAPITALIZE ON OUR FIRST MOVER ADVANTAGE. We have already installed fiber-optic
networks, established metropolitan hubs and hired sales personnel in 16
metropolitan areas, which enables us to deploy networks rapidly and
efficiently in additional buildings in those areas.
- - DESIGN NETWORKS FOR THE FUTURE. We designed our networks using fiber-optic
technology to ensure they are easily upgradeable.
- - TARGET SMALL- AND MEDIUM-SIZED BUSINESSES. Although we service businesses of
all sizes, our product offerings are targeted at underserved small- and
medium-sized businesses.
- - FOCUS SALES AND MARKETING EFFORTS. Our sales and marketing efforts are focused
on tenants in buildings in which we own and operate a network, which should
result in lower customer acquisition costs than our competitors.
- - EXPAND OUR SERVICE OFFERINGS. We intend to expand our service offerings and
more fully use our networks' capacity and capabilities.
- - OFFER SERVICES TO CUSTOMERS IN SELECTED OTHER BUILDINGS. We seek to increase
revenue with relatively modest incremental sales and marketing costs by
offering services to our core customers' remote offices located in buildings
where we do not own a fiber-optic network.
- - PROVIDE EXCELLENT CUSTOMER CARE. We operate an around-the-clock customer care
center and have technical personnel in each metropolitan area where we provide
services.
- - BUILD OUR BRAND. We seek to build our brand to enhance our ability to gain
access to additional buildings, add new customers, reduce customer churn and
attract employees.
4
<PAGE> 7
THE OFFERING
Common stock offered................ 14,750,000 shares
Common stock to be outstanding after
the offering........................ 61,357,060 shares
Proposed Nasdaq National Market
symbol.............................. "ARCC"
Use of proceeds..................... For the construction of in-building
networks, working capital, general
corporate purposes, business
acquisitions and investments.
In the above table and throughout this prospectus, unless otherwise
indicated, the number of shares of common stock that will be outstanding after
this offering is based on the number of shares of common stock outstanding as of
September 15, 1999, plus:
- the number of shares of common stock to be sold by us in this offering;
- 6,882,353 shares of common stock, assuming an initial public offering
price of $17 per share, to be issued at the completion of this offering
upon the conversion of all of our outstanding convertible preferred
stock; and
- 6,530,242 shares of common stock issuable upon the exercise of warrants
with no exercise price.
The number of shares of common stock outstanding as of September 15, 1999
excludes:
- 73,332 shares of common stock issuable upon the exercise of stock
options. These options have an exercise price of $.336 per share.
Unless we indicate otherwise, the information in this prospectus assumes
that the underwriters will not exercise their over-allotment option. See
"Description of Capital Stock."
---------------------
Our principal executive offices are located at 1700 Pacific Avenue, Suite
400, Dallas, Texas 75201 and our phone number is (214) 210-3000.
The ARC Lightspeed Network, OpticNet and ARC Connected are some of our
trademarks. Each trademark, trade name or service mark of any other company
appearing in this prospectus belongs to its holder.
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
You should read the following consolidated summary financial data together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes, all
of which appear elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
INCEPTION JUNE 30,
(DECEMBER 19, 1996) YEAR ENDED ------------------
TO DECEMBER 31, DECEMBER 31, (UNAUDITED)
1997 1998 1998 1999
------------------- ------------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Network services revenue.............. $ -- $ 212 $ 27 $ 547
Operating expenses.................... 1,438 14,216 4,205 20,464
------- -------- ------- --------
Operating income (loss)............... (1,438) (14,004) (4,178) (19,917)
Other income (expense)................ (59) (606) (204) 368
------- -------- ------- --------
Net income (loss)..................... $(1,497) $(14,610) $(4,382) $(19,549)
======= ======== ======= ========
Net income (loss) applicable to common
stock............................... $(1,497) $(15,062) $(4,382) $(22,849)
======= ======== ======= ========
</TABLE>
The pro forma balance sheet information below reflects:
- the sale and issuance of 17 shares of series B preferred stock and
2,019,766 shares of common stock in a financing transaction consummated
in August 1999; and
- the sale and issuance of 34 shares of series B preferred stock and
4,039,531 shares of common stock to our real estate partners and their
affiliates consummated in August 1999.
The pro forma as adjusted balance sheet information reflects all of these
adjustments and:
- the receipt of estimated net proceeds of $233,455,000 from this offering,
assuming an initial public offering price of $17 per share; and
- the conversion upon the completion of this offering of all preferred
stock into common stock, assuming an initial public offering price of $17
per share.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------------------
(UNAUDITED)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 24,307 $ 74,316 $307,771
Property and equipment, net............................... 20,765 20,765 20,765
Total assets.............................................. 47,220 97,229 330,684
Total liabilities......................................... 11,311 11,311 11,311
Convertible redeemable preferred stock.................... 69,751 120,751 --
Stockholders' equity (deficit)............................ (33,842) (34,833) 319,373
</TABLE>
6
<PAGE> 9
As used in the table below, EBITDA consists of net loss excluding net
interest, income taxes, depreciation and amortization. EBITDA does not reflect
our non-cash expenses, which we expect will increase considerably as we deploy
our infrastructure. We believe that because EBITDA is a measure of financial
performance that it is useful to investors as an indicator of a company's
ability to fund its operations and to service or incur debt. EBITDA is not a
measure calculated under generally accepted accounting principles. Other
companies may calculate EBITDA differently from us. It is not an alternative to
operating income as an indicator of our operating performance or an alternative
to cash flows from operating activities as a measure of liquidity and investors
should consider these measures as well. We do not expect to generate positive
EBITDA in the near term. We anticipate that our discretionary use of EBITDA, if
any, generated from our operations in the foreseeable future will be restricted
by our need to build our infrastructure and expand our business. To the extent
that EBITDA is available for these purposes, our requirements for outside
financing will be reduced.
The last three line items of other operating data below reflect data as of
the last day of each period and do not include our work-in-progress or under
contract as of those dates.
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
INCEPTION JUNE 30,
(DECEMBER 19, 1996) YEAR ENDED ------------------------
TO DECEMBER 31, DECEMBER 31, (UNAUDITED)
1997 1998 1998 1999
------------------- ------------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OTHER OPERATING DATA:
Net cash provided by (used in)
operating activities.......... $(1,229) $ (14,420) $ (3,615) $ (10,380)
Net cash provided by (used in)
investing activities.......... $(1,088) $ (8,115) $ (1,931) $ (4,528)
Net cash provided by (used in)
financing activities.......... $ 2,504 $ 63,719 $ 6,538 $ (2,157)
EBITDA.......................... $(1,401) $ (13,504) $ (4,111) $ (13,890)
Capital expenditures............ $ 1,220 $ 12,032 $ 2,972 $ 8,650
Metropolitan markets served..... -- 2 1 9
Buildings in operation.......... -- 4 3 30
Rentable square feet in
buildings in operation........ -- 2,900,000 1,900,000 22,000,000
</TABLE>
7
<PAGE> 10
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below, any of which could have a material adverse effect on
the price of our common stock. You should also consider the other information in
this prospectus before deciding to invest in the shares of common stock.
WE HAVE EXPERIENCED INCREASING NEGATIVE EBITDA, OPERATING LOSSES AND NET LOSSES,
WHICH WILL CONTINUE
We may not achieve or sustain positive EBITDA, operating income or net
income in the future. Since our formation we have generated increasing negative
EBITDA, and larger operating losses and net losses each quarter. We have not
achieved profitability and expect to continue to incur increasing negative
EBITDA, operating losses and net losses in 1999 and for the foreseeable future.
For 1998, we had negative EBITDA of $13,504,000, an operating loss of
$14,004,000 and a net loss of $14,610,000 on revenues of $212,000. For the first
six months of 1999, we had negative EBITDA of $13,890,000, an operating loss of
$19,917,000 and a net loss of $19,549,000 on revenues of $547,000.
In addition, we expect to continue to incur significant development costs
and, as a result, we will need to generate significant revenue to achieve
profitability, which may not occur.
WE HAVE AN UNPROVEN BUSINESS MODEL WHICH COULD FAIL
We are not aware of any company that has achieved positive EBITDA,
operating income or net income by executing a business plan like ours. We will
make substantial capital expenditures in deploying our networks before we know
whether our business plan can be successfully executed. As a result, there is a
risk that our business will fail.
WE ARE A START-UP COMPANY AND IF WE DO NOT GROW VERY RAPIDLY WE WILL NOT SUCCEED
We began operating our first fiber-optic network in January 1998 and we
must grow very rapidly to succeed. Because the communications industry is
capital intensive, rapidly evolving and prone to significant economies of scale,
as a relatively small organization we are at a competitive disadvantage. The
growth we must achieve to reduce that disadvantage will put a significant strain
on all our resources. In particular, we will require substantial additional
capital to finance our operations in the future according to our current
business plan. If we fail to grow rapidly or obtain additional capital our
ability to compete with larger more well established companies will be
substantially reduced.
OUR BUSINESS WILL BE HARMED IF OUR BILLING, CUSTOMER SERVICE AND INFORMATION
SUPPORT SYSTEMS ARE NOT REPLACED OR FURTHER DEVELOPED
Sophisticated information processing systems are vital to our growth and
our ability to achieve operating efficiencies. A failure of these systems could
substantially impair our ability to provide services, send invoices and monitor
our operations. Systems we have identified as being presently inadequate to meet
the increased demands of our anticipated growth include billing and collections,
work-flow and customer priority management, financial and accounting, human
resources, sales and customer support and fixed asset management.
We estimate that modifying or replacing these systems will cost
approximately $16 million in the second half of the current fiscal year,
although actual costs may be higher. Our plans for the development and
implementation of these systems rely, for the most part, on acquiring products
and services offered by third-party vendors and integrating those products and
services. We may be unable to implement these systems on a timely basis or at
all, and these systems may not
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<PAGE> 11
perform as expected. We may also be unable to maintain and upgrade our
operational support systems as necessary.
We are also dependent on the systems of our network capacity providers,
and, in some cases, on the interface between our systems and those of our
providers. Therefore, any systems failures experienced by our suppliers could
also have similar adverse effects on our systems.
THE SECTOR IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY
We face competition from many entities with significantly greater financial
resources, well-established brand names and larger customer bases. The numerous
companies that may seek to enter our niche may expose us to severe price
competition for our services or for building access rights. We expect
competition to intensify in the future. We expect significant competition from
traditional and new telecommunications companies, including local, long
distance, cable modem, Internet, digital subscriber line, microwave, mobile and
satellite data service providers. If these potential competitors successfully
focus on our niche, there may be intense price competition which could impede
our ability to become profitable.
IN-BUILDING COMPETITORS. Some competitors, such as Cypress Communications,
OnSite Access, Broadband Office, Intermedia Communications, SiteLine, RCN
Telecom Services, NextLink, Winstar, Teligent and Advanced Radio Telecom are
attempting to gain access to office buildings in our target markets. Some of
these competitors have sought to develop exclusive relationships with building
owners. To the extent these competitors are successful, we may face difficulties
in building our networks and marketing our services within some of our target
buildings. Our agreements to use utility shaft space within buildings are not
exclusive. An owner of any of the buildings we have rights to install a network
in could also give similar rights to one of our competitors. Certain competitors
already have rights to install networks in some of the buildings that we have
rights in. It will take a substantial amount of time for us to build networks in
all the buildings where we obtain rights to do so. Each building in which we
have not built a network is particularly vulnerable to competitors. It is not
clear whether it will be profitable for two or more different companies to
operate broadband networks within the same building. Therefore, it is critical
that we build our networks in additional buildings quickly. Once we have done
so, if a competitor installs a network in the same building, it is likely that
there will be substantial price competition.
LOCAL TELEPHONE COMPANIES. Incumbent local telephone companies, including
GTE and the Bell Operating Companies, have several competitive strengths which
may place us at a competitive disadvantage. These competitive strengths include:
- an established brand name and reputation;
- significant capital to deploy fiber-optic equipment rapidly;
- ability to offer higher-speed data services through digital subscriber
line technology;
- their own inter-building connections; and
- ability to bundle digital data services with their voice services to
achieve economies of scale in servicing customers.
Competitive local telephone companies often have broadband inter-building
connections, market their services to tenants of large- and medium-sized
buildings and selectively build in-building facilities.
LONG DISTANCE COMPANIES. We will face strong competition from long distance
companies. Many of the leading long distance carriers, including AT&T, MCI
WorldCom, and Sprint, are expanding their capabilities to support high-speed,
end-to-end data networking services, and
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<PAGE> 12
could begin to build their own in-building networks. The newer national long
distance carriers, such as Qwest, Level 3, Williams Communications and IXC
Communications, which has agreed to be acquired by Cincinnati Bell, are building
and managing high-speed fiber-based national data networks, partnering with
Internet service providers, and may extend their networks by installing
in-building fiber-optic cables.
FIXED WIRELESS SERVICE PROVIDERS. We may lose potential customers to fixed
wireless service providers. Fixed wireless service providers can provide high
speed inter-building communications services using microwave or other facilities
or satellite earth stations on building rooftops. Some of these providers have
targeted small- and medium-sized-business customers and have a business strategy
that is similar to ours. These providers include Winstar, Teligent, Advanced
Radio Telecom, Sprint and MCI WorldCom.
INTERNET, DIGITAL SUBSCRIBER LINE, AND CABLE MODEM SERVICE PROVIDERS. The
services provided by Internet service providers and cable modem service
providers can be used by our potential customers instead of our services.
Internet service providers, such as GTE Internetworking, UUNET, a subsidiary of
MCI WorldCom, Sprint, Concentric Networks, MindSpring, Prodigy, EarthLink, Verio
and PSINet, provide Internet access to residential and business customers,
generally using the existing communications infrastructure. Digital subscriber
line companies and/or their Internet service provider customers, such as Covad,
Rhythms NetConnections, NorthPoint, Network Access Solutions typically provide
broadband Internet access. Cable modem service providers, such as Excite@Home
and its @Work subsidiary, Road Runner, RCN Telecom Services and High Speed
Access also provide broadband Internet access. On-line service providers, such
as America Online, Compuserve, Microsoft Network, and WebTV, provide Internet
connectivity, ease-of-use and a stable environment for modem connections.
WE MUST OBTAIN ADDITIONAL AGREEMENTS WITH BUILDING OWNERS OR OUR GROWTH WILL BE
CONSTRAINED
Our business depends upon our ability to install in-building networks. The
failure of building owners to grant or renew access rights on acceptable terms
could substantially reduce our potential customer base. Current federal and
state regulations do not require building owners to make space available to us,
or to do so on terms that are reasonable or nondiscriminatory. Building owners
may decide not to permit us to install our networks in their buildings. In
addition, building owners may elect not to renew our access agreements which
typically have terms of ten years. Non-renewal of these agreements would cause
losses resulting from the removal or sale of our infrastructure in these
buildings and would reduce our revenues.
WE MUST INSTALL NETWORKS IN ADDITIONAL BUILDINGS BEFORE OUR COMPETITORS DO OR WE
MAY FACE A COMPETITIVE DISADVANTAGE
Our success will depend upon our ability to quickly install our in-building
networks in many more buildings. This is crucial in order to establish a
first-mover advantage. We may not be able to accomplish this. Each building in
which we have not built a network is particularly vulnerable to competitors.
Future expansions and adaptations of our network infrastructure may be necessary
to respond to growth in the number of customers served, increased capacity
demands and changes to our services. The expansion and adaptation of our
in-building networks will require substantial financial, operational and
managerial resources. Our failure to rapidly deploy, expand and adapt our
networks to changing conditions could make it difficult to increase and retain
our customer base, which would reduce our revenues and impede our growth.
THERE MIGHT NOT BE SUFFICIENT DEMAND FOR OUR SERVICES
Demand for broadband services has grown rapidly, and this market is
characterized by rapidly changing technology, evolving industry standards and
frequent new service introductions.
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<PAGE> 13
If the commercial market for Internet access and other broadband services
develops more slowly than expected or if the Internet services that we offer are
not broadly accepted, our revenues will not grow as quickly as necessary to
achieve or sustain profitability.
Demand and market acceptance for recently introduced services in this
industry are subject to a high level of uncertainty.
In addition, critical issues concerning the commercial use of services
requiring broadband capabilities remain unresolved and may impact the growth of
these services. Historically, some businesses have been reluctant to purchase
broadband services, such as high-speed Internet access, for a number of reasons,
including:
- resistance to the use of the Internet in business applications;
- inconsistent quality of service;
- lack of available cost-effective, high-speed options;
- the need to deal with multiple and frequently incompatible vendors;
- inadequate security for stored or transmitted data;
- lack of networking tools to simplify Internet access and use; and
- lack of high-speed application requirements.
Capacity constraints caused by heavy use of the Internet may impede further
development to the extent that users experience delays, transmission errors and
other difficulties. Further, enterprises that have already invested substantial
resources in other methods may be particularly reluctant or slow to adopt a new
strategy.
ALTERNATIVE TECHNOLOGIES POSE COMPETITIVE THREATS
In addition to fiber-optic technology, there are other technologies that
provide more capacity and speed than traditional copper wire transmission
technology and can be used instead of our services. Furthermore, these
technologies may be improved and other new technologies may develop that provide
more capacity and speed than the fiber-optic technology we employ. Existing
alternative technologies include:
- DIGITAL SUBSCRIBER LINE TECHNOLOGY. Digital subscriber line technology
was developed to produce higher data transfer rates over the existing
copper-based telephone network. The data transfer rates for digital
subscriber lines are reported to range between 144 thousand bits of data
per second and six million bits of data per second. Digital subscriber
line technology has been substantially improved in recent years.
- CABLE MODEMS. Cable modems can allow users to send and receive data using
cable television distribution systems. According to industry sources,
cable modem users typically experience download speeds of 1.5 million
bits of data per second.
- WIRELESS TECHNOLOGIES. Wireless technologies, such as satellite and
microwave communications systems, can provide high-speed data
communications. Satellite systems, such as DirecPC, can offer high
download speeds that are advertised at 400 thousand bits of data per
second.
- INTEGRATED SERVICES DIGITAL NETWORKS. Integrated services digital
networks have been offered by the incumbent local telephone companies
over the existing copper-based telephone network for some time. These
services offer data transfer speeds of 128 thousand bits of data per
second.
11
<PAGE> 14
The development of new technologies or the significant penetration of
alternative technologies into our target market may reduce the demand for our
services and consequently could have a material adverse effect on our revenues
and net income (loss).
WE MUST PURCHASE CAPACITY FROM THIRD PARTIES WHO MAY BE UNABLE OR UNWILLING TO
MEET OUR REQUIREMENTS
We construct in-building networks and generally rely on other
communications carriers to provide transmission capacity outside the buildings.
Our failure to obtain adequate connections from other carriers on a timely basis
could delay or impede our ability to provide services and generate revenue.
We have experienced, and expect to continue to experience, delays in
obtaining transmission capacity. In addition, in some of our target markets
there is only one established carrier available to provide the necessary
connection. This increases our cost and makes it extremely difficult, if not
impossible, to obtain redundant connections. Sufficient capacity or redundant
capacity may not be readily available from third parties at commercially
reasonable rates, if at all. Our failure to obtain sufficient redundant
connectivity could result in an inability to provide service in certain
buildings and service interruptions, which could in time lead to loss of
customers and damage to our reputation.
As of June 30, 1999, we have committed to pay for approximately $1,874,000
of services from other carriers and we expect to sign additional similar
contracts. We will have to pay those carriers even if we do not use their
services.
WE MUST MAKE SIGNIFICANT CAPITAL EXPENDITURES BEFORE GENERATING REVENUE, WHICH
MAY PROVE INSUFFICIENT TO JUSTIFY THOSE EXPENDITURES
When we install an in-building network, we incur significant initial
expenditures. If we fail to attract enough customers within each office
building, our capital expenditures in that building will be wasted. These
expenditures vary depending on the size of the building and whether we encounter
any construction-related difficulties. In addition, we typically install an
in-building network before we have any customers in that building. Since we
generally do not solicit customers within a building until our network is in
place, and since our costs can vary, we may not be able to recoup our
expenditures within any building.
OUR NETWORKS MAY BE VULNERABLE TO UNAUTHORIZED ACCESS WHICH COULD INTERFERE WITH
THE PROVISION OF OUR SERVICES
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Remediating the effects of computer viruses and
alleviating other security problems may require interruptions, incurrence of
costs and delays or cessation of service to our customers. Other companies have
experienced interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
Unauthorized access could jeopardize the security of confidential information
stored in our computer systems or those of our customers. Although we intend to
continue to implement industry-standard and other security measures, such
measures at other companies have been circumvented in the past and may be
circumvented on our systems in the future. These risks could have a material
adverse effect on our ability to provide services.
YEAR 2000 RISKS MAY HARM OUR BUSINESS
The threats posed by Year 2000 issues could adversely affect our business
in a number of significant ways. We are evaluating our internal information
technology systems and contacting our information technology and other third
party suppliers to ascertain their Year 2000 status.
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<PAGE> 15
However, we do not know whether our own systems will be Year 2000 compliant by
the year 2000 or whether our third party suppliers systems will be Year 2000
compliant by that time and there may be significant operational problems caused
by any failures of these information technology systems. In addition, customers
may spend less on our service in the second half of 1999 as customers focus on
Year 2000 readiness and systems rather than invest in new products. As a result,
there could be a material adverse effect on virtually every aspect of our
operations.
WE MUST ATTRACT AND RETAIN KEY PERSONNEL IN A TIGHT LABOR MARKET OR WE WILL BE
UNABLE TO MANAGE OUR GROWTH
There currently is intense competition for personnel with the
qualifications we require. The loss of the services of key personnel or the
failure to attract additional personnel as required could have a material
adverse effect on our ability to grow and on the price of our common stock. We
are highly dependent upon the efforts of our existing senior management team.
Although we have entered into employment agreements with members of our senior
management team, these agreements do not obligate the employees to remain with
us for any length of time. We believe that our future success will depend in
large part on our ability to attract and retain qualified technical and sales
personnel.
LEGISLATION AND GOVERNMENT REGULATION COULD ADVERSELY AFFECT US
Changes in the regulatory environment could affect our operating results by
increasing competition, decreasing revenue, increasing costs or impairing our
ability to offer services. The provision of basic telecommunications services is
subject to significant regulation at the federal and state level. The Federal
Communications Commission regulates telecommunications carriers providing
interstate and international common carrier services. State public utilities
commissions exercise jurisdiction over intrastate basic telecommunications
services but do not regulate most enhanced services, which involve more than the
pure transmission of customer provided information. Many of our competitors and
vendors, especially incumbent local telephone companies, are subject to federal
and state regulations. These regulations change from time to time in ways that
are difficult for us to predict. Although we believe the services we provide
today are not subject to substantial regulation by the FCC or the state public
utilities commissions, changes in regulation or new legislation may increase the
regulation of our current services. In addition, a regulatory body may seek to
apply telecommunications regulations to our enhanced services.
IF WE DECIDE TO PROVIDE VOICE AND OTHER BASIC TELECOMMUNICATIONS SERVICES
WE MAY BE UNABLE TO SUCCESSFULLY RESPOND TO REGULATORY CHANGES. We will become
subject to regulation by the FCC and state agencies in the event we decide to
offer non-enhanced voice and other basic telecommunications services. Complying
with these regulatory requirements may be costly. Through subsidiaries, we are
in the process of applying for, and in some states have received, authority from
state regulatory commissions and the FCC to provide basic telecommunications
services, such as voice telephony service. These subsidiaries will be subject to
direct federal and state regulation upon approval of their respective
applications. The regulations that apply to basic telecommunications services
change from time to time and such changes may have adverse effects on our
business.
REGULATION OF ACCESS TO OFFICE BUILDINGS COULD NEGATIVELY AFFECT OUR
BUSINESS. There have been proposals to require that commercial office buildings
give access to competitive providers of telecommunications services. If these
proposals are adopted and regulatory or legal requirements change access rights
to our target buildings or our networks, these requirements will facilitate our
competitors' entry into buildings where we have access rights, which in turn
will diminish the value of our access rights and adversely affect our
competitive position. Recently, the FCC initiated a regulatory proceeding
relating to utility shaft access in multiple tenant
13
<PAGE> 16
buildings, and a bill was introduced in Congress regarding the same topic. Some
of the issues being considered in these developments include requiring building
owners to provide utility shaft access to telecommunications carriers, and
requiring some telecommunications providers to provide access to other
telecommunications providers. We do not know whether or in what form these
proposals will be adopted.
AS AN INTERNET ACCESS PROVIDER, WE MAY INCUR LIABILITY FOR INFORMATION
DISSEMINATED THROUGH OUR NETWORK. The law relating to the liability of Internet
access providers and on-line services companies for information carried on or
disseminated through their networks is unsettled. Although we have not been sued
for information carried on our network, it is possible that we could be. Federal
and state statutes have been directed at imposing liability on Internet service
providers for aspects of content carried on their networks. There may be new
legislation and court decisions that may affect our services and expose us to
potential liability.
As the law in this area develops, the potential imposition of liability
upon us for information carried on and disseminated through our network could
require us to implement measures to reduce our exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain products or service offerings. Any costs that are incurred as a result
of such measures or the imposition of liability could have a material adverse
effect on our operating expenses and our liquidity.
RETAINED CONTROL OF ALLIED RISER BY OUR PRINCIPAL STOCKHOLDERS MAY CREATE
CONFLICTS OF INTEREST
The concentration of ownership of our stock may have the effect of
delaying, deferring or preventing a change in control, merger, consolidation, or
a tender offer which could involve a premium over the price of our common stock.
Upon completion of this offering, our officers, directors and
greater-than-five-percent stockholders and their affiliates will, in the
aggregate, beneficially own approximately 25% or 24% if the underwriters'
over-allotment option is exercised in full, of the outstanding common stock,
assuming an offering price of $17 per share.
MEMBERS OF OUR BOARD SERVE ON THE BOARDS OF OUR POTENTIAL COMPETITORS, WHICH MAY
CREATE CONFLICTS OF INTEREST
Members of our board of directors also serve as officers or directors of
other telecommunications or Internet services companies. To the extent that any
of these companies presently offer, or at some future point begin to offer,
services having characteristics similar to those offered by us, there may be
conflicts of interest between the fiduciary duties owed by these individuals to
us and the duties owed to these other companies. We have not adopted specific
policy guidelines to address these potential conflicts of interest and if these
conflicts of interest arise, they may be resolved on terms that are not in the
best interests of all of our stockholders.
ANTI-TAKEOVER PROVISIONS COULD PREVENT OR DELAY A CHANGE OF CONTROL
Provisions of our amended and restated certificate of incorporation and
amended and restated by-laws and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:
- the ability of our board of directors to issue preferred stock without
any further approval being required from our stockholders;
- the "staggered" nature of our board of directors which results in
directors being elected for terms of three years; and
- the requirement that stockholders provide us with advance notice of
proposed actions.
These provisions may have the effect of delaying, deferring or preventing a
change in our control, impeding a merger, consolidation, takeover or other
business combination, which in turn
14
<PAGE> 17
could preclude our stockholders from recognizing a premium over the prevailing
market price of the common stock.
IMPAIRMENT OF OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS
While we are seeking federal registration of ARC and certain other
trademarks, we have not been awarded any trademark registrations, and are
relying upon our common law rights. It is possible that other entities may
challenge our registration and use of these trademarks based on a claim of
superior rights, dilution or otherwise. Such challenges, if successful, could
preclude us from registering and even using our trademarks, in which case the
expense of developing new trademarks and resulting loss of product
identification and goodwill could have a material adverse effect on our net
income (loss) and our brand awareness.
FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations, intentions
and assumptions and other statements that are not historical facts. When used in
this prospectus, the words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate" and similar expressions are generally intended to identify
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, actual results may differ materially from those
expressed or implied by these forward-looking statements. We do not intend to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
15
<PAGE> 18
USE OF PROCEEDS
We estimate that our net proceeds from the sale of common stock in this
offering will be approximately $233,455,000, or $268,811,000 if the underwriters
exercise their over-allotment option in full, after deducting estimated
underwriting discounts and commissions and estimated offering expenses.
We intend to use more than $175,000,000 of the net proceeds from this
offering for the construction of in-building networks, and the remainder for
working capital and general corporate purposes, including to fund operating
losses. We may also use a portion of the net proceeds to acquire or invest in
complementary businesses, technologies, services or products. However, we
currently have no material commitments or agreements with respect to any of
these types of transactions.
Prior to the application of the net proceeds from the offering as described
above, the net proceeds from the offering will be invested in marketable,
investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying any cash dividends on our common stock for the
foreseeable future.
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<PAGE> 19
CAPITALIZATION
You should read this table in conjunction with the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Use of Proceeds" and our consolidated financial statements and
the related notes included elsewhere in this prospectus. The cash and
capitalization table below excludes 6,530,242 shares of common stock issuable
upon the exercise of warrants with no exercise price. These warrants are
exercisable upon our real estate partners meeting certain performance
obligations as outlined in the warrant agreements.
The following cash and capitalization table sets forth:
-- Our actual cash and capitalization as of June 30, 1999.
-- Our pro forma cash and capitalization after giving effect to:
- the sale and issuance of 17 shares of series B preferred stock and
2,019,766 shares of common stock in a financing transaction
consummated in August 1999; and
- the sale and issuance of 34 shares of series B preferred stock and
4,039,531 shares of common stock to our real estate partners and their
affiliates consummated in August 1999.
-- Our pro forma as adjusted cash and capitalization to reflect, in
addition:
- the receipt of estimated net proceeds of $233,455,000 from this
offering, assuming an initial public offering price of $17 per share;
and
- the conversion upon the completion of this offering of all preferred
stock into common stock, assuming an initial public offering price of
$17 per share.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------
JUNE 30, 1999
---------------------------------------------
(UNAUDITED) PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
---------- ----------- --------------
<S> <C> <C> <C>
Cash and cash equivalents........................... $ 24,307 $ 74,316 $307,771
======== ======== ========
Capital lease obligations, including current
portion........................................... $ 5,376 $ 5,376 $ 5,376
Convertible redeemable preferred stock, par value
$.0001 per share, 1,000 shares authorized, 66
shares issued and outstanding (actual) and 117
shares issued and outstanding (pro forma) and zero
shares issued and outstanding (pro forma as
adjusted)......................................... 69,751 120,751 --
Stockholders' equity (deficit):
Common stock, par value $.0001 per share,
66,666,667 shares authorized, 26,787,726 shares
issued and outstanding (actual) and 32,847,023
shares issued and outstanding (pro forma) and
54,479,376 shares issued and outstanding (pro
forma as adjusted)............................. 3 3 5
Additional paid-in capital........................ 18,446 17,455 371,659
Deferred compensation............................. (16,228) (16,228) (16,228)
Accumulated deficit............................... (36,063) (36,063) (36,063)
-------- -------- --------
Total stockholders' equity (deficit).............. (33,842) (34,833) 319,373
-------- -------- --------
Total capitalization...................... $ 41,285 $ 91,294 $324,749
======== ======== ========
</TABLE>
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<PAGE> 20
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $85,918,000
or $2.61 per share of outstanding common stock, after giving effect to the
adjustments shown in the pro forma column under "Capitalization." The pro forma
net tangible book value per share represents our total tangible assets less
total liabilities, divided by 32,847,023 shares of common stock outstanding on a
pro forma basis before the offering. Dilution per share represents the
difference between the amount per share paid by investors in this offering and
the pro forma net tangible book value per share after the offering. After giving
effect to this offering, the as adjusted pro forma net tangible book value at
June 30, 1999 would have been $319,373,000 or $5.86 per share. This represents
an immediate increase in the net tangible book value of $3.25 per share to
existing stockholders and an immediate dilution in net tangible book value of
$11.14 per share to new investors purchasing shares at the initial public
offering price. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public price per share.............................. $17.00
Pro forma net tangible book value per share as of June 30,
1999...................................................... $2.61
Increase per share attributable to new investors............ $3.25
Pro forma as adjusted net tangible book value per share
after the offering........................................ $ 5.86
------
Dilution per share to new investors......................... $11.14
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999,
the difference between the existing stockholders and new investors with respect
to the number of shares purchased from Allied Riser, the total consideration
paid and the average price per share paid. These amounts do not include
estimated underwriting discounts and commissions and offering expenses payable
by Allied Riser.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 39,729,401 72.9% $117,049,271 31.8% $ 2.95
New investors................... 14,750,000 27.1 250,750,000 68.2 $17.00
---------- ---- ------------ ----
Total........................... 54,479,401 100% $367,799,271 100%
========== ==== ============ ====
</TABLE>
The foregoing table assumes no exercise of stock options or warrants. As of
June 30, 1999, there were options outstanding to purchase 347,442 shares of
common stock at an exercise price of $.0015 per share. Between July 1, 1999 and
September 15, 1999 additional options were granted to purchase 73,332 shares of
common stock at an exercise price of $.336 per share. In October 1999, warrants
were issued to acquire 6,530,242 shares of common stock to owners and managers
of commercial office buildings with no exercise price. These warrants are
exercisable upon our real estate partners meeting certain performance
obligations as outlined in the warrant acquisition agreements. To the extent
outstanding options and warrants are exercised, there will be further dilution
to new investors. In addition, we may agree to issue additional warrants to
acquire common stock to owners and managers of commercial office buildings. In
addition, we may issue common stock to pay for acquisitions.
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<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
You should read the following consolidated summary financial data together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes, all
of which appear elsewhere in this prospectus. The following selected
consolidated statement of operations data for the period from inception
(December 19, 1996) to December 31, 1997 and for the year ended December 31,
1998, and the balance sheet data as of December 31, 1997 and 1998 have been
derived from our audited financial statements and the related notes. The
selected statement of operations data for the six months ended June 30, 1998 and
1999, and the selected balance sheet data as of June 30, 1999 are derived from
our unaudited condensed consolidated financial statements. Operating results for
the six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the entire year.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS ENDED
(DECEMBER 19, JUNE 30,
1996) TO YEAR ENDED --------------------
DECEMBER 31, DECEMBER 31, (UNAUDITED)
1997 1998 1998 1999
-------------- ------------- -------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Network services revenue................... $ -- $ 212 $ 27 $ 547
Operating expenses:
Network operations....................... 80 2,358 718 2,819
Selling expense.......................... -- 1,623 599 2,406
General and administrative expenses...... 1,348 9,736 2,822 9,207
Amortization of deferred compensation.... -- -- -- 5,142
Depreciation and amortization............ 10 499 66 890
------- -------- ------- --------
Total operating expenses......... 1,438 14,216 4,205 20,464
------- -------- ------- --------
Operating income (loss).................... (1,438) (14,004) (4,178) (19,917)
Other income (expense)..................... (59) (606) (204) 368
Provision for income taxes................. -- -- -- --
------- -------- ------- --------
Net income (loss).......................... (1,497) (14,610) (4,382) (19,549)
Accrued dividends on preferred stock....... -- (452) -- (3,300)
------- -------- ------- --------
Net income (loss) applicable to common
stock.................................... $(1,497) $(15,062) $(4,382) $(22,849)
======= ======== ======= ========
Net income (loss) per common share......... $ (7.45) $ (8.09) $(18.15) $ (1.01)
======= ======== ======= ========
Weighted average number of shares
outstanding.............................. 201 1,862 241 22,686
======= ======== ======= ========
</TABLE>
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<PAGE> 22
The pro forma balance sheet information below reflects:
- the sale and issuance of 17 shares of series B preferred stock and
2,019,766 shares of common stock in a financing transaction consummated
in August 1999; and
- the sale and issuance of 34 shares of series B preferred stock and
4,039,531 shares of common stock to our real estate partners and their
affiliates consummated in August 1999.
The pro forma as adjusted balance sheet information reflects all of these
adjustments and:
- the receipt of estimated net proceeds of $233,455,000 from this offering,
assuming an initial public offering price of $17 per share; and
- the conversion upon the completion of this offering of all preferred
stock into common stock, assuming an initial public offering price of $17
per share.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------------
AS OF DECEMBER 31, (UNAUDITED)
------------------ PRO FORMA AS
1997 1998 ACTUAL PRO FORMA ADJUSTED
------- -------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 188 $ 41,371 $ 24,307 $ 74,316 $307,771
Property and equipment, net........ 1,250 13,005 20,765 20,765 20,765
Total assets....................... 1,487 55,572 47,220 97,229 330,684
Total liabilities.................. 3,228 5,257 11,311 11,311 11,311
Convertible redeemable preferred
stock............................ -- 66,452 69,751 120,751 --
Additional paid-in capital......... 163 375 18,446 17,455 371,659
Stockholders' equity (deficit)..... (1,741) (16,137) (33,842) (34,833) 319,373
</TABLE>
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<PAGE> 23
As used in the table below, EBITDA consists of net loss excluding net
interest, income taxes, depreciation and amortization. EBITDA does not reflect
our non-cash expenses, which we expect will increase considerably as we deploy
our infrastructure. We believe that because EBITDA is a measure of financial
performance that it is useful to investors as an indicator of a company's
ability to fund its operations and to service or incur debt. EBITDA is not a
measure calculated under generally accepted accounting principles. Other
companies may calculate EBITDA differently from us. It is not an alternative to
operating income as an indicator of our operating performance or an alternative
to cash flows from operating activities as a measure of liquidity and investors
should consider these measures as well. We do not expect to generate positive
EBITDA in the near term. We anticipate that our discretionary use of EBITDA, if
any, generated from our operations in the foreseeable future will be restricted
by our need to build our infrastructure and expand our business. To the extent
that EBITDA is available for these purposes, our requirements for outside
financing will be reduced.
The last three line items of other operating data below reflect data as of
the last day of each period and do not include our work-in-progress or under
contract as of those dates.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(DECEMBER 19, SIX MONTHS ENDED JUNE 30,
1996) TO YEAR ENDED -------------------------
DECEMBER 31, DECEMBER 31, (UNAUDITED)
1997 1998 1998 1999
------------- ------------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OTHER OPERATING DATA:
Net cash provided by (used in)
operating activities............... $(1,229) $ (14,420) $ (3,615) $ (10,380)
Net cash provided by (used in)
investing activities............... $(1,088) $ (8,115) $ (1,931) $ (4,528)
Net cash provided by (used in)
financing activities............... $ 2,504 $ 63,719 $ 6,538 $ (2,157)
EBITDA............................... $(1,401) $ (13,504) $ (4,111) $ (13,890)
Capital expenditures................. $ 1,220 $ 12,032 $ 2,972 $ 8,650
Metropolitan markets served.......... -- 2 1 9
Buildings in operation............... -- 4 3 30
Rentable square feet in buildings in
operation.......................... -- 2,900,000 1,900,000 22,000,000
</TABLE>
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<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the summary and
selected consolidated financial and other data, and the consolidated financial
statements and the related notes contained elsewhere in this prospectus. See
"Risk Factors" for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements contained in this prospectus.
OVERVIEW
Since our inception in December 1996, our principal activities have
included developing our business plan, raising capital, hiring management and
other key personnel, designing and developing our fiber-optic networks inside
buildings, acquiring equipment and facilities, entering into agreements with
building owners and real estate managers and beginning the initial deployment of
our fiber-optic networks. In June 1997, we began installing our networks, and we
began operating our first in-building network in January 1998. We provide
services in 16 metropolitan areas. We currently own and operate fiber-optic
networks inside 61 office buildings with more than 33.6 million rentable square
feet. In addition, we have recently entered into agreements to install and
operate our fiber-optic networks in more than 1,000 office buildings with more
than 325 million rentable square feet.
To rapidly establish a strong position in the markets we target, we are
heavily investing in our fiber-optic networks. We incur costs in the design and
installation of our in-building infrastructure, which is typically installed
within a secure conduit located in the building's riser, which is the building's
vertical utility shaft. We also invest in electronic equipment that is needed to
connect our networks to the Internet. We expect to incur significant additional
costs building and refining our operational support systems; this includes the
purchase and implementation of software to facilitate customer acquisition,
billing, collections, and network management.
As a result of our development activities and the deployment of our
networks, from inception to date we have incurred significant operating losses,
net losses and negative EBITDA. We expect that the continued expansion of our
operations will result in increasing operating losses, net losses and negative
EBITDA. As a result of our limited operating history, prospective investors have
limited operating and financial data upon which to base an evaluation of our
performance and an investment in our common stock. See "Risk Factors -- We are a
start-up company and if we do not grow very rapidly we will not succeed."
FACTORS AFFECTING FUTURE OPERATIONS
NETWORK SERVICES REVENUE. We generate revenue from selling broadband data,
video and voice services primarily to tenants in buildings in which we own and
operate our fiber-optic networks. We generally enter into long-term,
non-exclusive contracts with the owners and managers of portfolios of office
buildings to permit us to construct and operate these networks within their
buildings. In return for the right to deploy and maintain our networks, building
owners receive a modest portion of the gross revenue we generate from tenants
inside their buildings. Upon completion of an in-building network, our direct
sales personnel market our services to the tenants of the building. Once a
customer orders our services, we generally initiate service within one to ten
business days. Our customers are not generally required to purchase or maintain
any equipment beyond their existing local area network.
We currently offer:
- ultra high-speed Internet access;
- business-oriented television for display on the computer desktop;
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<PAGE> 25
- enhanced conference calling services; and
- other broadband data services.
We generate the majority of our recurring revenue from subscription fees,
which vary depending upon a number of factors, including the services provided,
the number of desktops connected to our network and bandwidth usage volume. We
generally offer services on a month-to-month contractual basis. We do not
require our customers to purchase any equipment from us. We price our
combination of services competitively compared to existing providers of Internet
connectivity and broadband data services, such as local telephone companies and
Internet service providers. Although competitive pricing is an important part of
our strategy, we believe that the speed and performance of our fiber-optic
networks, combined with a high level of customer care, are the keys to
successfully attracting and retaining small- and medium-sized business
customers.
We expect that in the short term the majority of our revenue will be
derived from our Internet connectivity services. We intend to take advantage of
our presence in buildings in which we operate a network and our customer
relationships to market additional services to our customers. We expect these
services to include bandwidth-enabled services, such as enhanced Internet voice
services; full-motion, interactive, desktop-delivered video conferencing; direct
access to both on-line content and business applications through industry
specific portals; e-commerce and network management services. We also intend to
take advantage of our growing market presence and brand by offering similar
broadband services to our customers' branch offices and other businesses located
in buildings in which we have not installed our fiber-optic networks. We believe
that these additional services may generate significant incremental revenue.
NETWORK OPERATIONS. Our network operations expenses include payments to
providers of transmission capacity, costs associated with customer connections
to our in-building fiber-optic networks, customer care, equipment maintenance,
payments to building owners, and content licensing costs. In order to provide
our services, we must connect each in-building network to a metropolitan hub via
a local network and each metropolitan hub to a national network. These local and
national networks are owned by unaffiliated parties. We have contracts with
terms ranging from one month to five years for connections to these networks.
Under these agreements, we incur fixed monthly charges for local connectivity.
For national connectivity, we incur fixed monthly charges plus incremental
charges based upon customer usage. In addition, if we fail to meet our minimum
volume commitments for national connectivity, we may be obligated to pay
penalties. In the future, we may contract for volume discounts based on the
volume purchased from national connectivity providers. In the event we
underestimate our need for transmission capacity, we may be required to obtain
capacity through more expensive means. We expect that our connectivity costs
will increase as we enter new markets and provide services for new customers. In
addition, we pay usage-based calling fees in connection with our enhanced
conference calling services.
We incur expenses related to ongoing operations for customer support. We
provide customer care through our Dallas-based customer care center, which is
augmented by field support personnel and contracts with outside support
providers for on-site customer service. Because our strategy emphasizes the
importance of customer care, we expect that initially customer service will
become a larger part of our ongoing expenses. Equipment maintenance costs
include expenses for equipment repair and periodic servicing. Maintenance
services are provided by our field operations personnel, third-party contractors
and equipment vendors. In exchange for access rights from building owners, we
pay building owners a modest portion of the revenue that we generate from
tenants inside their buildings. The fee we pay building owners varies
proportionally with revenues generated in the respective buildings. We incur
both fixed and variable costs in connection with licenses related to the
provisioning of enhanced communications services, such as business-oriented
desktop television.
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<PAGE> 26
SELLING EXPENSE. Selling expense includes costs of employee salaries and
commissions, marketing, advertising and promotional expenses and costs
associated with leasing and operating sales demonstration centers. To attract
and retain a qualified sales force, we offer our sales personnel a compensation
package emphasizing commissions and stock options. We expect to incur
significant selling and marketing costs as we continue to expand our sales force
and penetrate our targeted markets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include costs associated with corporate administration and infrastructure,
billing and personnel. We are currently in the process of building and refining
our new operational support systems. These systems are necessary to enter,
schedule, provision and track a customer order from the point of sale to
installation, testing, and service initiation. In addition, these systems will
interface with our billing, collection and customer care service systems. We
believe that because most of our services are currently billed on a flat-rate
basis, the cost and complexity of generating and reconciling our billings is
less than that with usage-based pricing models. However, as we add customers and
provide more services that require usage-based billing, such as our enhanced
conference calling services, we expect that billing costs will increase.
Accordingly, customer billing is expected to be a significant part of our
ongoing administrative expenses. We have selected a group of vendors to provide
automated billing systems and other operational support systems that will either
replace or be integrated with our existing systems. See "Risk Factors -- Our
business will be harmed if our billing, customer service and information support
systems are not successfully replaced or further developed."
We expect that costs will increase significantly as we expand our
operations and that general and administrative expenses will be a larger portion
of these costs during the early stages of our business. However, we expect that
our general and administrative expenses will represent a smaller percentage of
our revenue as we build our customer base.
AMORTIZATION OF DEFERRED COMPENSATION. Amortization of deferred
compensation is a result of granting stock options and issuing restricted shares
to our employees with exercise prices per share treated for accounting purposes
as below the fair value of our common stock at the dates of grant. We are
amortizing the deferred compensation over the vesting period of the applicable
option and the lapsing of the restrictions on the applicable shares.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
include depreciation of system infrastructure, system equipment, furniture and
fixtures and the amortization of leasehold improvements. We expect depreciation
and amortization expenses to increase significantly as we install our
fiber-optic networks in more buildings. While construction is in progress and we
have outstanding debt, we capitalize related interest and we amortize the
related capitalized interest over the useful life of the constructed assets.
In October 1999, we issued warrants to our real estate partners. We expect
that we will do similar issuances in the future. The current warrant agreements
impose certain performance requirements on the real estate partners for
exercisability and retention of the warrants. The measurement date for valuing
the warrants will be the date(s) on which the real estate partners effectively
complete their performance requirements. Because the terms of the warrant allow
the holder to acquire the shares of common stock without any additional
consideration, the fair value of the warrant is equivalent to the fair value of
the common stock.
Based upon the current structure of the agreements governing the warrants,
we expect that the fair value of the warrants will be capitalized and amortized
over the 10 year term of our current agreements with our real estate partners.
However, we are evaluating whether possible changes to the agreements would
require treating the fair value of the warrants as an expense in the fiscal
quarter in which the warrants are issued. Under the asset approach, there will
be a recurring charge over the 10 year agreement term. If expense treatment is
required there will be a substantial charge in the period when the warrants were
issued.
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<PAGE> 27
OTHER INCOME (EXPENSE). Other income (expense) consists primarily of net
interest income and expense. We expect interest income to increase over the
short term as a result of receiving the proceeds of this offering.
PROVISION FOR INCOME TAXES. Provision for income taxes consists of federal,
state and local taxes, when applicable. We have not generated any taxable income
to date and therefore have not paid any federal income taxes since inception. A
full valuation allowance has been recorded on the deferred tax asset, consisting
primarily of start-up costs and net operating loss carry forwards, because of
the uncertainty of future operating results. We expect to generate significant
net losses for the foreseeable future which should generate net operating loss
carry forwards.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
NETWORK SERVICES REVENUE. Network services revenue for the six months ended
June 30, 1999 increased to $547,000 as compared to $27,000 for the corresponding
period of the prior year. Network services revenue for the six months ended June
30, 1999 includes the recognition in April 1999 of $123,000 of previously fully
reserved revenue which was earned upon the successful deployment of a virtual
private network. The remaining increase is attributable to growth in the number
of customers resulting from increased sales and marketing efforts concentrated
in our networked properties and the increased penetration of our fiber-optic
network into new buildings compared to the corresponding period in 1998. As of
June 30, 1999, our fiber-optic network was installed inside 30 buildings with
more than 22.0 million rentable square feet as compared to June 30, 1998 when
our networks were installed inside 3 buildings, with 1.9 million rentable square
feet.
NETWORK OPERATIONS. Network operations expenses were $2,819,000 for the six
months ended June 30, 1999 and $718,000 for the six months ended June 30, 1998.
This increase is consistent with expansion of our fiber-optic network and
resulting increase in transport, licensing and customer support costs.
SELLING EXPENSE. Selling expense increased from $599,000 for the six months
ended June 30, 1998 to $2,406,000 for the six months ended June 30, 1999. This
increase is attributable to the continued expansion of sales and marketing
efforts including commissions, development of corporate identification,
promotional and advertising materials, the establishment of sales demonstration
centers, market launch events and hiring sales personnel.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $9,207,000 for the six months ended June 30, 1999 and $2,822,000 for the
six months ended June 30, 1998. This increase is consistent with our development
activities and is attributable to the rapid growth in number of employees we
incurred in connection with building our operating infrastructure. Our number of
general and administrative employees increased to 122 as of June 30, 1999 as
compared to 43 at June 30, 1998.
AMORTIZATION OF DEFERRED COMPENSATION. Amortization of deferred
compensation was $5,142,000 for the six months ended June 30, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the six
months ended June 30, 1999 increased to $890,000 as compared to $66,000 for the
corresponding period of the prior year. This increase was primarily due to the
increase in system infrastructure and system equipment placed in service.
OTHER INCOME (EXPENSE). Other income (expense) was $368,000 for the six
months ended June 30, 1999 and $(204,000) for the six months ended June 30,
1998. The change in other
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<PAGE> 28
income (expense) is primarily due to a reduction in interest expense and an
increase in interest income as a result of the recapitalization and
reorganization. See "-- Liquidity and capital resources."
PROVISION FOR INCOME TAXES. For the six months ended June 30, 1999 and June
30, 1998 no provision for taxes was recognized as we operated at a loss
throughout both periods.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO PERIOD FROM INCEPTION
(DECEMBER 19, 1996) TO DECEMBER 31, 1997
NETWORK SERVICES REVENUE. Network services revenue for the year ended
December 31, 1998 was $212,000. Our first fiber-optic network began operation in
January of 1998. Accordingly, no revenue was recognized for the period from
inception to December 31, 1997. As of December 31, 1998, our fiber-optic network
was installed in 4 buildings, with more than 2.9 million rentable square feet.
NETWORK OPERATIONS. Network operations expenses were $2,358,000 for the
year ended December 31, 1998 and $80,000 for the period from inception to
December 31, 1997. This increase is consistent with the expansion of our
fiber-optic network and resulting increase in related costs.
SELLING EXPENSE. Our selling expense for the year ended December 31, 1998
was $1,623,000. This expense was attributable to the initial deployment of our
fiber-optic network and the related sales and marketing efforts, including
development of our brand and logo, establishment of sales demonstration centers,
promotional and advertising materials and hiring sales personnel. Consistent
with the initial deployment of our network in January of 1998, we had no selling
expense in the period from inception to December 31, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $9,736,000 for the year ended December 31, 1998 and $1,348,000 for the
period from inception to December 31, 1997. This increase is consistent with our
development activities and is attributable to growth in number of employees we
incurred in connection with building our operating infrastructure. Our number of
general and administrative employees increased to 85 as of December 31, 1998 as
compared to 13 at December 31, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the year
ended December 31, 1998 was $499,000 as compared to $10,000 for the
corresponding period of the prior year. This increase was attributable to the
deployment of our system infrastructure and system equipment which commenced in
January 1998.
OTHER INCOME (EXPENSE). Other income (expense) was $(606,000) for the year
ended December 31, 1998 and $(59,000) for the period from inception to December
31, 1997. The change in other income (expense) is primarily due to an increase
in interest expense as a result of increased borrowings throughout 1998.
PROVISION FOR INCOME TAXES. For the year ended December 31, 1998 and the
period from inception to December 31, 1997 no provision for taxes was recognized
as we operated at a loss throughout both periods.
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<PAGE> 29
QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain quarterly statement of operations
data for each full fiscal quarter since our inception. This information has been
derived from our unaudited financial statements. In the opinion of management,
this unaudited information has been prepared on the same basis as the annual
financial statements and includes all adjustments consisting only of normal
recurring adjustments necessary for a fair presentation of the information for
the quarters presented. This information should be read in conjunction with the
financial statements and related notes included elsewhere in the prospectus. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------------------
(UNAUDITED)
PERIOD FROM
INCEPTION
(DECEMBER 19, THREE MONTHS ENDED
1996) TO -----------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
------------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Network services revenues.. $ -- $ -- $ -- $ -- $ 5 $ 22
Operating expenses:
Network operations........ -- 3 14 63 220 498
Selling expense........... -- -- -- -- 205 394
General and administration
expenses................ 94 260 235 759 1,057 1,765
Amortization of deferred
compensation............ -- -- -- -- -- --
Depreciation and
amortization............ -- -- 1 9 21 45
----- ------ ------ ------ ------- -------
Total operating expenses... 94 263 250 831 1,503 2,702
----- ------ ------ ------ ------- -------
Operating income (loss).... (94) (263) (250) (831) (1,498) (2,680)
Other income (expense)..... 3 1 (17) (46) (61) (143)
Provision for income
taxes..................... -- -- -- -- -- --
----- ------ ------ ------ ------- -------
Net income (loss).......... (91) (262) (267) (877) (1,559) (2,823)
Accrued dividends on
preferred stock........... -- -- -- -- -- --
----- ------ ------ ------ ------- -------
Net income (loss)
applicable to common
stock..................... $ (91) $ (262) $ (267) $ (877) $(1,559) $(2,823)
===== ====== ====== ====== ======= =======
Net income (loss) per
common share.............. $(.89) $(1.20) $(1.11) $(3.64) $ (6.46) $(11.69)
===== ====== ====== ====== ======= =======
Weighted average number of
shares outstanding........ 102 219 241 241 241 241
===== ====== ====== ====== ======= =======
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------
(UNAUDITED)
THREE MONTHS ENDED
------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1998 1998 1999 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Network services revenues.. $ 77 $ 108 $ 146 $ 401
Operating expenses:
Network operations........ 775 865 1,168 1,651
Selling expense........... 522 502 605 1,801
General and administration
expenses................ 2,840 4,074 3,608 5,599
Amortization of deferred
compensation............ -- -- 112 5,030
Depreciation and
amortization............ 159 274 386 504
------- ------- ------- --------
Total operating expenses... 4,296 5,715 5,879 14,585
------- ------- ------- --------
Operating income (loss).... (4,219) (5,607) (5,733) (14,184)
Other income (expense)..... (253) (149) 415 (47)
Provision for income
taxes..................... -- -- -- --
------- ------- ------- --------
Net income (loss).......... (4,472) (5,756) (5,318) (14,231)
Accrued dividends on
preferred stock........... -- (452) (1,650) (1,650)
------- ------- ------- --------
Net income (loss)
applicable to common
stock..................... $(4,472) $(6,208) $(6,968) $(15,881)
======= ======= ======= ========
Net income (loss) per
common share.............. $(18.56) $ (.93) $ (.31) $ (.69)
======= ======= ======= ========
Weighted average number of
shares outstanding........ 241 6,671 22,396 22,886
======= ======= ======= ========
</TABLE>
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<PAGE> 30
We have generated greater revenue in each successive quarter in the last
six quarters, reflecting increases in the number of customers and buildings
served. Network operating expenses have increased in every quarter, reflecting
costs associated with deploying our fiber-optic networks in existing and new
markets and payments to providers of transmission capacity. Selling expenses
have increased with the acquisition of customers. General and administrative
expenses have generally increased in connection with the development of our
corporate infrastructure. Depreciation and amortization expenses have increased
in each quarter, reflecting the purchase of system infrastructure and system
equipment associated with the deployment of our fiber-optic networks.
Accordingly, our net losses have increased in each successive quarter.
LIQUIDITY AND CAPITAL RESOURCES
We have required significant capital to fund the construction and
installation of our fiber-optic networks within buildings and to purchase
electronic equipment for installation in building and metropolitan points of
presence. As of June 30, 1999, we had made capital expenditures of $21,902,000
since inception. We expect that our capital expenditures will increase
substantially in future periods as we construct our networks and purchase more
equipment. We will continue to seek access to additional buildings. If we are
successful in gaining access to additional buildings, we will have substantial
needs for additional capital for an indefinite period. We also expect to have
substantial and increasing operating losses and net losses.
Since our formation in December 1996 until November 1998, we funded our
capital expenditures and operating losses through $17,600,000 in loans and
advances. In November 1998, we consummated a series of reorganization and
recapitalization transactions, pursuant to which we issued shares of our common
and preferred stock for approximately $41,000,000 and used a portion of the
proceeds to repay the loans and advances. In December 1998, we sold additional
shares of common and preferred stock for aggregate proceeds of approximately
$25,000,000.
Since June 1998, we have received $10,500,000 in vendor commitments for
lease financing, subject to certain conditions. As of June 30, 1999, we have
financed approximately $6,557,000 of equipment additions through these lease
facilities and have outstanding capital lease obligations of approximately
$5,376,000.
As of June 30, 1999, we had committed to pay approximately $1,874,000 to
carriers under our existing connectivity contracts.
In March 1999, we entered into a credit facility with Chase Manhattan Bank
under which we can borrow up to $45,000,000, subject to certain conditions
including having less than $12,500,000 cash available at the time of initial
borrowing. We have not borrowed against the facility as of June 30, 1999 and
currently do not intend to. The facility will accrue interest at one of the
following or a combination of the following, at our option: the bank's prime
rate plus 3.5%, a base certificate of deposit rate plus 4.5%, Federal funds rate
plus 4%, or an Eurodollar rate plus 4.5%. The credit facility is secured by all
of our assets, except for the assets pledged in connection with our capital
lease obligations. We will pay a commitment fee of 1.5% on the unused portion of
the credit facility if we borrow against the facility. The facility, which
extends through October 2000, contains various restrictive covenants, including
the maintenance of certain financial ratios, the achievement of certain
operational targets and restrictions on certain activities.
As of June 30, 1999, we had cash and cash equivalents of $24,307,000.
In August 1999, we issued shares of common and preferred stock to a group
of financial sponsors for approximately $17,000,000.
Additionally, in August 1999, we issued shares of common and preferred
stock to our real estate partners for approximately $34,000,000. In October
1999, we issued warrants to acquire
28
<PAGE> 31
6,530,242 additional shares of our common stock to our real estate partners.
These warrants are exercisable upon our real estate partners meeting certain
performance obligations as outlined in the warrant acquisition agreements.
In addition, we may issue shares of common stock to pay for acquisitions.
Prior to the offering, we will have received irrevocable elections from all
preferred stockholders, whereby these parties will agree to convert all of their
preferred stock for 6,882,353 shares of common stock. Had the conversion of
preferred stock occurred at the beginning of each period, net income (loss) per
common share would have been $(.21), $(1.67), $(.62), and $(.66) for the period
from inception to December 31, 1997, the year ended December 31, 1998, and the
six months ended June 30, 1998 and 1999, respectively.
We estimate that our net proceeds from the sale of common stock in this
offering will be approximately $233,455,000, or $268,811,000 if the underwriters
exercise their overallotment option in full, after deducting estimated
underwriting discount and commissions, and offering expenses, based upon the
mid-point of our estimated offering price. We intend to use more than
$175,000,000 of the net proceeds from this offering for construction of
in-building fiber-optic networks and the remainder for working capital and
general corporate purposes, including to fund operating losses. We may also use
a portion of the net proceeds to acquire or invest in complementary businesses,
technologies, services or products. However, we currently have no material
commitments or agreements with respect to any of these types of transactions.
We estimate that the net proceeds of this offering in addition to our cash
on hand will be sufficient to fund our operations and the projected deployment
of our network through approximately the middle of 2001. We do, however, expect
to continue our growth, expansion and the further development of our network and
services beyond that point. Accordingly, we expect that we will eventually need
to arrange for additional sources of capital through the issuance of debt or
equity or additional bank borrowings. We have no commitments other than those
described above for any such additional financing, and we cannot be sure that we
will be able to obtain any such additional financing at the times required and
on terms and conditions acceptable to us. In such event, our growth could slow
and operations could be adversely affected.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of many factors. These factors
include:
- our ability to meet our construction schedules;
- obtaining favorable prices for purchases of equipment;
- our ability to develop, acquire and integrate the necessary operational
support systems;
- the cost of network development in each of our markets;
- demand for our services;
- the nature and penetration of new services that may be offered by us;
- regulatory changes; and
- changes in technology and competitive developments beyond our control.
We also expect that we will require additional financing or require
financing sooner than anticipated if our current business plans change, the
assumptions underlying those plans are inaccurate, if we engage in any material
acquisitions or we are not successful with this offering. We believe that our
current cash position and the net proceeds of this offering are adequate to fund
our current level of operations although this would require modification of our
business plan to reduce our network development plans. If we require additional
capital, we may raise such capital with proceeds from public or private sales of
equity and debt securities, credit facilities and other borrowings. There can be
no assurance that such financing will be available on a timely basis, on terms
acceptable to us or at all.
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<PAGE> 32
RECENT ACCOUNTING PRONOUNCEMENTS
We do not believe that any recent accounting pronouncements will have a
material impact on our financial statements.
YEAR 2000 READINESS DISCLOSURE
We view Year 2000 readiness as the ability to:
- correctly handle date information before, on and after December 31, 1999;
- function properly without material changes in operation resulting from
the advent of a new century; and
- recognize the Year 2000 as a leap year.
PROCESS. Our Year 2000 project is composed of four phases:
(1) INVENTORY. In the inventory phase, we identified all of the
systems and equipment that could be impacted by the Year 2000 problem. The
inventory phase is complete for all systems and equipment.
(2) ASSESSMENT. In the assessment phase, we assessed whether the
systems and equipment identified in the inventory are Year 2000 ready. The
assessment phase is complete for all systems and equipment.
(3) REMEDIATION. In the remediation phase, we seek to remedy any Year
2000 problems in systems or equipment we identified in the assessment
phase. Where the source of a Year 2000 problem is software or equipment
provided by a third party, we either obtain a Year 2000 ready upgrade from
the third party or obtain equivalent software or equipment from another
source. The remediation phase has been finished.
(4) TESTING. In the testing phase, we test the systems and equipment
that were the subject of remediation efforts to verify that they are Year
2000 ready. The testing phase has been completed.
THIRD PARTY PRODUCTS. We acquired our material systems and equipment
from third party vendors, and we have received assurances from our major
third party vendors either that the products we use are Year 2000 ready, or
that their recommended upgrades, which we have installed, are Year 2000
ready. In addition to these assurances, with the exception of our telephone
and security systems, we test all third party products to determine whether
they are Year 2000 ready. With the exception of one product from one
vendor, which we have not assessed and for which we have not received any
assurances from the vendor, we are not currently aware of any material
operational issues associated with preparing our systems for the Year 2000.
With respect to the one product for which we have not received assurances,
we have replaced the product with one that is Year 2000 ready. Since May
1999, we have required, as part of our quality testing process, that all
new products and services are tested for Year 2000 readiness before they
are introduced. Despite the assurances we receive and the testing we
perform, we may experience material unanticipated problems, both
operational and other, as a result of the Year 2000. In addition, there can
be no guarantee that we identified and remediated all of our material
systems that could potentially be impacted by the Year 2000. We may also
experience material unexpected costs or business interruption caused by
undetected errors or defects in the technology used in our systems. This
could have a material adverse effect on our business, financial condition,
results of operations and the price of our common stock.
SERVICES. We rely on telecommunications providers, building managers
and other service providers to deliver services to our customers. Our
ability to provide our Internet access and other services is dependent on
the Year 2000 readiness of these third parties.
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<PAGE> 33
We have sought and received assurances from the major telecommunications
carriers we use that they are Year 2000 ready, and we have received such
assurances from the majority of such building managers. Nevertheless, we
cannot test the Year 2000 readiness of such carriers, managers and
providers, and failure of any of these third parties to be Year 2000 ready
by January 1, 2000 could result in a deterioration in the performance of
our network or other systems, or a complete system failure, which could
have a material adverse effect on our business, financial condition,
results of operations and the price of our common stock. Additionally, the
Internet could face serious disruptions arising from the Year 2000 problem.
We are also subject to external forces that might generally affect
industry and commerce, such as utility Year 2000 compliance failures and
related service interruptions. All of these factors could have a material
adverse effect on our business, financial condition, results of operations
and the price of our common stock.
CUSTOMERS. The ability of our customers to receive our services
depends on the readiness of their personal computer equipment and the
equipment and services of telecommunications and other third party vendors.
We do not currently have any information concerning the Year 2000 readiness
status of our customers. As is the case with other similarly-situated
companies, if our current or future customers fail to achieve Year 2000
readiness, it could have a material adverse effect on our business,
financial condition, results of operations and the price of our common
stock.
COSTS/CONTINGENCY PLANS. The total budget for our Year 2000 project is
approximately $500,000 and is being expensed as incurred and funded through
operating cash flows. We do not expect to exceed the estimated budget.
We have not developed a contingency plan to address situations that
may result if either we or third parties upon which we rely are unable to
achieve Year 2000 readiness. We intend to perform a risk analysis for our
key services and develop a contingency plan where appropriate. We expect to
conclude this planning effort by November 1999. In addition, in order to
mitigate the effects of Year 2000 readiness problems from
telecommunications carriers, which are beyond our control, we utilize
multiple carriers in key locations. The cost of developing and implementing
a comprehensive contingency plan, if necessary, could be material.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio and to a lesser extent to our outstanding debt obligations. We
typically do not attempt to reduce or hedge our market exposure on our
investment securities because a substantial majority of our investments are in
fixed-rate, short-term securities. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the fixed-rate, short-term nature of the
substantial majority of our investment portfolio. In addition, substantially all
of our outstanding indebtedness at June 30, 1999 is fixed-rate debt.
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BUSINESS
HISTORY
Our company was formed in 1996. In 1998, we sold equity to several
financial sponsors and began implementing our business plan. By the end of 1998,
we had designed, constructed and were operating fiber optic networks inside 4
office buildings with more than 2.9 million rentable square feet in 2
metropolitan areas. In 1999, we completed another round of private equity
financing and signed agreements with more than a dozen owners and managers of
significant commercial real estate portfolios. These agreements with real estate
owners and managers give us the right to install and operate fiber-optic
networks in more than 1,000 office buildings with more than 325 million rentable
square feet. Today, we own and operate our fiber-optic networks inside 61
buildings with more than 33.6 million rentable square feet in 16 metropolitan
areas.
OUR MARKET OPPORTUNITY
Demand for connectivity to the Internet is growing as businesses are
realizing that the Internet can significantly enhance communications among
offices and employees as well as with customers and suppliers. In addition, more
and more businesses use the Internet to conduct business and more effectively
manage their human resources, allocate capital, reduce operating costs, access
valuable information and reach new markets. According to International Data
Corporation, business-to-business commerce over the Internet amounted to $24.8
billion in 1998 and is expected to be $632.9 billion in 2003.
While most large enterprises build or lease expensive, dedicated high-speed
networks, most small- and medium-sized businesses are using comparatively slow
dial-up connections. Forrester Research estimates that in 1998 approximately 93%
of enterprises accessed the Internet through dial-up connections. We believe
that faster, always-on connections enhance the productivity of employees of
small- and medium-sized businesses. International Data Corporation forecasts
that dedicated connections to the Internet for small- and medium-sized
businesses will grow from approximately 240,000 in 1998 to approximately 771,000
in 2000, representing a 83% compounded annual growth rate. Forrester Research
projects that the worldwide market for dedicated Internet access spending among
businesses will grow from $1.4 billion in 1998 to approximately $33.5 billion by
2003.
In addition to Internet connectivity, small- and medium-sized businesses
already demand enhanced services such as web hosting, network security,
e-commerce, video conferencing, data storage and retrieval, conference calling,
branch office connectivity and business television. However, most small- and
medium-sized business do not have full access to these services because the
existing in-building infrastructure is unable to provide broadband services to
small tenants. According to International Data Corporation, value-added services
is one of the fastest growing segments of the Internet services market and is
expected to grow from $3.0 million in 1998 to over $12.9 billion in 2003. In
addition, International Data Corporation estimates that Web hosting revenue from
small- and medium-sized businesses will grow from $658 million in 1998 to over
$3.4 billion in 2000, representing 96% of the total web hosting market.
Businesses of moderate size also do not usually have the resources to fully
analyze the choice between evolving service options on their own.
OUR SOLUTION
We provide small- and medium-sized businesses ultra high-speed Internet
access, business-oriented television for display on computer desktops, enhanced
conference calling services as well as other broadband services. We market these
services directly to our target customers with
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<PAGE> 35
a consultative approach to facilitate our customers' selection of appropriate
services. Our solution offers small- and medium-sized businesses a number of
important advantages, including:
- ULTRA HIGH-SPEED INTERNET ACCESS. Our Internet access products are able
to operate at speeds that are otherwise typically unavailable or
unaffordable to small- and medium-sized businesses. Our standard service
operates at ten megabits of data per second, which is substantially
greater than those usually available with digital subscriber lines, cable
modems, dial-up modems, integrated services digital network lines and T-1
circuits, the later of which transmits at 1.54 million bits of data per
second.
- ALWAYS-ON CONNECTIVITY. While dial-up connections require a user to dial
a phone number and wait while the modem connects to the Internet, our
service is always-on, providing an instantaneous connection and the
capability to send and receive data continuously.
- EASY BANDWIDTH UPGRADES. As our customers' needs evolve, our network
architecture enables us to provide our customers with higher bandwidth
and new broadband services. Using commercially available equipment, we
can increase the transmission speed of our infrastructure by 100 times,
to one billion bits of data per second.
- BROAD RANGE OF VALUE-ADDED SERVICES. In addition to providing ultra
high-speed Internet service, we offer business-oriented television and
other broadband data services to our customers. We intend to expand the
services we provide in the future to include other enhanced services such
as web hosting, network security, e-commerce, video conferencing and data
storage and retrieval, thereby increasing the value of a connection to
our network.
- AFFORDABLE DESKTOP-BASED MONTHLY RATE. We typically price our services on
a per desktop basis at a cost that makes our solutions affordable and
scaleable for our customers. This approach permits our customers to
initiate a relationship with us for a low monthly cost and increase the
number of employees with access to our network once our products
demonstrate their ability to enhance productivity.
- RAPID, EASY INSTALLATION. Unlike other providers of bandwidth-enabled
services who rely on local telephone companies to complete each customer
installation, we are able to independently provision a customer within a
few days. We connect each customer's local area network directly to our
fiber-based network so that our customers usually do not need to purchase
or install any new equipment.
- RELIABILITY. We provide support for our services through a national
customer care center and a national operations control center, both
located in Dallas. The national centers continuously monitor the network
for disruptions in service, remotely resolve problems, configure networks
and compile data on customer service levels. In addition, field
operations personnel augment our customer care center by providing local
support in each metropolitan market that we serve.
STRATEGY
Our objective is to be the primary provider of broadband communications
services to our target market. To achieve this objective we will employ the
following strategies:
- PARTNER WITH REAL ESTATE OWNERS. We seek to gain a competitive advantage
by partnering with large-scale building owners and securing the right to
install our fiber-optic networks inside office buildings that meet our
strategic criteria. We believe that having our services available in a
building assists the building owner in its tenant leasing and retention
efforts. We generally target buildings with more than 100,000 rentable
square feet and 10 or more tenants. We have already secured access to
more than 1,000 office buildings with
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<PAGE> 36
aggregate rentable space of more than 325 million square feet. We provide real
estate owners a modest portion of the revenue we generate from tenants in their
buildings.
- SELL BROADBAND CONNECTIONS AND BANDWIDTH-ENABLED APPLICATIONS. We provide
extremely fast data transport to our customers and augment their ability
to use those connections productively by providing sophisticated
communications applications. For example, we are designing
industry-specific Web pages, such as Web pages for law firms, that will
enable our customers to use the power of a broadband connection to the
Internet to enhance their productivity. These advanced applications help
us generate demand for connections to our network and improve the
usefulness of those broadband connections.
- OWN THE KEY ELEMENTS OF THE LOCAL BROADBAND NETWORK. We strive to be the
first broadband communications provider that owns the critical first mile
fiber-optic connection in the buildings we target. While local and long
distance broadband capacity has recently become readily available from a
wide variety of providers, in-building fiber-based broadband capacity is
typically not available. We believe that our in-building broadband
networks are highly valuable because they allow us to provide scalable,
ultra-high speed communications services to the businesses we target.
- CAPITALIZE ON OUR FIRST MOVER ADVANTAGE. We have already established a
national presence by installing hubs and in-building networks in 16
metropolitan areas. Once we have established a local presence in a
metropolitan area, we are able to expand our network into additional
buildings quickly and economically.
- DESIGN NETWORKS FOR THE FUTURE. We have designed our network architecture
to be robust enough to handle the predicted expansion of demand for
broadband capacity and services. Our fiber-based networks are easily
upgradeable with the use of commercially available equipment and software
and we expect further technological developments to continue to improve
the data transmission capacity of our facilities.
- TARGET SMALL- AND MEDIUM-SIZED BUSINESSES. We believe that small- and
medium-sized businesses are underserved by Internet, data and voice
communications service providers. Our in-building infrastructure
positions us to provision rapidly and provide superior broadband
communications products and services directly to these target customers.
- FOCUS SALES AND MARKETING EFFORTS. We focus our sales and marketing
efforts on the tenants of buildings in which we own and operate a
fiber-optic network. We have developed building-specific marketing and
promotional techniques, such as lobby events and advertising in landlord
newsletters. This focused approach should enable us to have lower per
customer sales and marketing costs than our competitors.
- EXPAND OUR SERVICE OFFERINGS. We seek to widen our array of advanced
broadband communications service offerings. Because we own in-building
fiber-optic networks, we are able to provide these broadband services
reliably and directly to our customers.
- OFFER SERVICES TO CUSTOMERS IN SELECTED OTHER BUILDINGS. Although we
focus our sales and marketing efforts on buildings in which we have
installed our broadband fiber-based networks, by also offering our
services outside these buildings we are better able to serve the
communications needs of our customers. For example, we can offer our
customers wide-area network services to reach their branch offices
located in buildings in which we have not installed a fiber-optic
network. We believe that by selectively offering our services outside
buildings in which we own fiber-based facilities, we can generate
additional revenue with only modest incremental sales and marketing
costs.
- PROVIDE EXCELLENT CUSTOMER CARE. We are dedicated to providing our
customers with the highest levels of customer service and satisfaction in
the industry. We believe we enjoy a competitive advantage because our
network and electronic equipment are located inside
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<PAGE> 37
buildings occupied by our customers. We have technical staff present in each of
our markets, who focus their efforts on buildings in which we provide service.
We also operate a national customer care center in Dallas that is staffed 24
hours a day, 365 days per year.
- BUILD OUR BRAND. We seek to build our brand to assist us in becoming a
leading provider of broadband communications services. We believe that
our brand will, over time, enhance our ability to gain access to
additional buildings. Because our services provide significant value to
small- and medium-sized businesses, we believe that by branding buildings
as ARC connected, we will assist owners in marketing office space. In
addition, developing a strong, lasting brand should help us in our
efforts to add new customers, reduce customer churn and attract
employees.
PRODUCTS AND SERVICES
Our products and services are designed for small- and medium-sized
businesses and today include ultra high-speed Internet access, business-oriented
television, enhanced conference calling services and other broadband data
services. These products and services and the additional products and services
that we intend to offer in the future fall into three categories and are
summarized as follows:
<TABLE>
<CAPTION>
CONNECTIVITY PRODUCTS BANDWIDTH-ENABLED APPLICATIONS MANAGED DATA SERVICES
--------------------- ------------------------------ ---------------------
<S> <C> <C>
- Internet Access - Business Television - Enhanced Conference Calling
- Virtual Private Networks - Messaging - Design
- Remote Access - Web Hosting - Implementation
- Voice - Content Services - Monitoring/Management
- Collaboration Applications - Support
- Video Conferencing - Backup
- eBusiness Toolkit
- Industry-Focused Web Pages
</TABLE>
CONNECTIVITY PRODUCTS. We use our in-building fiber-optic infrastructure
and networks to provide ultra high speed, always-on Internet access. Our
Internet access service is up to 175 times faster than standard dial-up modems
and operates at speeds substantially faster than a T-1 circuit, which transmits
data at 1.54 million bits of data per second. In addition, because our
infrastructure provides a dedicated fiber-optic connection for each customer,
our customer's Internet traffic is secure from other customers in the building.
We believe our connectivity services offer a combination of price and
performance that is substantially better than alternative service offerings that
are currently available to our target customers. We also offer branch office
connections to enable our customers to exchange data with their remote offices.
Our connectivity pricing varies by market, building and customer size. For
Internet access, we charge an initial installation service fee and a minimum
monthly fee for the first desktop connected. The installation service fee is
generally a fixed amount independent of the types of services provided to our
customers and the number of desktops connected to our network. We charge an
incremental monthly fee for each additional desktop, which typically ranges from
$50 to $5. These services are provided under month-to-month contracts. This
enables the typical small- to medium-sized business customer to connect its
desktops to our services for as little as several hundred dollars per month. Our
pricing is competitive with other broadband Internet access services while
generally providing substantially more bandwidth. We believe our customers
benefit from our desktop-by-desktop pricing policy because they only incur
expense for the actual number of desktops connected to our networks and they
therefore are able to add users at a pace that matches their resources and
requirements.
BANDWIDTH-ENABLED APPLICATIONS AND CONTENT. We currently offer our
customers a business-oriented television service that provides a high-quality
video feed from CNN and Bloomberg
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Television directly to computer desktops over our in-building networks. Many
office buildings do not have cable or satellite television service, so tenants
are unable to receive these business-oriented information services through
traditional means. We charge our customers on a per-desktop basis for this
service. We are developing additional bandwidth-enabled products with a focus on
providing value-added information services to our customers. We expect to offer
a number of new services, including industry-focused web pages known as portals,
over the next several years. In addition to developing new services, we may seek
to acquire businesses that have developed services which would enhance the value
of our networks. We might pay for these acquisitions with common stock.
MANAGED DATA SERVICES. Many of our current and targeted customers require
assistance in managing their data and data networks. We provide systems design
services and offer support and assistance with the implementation of our
customers' data networks. In addition, we offer enhanced conference calling
services that use the Internet to enable efficient scheduling and operation of
conference calls.
NETWORK ARCHITECTURE
We design, install, own, and operate Internet-protocol-based data networks
that provide broadband capacity to our customers. Our networks are a combination
of:
- fiber-optic infrastructure that we design, install, own and manage inside
an office building;
- electronic equipment at a building point of presence, usually located in
the basement of the building;
- electronic equipment at a metropolitan hub, which is where we aggregate
and disseminate traffic, which we call a metropolitan point of presence;
and
- leased facilities connecting our networked building to our metropolitan
point of presence and our metropolitan point of presence to a national
service provider, such as GTE Internetworking, Qwest or Level 3.
FIBER-OPTIC FACILITIES INSIDE BUILDINGS. Inside of our network buildings,
we design, install, own and manage a fiber-optic infrastructure that typically
runs from the basement of the building to the top floor inside the building's
vertical utility shaft. This fiber-optic infrastructure is designed to be
capable of carrying data and voice traffic for all the building's tenants for
the foreseeable future. We initiate service for our customers by connecting a
fiber-optic cable from a customer's local area network to the fiber in the
vertical utility shaft. Our customer then has dedicated and secure access to our
network using a link known as an Ethernet connection. Ethernet connections
generally permit the transmission of ten million bits of data per second, and
can transmit as much as one billion bits of data per second.
OUR BUILDING POINTS-OF-PRESENCE. Inside the building, usually in the
basement, we also establish a building point of presence. In each building point
of presence, we connect the fiber-optic cable to Cisco routers and other
electronic equipment that enables the transmission of data and video traffic and
aggregates and disseminates traffic to and from those cables. We typically
obtain the right to use a small amount of space in the basement of our buildings
to establish the building point of presence.
LEASED FIBER-OPTIC FACILITIES OUTSIDE OUR BUILDINGS. Within each
metropolitan area that we serve, we have a metropolitan point of presence, at
which we aggregate and disseminate traffic to and from all of our network
buildings in a city. We typically connect each of our buildings to the
metropolitan point of presence using fiber-optic cables. These fiber-optic lines
are leased from carriers that have previously installed fiber in the local
market. In our experience to date, there are generally several providers in the
local market who are able to provide us with local connectivity for traffic
between our buildings and the metropolitan point of presence.
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OUR METROPOLITAN POINTS OF PRESENCE. At our metropolitan point of presence,
we install the electronic equipment necessary to provide our services in the
metropolitan area. This equipment includes network computer servers, traffic
routers and other items. We generally connect each metropolitan point of
presence to multiple major Internet service providers that provide Internet
connectivity to our network. Each metropolitan point of presence is connected to
at least one other metropolitan point of presence in a different city over a
dedicated circuit to increase redundancy in our network. We also connect each
metropolitan point of presence to our national operating center in Dallas, Texas
where we manage and monitor our network traffic.
The architecture of our network provides us with significant competitive
advantages, including the ability to:
- rapidly connect customers without requiring complex provisioning of local
phone lines and circuits from phone companies;
- capitalize on advanced Internet-protocol-based technology to construct a
more efficient and lower cost network;
- provide low cost, high performance services;
- offer always-on, secure connections to our network and the Internet; and
- provide a flexible platform for bandwidth upgrades and new service
offerings as data communications technology and applications continue to
develop.
CONSTRUCTION
We have assembled an in-house centralized construction group with
experience in office building construction and electrical engineering. We
believe that our construction capabilities are a key competitive advantage, as
they allow us to rapidly and efficiently deploy our network within the markets
we penetrate.
STANDARD CONSTRUCTION PRACTICES. Our construction group has developed
standardized installation drawings and details that can be applied to most of
our construction projects and result in high quality construction processes. Our
construction practices are focused on ensuring compliance with applicable
building and industry codes and standards. Our expertise in designing and
constructing in-building advanced data networks allows us to reduce the space
and resources needed to support our fiber-optic infrastructure and associated
electronic systems in buildings.
DESIGN AND IMPLEMENTATION OF OUR IN-BUILDING NETWORK. Prior to commencement
of construction of a fiber-optic network inside an office building, our
construction management staff conducts a formal, detailed, building site survey.
Our construction team then develops a site-specific fiber and cable system
design using our standardized practices, and prepares a formal installation
contract. We utilize computer assisted design and drawing systems to design,
draw and document our system installations. We generally engage the specialty
electrical contractor who is most familiar with the building to perform the
installation under the supervision of our own construction management personnel.
We typically purchase construction services on a fixed price basis.
CONSTRUCTION TIME AND COST ASSOCIATED WITH OUR IN-BUILDING NETWORKS. The
total construction time for the completion of our in-building fiber-optic
infrastructure and related equipment room facility is typically between 60 and
90 days for a major metropolitan office-building complex. We typically spend
several hundred thousand dollars per building for the construction of the
vertical fiber-based infrastructure and electronic equipment. This cost has
fallen considerably as we have gained experience and standardized our
construction processes. These construction costs vary considerably with building
size, location, complexity of the construction project and other factors.
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We believe that our current cost structure, together with our technical
expertise and our rapid construction process, provide us with a competitive
advantage.
CONSTRUCTING CONNECTIONS TO OUR CUSTOMERS. Once we have completed the
construction and installation of our in-building fiber-optic network and have
received an order for service from a customer, we connect the customer's local
area network to our in-building network. Typically, this connection can be
completed within a few days by one of our employees or an independent contractor
hired for this purpose. The connection requires the installation of a piece of
electronic equipment to enable the connection of a strand of fiber-optic cable
from the vertical riser to the customer's local area network. Once this
connection is made, our installation representative will help the customer test
the network connection to verify that the intended desktops are receiving our
service. This approach to provisioning service to our customers is intended to
establish a relationship with the customer that will encourage future use of our
technical support and data management services.
OUR COMPETITIVE ADVANTAGE
Small- and medium-sized businesses currently face a limited choice of
alternatives for high-speed Internet access. Over the last few years, digital
subscriber line technologies, cable modems, T-1-based solutions and
fixed-wireless connections have emerged as alternative technologies for
high-speed, always-on service.
We believe that our fiber-optic-based solution is generally superior for
most of our target customers because our network provides:
- consistent speed and quality of signal that does not vary with distance
of the building from our metropolitan hub or environmental factors such
as rain;
- rapid, relatively uncomplicated provisioning of new customers that is not
dependent on the provider of local connectivity;
- symmetrical broadband capacity that will allow us to offer enhanced
business communication services such as full motion video conferencing;
- scaleable, competitive pricing schemes which are based on the number of
desktops connected to the network; and
- substantially higher speeds and an easy path to increased bandwidth.
For more information about the highly competitive market in which we
operate and the competitive risks we face, see "Risk Factors -- The sector in
which we operate is highly competitive, and we may not be able to compete
effectively."
MARKETING AND SALES
MARKETING STRATEGY. We directly market our services to the tenants in
buildings in which we have a fiber-optic infrastructure. To reach tenants, we
use a combination of direct marketing, public relations, event marketing, and
personal selling. Prior to marketing in a building, we conduct a detailed
customer analysis with the help of the building owner. We generally launch
service in each of our buildings with a promotional event, typically in the
lobby, at which we demonstrate our services and generate leads. Based on tenant
data provided by the building owner and other sources, we often use approaches
that are tailored to specific businesses, such as law firms, accounting firms,
consulting firms and other business segments. We also use promotional materials
and employ public relations firms to raise awareness of our services before an
official sales launch within a building or market, and later follow up with
event marketing and personal selling to launch and increase tenant sales in each
building. We also
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attempt to work closely with the building owners, management and leasing
representatives in both our initial and ongoing marketing efforts.
SALES FORCE ORGANIZATIONAL STRUCTURE. We have a sales organization, which
is managed by regional sales managers. These regional sales managers usually
have multiple account teams reporting to them. These regional account teams
consist of an account manager, supported by a sales engineer and a project
administrator and are typically responsible for two to four buildings. The sales
engineer provides our customers with very specific technical consulting on local
area and wide area networking and other application implementation and
integration issues. This is generally important to small- and medium-sized
businesses that typically have limited information technology staffs and
expertise. Our sales team typically jointly markets our services with the local
building management or leasing organization.
SALES STRATEGY. Our experienced sales team tailors the right broadband data
solutions for our customers using a consultative sales approach. We also market
to tenants of buildings that are not yet connected to our network through
similarly targeted tactics, including the use of local market and on-line
advertising. We believe that this approach is part of our competitive advantage
because this level of service was previously available only to very large
enterprises either through in-house expertise or through expensive consulting
contracts.
SALES CENTERS. We build and operate sales centers in each of our markets
where sales people and real estate leasing agents can bring customers or
prospects to obtain hands-on experience with our products and customer service.
These centers are also used to stage marketing events and seminars.
SALES SYSTEMS SUPPORT. To support our sales and customer service processes,
we employ a sales and customer service automation application. The system is
based around a database that enables all sales and service personnel to have
instantaneous access to current and historical customer information. We are also
currently implementing an Internet-based customer interface known as an extranet
that will allow registered customers to purchase additional services, modify or
otherwise customize their service profiles.
REAL ESTATE SELECTION AND MARKETING
To build our fiber-optic infrastructure inside of office buildings and
offer our services to the tenants of those buildings, we must first secure the
right to install fiber-optic cable in the utility shaft of the building. We
carefully target the buildings in our markets that we wish to secure rights in
and then work with the owners of those buildings to negotiate a partnership that
will benefit both the property owner and us.
PROPERTY SELECTION. We consider a number of criteria in selecting buildings
we target for installation of our fiber-based networks. These criteria include
building location, building size, number of tenants, tenant mix, proximity to
local fiber-optic systems, relationship to other network buildings and
suitability for installation of our network infrastructure. In addition, we
consider the presence of any existing broadband communications network systems
in the building. We have a team of real estate professionals who conduct the
assessment necessary to identify candidate buildings prior to the signing of
lease or license agreements with the owners of the buildings selected.
ARRANGEMENTS WITH REAL ESTATE OWNERS. Once we have selected an office
building or collection of office buildings in which we would like to offer our
services, we contact the property
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owner to secure the right to access the building and install our network. When
we contact building owners, we emphasize the following benefits of partnering
with us:
- we install and manage the in-building fiber-optic communications
infrastructure at no cost to the building owner or manager;
- our fiber-optic infrastructure and service offerings provide building
owners with a significant competitive advantage in attracting and
retaining tenants;
- we pay building owners either a fixed rental fee or a modest percentage
of the revenue we generate in the building; and
- our real estate services and construction groups are staffed with
experienced property management and construction management personnel who
reduce the disruption to the property owner and the customer.
Our typical lease or license agreement with a building owner is for a total
term of ten or more years. The agreement provides for the development of the
network installation design and the approval of the construction plans and
arrangements by the building owner. The agreement provides for ongoing reporting
to the building owner of our network expansion as we add customers and provides
for revenue sharing or fixed monthly rent.
MAJOR REAL ESTATE RELATIONSHIPS. We have agreements with more than a dozen
large commercial property owners and managers to obtain access to and the right
to install and operate networks in more than 1,000 buildings in major
metropolitan areas in the United States and selected international markets. Our
relationships include the following:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
PROPERTY OWNER OR MANAGER BUILDINGS PRINCIPAL CITIES
- ------------------------- ----------- --------------------------------------------
<S> <C> <C>
Whitehall 195 Boston, Dallas, Denver, Houston, Los
Angeles, Northern NJ and Washington, DC
Transwestern 115 Houston, Los Angeles, Phoenix and Salt Lake
City
Trizec Hahn 110 Atlanta, Chicago, Dallas, Houston, Los
Angeles, New York City and Washington, DC
Cornerstone 105 Los Angeles, Oakland, Phoenix and San
Francisco
Equity Office Properties 105 Boston, Philadelphia and Washington, DC
Hines 95 Chicago, Houston, Los Angeles, New York
City, San Francisco and Washington, DC
Vornado 70 New York City and Washington, DC
Boston Properties 70 Boston, Central NJ, New York City, San
Francisco and Washington, DC
Shorenstein 30 Boston, Chicago, Miami, New York City and
San Francisco
Hamilton 30 Chicago
Met Life 20 Chicago, Dallas, Houston and New York City
</TABLE>
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PENETRATION. The table below summarizes our success at selecting property
and negotiating license arrangements in the ten largest United States real
estate markets covered by Torto Wheaton data. Target buildings are generally
those designated by Torto Wheaton as Class A, Class B or Class C commercial
office buildings with more than 100,000 rentable square feet. The data below
concerning the total number and approximate square feet of target buildings is
from Torto Wheaton. Data for buildings and square feet that we have in operation
or under contract includes only those buildings with more than 100,000 square
feet.
<TABLE>
<CAPTION>
TARGET BUILDINGS TARGET BUILDINGS SQUARE FEET
--------------------------------- ---------------------------------
IN OPERATION OR IN OPERATION OR
MARKET UNDER CONTRACT TOTAL IN MARKET UNDER CONTRACT TOTAL IN MARKET
- ------ --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
New York City 49 749 40,643,000 352,000,000
Washington, D.C. 126 821 30,660,000 168,000,000
Chicago 70 501 34,362,000 156,000,000
Los Angeles 45 477 15,044,000 122,000,000
Dallas 36 397 15,246,000 108,000,000
Houston 58 359 25,440,000 100,000,000
Boston 67 400 20,078,000 92,000,000
Atlanta 37 322 14,811,000 80,000,000
Northern New Jersey 22 361 5,607,000 76,000,000
San Francisco 49 204 21,196,000 53,000,000
</TABLE>
NETWORK OPERATIONS
Our operations and customer care facilities are located in Dallas, Texas.
The operations center is staffed with skilled technicians and engineers and is
equipped with computerized network management tools.
PROVISIONING A CUSTOMER. We believe that rapid activation of services is
one of our key competitive advantages. We generally provide our customers with a
conservative estimate for provisioning time that ranges between one to several
days from receipt of contract.
PROVIDING CUSTOMER SERVICE. We believe that a high level of customer
service is required for us to build our brand and develop a strong reputation
among the tenants in our buildings. All of our customer service is managed
in-house and is available 24 hours a day, 365 days a year. Our customer service
representatives are equipped to handle requests for all of our services. We
strive to answer all calls quickly, provide rapid resolution and follow up with
customers to ensure satisfactory resolution. We use a computerized relationship
management system to capture, track and save customer call details. Information
is stored in a database that provides a valuable source of feedback about our
customer satisfaction and service quality.
MANAGING THE NETWORK. The network operations center is staffed 24 hours a
day, 365 days a year. All of our network assets are continuously monitored for
events that may interrupt or degrade service. Traffic and service-level
statistics are gathered to report performance, plan additional capacity and
communicate with our customers. Our technical staff is trained in provisioning,
activation, maintenance and troubleshooting. Service-affecting events are
automatically detected and communicated to our technical managers. Our system
assigns network events to network operations engineers for resolution.
PERFORMING FIELD SUPPORT. Field operations engineers are deployed in each
of the metropolitan markets we serve. Our field operations engineers are on call
24 hours a day. They perform on-site customer support, service activation, field
troubleshooting and equipment repair. We support our field personnel with a
computerized spare parts management system that provides delivery of spare parts
within each city served.
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<PAGE> 44
REGULATION
We are subject to numerous local regulations such as building and
electrical codes, licensing requirements and construction requirements. These
regulations vary on a city-by-city and county-by-county basis. There is no
current legal requirement in a large majority of states that owners or managers
of commercial office buildings give access to competitive providers of
telecommunications services, but such laws and regulations have been proposed in
the past and may be adopted in the future. On June 10, 1999, the FCC initiated a
regulatory proceeding on a number of issues related to utility shaft access in
multiple tenant environments, including the following:
- the FCC's tentative conclusion that utilities must allow
telecommunications and cable service providers access to rooftop and
other rights-of-way and utility shaft conduit in multiple tenant
environments on just, reasonable and nondiscriminatory rates, terms and
conditions;
- whether incumbent local telephone companies should make available
unbundled access to riser cable and wiring within multiple tenant
environments; and
- whether building owners offering access to any telecommunications
provider should be required to make comparable access available to all
such providers on a nondiscriminatory basis, and whether the FCC has the
authority to impose such a requirement.
In addition, legislation has been introduced in the U.S. Congress that addresses
issues relating to telecommunications access to buildings owned or used by the
federal government. We cannot predict the outcome of the FCC's proceeding or of
any legislation, nor what effect, if any, it may have on our business.
The FCC regulates common carriers' interstate services. State public
utilities commissions exercise jurisdiction over intrastate basic
telecommunications services, but we believe do not regulate most enhanced
services, which involve more than the pure transmission of customer-provided
information. The FCC has preempted certain inconsistent state regulation of, and
does not itself regulate, enhanced services. We believe that all of the
communications services that we currently provide are enhanced services and
therefore not subject to direct regulation. The offerings of many of our
competitors and vendors, especially incumbent local telephone companies, are
subject to direct federal and state regulations. These regulations change from
time to time in ways that are difficult for us to predict.
Through subsidiaries, we are in the process of applying for, and have
received in some states, authority from various state regulatory commissions and
the FCC to provide basic telecommunications services, such as voice telephony
service. These subsidiaries will be subject to direct state and federal
regulation upon approval of their applications. We do not expect to encounter
substantial legal barriers to entry into regulated telecommunications services.
We also do not expect to face regulatory restrictions on the pricing or terms of
any regulated telecommunications service offerings we might choose to offer that
would have a material adverse effect on our business. Changes in the regulatory
environment, however, could have a material adverse effect on our business.
The Telecommunications Act of 1996 substantially altered the federal and
state regulatory environment for telecommunications services. Among its more
significant provisions, this act:
- removed most of the significant legal barriers to entry into
telecommunications service, including local exchange service markets;
- required incumbent local telephone companies to interconnect with
competitors through unbundled network elements and with provision of
operations support systems, reciprocal compensation, local number
portability, dialing parity and collocation;
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<PAGE> 45
- required incumbent local telephone companies to offer their retail
services at wholesale discounts for resale by competitors;
- required incumbent local telephone companies and utilities to grant
access to their rights-of-way, conduit and ducts;
- established criteria and procedures for entry of Bell Operating Companies
into long distance service in their local service areas; and
- directed the FCC to establish an explicit subsidy mechanism for the
preservation of universal service.
We anticipate that, eventually, the Bell companies' applications to provide
in-region long distance service will be granted, at which time the Bell
companies will be able to compete more effectively in various markets, including
against us. Bell Atlantic has an application pending at the FCC to provide long
distance service in New York State. Legislation has been introduced to allow the
Bell companies to provide long distance Internet and high speed data services.
We do not know what the outcome or effects of these proceedings and legislation
will be.
In September 1999, the FCC declined to require incumbent telephone
companies to make their facilities used to provide high-speed data offerings,
such as digital subscriber line equipment, available to competitors as an
unbundled network element. The FCC has a pending regulatory proceeding regarding
steps to spur the deployment of broadband transmission capabilities and advanced
services, by both incumbent telephone companies and their competitors. The rules
adopted by the FCC in this area could have a material effect on our competitive
position with regard to incumbent telephone companies and other
telecommunications companies.
The FCC and state commissions may act in the near future to change the
charges for Internet traffic handled in part by incumbent local telephone
companies and Internet service providers' obligation to contribute to universal
service funds.
There have been various statutes, regulations and court cases relating to
liability of Internet service providers and other on-line service providers for
information carried on or through their services or equipment, including in the
areas of copyright, indecency/obscenity, defamation and fraud. The laws in this
area are unsettled and there may be new legislation and court decisions that may
affect our services and expose us to liability. See "Risk Factors -- Legislation
and government regulation could adversely affect us."
EMPLOYEES
As of September 15, 1999, we had 261 employees. None of our employees are
represented by a labor union, and we consider our relations with our employees
to be good. See "Risk Factors -- We must attract and retain key personnel in a
tight labor market or we will be unable to manage our growth."
FACILITIES
We are headquartered in facilities consisting of approximately 43,000
square feet in Dallas, Texas which we occupy under a lease that expires in
December 2003. In addition, our engineering department occupies approximately
19,000 square feet in Richardson, Texas under a lease which expires in December
2003. We also lease space under varying terms from three to five years in each
of our metropolitan areas served for sales demonstration centers. We consider
this space adequate for our current operations.
LEGAL PROCEEDINGS
We are not currently engaged in any material legal proceedings.
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<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER SENIOR MANAGEMENT
The following table sets forth certain information with respect to our
executive officers, directors, and other senior management as of October 6,
1999.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
David H. Crawford........... 42 Chief executive officer and director (class I)
John M. Todd................ 49 Chief operating officer, president and director (class
I)
John H. Davis............... 60 Chief technology officer and director (class II)
Todd C. Doshier............. 37 Senior vice president and chief financial officer
Michael R. Carper........... 38 Senior vice president and general counsel
Stephen W. Schovee.......... 40 Director and chairman of the board (class III)
Rod F. Dammeyer............. 58 Director (class II)
William J. Elsner........... 47 Director (class II)
R. David Spreng............. 38 Director (class II)
Jeffrey Weitzen............. 42 Director (class III)
Blair P. Whitaker........... 38 Director (class I)
William T. White............ 38 Director (class III)
Mary A. Wilderotter......... 44 Director (class III)
OTHER SENIOR MANAGEMENT
Elizabeth Carey Billante.... 38 Vice president -- real estate services
Thomas A. Blake............. 52 Vice president -- accounting
James P. Breen.............. 37 Vice president -- corporate development
John R. Bukowsky............ 43 Vice president -- product management
John A. Crooks.............. 52 Vice president -- sales
Thomas A. Eppes............. 51 Vice president -- technical operations
William T. Guthrie.......... 37 Vice president -- engineering
Brenda L. Hardesty.......... 41 Vice president -- human resources and administration
John D. Keys................ 67 Vice president -- construction
Douglas J. Morgan........... 46 Vice president -- strategic national initiative
Steve L. Reichert........... 42 Vice president -- information technology
Charles W. Yeargain......... 38 Vice president -- finance and treasurer
</TABLE>
DAVID H. CRAWFORD has served as our chief executive officer since July
1998, was elected to our board of directors in July 1998, and from July 1998 to
May 1999 also served as our president. From March 1997 until July 1998, Mr.
Crawford was senior vice president -- administration, general
counsel -- property operations and assistant secretary at Equity Office
Properties Trust. From February 1991 until March 1997, Mr. Crawford held senior
vice president, general counsel and other senior management positions at Equity
Office Properties and their affiliates and was of counsel to Rosenberg &
Liebentritt. Mr. Crawford was an associate at Kirkland & Ellis, a national law
firm based in Chicago, Illinois from June 1988 until February 1991.
JOHN M. TODD has served as our president and chief operating officer since
May 1999 and was elected to our board of directors in May 1999. From February
1996 to May 1999, Mr. Todd was vice president -- sales support services for
Sprint Business and vice president -- technology integration for Sprint
Business. From February 1986 until February 1996, Mr. Todd held various officer
and senior management positions at MCI, including vice president for
professional services, product management and marketing.
JOHN H. DAVIS, PH.D. has served as our chief technology officer since July
1999 and was elected to our board of directors in December 1998. Since September
1997 to June 1999, Dr. Davis was a principal of GeoPartners Research. Prior to
September 1997, Dr. Davis held senior management positions at Bell Labs and
AT&T, culminating in his role as the chief
44
<PAGE> 47
technology officer for AT&T Communications Services from 1993 until September
1997. Dr. Davis presently serves on the board of directors of Acoustics
Technologies, a startup company in Phoenix, AZ.
TODD C. DOSHIER has served as our chief financial officer since December
1996 and served as our chief operating officer from December 1996 to May 1999.
From May 1991 until December 1996, Mr. Doshier was a principal in Doshier & Co.,
later Perry, Nestman & Doshier, which provided corporate consulting, financial
advisory and management services.
MICHAEL R. CARPER has served as our senior vice president and general
counsel since June 1999. From August 1995 to June 1999, Mr. Carper was assistant
general counsel and assistant secretary of Nextel Communications. From August
1993 until July 1995, Mr. Carper was vice president and general counsel of
OneComm Communications, which merged with Nextel. Prior to August 1993, Mr.
Carper worked for Jones, Day, Reavis and Pogue, an international law firm, in
their communications practice area.
STEPHEN W. SCHOVEE was elected to our board of directors in December 1998
and currently serves as its chairman. Since August 1995, Mr. Schovee has been a
managing member of Telecom Management L.L.C. Since October 1997 Mr. Schovee has
been a managing member of Telecom Management II, L.L.C., the general Partner of
Telecom Partners II, L.P. From August 1992 until August 1995, Mr. Schovee was
the chief executive officer of OneComm, when it merged with Nextel. Mr. Schovee
was a founding director of Verio and is currently a director of Centennial
Communications, Advanced Telecom Group, Gabriel Communications and VeloCom.
ROD F. DAMMEYER was elected to our board of directors in December 1998.
Since January 1998, Mr. Dammeyer has been the managing director of Equity Group
Corporate Investments, an affiliate of EGI-ARC. Mr. Dammeyer is a director and
vice chairman of Anixter International where he has been employed since 1985 and
is also a director of Antec, CNA Surety, Grupo Azucarero Mexico, IMC Global,
Matria Healthcare, Stericycle, TeleTech Holdings and Transmedia Network. He is a
trustee of the Van Kampen Closed-End Funds.
WILLIAM J. ELSNER was elected to our board of directors in December 1998.
Since October 1997, Mr. Elsner has been a managing member of Telecom Management
II, L.L.C., the general partner of Telecom Partners II, L.P. From November 1995
until October 1997, Mr. Elsner was a private investor. From July 1991 until
September 1995, Mr. Elsner was the chief executive officer of United
International Holdings, an international cable operator he co-founded. Mr.
Elsner is currently the chairman of the board of directors of Formus
Communications and a director of Via Net.Works and VeloCom.
R. DAVID SPRENG was elected to our board of directors in December 1998.
Since September 1998, Mr. Spreng has been the managing general partner of
Crescendo Ventures. From March 1993 until September 1998, Mr. Spreng was
president of IAI Ventures, Crescendo's predecessor which he founded. Mr. Spreng
serves on the boards of CoSine Communications, Digital Island, Fujant
Technologies, Innuity, Novalux, Red Creek Communications and Tut Systems.
JEFFREY WEITZEN was elected to our board of directors in October 1999.
Since January 1998, Mr. Weitzen has been a director, president and chief
operating officer of Gateway 2000. From January 1997 to January 1998, Mr.
Weitzen was the executive vice president, business markets division at AT&T.
From 1994 to 1996, he was vice president and general manager, global services
and from 1992 to 1994, he was president, business and consumer lines of
business -- Asia-Pacific region at AT&T.
BLAIR P. WHITAKER was elected to our board of directors in December 1998.
Since October 1997, Mr. Whitaker has been a general partner at Norwest Venture
Partners. From January 1996 until October 1997 Mr. Whitaker was chief financial
officer and vice president for business development of Exactis.Com. From August
1990 until December 1995 he was a vice
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<PAGE> 48
president at the Centennial Funds, Language Technology and Massachusetts
Institute of Technology. Mr. Whitaker is a director of Advanced Telecom Group,
Diginet Americas, CO Space and Pangea.
WILLIAM T. WHITE was elected to our board of directors in December 1998.
Since 1991, Mr. White has held senior management positions at various Equity
Group Investment companies. Equity Group Investments is an affiliate of EGI-ARC.
Prior to 1991, Mr. White was an officer at Manufacturer's Hanover Trust Company.
MARY A. WILDEROTTER was elected to our board of directors in October 1999.
Since January 1997, Ms. Wilderotter has been president and chief executive
officer of Wink Communications. From August 1995 to January 1997, Ms.
Wilderotter was the executive vice president of national operations and chief
executive officer of the Aviation Communications Division of AT&T Wireless
Services. From October 1991 to August 1995, she was senior vice president and
regional president of the California/Nevada Region of McCaw Cellular
Communications. McCaw became AT&T Wireless upon McCaw's acquisition by AT&T. Ms.
Wilderotter serves as a director on the boards of Airborne Freight, Gaylord
Entertainment, American Tower Association, California Community College
Foundation and Electric Lightwave. She also serves as a member of the board of
trustees of the College of Holy Cross.
ELIZABETH CAREY BILLANTE has served as our vice president -- real estate
services since August 1998. Since 1990, Ms. Billante has held senior management
positions at Equity Office Properties and Wiggins Properties in the areas of
portfolio management and property management.
THOMAS A. BLAKE has served as our vice president -- accounting since
September 1998. Prior to joining us in November 1997 and since 1974, Mr. Blake
founded an independent CPA firm and served as the chief financial officer for
four international construction and real estate firms.
JAMES P. BREEN has served as our vice president -- corporate development
since July 1998. Since 1990, Mr. Breen has held officer and senior management
positions at Equity Office, Equity Group Investments and Barclays Bank in the
areas of finance and investments for the real estate and communications
industries.
JOHN R. BUKOWSKY has served as our vice president -- product management
since April 1999. Since 1996, Mr. Bukowsky has held officer and senior
management positions at Sanga International and GTE in the areas of business
strategy, business development, marketing, product development and sales.
JOHN A. CROOKS has served as our vice president -- sales since September
1999. Prior to joining us in August 1999 and since 1988, Mr. Crooks has held
officer and senior management positions with Evercom and MCI in the areas of
sales and marketing, including enterprise services marketing and national
accounts sales.
THOMAS A. EPPES, PH.D., has served as our vice president -- operations
since August 1998. Since June 1979, Dr. Eppes has held officer and senior
management positions at VTX and Frito-Lay in the areas of network design and
deployment, process engineering and operations.
WILLIAM T. GUTHRIE has served as our vice president -- engineering since
July 1998. Prior to joining us in February 1998 and since April 1992, Mr.
Guthrie held officer and senior management positions at MCI and US West in the
areas of wireless engineering and network systems.
BRENDA L. HARDESTY has served as our vice president -- human resources and
administration since March 1999. Prior to joining us in August 1998 and since
1984, Ms. Hardesty held senior management positions at Accugraph
Corporation/Architel Systems in the areas of human resources, customer support
and customer services.
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<PAGE> 49
JOHN D. KEYS has served as our vice president -- construction since
November 1997. Prior to joining us as a consultant in March 1997 and since 1968,
Mr. Keys founded two international electrical construction firms and has served
as a senior officer of Blount, Foley Enterprises and Fishbach & Moore.
DOUGLAS J. MORGAN has served as our vice president -- strategic national
initiative since July 1999. Since 1991, Mr. Morgan has held officer and senior
management positions at Winstar and Unisys in the areas of enhanced services,
sales, business development, marketing, product management, training, strategic
initiatives and media relations.
STEVE L. REICHERT has served as our vice president -- information
technology since June 1999. Since 1994, Mr. Reichert has held officer and senior
management positions at Pagenet and Pro Staff in the areas of business systems
development, IT consulting services, customer systems development, network
systems development and technical architecture planning.
CHARLES W. YEARGAIN has served as our vice president -- finance and
treasurer since December 1996. Since 1984, Mr. Yeargain has founded an
investment and consulting firm, and has held officer positions at AMRESCO
Management and Texas American Bank.
ELECTION OF DIRECTORS AND OFFICERS
According to our by-laws, our stockholders shall elect the members of our
board of directors at the annual meeting of the stockholders to be held each
year at a time specified by our board of directors. The by-laws also provide
that the directors shall be elected by a plurality of the votes cast at the
annual meeting. Each director elected shall hold office until his or her
successor is duly elected and qualified or until his or her earlier death,
resignation or removal.
Our board of directors will appoint officers at the annual board meeting or
at other times throughout the year, as may be required. Each officer appointed
will hold office until his or her successor is duly chosen and qualified or
until his or her earlier death, resignation or removal.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three-year terms. Messrs. Crawford, Todd and Whitaker will serve as
class I directors whose terms expire at the 2000 annual meeting of stockholders.
Messrs. Dammeyer, Davis, Elsner and Spreng will serve as class II directors
whose terms expire at the 2001 annual meeting of stockholders. Messrs. Schovee,
Weitzen, White and Ms. Wilderotter will serve as class III directors whose terms
expire at the 2002 annual meeting of stockholders.
BOARD COMMITTEES
Our by-laws provide that our board of directors may designate one or more
board committees. We currently have an audit committee and a compensation
committee.
Our audit committee, currently comprised of Messrs. Elsner, Spreng and
Weitzen:
- monitors our financial reporting and our internal and third-party audits;
- reviews and approves material accounting policy changes;
- monitors our internal accounting controls;
- recommends the engagement of independent auditors;
- reviews transactions between Allied Riser and our officers and directors;
and
- performs other duties upon the request of our board.
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<PAGE> 50
Our compensation committee, currently comprised of Messrs. Schovee, White
and Ms. Wilderotter:
- reviews and approves compensation and benefits paid to our executive
officers; and
- administers our 1999 stock option plan.
COMPENSATION OF DIRECTORS
Directors who are not our employees do not receive cash fees for serving as
directors. Our outside directors are compensated $1,000 for each meeting they
attend in person and $500 for each telephonic meeting. In addition, we reimburse
directors for out-of-pocket expenses incurred in connection with attendance at
meetings. Directors may also be granted options to purchase shares of our common
stock pursuant to our 1999 stock option and equity incentive plan.
EMPLOYMENT AGREEMENTS
We have employment agreements with each of Messrs. Crawford, Todd, Doshier,
Davis and Carper. These employment agreements do not set salary or bonus
compensation but provide for full accelerated vesting of restricted shares and
stock options in the event of a qualifying business combination transaction. The
agreements also provide for severance payments equal to six months salary and
partial accelerated vesting of restricted shares and stock options upon
termination of the employee's employment without cause. The agreements also
impose non-competition and nonsolicitation obligations on these employees for a
period of two years following their employment.
We have employment agreements with our employees at the vice president
level. These employment agreements do not set salary or bonus compensation but
provide for full accelerated vesting of restricted shares and stock options in
the event of both a qualifying business combination transaction and termination
of the employee's employment under certain circumstances. The agreements also
provide for severance payments equal to three months salary and partial
accelerated vesting of restricted shares and stock options upon termination of
the employee's employment without cause. The agreements also impose
non-competition and nonsolicitation obligations on these employees for a period
of one year following their employment.
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<PAGE> 51
EXECUTIVE COMPENSATION
The Summary Compensation Table below sets forth certain information
concerning the compensation paid or accrued for services rendered in all
capacities by the chief executive officer and our other executive officers whose
combined salary and other annual compensation exceeded $100,000 during 1998. The
columns for "Other Annual Compensation" and "All Other Compensation" have been
omitted from the table because there is no compensation required to be reported
in those columns. The aggregate amount of perquisites and other personal
benefits provided to each officer listed above is less than 10% of the total
annual salary and bonus of that officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION RESTRICTED
FISCAL ------------------ STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY $ BONUS $ AWARDS
- --------------------------- ------ -------- ------- ----------
<S> <C> <C> <C> <C>
David H. Crawford, chief executive officer.............. 1998(1) $104,077 $50,000 623,737
John M. Todd, chief operating officer................... 1998(2) -- -- --
John H. Davis, chief technology officer................. 1998(3) -- -- --
Todd C. Doshier, senior vice president and chief
financial officer..................................... 1998 $168,115 $45,000 577,485
Michael R. Carper, senior vice president and general
counsel............................................... 1998(4) -- -- --
</TABLE>
- ---------------
(1) Represents payments made from July 1998, the date on which Mr. Crawford
began his employment with Allied Riser.
(2) Mr. Todd commenced his employment in May 1999.
(3) Mr. Davis commenced his employment in July 1999.
(4) Mr. Carper commenced his employment in June 1999.
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<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of September 15, 1999. The percentage of beneficial
ownership is based on 54,826,818 shares of our common stock outstanding as of
such date, as adjusted to reflect the shares to be issued in the offering and
the conversion of outstanding preferred stock into common stock immediately
prior to the completion of the offering, assuming an offering price of $17, by:
- each stockholder who is known by us to beneficially own 5% or more of any
class of our capital stock;
- each of the executive officers named in the "Summary Compensation Table"
and each of our directors; and
- all of our executive officers and our directors as a group.
Unless otherwise indicated in the footnotes to this table, each of the
stockholders named in this table has sole voting and investment power with
respect to the shares shown as beneficially owned. In accordance with Rule 13d-3
under the Exchange Act, a person is deemed to be a beneficial owner of a
security if he or she has or shares the power to dispose or direct the
disposition of such security. A person also is deemed to be a beneficial owner
of any securities of which that person has the right to acquire beneficial
ownership within 60 days.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 15, 1999
---------------------------------------------------------------------------------
NUMBER OF TOTAL ALL
SHARES PERCENT OF TOTAL PERCENT OF SHARES PERCENT OF
BENEFICIALLY OUTSTANDING VESTED OUTSTANDING (VESTED AND OUTSTANDING
NAME OWNED SHARES SHARES SHARES UNVESTED) SHARES
- ---- ------------ ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
EGI-ARC Investors(1)
Two North Riverside Plaza,
Chicago, Illinois 60606................. 6,446,674 11.8%
Telecom Partners II
6400 South Fiddlers Green Circle, Suite
720
Englewood, Colorado 80111............... 5,906,950 10.8
Crescendo(2)
c/o Crescendo Venture Management
800 LaSalle Avenue, Suite 2250
Minneapolis, Minnesota 55402............ 5,212,015 9.5
Norwest Venture Partners VII
40 William Street, Suite 305
Wellesley, Massachusetts 02481.......... 5,212,015 9.5
The Goldman Sachs Group, Inc.(3)
85 Broad Street
New York, New York 10004................ 3,552,666 6.5
David H. Crawford(4)...................... 623,737 1.1 285,879 0.5% 623,737 1.1%
John M. Todd(4)........................... 466,666 0.9 124,444 0.2 466,666 0.9
John H. Davis............................. 333,334 0.6 39,167 0.1 333,334 0.6
Todd C. Doshier(4)........................ 617,094 1.1 372,039 0.7 617,094 1.1
Michael R. Carper......................... 266,667 0.5 47,916 0.1 266,667 0.5
Stephen W. Schovee(5)..................... 5,906,950 10.8 5,906,950 10.8 5,906,950 10.8
Rod F. Dammeyer(6)........................ -- -- -- -- -- --
William J. Elsner(5)...................... 5,906,950 10.8 5,906,950 10.8 5,906,950 10.8
R. David Spreng(7)........................ 5,212,015 9.5 5,212,015 9.5 5,212,015 9.5
Jeffrey Weitzen(8)........................ -- -- -- -- -- --
Blair P. Whitaker(9)...................... -- -- -- -- -- --
William T. White(6)....................... -- -- -- -- -- --
Mary A. Wilderotter(8).................... -- -- -- -- -- --
All executive officers and directors as a
group (13 persons)...................... 13,426,463 24.5% 11,988,410 21.9% 13,426,463 24.5%
</TABLE>
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(1) EGI-ARC Investors is controlled by Samuel Zell, a Chicago-based investor who
is chairman of Equity Group Investors, L.L.C.
(2) The shares beneficially owned by the Crescendo affiliates are held as
follows: Crescendo World Fund, 994,766; Eagle Venture WF, 47,638; Crescendo
III, 3,969,887; Crescendo III Executive Fund, 118,000; and Crescendo III
GbR, 81,724.
(3) Represents 3,552,666 shares of Common Stock owned by certain investment
partnerships, of which affiliates of The Goldman Sachs Group, Inc. are the
general partner, managing general partner or investment manager. Includes
1,344,634 shares held of record by GS Capital Partners III, L.P., 369,652
shares held of record by GS Capital Partners III Offshore, L.P., 62,047
shares held of record by Goldman, Sachs & Co. Verwaltungs, GmbH, and
1,776,333 shares held of record by Whitehall Street Limited Partnership XI.
The Goldman Sachs Group disclaims beneficial ownership of the shares owned
by such investment partnerships to the extent attributable to partnership
interests therein held by persons other than The Goldman Sachs Group and its
affiliates. Each of such investment partnerships shares voting and
investment power with certain of its respective affiliates.
(4) On September 16, 1999, a stock option grant in the amount of 200,000,
133,334 and 66,667 shares of common stock with an exercise price of $18.00
was granted to each Messrs. Crawford, Todd and Doshier, respectively.
(5) Includes 5,906,950 shares of our common stock beneficially owned by Telecom
Partners II. Messrs. Schovee and Elsner are managing members of Telcom
Management II, the general partner of Telcom Partners II. On October 6,
1999, a stock option grant in the amount of 6,250 shares of common stock
with an exercise price of $18.00 was granted to each Messrs. Schovee and
Elsner.
(6) Excludes 6,446,674 shares of common stock beneficially owned by EGI-ARC, as
to which each of Messrs. Dammeyer and White disclaim beneficial ownership
because neither individual has or shares control over the voting or
disposition of such shares. Messrs. Dammeyer and White have interests in
EGI-ARC not to exceed 1.5% in the case of Mr. Dammeyer and 1.0% in the case
of Mr. White. On October 6, 1999, a stock option grant in the amount of
6,250 shares of common stock with an exercise price of $18.00 was granted to
each Messrs. Dammeyer and White.
(7) Includes 5,559,484 shares of our common stock beneficially owned by
Crescendo of which Mr. Spreng is the managing partner. On October 6, 1999, a
stock option grant in the amount of 6,250 shares of common stock with an
exercise price of $18.00 was granted to Mr. Spreng.
(8) On October 6, 1999, a stock option grant in the amount of 66,667 shares of
common stock with an exercise price of $4.50 was granted to each of Mr.
Weitzen and Ms. Wilderotter, who were elected to the Board of Directors on
that day.
(9) Excludes 5,212,015 shares of our common stock beneficially owned by Norwest
of which Mr. Whitaker is the general partner. Mr. Whitaker disclaims
beneficial ownership of these shares. On October 6, 1999, a stock option
grant in the amount of 6,250 shares of common stock with an exercise price
of $18.00 was granted to Mr. Whitaker.
STOCK OPTION PLAN
We have adopted, effective June 1, 1999, a stock option and equity
incentive plan. The option and incentive plan authorizes the issuance of up to
2,703,116 shares of common stock subject to equitable adjustment upon the
occurrence of any stock dividend or other distribution, stock split, merger,
consolidation, combination, share repurchase or exchange, or other similar
corporate transaction or event.
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In accordance with the option and incentive plan, our board of directors or
a board committee may grant incentive stock options as that term is defined in
Section 422 of the Internal Revenue Code and nonstatutory stock options, stock
appreciation rights, restricted shares, deferred shares and certain tax offset
payments. The terms of any particular grant, including any performance-based
requirements, vesting terms and other restrictions are determined by the board
or by the compensation committee of the board. Certain limited authority to
effect grants may also be delegated to specified executive officers. Grants may
be made to employees, officers, directors or consultants. A member of the board
of directors will be eligible for a nonstatutory stock option grant of 66,667
shares at the time he or she becomes a member of the board.
The option and incentive plan is administered by the compensation committee
consisting of no less than two members of the board, each of whom is a
nonemployee director within the meaning of Rule 16 b-3(b)(3)(i) under Section 16
of the Exchange Act.
The exercise price of nonstatutory options may be above, at or below fair
market value of the common stock on the date of grant the exercise price of an
incentive stock option must not be less than the fair market value of the common
stock on the date of grant. The exercise period may be set by the board or the
committee but may not exceed ten years for incentive stock options. Stock
appreciation rights may be granted alone or in tandem with stock options. A
stock appreciation right that is granted without stock options, is a right to be
paid an amount equal to the excess of the fair market value of a share of common
stock on the date the stock appreciation right is exercised over the fair market
value of a share of common stock on the date of grant. A stock appreciation
right that is granted with stock options is a right to be paid an amount equal
to the exercise price of the related stock option. Payment on stock appreciation
rights may be made in cash, common stock or both, as specified in the grant or
determined by the committee.
Stock options and stock appreciation rights will be exercisable at such
times and upon such conditions as the committee may determine, as reflected in
the applicable grant.
A restricted stock award is an award of common stock that is subject to
such vesting, performance criteria, restrictions on transferability and other
restrictions, if any, as the committee may impose at the date of grant, which
restrictions may lapse separately or in combination at such times, under such
circumstances, in such installments or otherwise, as the committee may
determine. Except to the extent restricted under the grant relating to the
restricted stock, a participant granted restricted stock shall have all of the
rights of a stockholder, including without limitation the right to vote and the
right to receive dividends thereon. The committee has the authority to cancel
all or any portion of any outstanding restrictions.
Except as otherwise determined by the committee, options, restricted shares
and other rights granted under the option and incentive plan may not be
transferred other than by will, or by the laws of descent and distribution.
The option and incentive plan may, at any time and from time to time, be
altered, amended, suspended or terminated by the board of directors, in whole or
in part, except that no amendment that requires stockholder approval in order
for the option and incentive plan to comply with state law, stock exchange
requirements or other applicable law will be effective, except as otherwise
determined by the committee, unless such amendment has received the requisite
approval of stockholders. In addition, no amendment may be made which adversely
affects any of the rights of a participant under any grant previously granted,
without that participant's consent.
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CERTAIN TRANSACTIONS
REORGANIZATION AND RECAPITALIZATION, AND RELATED TRANSACTIONS
We were formed in Texas on December 19, 1996 as RCH Holdings. In November
1998, we consummated a reorganization and recapitalization transaction in which
our operations were merged into Allied Riser Communications Corporation,
formerly known as Allied Riser Communications Holdings, a Delaware corporation.
In connection with the reorganization and recapitalization, in November and
December of 1998, we sold 20,560,831 shares of our common stock and 66 shares of
our preferred stock in private transactions. In connection with this offering
all of these shares of outstanding preferred stock will be converted into
3,882,353 shares of common stock, assuming an initial public offering price of
$17 per share.
We had previously agreed to grant to Advest a warrant and certain future
co-management rights and fees in consideration of investment banking services
received from Advest. William Lundquist, a former director of RCH, is a managing
director of Advest. In connection with the reorganization and recapitalization,
this warrant and these rights were canceled in consideration for the issuance of
125,407 shares of our common stock to Advest in April 1999.
In February 1996, each of Messrs. Yeargain and Doshier and a former
employee of RCH acquired warrants to purchase, at a purchase price of $.15 per
share, a number of shares of our common stock representing two percent of the
total number of shares of our common stock outstanding, determined on a fully
diluted basis, on the earlier of the date of exercise of the warrant or April
30, 1998. As of April 30, 1998, there were 241,433 shares of our common stock
outstanding. As a result, each of these warrants evidenced the right to purchase
approximately 4,800 shares of our common stock. These warrants were terminated
in 1998 and early 1999 in connection with the consummation of the reorganization
and recapitalization.
INVESTOR RELATIONSHIPS
Samuel Zell and affiliates of Samuel Zell own an interest in and or control
a number of entities with which we have entered into contractual or other
relationships. EGI-ARC Investors is a limited liability company whose managing
member is controlled by Samuel Zell. Affiliates of Mr. Zell have substantial
economic interests in EGI-ARC. As an investor, EGI-ARC has a substantial equity
interest in us. Through a stockholders' agreement, which has been terminated
prior to this offering, EGI-ARC, and therefore Mr. Zell, exercised a substantial
degree of control over us during 1998. Through EGI-ARC, Mr. Zell may be deemed
to beneficially own 6,446,674 shares of our common stock as of September 15,
1999, which amount includes the conversion of all preferred stock held by
EGI-ARC. Mr. Zell is the chairman of the board of trustees of Equity Office
Properties which, as of September 15, 1999 owned 630,929 shares of our common
stock, including the conversion of all preferred stock held by Equity Office
Properties. Mr. Zell disclaims beneficial ownership of these shares.
Samuel Zell has a significant economic interest in and controls S Z
Investments, which provided the majority of our debt financing prior to the
consummation of the reorganization and recapitalization transactions. During
1998, we incurred $14,000,000 of indebtedness to S Z Investments, all of which
was paid off in November 1998.
Samuel Zell is chairman of the board of trustees of Equity Office
Properties Trust, a publicly held real estate investment trust. As of December
31, 1998 and June 30, 1999 we had license agreements with Equity Office
Properties covering the installation of our fiber-optic networks in 57
buildings. In addition, we have negotiated an agreement with Equity Office
Properties which would cover these and additional buildings. Total license fees
paid to Equity Office Properties under the existing license agreements were less
than $1,000 in 1998 and approximately $36,000 for the six months ended June 30,
1999.
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We currently lease approximately 36,000 feet of office space from Equity
Office. Rent payments to Equity Office for this space during 1998 were
approximately $156,000 and $487,000 for the six months ended June 30, 1999. In
addition, Equity Office advanced us $3,600,000 for infrastructure in buildings
during 1998. This advance was repaid in November 1998.
Affiliates of Mr. Zell are significant stockholders of Anixter
International. In addition, Mr. Dammeyer, a director of Allied Riser, is also a
director and vice chairman of Anixter. Mr. Dammeyer may be deemed to be the
beneficial owner of 818,936 shares, which represents less than 3% of Anixter's
outstanding common stock. Anixter is a supplier of wiring systems, networking,
and Internet working products for voice, data, and video networks. Mr. Zell also
serves as chairman of Anixter. Anixter supplies us with a portion of our
fiber-optic cable requirements and other materials used in the installation of
our networks. For the year ended December 31, 1998 and for the six months ended
June 30, 1999, we paid Anixter approximately $2,319,000 and $1,408,000,
respectively for such supplies.
In addition, we purchased commercial general liability and other insurance
policies through EGI Risk Services, an insurance brokerage firm affiliated with
Samuel Zell. For the year ended December 31, 1998 and for the six months ended
June 30, 1999, we paid approximately $64,000 and $55,000, respectively, to EGI
Risk Services.
In addition, we engaged Rosenberg & Liebentritt for certain legal services
during 1998 and the first six months of 1999. Rosenberg & Liebentritt was a law
firm that provided legal services almost exclusively to Samuel Zell and his
affiliates. For the year ended December 31, 1998 and the six months ended June
30, 1999, we paid approximately $323,000 and $108,000 for such legal services.
We are not currently using Rosenberg & Liebentritt to provide any material
amount of legal services.
We believe that these transactions were negotiated on market-based terms
and all material transactions with Mr. Zell have been approved by our board of
directors. Our current policy is to obtain the approval of our board of
directors with respect to any transaction involving our affiliates.
DIRECTOR AND STOCKHOLDER RELATIONSHIPS
In addition to serving as members of our board, Messrs. Elsner, Schovee and
Spreng each serve as directors of other communications companies and other
private companies. As a result of these additional directorships, Messrs.
Elsner, Schovee and Spreng may be subject to conflicts of interest during their
tenure as our directors. Because of these potential conflicts, Messrs. Elsner,
Schovee and Spreng may be required, from time to time, to disclose certain
financial or business opportunities to us and to the other companies to which
they owe fiduciary duties. However, we do not believe these conflicts of
interest will be a detriment to our growth or ability to operate our business.
Currently, we do not have any standard procedures for resolving potential
conflicts of interest relating to corporate opportunities or otherwise.
Certain of our directors are affiliated with our principal stockholders.
Mr. Whitaker is a general partner of Norwest Venture Partners VII. Mr. Spreng is
a managing partner of Crescendo Ventures. Messrs. Dammeyer and White have
interests in EGI-ARC not to exceed 1.5% in the case of Mr. Dammeyer and 1.0% in
the case of Mr. White. Mr. Dammeyer also serves as the managing director of
Equity Group Corporate Investments, an affiliate of EGI-ARC and Mr. White is
employed by Equity Group Investments, an affiliate of EGI-ARC. Each of Messrs.
Elsner and Schovee is a managing member of Telecom Management II, the general
partner of Telecom Partners II, L.P.
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RELATIONSHIP WITH OUR PRINCIPAL UNDERWRITER
Goldman Sachs is a representative of the underwriters in this offering and
provides financial advisory and consulting services to us.
In August 1999, we issued 17 shares of series B preferred stock and
2,019,766 shares of common stock to a group of financial sponsors, including GS
Capital Partners III, an affiliate of Goldman Sachs. We received approximately
$10.0 million in gross proceeds from GS Capital Partners III in this financing
transaction.
Also in August 1999, we issued 34 shares of series B preferred stock and
4,039,531 shares of common stock to our real estate partners and their
affiliates, including Whitehall Street Real Estate Limited Partnership XI, an
affiliate of Goldman Sachs. We received approximately $10.0 million in gross
proceeds from Whitehall in connection with this transaction. In addition, in
October 1999 we issued warrants to acquire 6,530,242 shares of common stock to
our real estate partners and their affiliates, including warrants to acquire
590,035 shares of common stock to Whitehall. These warrants have no exercise
price. These warrants are exercisable upon our real estate partners meeting
certain performance obligations as outlined in the warrant agreements.
Each of the transactions with affiliates of Goldman Sachs has been approved
by our board of directors and each of these transactions was completed on
substantially the same terms as with several unaffiliated third-parties
participating in the same transactions.
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DESCRIPTION OF CAPITAL STOCK
The following summary describes the material terms of our capital stock.
However, you should refer to the actual terms of the capital stock contained in
our certificate of incorporation. The following summary gives effect to the
conversion of all outstanding shares of preferred stock and warrants into common
stock upon the completion of this offering.
Our authorized capital stock of 66,667,667 consists of 33,194,465 shares of
common stock and 117 shares of preferred stock issued and outstanding, as of
September 15, 1999. There were 173 holders of record of common stock on that
date. The common stock has a par value of $.0001 and the preferred stock has a
par value of $.0001 per share. After the offering, there will be 54,826,818
shares outstanding, which does not include outstanding warrants to acquire an
additional 6,530,242 shares which are not exercisable immediately following the
offering. No shares of our capital stock are subject to sinking fund provisions.
As of September 15, 1999, options to purchase 73,332 shares of common stock were
outstanding. Upon the completion of this offering, no shares of preferred stock
will be outstanding.
COMMON STOCK
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available for this purpose
at the times and in the amounts as the board of directors may from time to time
determine. Each stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders. Cumulative voting
for the election of directors is not provided for in our amended and restated
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. At the
time of the offering, the common stock will not be entitled to preemptive
rights. The common stock is not subject to conversion or redemption. Upon the
occurrence of a liquidation, dissolution or winding-up of Allied Riser, the
holders of shares of common stock would be entitled to share ratably in the
distribution of all of our assets remaining available for distribution after
satisfaction of all its liabilities and the payment of the liquidation
preference of any outstanding preferred stock.
PREFERRED STOCK
The board of directors has the authority, within the limitations and
restrictions stated in our certificate of incorporation, as amended, to provide
by resolution for the issuance of up to 1,000 shares of preferred stock, in one
or more classes or series, and to fix the rights, preferences, privileges and
restrictions of this preferred stock, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund provisions, if any, and the number of shares constituting any series or the
designation of such series. The issuance of preferred stock could have the
effect of decreasing the market price of the common stock and could adversely
affect the voting and other rights of the holders of common stock.
WARRANTS
In October 1999, we issued warrants to acquire 6,530,242 shares of common
stock to property owners and managers. The warrants have no exercise price and
are exercisable for a period of ten years from the date of grant. The warrants
are exercisable upon our real estate partners meeting certain performance
obligations as outlined in the warrant agreements.
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OPTIONS
As of September 15, 1999:
- options to purchase a total of 73,332 shares of common stock at an
exercise price of $.336 per share were outstanding, of which 1,530 shares
underlying these options have vested; and
- up to 2,282,342 additional shares of common stock may be subject to
options granted in the future.
Outstanding options expire on July 26, 2009.
See "Management -- Executive compensation -- stock option plan."
REGISTRATION RIGHTS
In November and December 1998, we issued 20,560,831 shares of common stock
and 66 shares of series A preferred stock in private transactions which will be
converted into 3,882,353 shares of common stock at the consummation of this
offering, assuming an initial offering price of $17 per share. In connection
with these transactions, these parties entered into a registration rights
agreement with us. This agreement grants contractual rights to these holders
which require us to register their shares under the Securities Act. Prior to the
offering, all of these holders will have delivered to us written waivers, which
will effectively waive their registration rights with respect to this offering.
These waivers will not affect the rights of these holders with respect to any
future offerings.
In August 1999, we issued 51 shares of series B preferred stock and
6,059,297 shares of common stock in a series of transactions. The preferred
shares will be converted into 3,000,000 shares of common stock at the
consummation of this offering, assuming an initial offering price of $17 per
share. The holders of these shares were made a party to the registration rights
agreement mentioned above.
As a result, the holders of these securities have the ability, upon the
request of holders of at least 33% of these securities, to require us to
register their shares of common stock. They may also include the common shares
in a piggy-back registration when we file another registration statement
covering the sale of common stock.
In October 1999, we issued warrants to acquire 6,530,242 shares of common
stock. The warrants are exercisable upon our real estate partners meeting
certain performance obligations as outlined in the warrant agreements. These
warrant holders may include the common shares underlying these warrants in a
piggy-back registration when we file another registration statement covering the
sale of common stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
Some provisions of our amended and restated certificate of incorporation
and amended and restated by-laws, which provisions are summarized in the
following paragraphs, may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider it its best interest, including those attempts that might result
in a premium over the market price for the shares held by stockholders. See
"Risk Factors -- Anti-takeover provisions could prevent or delay a change in
control."
CLASSIFIED BOARD OF DIRECTORS
Because our board of directors is divided into three classes of directors
serving staggered three-year terms, approximately one-third of the board of
directors will be elected each year. Our
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classified board, coupled with the provision of our amended and restated
certificate of incorporation authorizing the board of directors to fill vacant
directorships or increase the size of the board of directors, may deter a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors by filling the vacancies created by such removal with
its own nominees.
CUMULATIVE VOTING
Our amended and restated certificate of incorporation expressly denies
stockholders the right to cumulate votes in the election of directors.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS
Our amended and restated certificate of incorporation eliminates the
ability of stockholders to act by written consent. It further provides that
special meetings of our stockholders may be called only by the chairman of the
board of directors, the president or a majority of the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS NOMINATIONS
Our amended and restated by-laws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at our principal executive offices not less than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders. If the annual meeting is called for a date that is not within
thirty (30) days before or after such anniversary date, notice by the
stockholder in order to be timely must be received not later than the close of
business on the 15th day following the date on which notice of the date of the
annual meeting was mailed to stockholders or made public, whichever first
occurs. In the case of a special meeting of stockholders called for the purpose
of electing directors, notice by the stockholder in order to be timely must be
received not later than the close of business on the fifteenth (15th) day
following the day on which notice of the date of the special meeting was mailed
or public disclosure of the date of the special meeting was made, whichever
first occurs. Our amended and restated by-laws also specify certain requirements
as to the form and content of a stockholder's notice. These provisions may
preclude stockholders from bringing matters before an annual meeting of
stockholders or from making nominations for directors at an annual meeting of
stockholders.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our amended and restated certificate of
incorporation imposes supermajority vote requirements in connection with
business combination transactions and the amendment of provisions of our amended
and restated certificate of
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incorporation and amended and restated by-laws, including those provisions
relating to the classified board of directors, action by written consent and the
ability of stockholders to call special meetings.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services. Its address is 85 Challenger, Ridgefield, New Jersey
07660, and its telephone number at this location is 201-296-4000.
LISTING
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the trading symbol "ARCC."
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. Furthermore,
since no shares will be available for sale shortly after this offering because
of contractual and legal restrictions on resale described below, sales of
substantial amounts of common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future. In addition, it is possible that
we might issue additional shares of common stock to pay for acquisitions.
Upon completion of this offering, we will have outstanding an aggregate of
54,826,818 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding warrants and options. Of
these shares, all of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by affiliates as that term is defined in Rule 144
under the Securities Act. The remaining shares of common stock held by existing
stockholders are restricted securities as that term is defined in Rule 144 under
the Securities Act. Restricted securities may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rule
144 promulgated under the Securities Act, which rules are summarized below.
As a result of the contractual restrictions described below and the
provisions of Rule 144, the restricted securities will be available for sale in
the public market subject to the volume limitations and other conditions of Rule
144. The shares could be available for resale immediately upon the expiration of
the 180-day lock-up period.
LOCK-UP AGREEMENTS
The Company, all of our executive officers and directors, certain of our
stockholders and certain of our employees holding shares of common stock or
options exercisable in the six months following this offering have signed
agreements under which they have agreed not to transfer, dispose of or hedge,
any shares of common stock or any securities convertible into, exercisable or
exchangeable for shares of common stock, for a period of 180 days after the date
of this prospectus without the prior consent of the representatives of the
underwriters. The lock-up agreements by these persons cover approximately 95% of
the vested outstanding shares including shares issued upon conversion of
preferred stock outstanding prior to this offering.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares of our common stock, which are subject to Rule 144, for at least one year
would be entitled to sell within any three-month period a number of those shares
that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 548,000 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
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RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
STOCK OPTIONS AND WARRANTS
Following the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act of 1933 covering 5,000,000 shares
of common stock reserved for issuance under our 1999 stock option and equity
incentive plan and approximately 5,755,000 shares of common stock issued under
our prior benefit plans. The registration statement will become effective
automatically upon filing. As of September 15, 1999, options to purchase 73,332
shares of common stock were issued and outstanding, of which 1,530 shares
underlying these options have vested. Accordingly, shares registered under the
registration statement will, subject to vesting provisions, Rule 144 volume
limitations and lock-up agreements, in each case, as applicable, be available
for sale in the open market immediately after the consummation of this offering.
See "Description of Capital Stock -- Registration rights."
In addition, in October 1999 we issued warrants to acquire 6,530,242 shares
of our common stock to owners and managers of commercial office buildings, which
have no purchase price or exercise price. The warrants are exercisable upon our
real estate partners meeting certain performance obligations as outlined in the
warrant agreements.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of approximately 33,500,000
shares of our common stock outstanding at that date, including the shares to be
issued upon conversion of all of our outstanding preferred stock, or their
transferees, are entitled to request that we register their shares under the
Securities Act or have their shares included in a future registration statement,
which we may file. After these shares are registered, they will become freely
tradable without restriction under the Securities Act. Any sales of securities
by these stockholders could have a material adverse effect on the trading price
of our common stock. See "Description of Capital Stock -- Registration rights."
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MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general summary of the material United States federal
income and estate tax consequences of the purchase, ownership, and sale or other
taxable disposition of the common stock by any person or entity other than:
- a citizen or resident of the United States;
- a partnership, corporation or other entity created or organized in or
under the laws of the United States or of any political subdivision
thereof;
- a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust or the trust has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S. person; and
- an estate, the income of which is includible in gross income for United
States income tax purposes regardless of its source.
This summary does not address all tax considerations that may be relevant
to non-U.S. holders in light of their particular circumstances or to certain
non-U.S. holders that may be subject to special treatment under United States
federal income or estate tax laws. This summary is based upon the Internal
Revenue Code of 1986, existing, temporary and proposed regulations promulgated
thereunder and administrative and judicial decisions, all of which are subject
to change, possibly with retroactive effect. In addition, this summary does not
address the effect of any state, local or foreign tax laws. Each prospective
purchaser of common stock should consult its tax advisor with respect to the tax
consequences of purchasing, owning and disposing of the common stock.
DIVIDENDS
Dividends paid to a non-U.S. holder of common stock generally will be
subject to a withholding of United States federal income tax at a 30 percent
rate or such lower rate as may be specified by an applicable income tax treaty,
unless:
- the dividend is effectively connected with the conduct of a trade or
business of the non-U.S. holder within the United States; or
- if a tax treaty applies, it is attributable to a United States permanent
establishment of the non-U.S. holder.
In these cases, the dividend will be taxed at ordinary federal income tax
rates. If the non-U.S. holder is a corporation, such effectively connected
income may also be subject to an additional branch profits tax. A non-U.S.
holder may be required to satisfy certain certification requirements in order to
claim treaty benefits or otherwise claim a reduction of, or exemption from, the
withholding described above.
SALE OR OTHER DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to United States federal
income tax in respect of any gain recognized on the sale or other taxable
disposition of common stock, unless:
- the gain is effectively connected with the conduct of a trade or business
of the non-U.S. holder within the United States;
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- in the case of a non-U.S. holder who is an individual and holds the
common stock as a capital asset, the holder is present in the United
States for 183 or more days in the taxable year of the disposition and
certain other tests are met;
- the non-U.S. holder is subject to tax under the provisions of United
States federal income tax law applicable to certain United States
expatriates; or
- we are or have been during certain periods preceding the disposition a
United States real property holding corporation for United States federal
income tax purposes and certain other requirements are met. We currently
believe that we not a real property holding corporation and we do not
anticipate that we will become one.
ESTATE TAX
Common stock owned or treated as owned by an individual non-U.S. holder at
the time of death will be includible in the individual's gross estate for United
States federal estate tax purposes, unless an applicable treaty provides
otherwise, and may be subject to United States federal estate tax.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Dividends. United States backup withholding tax generally will not apply to
dividends paid on the common stock that are subject to the 30 percent or reduced
treaty rate of United States withholding tax previously discussed. We must
report annually to the Internal Revenue Service and to each non-U.S. holder the
amount of dividends paid to, and the tax withheld with respect to, such holder,
regardless of whether any tax was withheld. This information may also be made
available to the tax authorities in the non-U.S. holder's country of residence.
Sale or Other Disposition of Common Stock. Upon the sale or other taxable
disposition of common stock by a non-U.S. holder to or through a United States
office of a broker, the broker must backup withhold at a rate of 31 percent and
report the sale to the Internal Revenue Service, unless the holder certifies its
non-U.S. holder status under penalties of perjury or otherwise establishes an
exemption. Upon the sale or other taxable disposition of common stock by a
non-U.S. holder to or through the foreign office of a United States broker, or a
foreign broker with a certain relationship to the United States, the broker must
report the sale to the Internal Revenue Service, but not backup withhold, unless
the broker has documentary evidence in its files that the seller is a non-U.S.
holder and certain other conditions are met or the holder otherwise establishes
an exemption.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules generally are allowable as a refund or credit against a
non-U.S. holder's United States federal income tax liability, if any, provided
that the required information is furnished to the Internal Revenue Service on a
timely basis.
The U.S. Treasury Department has issued regulations generally effective for
payments made after December 31, 2000 that will affect the procedures to be
followed by a non-U.S. holder in establishing such holder's status as a non-U.S.
holder for purposes of the withholding, backup withholding and information
reporting rules described herein. In general, such regulations do not
significantly alter the substantive withholding and information reporting
requirements, but unify current certification procedures and forms and clarify
reliance standards. Prospective investors should consult their tax advisors
concerning the effect of such regulations on an investment in the common stock.
63
<PAGE> 66
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York. Certain legal matters in connection with this offering will be passed upon
for the underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements of Allied Riser Communications
Corporation as of December 31, 1997 and 1998 and for the period from inception
(December 19, 1996) through December 31, 1997 and for the year ended December
31, 1998 included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving such reports.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered by this prospectus. This prospectus does not contain all of
the information set forth in the registration statement and the exhibits and
schedules filed with the registration statement. For additional information
about us and the common stock offered by this prospectus, reference is made to
the registration statement and the exhibits and schedule filed with the
registration statement, with respect to statements contained in this prospectus
regarding the contents of any contract or any other document, reference is made
to the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. A copy of the registration statement and the exhibits and
schedules filed with the registration statement may be inspected without charge
at the public reference facilities maintained by the Commission in Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048, and copies of all or any part of the Registration
Statement may be obtained from such offices upon the payment of the fees
prescribed by the Commission. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The
Commission maintains a World Wide web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
Upon the effectiveness of the Registration Statement, we will become
subject to the information requirement of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
Commission. You will be able to inspect and copy these reports and other
information about our company at the locations set forth above or download these
reports from the Commission's web site.
64
<PAGE> 67
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the Period from
Inception (December 19, 1996) to December 31, 1997 and the
Year Ended December 31, 1998.............................. F-4
Consolidated Statements of Stockholders' Deficit for the
Period from Inception (December 19, 1996) to December 31,
1997 and the Year Ended December 31, 1998................. F-5
Consolidated Statements of Cash Flows for the Period from
Inception (December 19, 1996) to December 31, 1997 and the
Year Ended December 31, 1998.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Condensed Consolidated Balance Sheet as of June
30, 1999.................................................. F-21
Unaudited Condensed Consolidated Statement of Operations for
the Three Months Ended June 30, 1998 and 1999............. F-22
Unaudited Condensed Consolidated Statement of Operations for
the Six Months Ended June 30, 1998 and 1999............... F-23
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1999........... F-24
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-25
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Allied Riser Communications Corporation:
We have audited the accompanying consolidated balance sheets of Allied
Riser Communications Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the period from inception
(December 19, 1996) to December 31, 1997 and the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Allied Riser Communications
Corporation and subsidiaries as of December 31, 1997 and 1998, and the results
of their operations and their cash flows for the period from inception (December
19, 1996) to December 31, 1997 and the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 11, 1999 (except with
respect to Note 12, as to which
the dates are April 29, 1999 for
the matters discussed in the
first two paragraphs, and
September 18, 1999 for the
matter discussed in the third
paragraph.)
F-2
<PAGE> 69
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1997 AND 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 187,919 $ 41,371,453
Accounts receivable, net of reserve of $2,123 in 1998..... -- 19,979
Stock subscription receivable............................. -- 7,371
Prepaid expenses and other current assets................. 3,390 131,023
----------- ------------
Total current assets.............................. 191,309 41,529,826
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $10,477 and $509,674 in 1997 and 1998,
respectively.............................................. 1,250,353 13,004,626
OTHER ASSETS................................................ 44,951 1,037,065
----------- ------------
Total assets...................................... $ 1,486,613 $ 55,571,517
=========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 341,641 $ 271,756
Accrued liabilities....................................... 318,694 2,842,503
Current maturities of debt................................ 2,517,715 --
Current maturities of capital lease obligations........... -- 722,338
----------- ------------
Total current liabilities......................... 3,178,050 3,836,597
DEBT, net of current maturities............................. 50,107 --
CAPITAL LEASE OBLIGATIONS, net of current maturities........ -- 1,420,385
----------- ------------
Total liabilities................................. 3,228,157 5,256,982
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE REDEEMABLE PREFERRED STOCK, $.0001 par value,
1,000 shares authorized, Series A, 66 shares issued and
outstanding in 1998 (aggregate redemption of
$66,451,781).............................................. -- 66,451,781
STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value, 66,666,667 shares
authorized, 241,433 and 25,716,396 shares issued and
outstanding in 1997 and 1998, respectively............. 24 2,572
Additional paid-in capital................................ 162,671 374,755
Accumulated deficit....................................... (1,904,239) (16,514,573)
----------- ------------
Total stockholders' deficit....................... (1,741,544) (16,137,246)
----------- ------------
Total liabilities and stockholders' deficit....... $ 1,486,613 $ 55,571,517
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 70
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (DECEMBER 19, 1996) TO
DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM FOR THE
INCEPTION TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
NETWORK SERVICES REVENUE.................................... $ -- $ 212,285
OPERATING EXPENSES:
Network operations........................................ 79,624 2,358,196
Selling expense........................................... -- 1,623,292
General and administrative expenses....................... 1,348,451 9,735,336
Depreciation and amortization............................. 10,477 499,197
----------- ------------
Total operating expenses.......................... 1,438,552 14,216,021
----------- ------------
OPERATING INCOME (LOSS)..................................... (1,438,552) (14,003,736)
----------- ------------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (123,196) (724,777)
Interest income........................................... 37,421 117,179
Other income, net......................................... 27,116 1,000
----------- ------------
Total other income (expense)...................... (58,659) (606,598)
----------- ------------
NET INCOME (LOSS) BEFORE INCOME TAXES....................... (1,497,211) (14,610,334)
PROVISION FOR INCOME TAXES.................................. -- --
----------- ------------
NET INCOME (LOSS)........................................... (1,497,211) (14,610,334)
ACCRUED DIVIDENDS ON PREFERRED STOCK........................ -- (451,781)
----------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $(1,497,211) $(15,062,115)
=========== ============
NET INCOME (LOSS) PER COMMON SHARE.......................... $ (7.45) $ (8.09)
=========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 200,883 1,862,066
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 71
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (DECEMBER 19, 1996) TO DECEMBER 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
NUMBER ADDITIONAL
OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 19, 1996 (date of
inception).......................... -- $ -- $ -- $ -- $ --
Issuance of common stock in
conjunction with the DPI Tech and
DPI merger (see Note 1)........... 200,000 20 156,460 (407,028) (250,548)
Issuance of common stock............ 41,433 4 6,211 -- 6,215
Net income (loss)................... -- -- -- (1,497,211) (1,497,211)
---------- ------ --------- ------------ ------------
BALANCE, December 31, 1997............ 241,433 24 162,671 (1,904,239) (1,741,544)
Issuance of common stock............ 25,474,963 2,548 35,665 -- 38,213
Stock issuance costs................ -- -- (351,580) -- (351,580)
Capital contribution by SZI and
EOP............................... -- -- 979,780 -- 979,780
Accrued cumulative dividends on
preferred stock................... -- -- (451,781) -- (451,781)
Net income (loss)................... -- -- -- (14,610,334) (14,610,334)
---------- ------ --------- ------------ ------------
BALANCE, December 31, 1998............ 25,716,396 $2,572 $ 374,755 $(16,514,573) $(16,137,246)
========== ====== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 72
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (DECEMBER 19, 1996) TO DECEMBER 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM FOR THE
INCEPTION TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,497,211) $(14,610,334)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 10,477 499,197
Changes in assets and liabilities --
Increase in accounts receivable, net................. -- (19,979)
Increase in prepaid expenses and other current
assets............................................ (3,390) (127,633)
Increase in other assets............................. (44,062) (992,114)
Increase in accounts payable and accrued
liabilities....................................... 305,556 830,567
----------- ------------
Net cash used in operating activities............. (1,228,630) (14,420,296)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,260,830) (8,115,325)
Cash received in the merger and liquidation in the net
assets of DPI and DPI Tech (see Note 1)................ 173,059 --
----------- ------------
Net cash used in investing activities............. (1,087,771) (8,115,325)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt........................................ 2,505,803 15,100,000
Payments of debt.......................................... (7,698) (17,667,822)
Payments on capital lease obligations..................... -- (372,065)
Proceeds from related party loans......................... 160,000 --
Payments on related party loans........................... (160,000) --
Capital contribution by SZI and EOP....................... -- 979,780
Proceeds from issuance of common stock.................... 6,215 30,842
Proceeds from issuance of preferred stock................. -- 66,000,000
Stock issuance costs...................................... -- (351,580)
----------- ------------
Net cash provided by financing activities......... 2,504,320 63,719,155
----------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 187,919 41,183,534
CASH AND CASH EQUIVALENTS, beginning of period.............. -- 187,919
----------- ------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 187,919 $ 41,371,453
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................... $ 11,602 $ 113,457
Noncash investing and financing activities --
Equipment acquired under capital leases................ -- 2,514,788
Accrued dividends on preferred stock................... -- 451,781
Accrued property and equipment additions............... -- 1,623,357
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 73
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. ORGANIZATION:
Allied Riser Communications Corporation ("ARC Corporation") (collectively
including all predecessors, the "Company") was incorporated on November 2, 1998,
as a Delaware corporation. Immediately following its incorporation, a
reorganization of its predecessor, RCH Holdings, Inc. ("RCH"), occurred. The
wholly owned subsidiaries of RCH, Allied Riser Communications, Inc. ("ARC"), a
Texas corporation, and Carrier Direct, Inc.("Carrier Direct"), a Texas
corporation, distributed their assets and liabilities to RCH in a complete
liquidation and dissolution. Thereafter, RCH transferred all of its assets and
liabilities to ARC Corporation in exchange for shares of ARC Corporation common
stock. ARC Corporation then contributed the assets and liabilities acquired to
its wholly owned subsidiary, Allied Riser Communications, Inc., a Delaware
corporation.
RCH was incorporated on December 19, 1996, as a Texas corporation.
Concurrent with its formation, RCH purchased 100% of the outstanding common
stock of two newly formed corporations, ARC (formerly RiserCorp, Inc.) and
Carrier Direct. For the period from December 19, 1996 through December 31, 1996,
RCH had no operations.
On February 14, 1997, DPI Technology Resources, Inc. ("DPI Tech") and
Digital Packet Interface Solutions, Inc. ("DPI"), two affiliates under common
control, merged with and into RCH. The stockholders of DPI Tech and DPI
exchanged all the outstanding stock for stock of RCH. DPI Tech and DPI had no
significant operations before the merger with RCH and concurrent with the
merger, the Company made a decision to discontinue the operations and business
activities of DPI Tech and DPI. Accordingly, substantially all of the net assets
of DPI Tech and DPI were liquidated subsequent to the merger. Due to the merger
and subsequent liquidation and as the DPI Tech and DPI operations were separate
and distinctly different from RCH's business plan, historical financial results
of DPI Tech and DPI for 1996 have not been presented. In 1996, DPI Tech and DPI
incurred a combined loss of $363,653. The merger of the companies was accounted
for as an exchange between companies under common control, as such, the assets
and liabilities were recorded on a historical cost basis at the date of
inception of RCH.
The Company is a facilities-based provider of broadband data, video, and
voice communications services to small-and-medium-sized businesses in major
metropolitan areas in the United States. The Company's services, which today
include ultra high-speed Internet access, business-oriented television for
display on the computer desktop, and Internet-enhanced voice conferencing
calling services, among others, are typically delivered to the Company's
customers over its own fiber optic network built inside multi-tenant commercial
office buildings. In addition to selling services to the commercial tenants of
buildings in which the Company owns and operates these advanced communications
networks, the Company leverages its market presence and brand by offering
end-to-end connectivity on a resold basis to businesses located outside these
buildings.
Until April 29, 1999, the Company was in the development stage (see Note
12). Since its inception on December 19, 1996, the Company's principal
activities have included developing its business plans, procuring governmental
authorizations, raising capital, hiring management and other key personnel,
working on the design and development of its high capacity fiber-optic networks,
acquiring equipment and facilities, and negotiating interconnection agreements.
Accordingly, the Company has incurred operating losses and operating cash flow
deficits.
The Company's success will be affected by the problems, expenses and delays
encountered by early stage companies and the competitive environment in which
the Company intends to
F-7
<PAGE> 74
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operate. Certain key risk factors which may impact the Company include: the
Company's ability to successfully market its products and services and to
generate profitable results, the availability of adequate financial and capital
resources to finance the execution of the Company's business plan, the Company's
industry is highly competitive and competitive threats are expected to increase,
the Company operates in an industry subject to rapid technological changes and
future changes may negatively impact the Company's ability to successfully
market its products and services, the availability of adequate network capacity
from other communication carriers and the Company's ability to manage its
anticipated growth. The Company's failure to mitigate these significant risk
factors will have a material adverse effect on the Company's business, financial
condition and results of operations. Although management believes that the
Company will be able to successfully mitigate these risks, management cannot
give assurances that it will be able to do so or that the Company will ever
operate profitably.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and marketable securities with
original maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated once placed in
service using the straight-line method. Interest is capitalized during the
construction period of system infrastructure based on the rates applicable to
borrowings outstanding during the period. Equipment held under capital lease
obligations is amortized over the estimated useful life of the asset. Equipment
held under capital lease obligations amounted to approximately $2,453,000, net
of accumulated amortization of approximately $62,000, as of December 31, 1998.
No equipment was held under capital leases as of December 31, 1997.
The Company periodically evaluates its long-lived assets, including
property and equipment, to determine whether events or changes in circumstances
have occurred that indicate the remaining asset balances may not be recoverable
and an impairment loss should be recorded. Recoverability of assets is measured
by comparing the carrying amount of an asset to the undiscounted future cash
flows estimated to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Repair
and maintenance costs are expensed as incurred.
REVENUE RECOGNITION
Network services revenue includes broadband data, video, voice
communication and installation services. Broadband data and video are
subscription based services provided to customers under month-to-month
contracts. Voice communications and installation services are usage based
services. Installation service fees are nonrecurring fees for access to our
network. To date, such installation revenues have not exceeded the direct costs
of installation. Revenues are recognized in the month in which the services are
provided. All expenses related to services provided are recognized as incurred.
F-8
<PAGE> 75
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NETWORK OPERATIONS
Network operations include payments to providers of transmission capacity,
costs associated with customer care, customer installations, equipment
maintenance, payments to building owners, and content licensing costs. Costs are
expensed as incurred.
SELLING EXPENSE
Selling expense includes employee salaries and commissions, marketing,
advertising, and promotional expenses and costs associated with leasing and
operating sales demonstration centers.
INCOME TAXES
Deferred income tax assets and liabilities are recorded for the differences
between the tax and financial reporting basis of the assets and liabilities and
are based on the enacted income tax rates which are expected to be in effect in
the period in which the difference is expected to be settled or realized. A
change in tax laws would result in adjustments to the deferred tax assets and
liabilities.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results may differ from those estimates.
NEW ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities," in April
1998. Effective for financial statements for fiscal years beginning after
December 15, 1998, SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Start-up activities are defined
as those one-time activities related to opening a new facility, introducing a
new product or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new process
in an existing facility, or commencing some new operation. The Company has not
capitalized any expenses with such characteristics for financial reporting
purposes. Therefore, the Company believes adoption of this SOP will not
materially impact the consolidated financial statements.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is presented in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
(SFAS 128). SFAS 128 requires a presentation of basic EPS and diluted EPS. Basic
EPS excludes dilution for common stock equivalents and is computed by dividing
income or loss available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock and resulted in the issuance of
common stock.
Shares issued to employees subject to repurchase by the Company are not
included in the weighted average number of common shares outstanding for the
period. Convertible redeemable
F-9
<PAGE> 76
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock was outstanding at December 31, 1998. These securities were not
considered in a computation of diluted EPS at December 31, 1998 as the
conversion is dependent upon a qualifying public offering or qualifying
recapitalization, as defined in the articles of incorporation.
Diluted EPS is not presented as all potentially dilutive securities would
be antidilutive.
3. PROPERTY AND EQUIPMENT:
Property and equipment as of December 31, consist of the following:
<TABLE>
<CAPTION>
AVERAGE
ESTIMATED
USEFUL
LIVES
(YEARS) 1997 1998
--------- ---------- -----------
<S> <C> <C> <C>
Office equipment................................... 4 $ 156,587 $ 1,944,527
Furniture and fixtures............................. 7 892 71,770
Leasehold improvements............................. 5 639 450,818
System infrastructure.............................. 10 -- 2,420,834
System equipment................................... 5 -- 2,240,357
Construction-in-progress........................... 1,102,712 6,385,994
---------- -----------
1,260,830 13,514,300
Less --
Accumulated depreciation and amortization........ (10,477) (509,674)
---------- -----------
Property and equipment, net........................ $1,250,353 $13,004,626
========== ===========
</TABLE>
Capitalized interest for the period from inception (December 19, 1996) to
December 31, 1997 and the year ended December 31, 1998 was approximately $41,000
and $221,000, respectively.
4. OTHER ASSETS:
Other assets as of December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1998
------- ----------
<S> <C> <C>
Restricted cash............................................. $ -- $ 550,000
Deposits.................................................... 44,951 487,065
------- ----------
$44,951 $1,037,065
======= ==========
</TABLE>
Restricted cash represents cash securing a letter of credit issued by a
bank in accordance with an operating lease for office space.
F-10
<PAGE> 77
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED LIABILITIES:
Accrued liabilities as of December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Property and equipment additions............................ $ -- $1,751,779
Legal fees.................................................. -- 50,000
General operating expenses.................................. -- 285,000
Rent........................................................ -- 264,333
Interest.................................................... 151,240 --
Property taxes.............................................. -- 145,795
Other taxes................................................. -- 100,192
Other....................................................... 167,454 245,404
-------- ----------
$318,694 $2,842,503
======== ==========
</TABLE>
6. DEBT:
Debt as of December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Credit agreement due August 10, 1998, bearing interest
at prime plus 2%, secured by all property of the
Company............................................... $ 2,500,000 $ --
Bank loan agreement due April 28, 2001, bearing interest
at prime plus 2%, secured by property of the
Company............................................... 67,822 --
----------- -----------
2,567,822
Current maturities...................................... (2,517,715) --
----------- -----------
Debt, net of current maturities......................... $ 50,107 $ --
=========== ===========
</TABLE>
On May 16, 1997, the Company entered into a credit agreement with S Z
Investments, L.L.C. ("SZI") to finance the initial network installation and
other general corporate purposes (see Notes 8, 9 and 11). Between January 15,
1998 and November 18, 1998, the Company and SZI executed several amendments to
the credit agreement, which effectively increased the original principal amount
of $2,500,000 to a total aggregate amount of $14,000,000. As part of the
agreement, SZI received a security interest in all of the Company's assets and
outstanding common shares. On November 23, 1998, the Company repaid the entire
outstanding balance of $14,000,000 under the credit agreement. In May 1998, EOP
Operating Limited Partnership ("EOP") advanced the Company $3,600,000 for the
construction of certain infrastructure in Equity Office Properties Trust
("EOPT") buildings. The Company repaid the entire $3,600,000 advance on November
23, 1998 (see Notes 8, 9 and 11).
Accrued interest totaling $979,780 was contributed by SZI and EOP. As both
SZI and EOP are related parties, the contribution has been accounted for as a
capital transaction and included in the accompanying consolidated statements of
stockholders' deficit (see Notes 8, 9 and 11).
On May 29, 1997, the Company issued a $75,520 promissory note to a bank.
The note was paid off in November 1998 in conjunction with the Company's equity
funding (see Notes 8 and 9).
F-11
<PAGE> 78
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has entered into various operating lease agreements, with
expirations through 2004, for leased space and equipment. Future minimum lease
obligations as of December 31, 1998, related to the Company's operating leases
are as follows:
<TABLE>
<S> <C>
1999........................................................ $1,312,219
2000........................................................ 1,319,126
2001........................................................ 1,288,708
2002........................................................ 1,152,993
2003........................................................ 1,207,270
Thereafter.................................................. 24,098
----------
Total minimum lease obligations................... $6,304,414
==========
</TABLE>
Total rent expense for the period from inception (December 19, 1996) to
December 31, 1997, and for the year ended December 31, 1998, was approximately
$94,000 and $586,000, respectively.
CAPITAL LEASES
The Company has entered into various capital leases for equipment. Future
minimum lease obligations as of December 31, 1998, related to the Company's
capital leases are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 918,493
2000........................................................ 987,805
2001........................................................ 571,596
Thereafter.................................................. --
----------
Total minimum lease obligations................... 2,477,894
Less -- Amounts representing interest....................... (335,171)
----------
Present value of minimum lease obligations.................. 2,142,723
Current maturities.......................................... (722,338)
----------
Capital lease obligations, net of current maturities........ $1,420,385
==========
</TABLE>
CONNECTIVITY CONTRACTS
In order to provide its services, the Company must connect each
intra-building network to a local network and each metropolitan point of
presence to a national fiber optic connection. The Company has secured contracts
that range from monthly to five years for local transport and up to three years
for national inter-city transport. The Company incurs fixed monthly charges for
local connectivity. For national connectivity, the Company incurs fixed monthly
charges plus incremental charges for customer usage above a certain volume. In
addition, in the event the Company fails to meet its minimum volume commitments
for national connectivity, it may be obligated to pay underutilization charges.
F-12
<PAGE> 79
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum obligations as of December 31, 1998, related to the
Company's connectivity contracts are as follows:
<TABLE>
<S> <C>
1999........................................................ $328,679
2000........................................................ 49,800
2001........................................................ 34,950
2002........................................................ 30,000
2003........................................................ 25,000
--------
Total minimum lease obligations............................. $468,429
========
</TABLE>
LITIGATION
The Company is involved in certain litigation arising in the ordinary
course of business. Management believes that such litigation will be resolved
without material effect on the Company's financial position or results of
operations.
8. CONVERTIBLE REDEEMABLE PREFERRED STOCK:
Pursuant to the Investment Agreement dated November 23, 1998, in November
and December 1998, the Company issued to a group of investors 41 and 25 shares
of Series A convertible redeemable preferred stock (the "Preferred Stock"),
respectively, for $41,000,000 and $25,000,000 in cash, respectively. Proceeds
from the issuance were used to repay all outstanding indebtedness (see Note 6).
The shareholders of the Preferred Stock are entitled to certain rights as
described below:
-Redemption -- Upon the occurrence of a qualifying public offering or
qualifying recapitalization as defined in the Articles of Incorporation,
the holders of at least a majority of the outstanding shares of Preferred
Stock may elect to redeem all or any part of the Preferred Stock at a price
per share equal to the liquidation value ($1,000,000 per share) plus
accrued and unpaid dividends ($451,781 for all preferred shares as of
December 31, 1998).
-Conversion Rights -- Upon the occurrence of a qualifying public
offering or qualifying recapitalization as defined in the Articles of
Incorporation, the holders of at least a majority of the outstanding shares
of Preferred Stock may elect to convert all or any portion of their
Preferred Stock into shares of common stock computed by dividing the
liquidation value of the Preferred Stock by the applicable market value of
the common stock. Regardless of the foregoing, all issued and outstanding
shares of Preferred Stock not redeemed shall be automatically converted
into shares of common stock upon a qualifying public offering.
-Dividends -- Dividends shall accrue on a daily basis at a rate of 10%
per annum on the liquidation value ($1,000,000 per share). The dividends
shall be cumulative such that all accrued and unpaid dividends shall be
fully paid or declared before any dividend may be made with respect to any
common shares. Additionally, in certain situations upon occurrence of a
qualifying initial public offering or qualifying recapitalization (1) no
further dividends shall accrue on the Series A Preferred Stock (2) any
accrued but unpaid dividends on the Series A Preferred Stock shall be
waived and (3) each holder of shares of Series A Preferred Stock shall
return all previous paid dividends to the Company.
F-13
<PAGE> 80
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
-Liquidation Preference -- Each share of Preferred Stock outstanding
at the time of a "liquidating event," as defined in the Articles of
Incorporation, shall be paid $1,000,000 per share, plus any accrued and
unpaid dividends.
As a result of the redemption provision, the Preferred Stock has been
presented outside of stockholders' deficit.
9. COMMON STOCK:
On February 14, 1997, DPI Tech and DPI, two affiliates under common
control, merged with and into RCH. The stockholders of DPI Tech exchanged 75,000
shares, and the stockholders of DPI exchanged 151,266 shares, which represented
the total outstanding shares of both entities, respectively, for 200,000 shares
of RCH (see Note 1).
In early 1997, after the formation of RCH and the merger with DPI Tech and
DPI, RCH sold 41,433 shares at par, $.15, to executives and various other
related parties. As discussed in Note 6, all shares were pledged as security for
the loan from SZI.
On November 16, 1998, the stockholders of RCH approved an amendment to the
Articles of Incorporation increasing authorized shares to 3,666,667 shares from
666,667 shares and reducing the par value to no par from $.15.
In November 1998, ARC Corporation, the successor to RCH, authorized the
issuance of up to 66,667,667 shares of capital stock of which 66,666,667 shares
were designated as common stock, par value $.0001 per share, and 1,000 shares
were designated as Series A convertible redeemable preferred stock, par value
$.0001 per share. The consolidated financial statements and the notes thereto
have been adjusted to reflect the change in par value on a retroactive basis.
In conjunction with the reorganization, RCH transferred all of its assets
and liabilities to ARC Corporation in exchange for 3,495,786 shares of ARC
Corporation common stock, which represented the 200,000 shares issued in the DPI
Tech and DPI mergers, the 41,433 shares issued to executives and various other
related parties during 1997, and 3,254,353 shares to be issued to management,
current and former employees, and non-employee stockholders for $.0015 per share
during 1999. Certain of these shares are subject to vesting as described below
in the stockholders' agreement.
Pursuant to an investment agreement dated November 23, 1998, the Company
issued to a group of investors 13,269,756 shares of common stock for $.0015 per
share, which management believes represented the fair value of the shares.
Subject to a subscription agreement, 927,466 additional shares of common stock
were reserved by the Company in connection with this transaction. Subscription
agreements entered into by the former RCH stockholders granted protection
against dilution, in the event of certain issuances of ARC Corporation common
stock. Certain of these shares are subject to vesting as described below in the
stockholders' agreement. The subscribers were entitled to purchase common stock
in an amount equal to 25% of the total common stock outstanding up to
$60,000,000 of cash equity investments in ARC Corporation (including the capital
invested by the group of investors upon their purchase of ARC Corporation
preferred stock in connection with the reorganization and recapitalization).
On December 30, 1998, the Company issued to a second group of investors
7,291,075 shares of common stock for $.0015 per share. In accordance with the
subscription agreement described above, 1,659,778 shares of common stock were
issued to RCH for distribution to management, current and former employees, and
non-employee stockholders for
F-14
<PAGE> 81
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$.0015 per share, and an additional 387,294 shares of common stock were reserved
by the Company. As a result of this transaction, ARC Corporation equity
investment exceeded $60,000,000, effectively terminating all anti-dilution
rights. Including the 3,495,786 shares exchanged for the RCH common stock to be
issued to management, current and former employees, and non-employee
stockholders, and the 13,269,756 shares issued to a group of investors in
November 1998, the aggregate common shares issued by the Company during 1998
totaled 25,716,389. Of the 25,716,389 shares issued during 1998, 4,914,131
shares were issued to RCH for subsequent issuance to management, current and
former employees and non-employee stockholders subject to subscription
agreements. The subscription agreements were ratified and the shares were
distributed by RCH on January 11, 1999. Reserved shares totaling 1,314,760 will
be used by management for issuance to new employees and potentially for issuance
under a stock option agreement. Issuance costs of approximately $351,580 were
offset against additional paid-in capital.
STOCKHOLDERS' AGREEMENT
As a condition of the investment agreement discussed above, on November 5,
1998, a stockholders' agreement was established which stipulates the terms under
which the Company's shares can be sold or transferred. Among other things, the
agreement states that any stockholder wishing to sell his shares must first
allow the Company and certain other stockholders the option to purchase the
shares. The agreement shall terminate at the election of all the Series A
Preferred stockholders and at least 50% of the common stockholders.
The Company accounts for restricted stock awards under the provisions of
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees."
The Company believes the restricted stock issuances reflect fair value. With
respect to stockholders who are employees of the Company or its successors, the
subscription agreements provide that the shares of ARC Corporation common stock
held by such subscribers shall be restricted, non-transferable, and subject to
repurchase by the Company, or its successors, until vested. Upon issuance of the
shares to the employees in 1998, certain shares were vested based on employees'
prior service with the Company. Unvested shares vest over four years in equal
monthly installments commencing upon their issuance. Pursuant to contractual
arrangements, vesting of shares may accelerate upon the occurrence of a
qualifying business combination or a combination of a qualifying business
combination and termination of employment without cause. The accelerated vesting
provisions differ based upon the employee's position within the Company. There
are no accelerated vesting provisions related to performance criteria. Upon the
resignation or termination of an employee subscriber for any reason, all
unvested shares will be subject to repurchase by the Company, or its successors,
at the price paid by the employee.
The vesting schedule for the shares that have been issued or subscribed
through December 31, 1998, for the years ending December 31 is:
<TABLE>
<S> <C>
1998........................................................ 1,982,606
1999........................................................ 602,838
2000........................................................ 602,838
2001........................................................ 602,838
2002........................................................ 552,601
</TABLE>
Prior to the reorganization, the Company had both outstanding warrants to
purchase common stock and outstanding stock rights. At November 23, 1998, all
outstanding warrants and stock rights were extinguished, except for warrants to
purchase approximately 4,800 shares of
F-15
<PAGE> 82
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock held by one individual. It is management's opinion that these
warrants are currently not exercisable.
10. INCOME TAXES:
The provision (benefit) for income taxes for the year ended December 31
consist of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Current..................................................... $-- $--
Deferred.................................................... -- --
--- ---
Total....................................................... $-- $--
=== ===
</TABLE>
The differences between the statutory federal income tax rates and the
Company's effective income tax rate for the year ended December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1998
----- -----
<S> <C> <C>
Computed statutory tax expense.............................. (34.0)% (34.0)%
Non-deductible expenses and non-book income................. 0.3% 2.4%
Valuation allowance......................................... 33.7% 31.6%
----- -----
-- --
===== =====
</TABLE>
Deferred taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as incurred by tax laws and regulations.
]The following table discloses the components of the deferred tax amounts at
December 31:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets --
Temporary difference for basis in and depreciation of
property and equipment................................ $ 5,698 $ 157,754
Start-up costs........................................... 406,246 3,896,352
Net operating loss....................................... 92,895 811,920
Other.................................................... -- 76,090
--------- -----------
Total deferred tax assets........................ 504,839 4,942,116
Deferred tax liability..................................... -- --
--------- -----------
Net deferred tax asset..................................... 504,839 4,942,116
Less -- Valuation allowance................................ (504,839) (4,942,116)
--------- -----------
Net deferred tax amount.......................... $ -- $ --
========= ===========
</TABLE>
The Company had approximately $2,388,000 of net operating loss carryforward
for federal income tax purposes at December 31, 1998. The net operating loss
carryforward will expire in the year 2018 if not previously utilized. Under
existing income tax law, all operating expenses incurred prior to a company
commencing its principal operations are capitalized and amortized over a
five-year period for tax purposes. On November 23, 1998, the Company commenced
its principal operations for tax purposes and no longer capitalizes operating
expenses as start-up costs.
F-16
<PAGE> 83
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A valuation allowance must be provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. Management has
decided to record this allowance due to the uncertainty of future operating
results. In subsequent periods, the Company may reduce the valuation allowance,
provided that utilization of the deferred tax asset is more likely than not, as
defined by SFAS No. 109.
11. RELATED PARTIES:
One member of the group of investors that purchased common stock and
Preferred Stock on November 23, 1998, was EGI-ARC Investors, L.L.C. ("EGI-ARC").
The managing member of EGI-ARC is indirectly controlled by Samuel Zell. EGI-ARC
purchased 5,687,038 shares of common stock and 15 shares of Series A Preferred
Stock. Further, an affiliate of Samuel Zell is a passive investor in Telecom
Partners, L.P. ("TP"). TP purchased 4,957,931 shares of common stock and 17
shares of Series A Preferred Stock.
Samuel Zell owns and controls SZI, a lender who had provided the majority
of the Company's debt prior to November 23, 1998 (see Note 6). Affiliates of
Samuel Zell own an interest in and/or control a number of entities with which
the Company has entered into contractual or other relationships. Samuel Zell is
Chairman of the Board of Trustees of EOPT, a publicly held Real Estate
Investment Trust. The Company has telecommunications license agreements with 40
EOPT properties. In certain of these properties, the Company paid approximately
$155,900 to EOPT for rent and other related costs during the year ended December
31, 1998. In addition, EOP advanced the Company $3,600,000 for infrastructure in
EOPT buildings (see Note 6).
Samuel Zell is Chairman of Anixter International, Inc., ("Anixter") a
supplier of wiring systems, networking, and internetworking products for voice,
data, and video networks. Anixter supplies the Company with certain of its
requirements for fiber optic cable and other materials used in the installation
of the ARC Network. For the period from inception (December 19, 1996) to
December 31, 1997 and the year ended December 31, 1998, the Company paid Anixter
approximately $195,000 and $2,319,000, respectively, for such supplies.
In addition, the Company purchases its commercial general liability and
other insurance policies through EGI Risk Services, Inc., an insurance brokerage
affiliated with Samuel Zell. For the year ended December 31, 1998, the Company
remitted approximately $64,000 to EGI Risk Services, Inc. Moreover, the Company
engaged Rosenberg & Liebentritt, P.C. for certain legal services. Rosenberg &
Liebentritt, P.C. was a law firm that provided legal services almost exclusively
to Samuel Zell and his affiliates. For the year ended December 31, 1998, the
Company paid approximately $323,000 for such legal services.
In April 1997, Mrs. O.W. Koberg, a related party of William Koberg, a
shareholder, lent the Company $100,000, at 10% annual interest, for the purpose
of funding continuing operations. This loan was paid shortly after the Company
received the funding from SZI in June 1997 (see Note 6).
In December 1996, Todd Doshier, the CFO and shareholder, and Steve Polizzi,
a shareholder, lent the Company $60,000, for the purpose of funding continuing
operations. The loan was repaid on February 20, 1997.
12. SUBSEQUENT EVENTS (AUDITED):
In March 1999, the Company entered into a credit facility under which the
Company can borrow up to $45,000,000, subject to certain conditions. The
facility will accrue interest at one of
F-17
<PAGE> 84
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the following or a combination of the following, at the Company's option: the
bank's prime rate plus 3.5%, a base CD rate plus 4.5%, Federal funds rate plus
4.0%, or an Eurodollar rate plus 4.5%. The credit facility is secured by all of
the Company's assets, except for the assets pledged in connection with the
Company's capital lease obligations. The Company paid an origination fee of
$1,350,000 in conjunction with the agreement. This amount is being amortized to
interest expense over the term of the agreement. The Company pays a commitment
fee of 1.5% on the unused portion of the credit facility once the facility is
initially borrowed against. The facility, which extends through October 2000,
contains various restrictive covenants, including the maintenance of certain
financial ratios, the achievement of certain operation targets and restrictions
on certain activities.
On April 29, 1999, the Company successfully deployed a significant product
and emerged from the development stage.
On September 18, 1999 the Company's Board of Directors declared a 1:15
reverse stock split applicable to its outstanding common stock. The number of
common shares and net income (loss) per share have been retroactively adjusted
to reflect the stock split for all periods presented.
13. SUBSEQUENT EVENTS (UNAUDITED):
STOCK OPTIONS
Effective June 1, 1999, the Company adopted the 1999 Stock Option and
Equity Incentive Plan (the "Plan") under which 2,703,116 shares of common stock,
subject to adjustment, are available for award to employees, officers,
directors, or consultants. Pursuant to the Plan, the Company's board of
directors may grant stock options, stock appreciation rights, restricted shares,
deferred shares and certain tax offset payments. The terms of any particular
grant, including any performance-based requirements, vesting terms and other
restrictions are determined by the Board or by the Compensation Committee of the
Board.
The exercise price of nonstatutory options may be above, at or below fair
market value of the common stock on the grant date. The exercise price of
incentive stock options must not be less than the fair market value. The
exercise period of options may be set by the Board or the Committee but may not
exceed ten years for incentive stock options.
The Company accounts for stock options and other employee awards under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." During June 1999, the Company granted 347,442 stock
options to employees. Each of the options granted has an exercise price of
$.0015 per share and a term of 10 years. Each of the options granted includes a
provision for exercise through July 26, 1999. Any options which are not
exercised by July 26, 1999 will vest ratably over four years based upon the
employee's anniversary date. Shares issued upon the exercise of the stock
options are restricted. Restricted shares vest on a monthly basis over a four
year period.
The Company believes the exercise price of the stock options granted
reflect fair value. Management determined the exercise price based on a
valuation of the Company's common stock and stock transactions with independent
third parties in late 1998 and considering business activities through mid June
1999.
In late June 1999, the Company engaged an independent third party to
perform another valuation of the Company. The valuation, received in late July,
indicated a stock valuation of $.336 per share as of June 29, 1999. Management
believes that the increase in the value of the
F-18
<PAGE> 85
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company from mid-June is the result of the Company executing a letter of intent
on June 22, 1999 with an investor to purchase an interest in the Company.
On July 27, 1999 the Company granted 73,332 stock options to employees.
Each of the options granted has an exercise price of $.336 per share.
COMPENSATION CHARGE
The Company is in the process of filing for an initial public offering of
its securities. Based on the ultimate valuation of the Company determined by
this offering and business activities and transactions which have occurred prior
to the completion of the offering, the Company will be required to record
compensation expense and deferred compensation to the extent the Company cannot
reconcile the value determined in the offering to the exercise prices of options
granted and issuance prices of restricted stock issued.
Based on the midpoint of the estimated range of the per share price of the
initial public offering, the Company is unable to reconcile the $12.50 per share
difference between the offering price and management's determination of fair
value prior to this offering. Accordingly, the Company will record a
compensation charge of $12.50 per share for each restricted stock issuance or
option grant to employees related to the period subsequent to January 1, 1999.
The total compensation charge as of June 30, 1999 is approximately $21,370,000
of which approximately $16,228,000 will be deferred and amortized over the
employee service period. An additional compensation charge of approximately
$917,000 will be recorded for options granted to employees for the period July
1, 1999 through September 15, 1999.
COMMON, PREFERRED STOCK AND WARRANTS
In August 1999, the Company issued 17 shares of Series B Preferred Stock
and 2,019,766 shares of common stock to a group of financial sponsors for
approximately $17,000,000 in cash.
Also in August 1999, the Company issued 34 shares of Series B Preferred
Stock and 4,039,531 shares of common stock for approximately $34,000,000 in
cash. In October 1999, the Company issued warrants to acquire 6,530,242 shares
of its common stock to real estate partners and their affiliates. The warrants
are exercisable upon the occurrence of certain events, as defined in the warrant
acquisition agreements and will have no exercise price.
The warrants and the rights associated with the warrants may be adjusted if
certain telecommunication license agreements are not executed in accordance with
the parameters outlined in the warrant acquisition agreements. Accordingly, the
measurement date for the warrants will be the date(s) on which the
telecommunications license agreements are signed and the real estate partners
effectively complete their performance element of the agreement.
At the measurement date, the Company will measure the fair value of the
warrants based on the fair value of the underlying common stock. As the terms of
the warrant allow the holder to acquire shares of common stock without any
additional consideration, the fair value of the warrant is equivalent to the
fair value of the common stock. Based upon the current structure of the
agreements, the fair value of the warrants will be capitalized as an intangible
asset in accordance with APB No. 17, Intangible Assets, and amortized over the
term of the telecommunications license agreement; however the Company is
evaluating whether possible changes to the agreements would require a change in
this treatment. Assuming a $17.00 per share common stock value on the
measurement date, the fair value of the warrants would be approximately
$111,000,000 and would result in approximately $11,100,000 of amortization on an
F-19
<PAGE> 86
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
annual basis, if capitalized as an asset, or conversely would result in an
expense if capitalization was not allowed. Additionally, depending upon timing
of the measurement dates related to the issuance of the warrants, the total fair
value may vary. For every 10% change in our stock price, the fair value of the
warrants would increase or decrease approximately $11,100,000.
Simultaneous with the Company's initial public offering and pursuant to
contractual agreements with the preferred shareholders, all shares of preferred
stock will be converted into shares of common stock (see Note 8). Accrued
dividends on the preferred stock will be waived as of the initial public
offering and recorded as a contribution to capital. Assuming the offering price
at the midpoint of the estimated price range of the initial public offering of
$17 per share, the 117 shares of preferred stock outstanding will be converted
into 6,882,353 shares of common stock. Had the conversion of preferred stock
occurred at the beginning of each year presented, net income (loss) per common
share would have been $(.21) and $(1.67), respectively, for the period from
inception (December 16, 1996) to December 31, 1997 and for the year ended
December 31, 1998.
F-20
<PAGE> 87
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET -- JUNE 30, 1999
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 24,307,103
Accounts receivable, net of reserve of $6,378............. 113,666
Stock subscription receivable............................. 762
Prepaid expenses and other current assets................. 269,110
------------
Total current assets.............................. 24,690,641
PROPERTY AND EQUIPMENT, net................................. 20,764,738
OTHER ASSETS................................................ 1,764,889
------------
Total assets...................................... $ 47,220,268
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 789,905
Accrued liabilities....................................... 5,145,063
Current maturities of capital lease obligations........... 1,882,444
------------
Total current liabilities......................... 7,817,412
CAPITAL LEASE OBLIGATIONS, net of current maturities........ 3,493,405
------------
Total liabilities................................. 11,310,817
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE REDEEMABLE PREFERRED STOCK, $.0001 par value,
1,000 shares authorized, Series A, 66 shares issued and
outstanding (aggregate redemption of $69,751,781)......... 69,751,781
STOCKHOLDERS DEFICIT:
Common Stock, $.0001 par value, 66,666,667 shares
authorized, 26,787,726 shares issued and outstanding... 2,679
Additional paid-in capital................................ 18,445,796
Deferred compensation..................................... (16,227,696)
Accumulated deficit....................................... (36,063,109)
------------
Total stockholders' deficit....................... (33,842,330)
------------
Total liabilities and stockholders' deficit....... $ 47,220,268
============
</TABLE>
The accompanying notes are an integral part of this
condensed consolidated balance sheet.
F-21
<PAGE> 88
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998, AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
NETWORK SERVICES REVENUE.................................... $ 22,325 $ 401,466
OPERATING EXPENSES:
Network operations........................................ 497,913 1,651,634
Selling expense........................................... 394,007 1,800,590
General and administrative expenses....................... 1,764,938 5,598,985
Amortization of deferred compensation..................... -- 5,029,966
Depreciation and amortization............................. 45,172 504,292
----------- ------------
Total operating expenses.......................... 2,702,030 14,585,467
----------- ------------
OPERATING INCOME (LOSS)..................................... (2,679,705) (14,184,001)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (151,994) (390,806)
Interest income........................................... 8,061 349,092
Other income (expense), net............................... 1,000 (4,926)
----------- ------------
Total other income (expense)...................... (142,933) (46,640)
----------- ------------
NET INCOME (LOSS) BEFORE INCOME TAXES....................... (2,822,638) (14,230,641)
----------- ------------
PROVISION FOR INCOME TAXES.................................. -- --
----------- ------------
NET INCOME (LOSS)........................................... (2,822,638) (14,230,641)
ACCRUED DIVIDENDS ON PREFERRED STOCK........................ -- (1,650,000)
----------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $(2,822,638) $(15,880,641)
=========== ============
NET INCOME (LOSS) PER COMMON SHARE.......................... $ (11.69) $ (.69)
=========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 241,433 22,885,629
=========== ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-22
<PAGE> 89
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
NETWORK SERVICES REVENUE:................................... $ 26,992 $ 547,463
OPERATING EXPENSES:
Network operations........................................ 717,686 2,819,162
Selling expense........................................... 599,501 2,406,302
General and administrative expenses....................... 2,821,605 9,207,479
Amortization of deferred compensation..................... -- 5,141,846
Depreciation and amortization............................. 65,741 889,650
----------- ------------
Total operating expenses.......................... 4,204,533 20,464,439
----------- ------------
OPERATING INCOME (LOSS)..................................... (4,177,541) (19,916,976)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (220,407) (461,627)
Interest income........................................... 15,057 834,993
Other income (expense), net............................... 1,000 (4,926)
----------- ------------
Total other income (expense)...................... (204,350) 368,440
----------- ------------
NET INCOME (LOSS) BEFORE INCOME TAXES....................... (4,381,891) (19,548,536)
----------- ------------
PROVISION FOR INCOME TAXES.................................. -- --
----------- ------------
NET INCOME (LOSS)........................................... (4,381,891) (19,548,536)
ACCRUED DIVIDENDS ON PREFERRED STOCK........................ -- (3,300,000)
----------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $(4,381,891) $(22,848,536)
=========== ============
NET INCOME (LOSS) PER COMMON SHARE.......................... $ (18.15) $ (1.01)
=========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 241,433 22,686,398
=========== ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-23
<PAGE> 90
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(4,381,891) $(19,548,536)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 65,741 889,650
Amortization of deferred compensation.................. -- 5,141,846
Changes in assets and liabilities --
Increase in accounts receivable, net................. (9,379) (87,078)
Increase in prepaid expenses......................... (52,345) (138,087)
(Increase) decrease in other assets.................. (37,583) 622,176
Increase in accounts payable and accrued
liabilities....................................... 800,032 2,740,460
----------- ------------
Net cash used in operating activities............. (3,615,425) (10,379,569)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (1,930,650) (4,527,800)
----------- ------------
Net cash used in investing activities............. (1,930,650) (4,527,800)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt........................................ 6,585,252 --
Payments on capital lease obligations..................... (47,533) (808,587)
Proceeds from issuance of common stock.................... -- 1,606
Credit facility origination fee........................... -- (1,350,000)
----------- ------------
Net cash provided by (used in) financing
activities...................................... 6,537,719 (2,156,981)
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 991,644 (17,064,350)
CASH AND CASH EQUIVALENTS, beginning of period.............. 187,919 41,371,453
----------- ------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,179,563 $ 24,307,103
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................... $ 1,495 $ 236,627
Noncash investing and financing activities --
Equipment acquired under capital leases................ 213,109 4,041,713
Accrued property and equipment additions............... 900,000 80,249
Accrued dividends on preferred stock................... -- 3,300,000
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-24
<PAGE> 91
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
1. ORGANIZATION:
The Company is a facilities-based provider of broadband data, video and
voice communications services to small-and-medium-sized businesses in major
metropolitan areas in the United States. The Company's services, which today
include ultra high-speed Internet access, business-oriented television for
display on the computer desktop, and Internet-enhanced voice conferencing
calling services, among other things, are typically delivered to the Company's
customers over its own fiber optic network built inside multi-tenant commercial
office buildings. In addition to selling services to the commercial tenants of
buildings in which the Company owns and operates these advanced communications
networks, the Company leverages its market presence and brand by offering
end-to-end connectivity on a resold basis to businesses located outside these
buildings.
On April 29, 1999, the Company successfully deployed a significant product
and emerged from the development stage. Since its inception on December 19,
1996, the Company's principal activities have included developing its business
plans, procuring governmental authorizations, raising capital, hiring
management, and other key personnel, working on the design and development of
its high capacity fiber-optic networks, acquiring equipment and facilities, and
negotiating interconnection agreements. Accordingly, the Company has incurred
operating losses and operating cash flow deficits.
2. PRESENTATION:
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the Company's
consolidated financial position as of June 30, 1999 (see Note 7). The results of
operations for the three and six months ended June 30, 1999 and cash flows for
the six months ended June 30, 1998 and 1999, are not necessarily indicative of
the results of operations or cash flows to be expected for the full year. The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and disclosures normally included
in notes to consolidated financial statements have been condensed or omitted
pursuant to such rules and regulations, but resultant disclosures are in
accordance with generally accepted accounting principles as they apply to
interim reporting. The unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto.
3. NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." Shares issued to employees subject to repurchase by the Company are
included in the weighted average number of common shares outstanding for the
period. Convertible redeemable preferred stock was outstanding at June 30, 1999.
These securities were not considered in a computation of diluted EPS for the
periods ended June 30, 1999 as the conversion is dependent upon a qualifying
public offering or qualifying recapitalization, as defined in the articles of
incorporation and due to the net loss incurred for both the three and six month
period ended June 30, 1999, as the impact would be antidilutive.
Options to purchase 347,442 shares of common stock at $.0015 per share were
outstanding at June 30, 1999. In management's opinion, the exercise price was
equal to the fair value of the
F-25
<PAGE> 92
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
common stock at the date of grant. These securities were not considered in a
computation of diluted EPS due to the net loss incurred for both the three and
six month period ended June 30, 1999, as the impact would be antidilutive.
4. PROPERTY AND EQUIPMENT:
Property and equipment as of June 30, 1999, consist of the following:
<TABLE>
<CAPTION>
AVERAGE
ESTIMATED
USEFUL LIVES
(YEARS)
-------------
<S> <C> <C>
Office equipment.......................................... 4 $ 4,272,137
Furniture and fixtures.................................... 7 198,160
Leasehold improvements.................................... 5 712,649
System infrastructure..................................... 10 3,434,929
System equipment.......................................... 5 3,288,823
Construction-in-progress.................................. 10,256,321
-----------
22,163,019
Less -- Accumulated depreciation and amortization......... (1,398,281)
-----------
Property and equipment, net............................... $20,764,738
===========
</TABLE>
No interest was capitalized for the six months ended June 30, 1999.
5. CREDIT FACILITY:
In March 1999, the Company entered into a credit facility under which the
Company can borrow up to $45,000,000, subject to certain conditions. The Company
has not borrowed against the facility as of June 30, 1999. The facility will
accrue interest at one of the following or a combination of the following, at
the Company's option: the bank's prime rate plus 3.5%, a base CD rate plus 4.5%,
Federal funds rate plus 4.0%, or an Eurodollar base rate plus 4.5%. The credit
facility is secured by all of the Company's assets, except for the assets
pledged in connection with the Company's capital lease obligations. The Company
pays a commitment fee of 1.5% on the unused portion of the credit facility once
the facility is initially borrowed against. The facility, which extends through
October 2000, contains various restrictive covenants, including the maintenance
of certain financial ratios, the achievement of certain operation targets and
restrictions on certain activities.
The Company paid an origination fee of $1,350,000 in conjunction with the
facility. This amount has been included in other assets and is being amortized
to interest expense over the term of the facility.
F-26
<PAGE> 93
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has entered into various operating lease agreements, with
expirations through 2005, for lease space and equipment. Future minimum lease
obligations as of June 30, 1999, related to the Company's operating leases are
as follows:
<TABLE>
<S> <C>
2000........................................................ $2,018,766
2001........................................................ 2,021,051
2002........................................................ 2,004,498
2003........................................................ 2,000,463
2004........................................................ 1,134,285
Thereafter.................................................. 8,507
----------
Total minimum lease obligations................... $9,187,570
==========
</TABLE>
Total rent expense for the three months ended June 30, 1998 and 1999, was
approximately $64,597 and $495,995, respectively. Total rent expense for the six
months ended June 30, 1998 and 1999, was approximately $100,303 and $851,389,
respectively.
CAPITAL LEASES
The Company has entered into various capital leases for equipment. Future
minimum lease obligations as of June 30, 1999, related to the Company's capital
leases are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 2,351,772
2001........................................................ 2,478,865
2002........................................................ 1,348,714
Thereafter.................................................. --
-----------
Total minimum lease obligations................... 6,179,351
Less -- Amounts representing interest....................... (803,502)
-----------
Present value of minimum lease obligations.................. 5,375,849
Current maturities.......................................... (1,882,444)
-----------
Capital lease obligations, net of current maturities........ $ 3,493,405
===========
</TABLE>
CONNECTIVITY CONTRACTS
In order to provide its services, the Company must connect each
intra-building network to a local network and each metropolitan point of
presence to a national fiber optic connection. The Company has secured contracts
that range from monthly to five years for local transport and up to three years
for national inter-city transport. The Company incurs fixed monthly charges for
local connectivity. For national connectivity, the Company incurs fixed monthly
charges plus incremental charges for customer usage above a certain volume. In
addition, in the event the Company fails to meet its minimum volume commitments
for national connectivity, it may be obligated to pay underutilization charges.
F-27
<PAGE> 94
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum obligations as of June 30, 1999, related to the Company's
connectivity contracts are as follows:
<TABLE>
<S> <C>
2000........................................................ $1,323,506
2001........................................................ 279,855
2002........................................................ 152,624
2003........................................................ 75,019
2004........................................................ 42,511
----------
Total minimum lease obligations................... $1,873,515
==========
</TABLE>
7. EQUITY TRANSACTIONS:
Effective June 1, 1999, the Company adopted the 1999 Stock Option and
Equity Incentive Plan (the "Plan") under which 2,703,116 shares of common stock,
subject to adjustment, are available for award to employees, officers,
directors, or consultants. Pursuant to the Plan, the Company's board of
directors may grant stock options, stock appreciation rights, restricted shares,
deferred shares and certain tax offset payments. The terms of any particular
grant, including any performance-based requirements, vesting terms and other
restrictions are determined by the Board or by the Compensation Committee of the
Board.
The exercise price of nonstatutory options may be above, at or below fair
market value of the common stock on the grant date. The exercise price of
incentive stock options must not be less than the fair market value. The
exercise period of options may be set by the Board or the Committee but may not
exceed ten years for incentive stock options.
The Company accounts for stock options and other employee awards under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." For the six month period ended June 30, 1999, the Company
granted approximately 347,000 stock options to employees. Each of the options
granted has an exercise price of $.0015 per share and a term of 10 years.
Options granted during the six month period ended June 30, 1999 vest over a four
year period and include a provision for exercise through July 26, 1999. Any
options which are not exercised by July 26, 1999 will vest ratably over four
years based upon the employee's anniversary date. Shares issued upon the
exercise of the stock options are restricted. Restricted shares vest on a
monthly basis over a four year period.
Also during the six month period ended June 30, 1999, the Company issued,
net of repurchases, 945,923 shares of restricted stock to certain employees.
These issuances were pursuant to subscription agreements and vest on a monthly
basis over four years. The restricted stock was issued at $.0015 per share.
Unvested shares will be subject to repurchase by the Company at the price paid
by the employee. The Company believes the exercise price of the stock options
issued and the restricted stock issuances during the six month period ended June
30, 1999 reflects fair value. Management determined the exercise and issuance
price based on a valuation of the Company's common stock and stock transactions
with independent third parties in late 1998 and considering business activities
through mid June 1999.
In April 1999, the Company issued 125,407 shares of common stock to Advest
at $.0015 per share as settlement of certain rights held by Advest and for
consulting and investment banking services.
F-28
<PAGE> 95
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENTS:
STOCK OPTIONS
In late June 1999, the Company engaged an independent third party to
perform another valuation of the Company. The valuation, received in late July,
indicated a stock valuation of $.336 per share as of June 29, 1999. Management
believes that the increase in the value of the Company from mid June is the
result of the Company executing a letter of intent on June 22, 1999 with an
investor to purchase an interest in the Company.
On July 27, 1999, the Company granted 73,332 stock options to employees.
Each of the options granted has an exercise price of $.336 per share.
COMPENSATION CHARGE
The Company is in the process of filing for an initial public offering of
its securities. Based on the ultimate valuation of the Company determined by
this offering and business activities and transactions which have occurred prior
to the completion of the offering, the Company will be required to record
compensation expense and deferred compensation to the extent the Company cannot
reconcile the value determined in the offering to the exercise prices of options
granted and issuance prices of restricted stock issued.
Based on the midpoint of the estimated range of the per share price of the
initial public offering, the Company is unable to reconcile the $12.50 per share
difference between the offering price and management's determination of fair
value prior to this offering. Accordingly, the Company will record a
compensation charge of $12.50 per share for each restricted stock issuance or
option grant to employees related to the period subsequent to January 1, 1999.
The total compensation charge as of June 30, 1999 is approximately $21,370,000
of which approximately $16,228,000 will be deferred and amortized over the
employee service period. An additional compensation charge of approximately
$917,000 will be recorded for options granted to employees for the period July
1, 1999 through September 15, 1999.
COMMON, PREFERRED STOCK AND WARRANTS
In August 1999, the Company issued 17 shares of Series B Preferred Stock
and 2,019,766 shares of common stock to a group of financial sponsors for
approximately $17,000,000 in cash.
Also in August 1999, the Company issued 34 shares of Series B Preferred
Stock and 4,039,531 shares of common stock for approximately $34,000,000 in
cash. In October 1999, the Company issued warrants to acquire 6,530,242 shares
of common stock to real estate partners and their affiliates. The warrants are
exercisable upon the occurrence of certain events, as defined in the warrant
acquisition agreements and will have no exercise price.
The warrants and the rights associated with the warrants may be adjusted if
certain telecommunication license agreements are not executed in accordance with
the parameters outlined in the warrant acquisition agreements. Accordingly, the
measurement date for the warrants will be the date(s) on which the
telecommunications license agreements are signed and the real estate partners
effectively complete their performance element of the agreement.
At the measurement date, the Company will measure the fair value of the
warrants based on the fair value of the underlying common stock. As the terms of
the warrant allow the holder to acquire shares of common stock without any
additional consideration, the fair value of the warrant is equivalent to the
fair value of the common stock. Based upon the current structure of
F-29
<PAGE> 96
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
the agreements, the fair value of the warrants will be capitalized as an
intangible asset and amortized over the term of the telecommunication license
agreements. In accordance with APB No. 17, Intangible Assets, however, the
Company is evaluating whether possible changes to the agreements would require a
change in this treatment. Assuming a $17 per share common stock value on the
measurement date, the fair value of the warrants would be approximately
$111,000,000 and would result in approximately $11,100,000 of amortization on an
annual basis, if capitalized as an asset, or conversely would result in an
expense if capitalization was not allowed. Additionally, depending upon timing
of the measurement dates related to the issuance of the warrants, the total fair
value may vary. For every 10% change in our stock price, the fair value of the
warrants would increase or decrease approximately $11,100,000.
Simultaneous with the Company's initial public offering and pursuant to
contractual agreements with the preferred shareholders, all shares of preferred
stock will be converted into shares of common stock (see Note 8 to the December
31, 1998 financial statements). Accrued dividends on the preferred stock will be
waived as of the initial public offering and recorded as a contribution to
capital. Assuming the offering is priced at the midpoint of the estimated price
range of the initial public offering of $17 per share, the 117 shares of
preferred stock outstanding, will be converted into 6,882,353 shares of common
stock. Had the conversion of preferred stock occurred at the beginning of each
period presented, net income (loss) per common share would have been $(.62) and
$(.66), respectively, for the six months ended June 30, 1998 and 1999.
Stock Split
On September 18, 1999, the Company's Board of Directors declared a 1:15
reverse stock split applicable to its outstanding common stock. The number of
common shares and net income (loss) per common share have been retroactively
adjusted to reflect the stock split for all periods presented.
F-30
<PAGE> 97
UNDERWRITING
Allied Riser and the underwriters for the U.S. offering named below have
entered into an underwriting agreement with respect to the shares being offered
in the United States. Subject to certain conditions, each U.S. underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs, & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, and Thomas
Weisel Partners LLC are the representatives of the U.S. underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Donaldson, Lufkin & Jenrette Securities Corporation.........
Thomas Weisel Partners LLC..................................
----------
Total..........................................
==========
</TABLE>
---------------------
If the U.S. underwriters sell more shares than the total number set forth
in the table above, the U.S. underwriters have an option to buy up to an
additional 1,770,000 shares from Allied Riser to cover such sales. They may
exercise this option for 30 days. If any shares are purchased pursuant to this
option, the U.S. underwriters will severally purchase shares in approximately
the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the U.S. underwriters by Allied Riser. Such
amounts are shown assuming both no exercise and full exercise of the U.S.
underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Allied Riser
--------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.............................................. $ $
Total.................................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
Allied Riser has entered into an underwriting agreement with the
underwriters for the sale of 2,950,000 shares outside of the United States. The
terms and conditions of both offerings are the same and the sale of shares in
both offerings are conditioned on each other. Goldman Sachs International,
Merrill Lynch International, Donaldson, Lufkin & Jenrette International, and
Thomas Weisel Partners LLC are representatives of the underwriters for the
international offering outside the United States. Allied Riser has granted the
international underwriters a similar option to purchase up to an aggregate of an
additional 442,500 shares.
The underwriters for both of the offerings have entered into an agreement
in which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer
U-1
<PAGE> 98
shares as a part of the distribution of the shares. The underwriters also have
agreed that they may sell shares among each of the underwriting groups.
Allied Riser and its executive officers and directors, certain of its
stockholders, and certain of its employees holding shares or options exercisable
in the six months following this offering have agreed with the underwriters not
to dispose of or hedge any of its common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans. The lock-up
agreements by persons other than Allied Riser cover approximately 95% of the
vested outstanding shares issued upon conversion of preferred stock and prior to
the shares issued in this offering. See "Shares Available for Future Sale" for a
discussion of certain transfer restrictions.
Prior to the offerings, there has been no public market for the shares. The
initial public offering price will be negotiated among Allied Riser and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Allied Riser's historical performance, estimates of the
business potential and ARC's earnings prospects, an assessment of Allied Riser's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
Application has been made for quotation of the common stock on the Nasdaq
National Market under the symbol "ARCC."
In connection with the offerings, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offerings.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offerings are in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Allied Riser estimates that its share of the total expenses of the
offerings, excluding underwriting discounts and commissions, will be
approximately $2,250,000.
Allied Riser has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offering being made outside of the
United States, to persons located in the United States.
U-2
<PAGE> 99
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 70 filed
public offerings of equity securities, of which 39 have been completed, and has
acted as a syndicate member in an additional 34 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us pursuant to the underwriting
agreement entered into in connection with this offering.
In August 1999, Allied Riser issued 17 shares of series B preferred stock
and 2,019,766 shares of common stock to a group of financial sponsors, including
GS Capital Partners III, L.P., an affiliate of Goldman, Sachs & Co. Allied Riser
received $16,703,000 in net proceeds from this financing transaction. The shares
issued to GS Capital Partners III, L.P. have been deemed to be underwriting
compensation by the National Association of Securities Dealers, Inc.
Also in August 1999, Allied Riser issued 34 shares of series B preferred
stock and 4,039,531 shares of common stock. Allied Riser received $33,306,000 in
net proceeds from the sale of the preferred and common stock. In October 1999,
Allied Riser issued warrants to acquire 6,530,242 additional shares of its
common stock to 13 real estate partners and their affiliates, including
Whitehall Street Real Estate Limited Partnership XI, an affiliate of Goldman,
Sachs & Co. These warrants are exercisable upon our real estate partners meeting
certain performance obligations as outlined in the warrant agreements.
U-3
<PAGE> 100
[EDGAR back cover description for ARC Prospectus]
Graphic consisting of a group of eleven buildings connected in a fiber-optic
network ring over which Internet, video, data and voice communications are
provided to the Company's customers. One building is enlarged and is partially
cut away to show the building riser containing a fiber-optic cable, to which a
cluster of desktop computers is linked at the middle of the riser. Each building
has a small box at its base representing a "point of presence", through which
Network services are routed. Emanating from the "point of presence" of the
enlarged building is a sphere with the word Internet. Company logo in lower
right corner and Allied Riser Communications Network in lower left corner.
<PAGE> 101
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 3
Summary Consolidated Financial and
Other Data......................... 6
Risk Factors......................... 8
Forward-looking Statements........... 15
Use of Proceeds...................... 16
Dividend Policy...................... 16
Capitalization....................... 17
Dilution............................. 18
Selected Consolidated Financial and
Other Data......................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................. 32
Management........................... 44
Summary Compensation Table........... 49
Principal Stockholders............... 50
Certain Transactions................. 53
Description of Capital Stock......... 56
Shares Eligible for Future Sale...... 60
Material United States Federal Tax
Considerations for Non-U.S. Holders
of Common Stock.................... 62
Legal Matters........................ 64
Experts.............................. 64
Additional Information............... 64
Index to Financial Statements........ F-1
Underwriting......................... U-1
</TABLE>
---------------------------
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold allotment
or subscription.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
14,750,000 Shares
ALLIED RISER
COMMUNICATIONS
CORPORATION
Common Stock
---------------------------
LOGO
---------------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 102
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK TO OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED OCTOBER 12, 1999.
14,750,000 Shares
LOGO
ALLIED RISER COMMUNICATIONS CORPORATION
Common Stock
---------------------
This is an initial public offering of shares of common stock of Allied
Riser Communications Corporation. This prospectus relates to an offering of
2,950,000 shares in an international offering outside the United States. In
addition, 11,800,000 shares are being offered in United States offering.
It is currently estimated that the initial public offering price per share
will be between $16 and $18. Application has been made for quotation of the
common stock on the Nasdaq National Market under the symbol "ARCC".
See "Risk Factors" on page 8 to read about factors you should consider
before buying shares of the common stock.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Allied Riser.................. $ $
</TABLE>
---------------------
To the extent that the underwriters sell more than 14,750,000 shares of
common stock, the underwriters have the option to purchase up to an additional
2,212,500 shares from Allied Riser at the initial public offering price less the
underwriting discount.
---------------------
The underwriters expect to deliver the shares in New York, New York on
, 1999.
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
---------------------
Prospectus dated , 1999.
<PAGE> 103
UNDERWRITING
Allied Riser and the underwriters for the international offering named
below have entered into an underwriting agreement with respect to the shares
being offered outside the United States. Subject to certain conditions, each
international underwriter has severally agreed to purchase the number of shares
indicated in the following table. Goldman Sachs International, Merrill Lynch
International, Donaldson, Lufkin & Jenrette International and Thomas Weisel
Partners LLC are the representatives of the international underwriters.
<TABLE>
<CAPTION>
International Underwriters Number of Shares
-------------------------- ----------------
<S> <C>
Goldman Sachs International.............................
Merrill Lynch International.............................
Donaldson, Lufkin & Jenrette International..............
Thomas Weisel Partners LLC..............................
-----------
Total.........................................
===========
</TABLE>
---------------------
If the international underwriters sell more shares than the total number
set forth in the table above, the International underwriters have an option to
buy up to an additional 442,500 shares from Allied Riser to cover such sales.
They may exercise this option for 30 days. If any shares are purchased pursuant
to this option, the international underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the international underwriters by Allied Riser.
Such amounts are shown assuming both no exercise and full exercise of the
international underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Allied Riser
--------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share...................................... $ $
Total.......................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
Allied Riser has entered into an underwriting agreement with the
underwriters for the sale of 11,800,000 shares in the United States. The terms
and conditions of both offerings are the same and the sale of shares in both
offerings are conditioned on each other. Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Thomas Weisel Partners LLC are representatives of the
underwriters for the offering in the United States. Allied Riser has granted the
U.S. Underwriters a similar option to purchase up to an aggregate of an
additional 1,770,000 shares.
The underwriters for both of the offerings have entered into an agreement
in which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a part of the distribution of the
shares. The underwriters also have agreed that they may sell shares among each
of the underwriting groups.
U-1
<PAGE> 104
Allied Riser and its executive officers and directors, certain of its
stockholders, and certain of its employees holding shares or options exercisable
in the six months following this offering have agreed with the underwriters not
to dispose of or hedge any of its common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans. The lock-up
agreements by persons other than Allied Riser cover approximately 95% of the
vested outstanding shares including shares issued upon conversion of preferred
stock and prior to the shares issued in this offering. See "Shares Available for
Future Sale" for a discussion of certain transfer restrictions.
Prior to the offerings, there has been no public market for the shares. The
initial public offering price will be negotiated among Allied Riser and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Allied Riser's historical performance, estimates of the
business potential and Allied Riser's earnings prospects, an assessment of
Allied Riser's management and the consideration of the above factors in relation
to market valuation of companies in related businesses.
Application has been made for quotation of the common stock on the Nasdaq
National Market under the symbol "ARCC."
In connection with the offerings, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offerings.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or recording a decline in the market price of the common
stock while the offerings are in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
Each underwriter has also represented and agreed that (i) it has not
offered or sold and prior to the date six months after the date of issue of the
shares of common stock will not offer or sell any shares of common stock to
persons in the United Kingdom, except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances that have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied, and will comply with, all
applicable provisions of the Financial Services Act 1986 of Great Britain with
respect to anything done by it in relation to the shares of common stock in,
from or otherwise involving the United Kingdom; and (iii) it has only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issuance of the international shares to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1986 (as amended) of Great
Britain or is a person to whom the document may otherwise lawfully be issued or
passed on.
U-2
<PAGE> 105
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 70 filed
public offerings of equity securities, of which 39 have been completed, and has
acted as a syndicate member in an additional 34 public offerings of equity
securities. Thomas Weisel Partners LLC does not have any material relationship
with us or any of our officers, directors or other controlling persons, except
with respect to its contractual relationship with us pursuant to the
underwriting agreement entered into in connection with this offering.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Allied Riser estimates that its share of the total expenses of the
offerings, excluding underwriting discounts and commissions, will be
approximately $2,250,000.
Allied Riser has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
In August 1999, Allied Riser issued 17 shares of series B preferred stock
and 2,019,766 shares of common stock to a group of financial sponsors, including
GS Capital Partners III, L.P., an affiliate of Goldman, Sachs & Co. Allied Riser
received $16,703,000 in net proceeds from this financing transaction. The shares
issued to GS Capital Partners III, L.P. have been deemed to be underwriting
compensation by the National Association of Securities Dealers, Inc.
Also in August 1999, Allied Riser issued 34 shares of series B preferred
stock, and 4,039,531 shares of common stock. Allied Riser received $33,306,000
in net proceeds from the sale of the preferred and common stock. In October
1999, Allied Riser issued warrants to acquire 6,530,242 additional shares of its
common stock to 13 real estate partners and their affiliates, including
Whitehall Street Real Estate Limited Partnership XI, an affiliate of Goldman,
Sachs & Co. These warrants are exercisable upon our real estate partners meeting
certain performance obligations as outlined in the warrant agreements.
U-3
<PAGE> 106
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 3
Summary Consolidated Financial and
Other Data......................... 6
Risk Factors......................... 8
Forward-looking Statements........... 15
Use of Proceeds...................... 16
Dividend Policy...................... 16
Capitalization....................... 17
Dilution............................. 18
Selected Consolidated Financial and
Other Data......................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................. 32
Management........................... 44
Summary Compensation Table........... 49
Principal Stockholders............... 50
Certain Transactions................. 53
Description of Capital Stock......... 56
Shares Eligible For Future Sale...... 60
Material United States Federal Tax
Considerations for Non-U.S. Holders
of Common Stock.................... 62
Legal Matters........................ 64
Experts.............................. 64
Additional Information............... 64
Underwriting......................... U-1
Index to Financial Statements........ F-1
</TABLE>
---------------------------
Through and including , 1999 (the 25th day after the date of
this international prospectus), all dealers effecting transactions in these
securities in the United States, whether or not participating in this offering,
may be required to deliver the U.S. prospectus. This is in addition to the
dealers' obligation to deliver a U.S. prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions in transactions in the
United States.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
14,750,000 Shares
ALLIED RISER
COMMUNICATIONS
CORPORATION
Common Stock
---------------------------
LOGO
---------------------------
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 107
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the expenses to be incurred in connection
with the offering described in this Registration Statement, all of which will be
paid by Allied Riser. All amounts are estimates, other than the Securities and
Exchange Commission registration fee, the NASD fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
Securities Exchange Commission Registration fee............. $ 85,000
National Association of Securities Dealers, Inc. fee Nasdaq
listing fee............................................... 31,000
Accounting fees and expenses................................ 400,000
Legal fees and expenses..................................... 1,000,000
Director and officer insurance expenses..................... 375,000
Printing and engraving...................................... 250,000
Transfer agent fees and expenses............................ 5,000
Miscellaneous expenses...................................... 104,000
----------
Total............................................. $2,250,000
==========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law, as amended ("DGCL"),
allows a corporation to eliminate the personal liability of directors of a
corporation to the corporation or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of Allied Riser) by reason of the fact that the person
is or was a director, officer, agent or employee of Allied Riser or is or was
serving at our request as a director, officer, agent, or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if such person acted in good faith and in a manner he or
she reasonably believed to be in the best interest, or not opposed to the best
interest, of Allied Riser, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of Allied
Riser as well, but only to the extent of defense expenses (including attorneys'
fees but excluding amounts paid in settlement) actually and reasonably incurred
and not to any satisfaction of judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct in the
performance of his or her duties to Allied Riser, unless the court believes that
in the light of all the circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for such actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time may avoid liability by causing his or her
II-1
<PAGE> 108
dissent to such actions to be entered in the books containing the minutes of the
meetings of the board of directors at the time such action occurred or
immediately after such absent director receives notice of the unlawful acts.
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of fiduciary
duty as a director, except for liability:
- for any breach of the directors's duty of loyalty to Allied Riser or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under the section 174 of the DGCL regarding unlawful dividends and stock
purchases; or
- for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our by-laws provide that:
- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
- we may indemnify our other employees and agents to the same extent that
we indemnified our officers and directors, unless otherwise determined by
our board of directors; and
- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law.
The indemnification provisions contained in Allied Riser's certificate of
incorporation and by-laws are not exclusive of any other rights to which a
person may be entitled by law, agreement, vote of stockholders or disinterested
directors or otherwise. In addition, Allied Riser maintains insurance on behalf
of its directors and executive officers insuring them against any liability
asserted against them in their capacities as directors or officers or arising
out of such status.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Common Stock
(1) On February 14, 1997, Allied Riser issued 200,000 shares in connection
with a business combination whereby DPI and DPI Tech were merged into Allied
Riser in consideration for all of the issued and outstanding shares of DPI and
DPI Tech.
(2) In early 1997, Allied Riser sold 41,433 shares for an aggregate
offering price of $6,215, to a group of current and former employees and other
individuals, the majority of whom are related to our current and former
employees.
(3) On November 23, 1998, Allied Riser consummated a private placement
pursuant to which ARC issued to a group of private investors 13,269,756 shares
of common stock for an aggregate offering price of $19,905.
(4) On December 30, 1998, Allied Riser issued to a second group of private
investors 7,291,075 shares of common stock for an aggregate offering price of
$10,937.
(5) On November 23, 1998, Allied Riser consummated a private placement
pursuant to which Allied Riser issued 41 and 25 shares of Series A convertible
redeemable preferred stock to a group of individual investors, respectively, for
$41,000,000 and $25,000,000 in cash, respectively.
(6) On November 23, 1998 and December 30, 1998, Allied Riser issued an
aggregate of 5,985,368 shares of common stock to employees and directors in
connection with subscription
II-2
<PAGE> 109
agreements for an aggregate consideration of $8,978. On November 23, 1998 shares
were reserved for subsequent issuing to management and new employees. As of June
30, 1999, 110,191 shares were still reserved.
(7) From June 1, 1999 to June 30, 1999, Allied Riser issued stock options
to purchase an aggregate of 347,442 shares of common stock to employees, with an
exercise price of $0.0015 per share pursuant to Allied Riser's 1999 Stock Option
and Equity Incentive Plan.
(8) In August 1999, Allied Riser issued 51 shares of Series B Preferred
Stock and 6,059,297 shares of common stock to a group of private investors and
real estate owners, for an aggregate consideration of approximately $51,000,000.
(9) In October 1999, Allied Riser issued warrants to acquire 6,530,242
shares of common stock to a group of real estate owners. The warrants had no
purchase price and no exercise price. These warrants are exercisable upon the
real estate owners meeting certain performance obligations as outlined in the
warrant agreements.
No underwriters were used in connection with these sales and issuances. The
sales and issuances of these securities were exempt from registration under the
Securities Act pursuant to (1) Rule 701 promulgated thereunder on the basis that
these options were offered and sold either pursuant to a written compensatory
benefit plan or pursuant to written contracts relating to consideration, as
provided by Rule 701, or (2) Section 4(2) thereof, on the basis that the
transactions did not involve a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 -- Form of Underwriting Agreement
2.1 -- Plan of Complete Liquidation and Reorganization, dated
November 18, 1998
3.1* -- Certificate of Incorporation of Allied Riser, as amended
and restated
3.2 -- By-laws of Allied Riser, as amended and restated
4.1 -- Specimen Certificate for Allied Riser's common stock
4.2 -- Specimen Certificate for Allied Riser's warrants
4.3+ -- Registration Rights Agreement, dated as of November 23,
1998, among Allied Riser and the stockholders named
therein
4.3.1+ -- First Amendment to Registration Rights Agreement, dated
as of December 30, 1998
4.3.2+ -- Second Amendment to Registration Rights Agreement, dated
as of
4.3.3+ -- Third Amendment to Registration Rights Agreement, dated
as of August 18, 1999
5.1+ -- Form of Opinion of Skadden, Arps, Slate, Meagher & Flom
LLP
10.1 -- Form of Employment Agreement
10.2 -- Form of Lock-Up Agreement
10.3+ -- Lease Facility, dated October 23, 1997, by and between
Allied Riser and Cisco Systems Capital Corporation, as
amended
10.4+ -- Stockholders' Agreement, dated as of November 5, 1998,
among the stockholders listed on the signature pages
thereof
10.4.1+ -- Amendment No. 1 and Joinder to Stockholders' Agreement,
dated November, 1998
10.4.2 -- Amendment No. 2 and Joinder to Stockholders' Agreement,
dated December 30, 1998
10.4.3 -- Amendment No. 3 and Joinder to Stockholders' Agreement,
dated August 18, 1999
</TABLE>
II-3
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.4.4 -- Amendment No. 4 and Joinder to Stockholders' Agreement,
dated August 18, 1999
10.5+ -- Subscription Agreement, dated as of November 13, 1998, by
and among Allied Riser and the investors listed on the
signature pages thereof
10.5.1+ -- Amendment No. 1 to Subscription Agreement, dated as of
November , 1998
10.6 -- Indemnification Agreement, dated as of November 23, 1998,
by and among Allied Riser and the investors listed on the
signature pages thereof
10.6.1 -- Joinder to Indemnification Agreement, dated December 30,
1998
10.7 -- Stockholders' Pledge Agreement, dated as of November 23,
1998, by and among Allied Riser and the investors listed
on the signature pages thereof
10.8 -- Series A-1 Preferred Stock and Common Stock Investment
Agreement, dated December 30, 1998, by and between Allied
Riser and Norwest Venture Partners VII, L.P. (includes
schedule of other 1998 Investment Agreements)
10.9 -- Waiver and Consent, dated as of December 30, 1998, by and
among Allied Riser and the investors listed on the
signature pages thereof
10.10 -- Allied Riser 1999 Stock Option Plan, as amended
10.11+ -- Credit Facility, dated March 25, 1999, by and among
Allied Riser and The Chase Manhattan Bank, as
Administrative Agent, and Chase Securities Inc., as Lead
Arranger and Book Manager
10.12 -- Waiver and Consent, dated as of August 18, 1999, by and
among Allied Riser and the investors listed on the
signature pages thereof
10.13* -- Waiver and Consent, dated as of , 1999, by
and among Allied Riser and the investors listed on the
signature pages thereof
21.1+ -- Subsidiaries of Allied Riser
23.1 -- Consent of Arthur Andersen LLP
23.2+ -- Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1)
24.1 -- Power of Attorney (contained on the signature page of
this Registration Statement)
27.1 -- Financial Data Schedule
99.1 -- Agreement and Plan of Merger, dated January, 1997, by and
among RCH Holdings, Digital Packet Interface Solutions
and DPI Technology
</TABLE>
- ---------------
* To be filed by amendment
+ Previously filed.
(b) Financial Statement Schedules:
No financial statement schedules are provided, because the information
called for is not required or is shown either in the financial statements or the
notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(b) 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 provisions described in Item 14, or otherwise,
the registrant has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is therefore unenforceable. In the event that
a
II-4
<PAGE> 111
claim for indemnification by the registrant against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 112
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 Dallas, State of Texas,
on October 20, 1999.
ALLIED RISER COMMUNICATIONS
CORPORATION
/s/ DAVID H. CRAWFORD
------------------------------------
By: David H. Crawford
Title: Chief executive officer
Each person whose signature appears below hereby constitutes and appoints
David H. Crawford and Todd C. Doshier, and each of them, his true and lawful
attorneys-in-fact and agents 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 (i) amendments (including post-effective amendments) and additions to
this Registration Statement and (ii) Registration Statements, and any and all
amendments thereto (including post-effective amendments), relating to the
offering contemplated pursuant to Rule 462(b) under the Securities Act of 1933,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and hereby
grants to such attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or his
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID H. CRAWFORD Chief executive officer and October 20, 1999
- ----------------------------------------------------- director (principal
David H. Crawford executive officer)
/s/ TODD C. DOSHIER Senior vice president and October 20, 1999
- ----------------------------------------------------- chief financial officer
Todd C. Doshier (principal financial and
accounting officer)
/s/ JOHN M. TODD Chief operating officer, October 20, 1999
- ----------------------------------------------------- president and director
John M. Todd
/s/ JOHN H. DAVIS Chief technology officer and October 20, 1999
- ----------------------------------------------------- director
John H. Davis
/s/ STEPHEN W. SCHOVEE Director and chairman of the October 20, 1999
- ----------------------------------------------------- board
Stephen W. Schovee
/s/ ROD F. DAMMEYER Director October 20, 1999
- -----------------------------------------------------
Rod F. Dammeyer
</TABLE>
II-6
<PAGE> 113
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM J. ELSNER Director October 20, 1999
- -----------------------------------------------------
William J. Elsner
/s/ R. DAVID SPRENG Director October 20, 1999
- -----------------------------------------------------
R. David Spreng
/s/ JEFFREY WEITZEN Director October 20, 1999
- -----------------------------------------------------
Jeffrey Weitzen
/s/ BLAIR P. WHITAKER Director October 20, 1999
- -----------------------------------------------------
Blair P. Whitaker
/s/ MARY A. WILDEROTTER Director October 20, 1999
- -----------------------------------------------------
Mary A. Wilderotter
/s/ WILLIAM T. WHITE Director October 20, 1999
- -----------------------------------------------------
William T. White
</TABLE>
II-7
<PAGE> 114
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 -- Form of Underwriting Agreement
2.1 -- Plan of Complete Liquidation and Reorganization, dated
November 18, 1998
3.1* -- Certificate of Incorporation of Allied Riser, as amended
and restated
3.2 -- By-laws of Allied Riser, as amended and restated
4.1 -- Specimen Certificate for Allied Riser's common stock
4.2 -- Specimen Certificate for Allied Riser's warrants
4.3+ -- Registration Rights Agreement, dated as of November 23,
1998, among Allied Riser and the stockholders named
therein
4.3.1+ -- First Amendment to Registration Rights Agreement, dated
as of December 30, 1998
4.3.2+ -- Second Amendment to Registration Rights Agreement, dated
as of
4.3.3+ -- Third Amendment to Registration Rights Agreement, dated
as of August 18, 1999
5.1+ -- Form of Opinion of Skadden, Arps, Slate, Meagher & Flom
LLP
10.1 -- Form of Employment Agreement
10.2 -- Form of Lock-Up Agreement
10.3+ -- Lease Facility, dated October 23, 1997, by and between
Allied Riser and Cisco Systems Capital Corporation, as
amended
10.4+ -- Stockholders' Agreement, dated as of November 5, 1998,
among the stockholders listed on the signature pages
thereof
10.4.1+ -- Amendment No. 1 and Joinder to Stockholders' Agreement,
dated November, 1998
10.4.2 -- Amendment No. 2 and Joinder to Stockholders' Agreement,
dated December 30, 1998
10.4.3 -- Amendment No. 3 and Joinder to Stockholders' Agreement,
dated August 18, 1999
10.4.4 -- Amendment No. 4 and Joinder to Stockholders' Agreement,
dated August 18, 1999
10.5+ -- Subscription Agreement, dated as of November 13, 1998, by
and among Allied Riser and the investors listed on the
signature pages thereof
10.5.1+ -- Amendment No. 1 to Subscription Agreement, dated as of
November , 1998
10.6 -- Indemnification Agreement, dated as of November 23, 1998,
by and among Allied Riser and the investors listed on the
signature pages thereof
10.6.1 -- Joinder to Indemnification Agreement, dated December 30,
1998
10.7 -- Stockholders' Pledge Agreement, dated as of November 23,
1998, by and among Allied Riser and the investors listed
on the signature pages thereof
10.8 -- Series A-1 Preferred Stock and Common Stock Investment
Agreement, dated December 30, 1998, by and between Allied
Riser and Norwest Venture Partners VII, L.P. (includes
schedule of other 1998 Investment Agreements)
10.9 -- Waiver and Consent, dated as of December 30, 1998, by and
among Allied Riser and the investors listed on the
signature pages thereof
10.10 -- Allied Riser 1999 Stock Option Plan, as amended
10.11+ -- Credit Facility, dated March 25, 1999, by and among
Allied Riser and The Chase Manhattan Bank, as
Administrative Agent, and Chase Securities Inc., as Lead
Arranger and Book Manager
10.12 -- Waiver and Consent, dated as of August 18, 1999, by and
among Allied Riser and the investors listed on the
signature pages thereof
</TABLE>
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.13* -- Waiver and Consent, dated as of , 1999, by
and among Allied Riser and the investors listed on the
signature pages thereof
21.1+ -- Subsidiaries of Allied Riser
23.1 -- Consent of Arthur Andersen LLP
23.2+ -- Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1)
24.1 -- Power of Attorney (contained on the signature page of
this Registration Statement)
27.1 -- Financial Data Schedule
99.1 -- Agreement and Plan of Merger, dated January, 1997, by and
among RCH Holdings, Digital Packet Interface Solutions
and DPI Technology
</TABLE>
- ---------------
* To be filed by amendment
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
ALLIED RISER COMMUNICATIONS CORPORATION
COMMON STOCK
----------
UNDERWRITING AGREEMENT
(U.S. VERSION)
---------------------------
, 1999
Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Thomas Weisel Partners LLC
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Allied Riser Communications Corporation, a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of ________ shares (the "Firm Shares") and, at the
election of the Underwriters, up to ________ additional shares (the "Optional
Shares") of Common Stock ("Stock"), par value 0.0001 per share, of the Company
(the Firm Shares and the Optional Shares that the Underwriters elect to purchase
pursuant to Section 2 hereof being collectively called the "Shares").
It is understood and agreed to by all parties that the Company is
concurrently entering into an agreement (the "International Underwriting
Agreement") providing for the sale by the Company of up to a total of ___ shares
of Stock (the "International Shares") including the overallotment option
thereunder through arrangements with certain underwriters outside the United
States (the "International Underwriters"), for whom Goldman Sachs International,
Merrill Lynch International Limited, Donaldson Lufkin & Jenrette International
and Thomas Weisel Partners LLC are acting as lead managers. Anything herein or
therein to the contrary notwithstanding, the respective closings under this
Agreement and the International Agreement are hereby expressly made conditional
on one another. The Underwriters hereunder and the International Underwriters
are simultaneously entering into an Agreement between U.S. and International
Underwriting Syndicates (the "Agreement between Syndicates") which provides,
among other things, for the transfer of shares of Stock between the two
syndicates. Two forms of prospectus are to be used in connection with the
offering and sale of Stock contemplated by the foregoing, one relating to the
Shares hereunder and the other relating to the International Shares. The latter
form of prospectus will be identical to the former except for certain substitute
pages as included in the registration statement and amendments thereto as
mentioned below. Except as used in Sections 2, 3, 4 9 and 11 herein, and except
as the context may otherwise require, references hereinafter to the Shares shall
include all the shares of Stock which may be sold pursuant to either this
Agreement or the International Underwriting Agreement, and
<PAGE> 2
references herein to any prospectus whether in preliminary or final form, and
whether as amended or supplemented, shall include both the U.S. and the
international versions thereof.
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-85597) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a) of
the rules and regulations of the Commission under the Act is hereinafter called
a "Preliminary Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b) under the Act in
accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the
Act to be part of the Initial Registration Statement at the time it was declared
effective, or such part of the Rule 462(b) Registration Statement, if any,
became or hereafter becomes effective, each as amended at the time such part of
the Initial Registration Statement became effective, are hereinafter
collectively called the "Registration Statement"; and such final prospectus, in
the form first filed pursuant to Rule 424(b) under the Act, is hereinafter
called the "Prospectus";
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information
2
<PAGE> 3
furnished in writing to the Company by an Underwriter through Goldman, Sachs &
Co. expressly for use therein;
(d) Neither the Company nor any of its subsidiaries has sustained since
the date of the latest audited financial statements included in the Prospectus
any material loss or interference with its business from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, other than such loss
or interference which would have, individually or in the aggregate, a material
adverse effect on the financial condition, results of operation, business or
prospects of the Company (a "Material Adverse Effect"), or as set forth or
contemplated in the Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there has
not been any change in the capital stock or long-term debt of the Company or any
of its subsidiaries or any material adverse change, or any development involving
a prospective material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity, results of operations or
prospects of the Company and its subsidiaries, otherwise than as set forth or
contemplated in the prospectus;
(e) Except as set forth in the Prospectus, the Company and each
Significant Subsidiary (as such term is defined in Rule 1-02 of Regulation S-X)
have (i) good and marketable title to all personal properties owned by them free
and clear of all liens, security interests, pledges, charges, encumbrances, and
mortgages and (ii) valid, subsisting and enforceable leases, subject to such
exceptions which would not have a Material Adverse Effect;
(f) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of Delaware with power and authority
(corporate and other) to own its properties and conduct its business as
described in the Prospectus, and has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, except where the
failure to be so qualified in any such jurisdiction would not have a Material
Adverse Effect and each Significant Subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation;
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in the Prospectus; and all
of the issued shares of capital stock of each Significant Subsidiary of the
Company have been duly and validly authorized and issued, are fully and
non-assessable and (except for directors' qualifying shares are owned directly
or indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims;
(h) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder and under the International Underwriting Agreement have
been duly and validly authorized and, when issued and delivered against payment
therefor as provided herein, will be duly and validly issued and fully paid and
non-assessable and will conform to the description of the Stock contained in the
Prospectus;
(i) The issue and sale of the Shares by the Company hereunder and under
the International Underwriting Agreement and the compliance by the Company with
all of the provisions of this Agreement and the International Underwriting
Agreement and the consummation of the transactions herein contemplated will not
conflict with or result in a breach
3
<PAGE> 4
or violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or 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 or to which any of the
property or assets of the Company or any of its subsidiaries is subject, except
for such conflict, breach, violation or default which would not have a Material
Adverse Effect or influence the Company's ability to issue shares, nor will such
action result in any violation of (i) the provisions of the Certificate of
Incorporation or By-laws of the Company or(ii) any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties, except in the
case of clause (ii) above, such violation which would not have a Material
Adverse Effect; and no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement and the International
Underwriting Agreement, except the registration under the Act of the Shares and
such consents, approvals, authorizations, registrations or qualifications as may
be required under state securities or Blue Sky laws or the by-laws, rules and
regulations of the National Association of Securities Dealers, Inc. (the "NASD")
in connection with the purchase and distribution of the Shares by the
Underwriters and the International Underwriters, except those which will not
adversely affect the ability of the Company to perform its obligations under
this Agreement or the transactions contemplated;
(j) Neither the Company nor any of its Significant Subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by which it or any of
its properties may be bound other than any violations or defaults which in the
aggregate would not have a Material Adverse Effect;
(k) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock, and under the caption "Shares Eligible for Future
Sale", insofar as they constitute summaries of legal matters or documents
referred to therein, are accurate, complete and fair;
(l) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its subsidiaries is
the subject, which are reasonably likely to have a Material Adverse Effect; and,
to the best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(m) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company", as such term is defined
in the Investment Company Act of 1940, as amended (the "Investment Company
Act");
(n) Arthur Andersen LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder;
(o) The Company has reviewed its operations and that of its Significant
Subsidiaries and has received assurances from its third-party vendors, in order
to evaluate the extent to which the business or operations of the Company or any
of its Significant Subsidiaries will be affected by the Year 2000 Problem. As a
result of such review and such assurances, the Company has
4
<PAGE> 5
no reason to believe, and does not believe that the Year 2000 Problem will have
a Material Adverse Effect. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, retransmission or
other utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000;
(p) No material labor dispute with the employees of the Company exists,
or, to the knowledge of the Company, is imminent;
(q) The Company and each of its Significant Subsidiaries have all
concessions, licenses, certificates, franchises, permits, authorizations,
approvals, orders and other rights from, and has made all declarations and
filings with, all Federal, state and local authorities (including, without
limitation, the Federal Communications Commission), all self-regulatory
authorities and all courts and other tribunals (each, an "Authorization") that
are necessary to conduct their businesses as described in the Prospectus, except
as described in the Prospectus and except insofar as the failure to obtain any
such Authorization or make such filings would not result in a Material Adverse
Effect; and neither the Company nor any of its Significant Subsidiaries has
received any notice of proceedings relating to the revocation, suspension or
modification of any such Authorization. All such Authorizations are valid and in
full force and effect and the Company and its Significant Subsidiaries are in
compliance in all material respects with the terms and conditions of all such
Authorizations and with the rules and regulations of the regulatory authorities
having jurisdiction with respect thereto, except where the failure to be in full
force and effect or be in compliance would not result in a Material Adverse
Effect;
(r) The Company and its Significant Subsidiaries own or have had
licensed to them or otherwise have the benefit or use under the authority of the
owners thereof of, all patents, patent rights, inventions, trademarks, service
marks, trade names and copyrights (in each case, registered or not), know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, software, systems or procedures), computer programs,
technical data and information (collectively, "Intellectual Property Rights")
that are reasonably necessary for the conduct of the business of the Company and
its Significant Subsidiaries as described in the Prospectus, except where the
failure to own, have licensed to them or otherwise have the benefit or use of
such Intellectual Property Rights would not result in a Material Adverse Effect;
and, except as set forth or contemplated in the Prospectus. To the Company's
knowledge there are no unresolved assertions that the Company or any of its
Significant Subsidiaries has infringed the Intellectual Property Rights of
others, except where such assertions if resolved unfavorably against the Company
and its Significant Subsidiaries would not result in a Material Adverse Effect;
(s) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences;
(t) The Real Estate Investors are institutional accredited investors
(as defined in Rule
5
<PAGE> 6
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 investing in the Company.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $_________, the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto and (b) in the event
and to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to issue and sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to ___________ Optional Shares, at the purchase price per
share set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., through the facilities of the Depository Trust Company
("DTC"), for the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds to the account specified by the Company to Goldman, Sachs & Co.
at least forty-eight hours in advance. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with respect
thereto at the office of DTC or its designated custodian (the "Designated
Office"). The time and date of such delivery and payment shall be, with respect
to the Firm Shares, 9:30 a.m., New York City time, on _________, 1999 or such
other time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on
the date specified by Goldman, Sachs & Co. in the written notice given by
Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co. and the Company may
6
<PAGE> 7
agree upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "First Time of Delivery", such time and date for delivery of
the Optional Shares, if not the First Time of Delivery, is herein called the
"Second Time of Delivery", and each such time and date for delivery is herein
called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7 hereof, will be delivered at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, NY (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
such Time of Delivery. A meeting will be held at the Closing Location at _____
p.m., New York City time, on the New York Business Day next preceding such Time
of Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the parties
hereto. For the purposes of this Section 4, "New York Business Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus prior to
the last Time of Delivery which shall be disapproved by you promptly after
reasonable notice thereof; to advise you, promptly after it receives notice
thereof, of the time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to advise you,
promptly after it receives notice thereof, of the issuance by the Commission of
any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus, of the suspension of the qualification of
the Shares for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration Statement or
Prospectus or for additional information; and, in the event of the issuance of
any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such qualification,
promptly to use its best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to file a general consent to
service of process or to subject itself to taxation in respect of doing business
in any jurisdiction in which it is not otherwise so subject;
(c) Prior to 12:00 P.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
is required at any time prior to the expiration of nine months
7
<PAGE> 8
after the time of issue of the Prospectus in connection with the offering or
sale of the Shares and if at such time any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act, to notify you and
upon your request to prepare and furnish without charge to each Underwriter and
to any dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or omission or effect such compliance, and in
case any Underwriter is required to deliver a prospectus in connection with
sales of any of the Shares at any time nine months or more after the time of
issue of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as you
may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder and
under the International Underwriting Agreement any securities of the Company
that are substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that represent the
right to receive, Stock or any such substantially similar securities (other than
pursuant to employee stock option, bonus or benefit plans existing on, or upon
the conversion or exchange of convertible or exchangeable securities outstanding
as of, the date of this Agreement, if the holder thereof executes and delivers a
lock-up letter to you in the form attached hereto as Exhibit A), without your
prior consent;
(f) To make generally available to its stockholders as soon as
practicable after the end of each fiscal year an annual report (including a
balance sheet and statements of income, stockholders' equity and cash flows of
the Company and its consolidated subsidiaries certified by independent public
accountants) and as soon as practicable after the end of each of the first three
quarters of each fiscal year (beginning with the fiscal quarter ending after the
effective date of the Registration Statement), to make available to its
stockholders consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(g) During a period of three years from the effective date of the
Registration Statement, to make generally available to you copies of all reports
or other communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the Company is listed;
and (ii) such additional information concerning the business and financial
condition of the Company as you may from time to time reasonably request (such
financial statements to be on a consolidated basis to the extent the accounts of
the Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
8
<PAGE> 9
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement and the International Underwriting Agreement in the
manner specified in the Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ");
(j) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
(l) No outstanding Preferred Stock will be outstanding at the Date of
Delivery. The Company further covenants that any Preferred Stock that was
outstanding prior to the Date of Delivery will have been converted into Stock.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the International Underwriting
Agreement, the Agreement between Syndicates, the Selling Agreement, the Blue Sky
Memorandum, and any other documents in connection with the offering, purchase,
sale and delivery of the Shares; (iii) all expenses in connection with the
qualification of the Shares for offering and sale under state securities laws as
provided in Section 5(b) hereof, including the reasonable fees and disbursements
of counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky survey; (iv) all fees and expenses in connection
with listing the Shares on NASDAQ; (v) the filing fees incident to, and the
reasonable fees and disbursements of counsel for the Underwriters in connection
with, securing any required review by the National Association of Securities
Dealers, Inc. of the terms of the sale of the Shares; (vi) the cost of preparing
stock certificates; (vii) the cost and charges of any transfer agent or
registrar; and (viii) all other costs and expenses incident to the performance
of its obligations hereunder which are not otherwise specifically provided for
in this Section. It is understood, however, that, except as provided in this
Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their
own costs and expenses, including, without limitation; the fees of their
counsel, stock transfer taxes on resale of any of the Shares by them, and any
advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule
9
<PAGE> 10
424(b) within the applicable time period prescribed for such filing by the rules
and regulations under the Act and in accordance with Section 5(a) hereof; if the
Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on
the date of this Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction;
(b) Shearman & Sterling, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such opinion
is attached as Annex II(a) hereto), dated such Time of Delivery, with respect to
the matters covered in paragraphs (i), (ii), (vii), (xi) and (xiii) of
subsection (c) below as well as such other related matters as you may reasonably
request, and such counsel shall have received such papers and information as
they may reasonably request to enable them to pass upon such matters;
(c) Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Company,
shall have furnished to you their written opinion (a draft of such opinion is
attached as Annex II(b) hereto), dated such Time of Delivery, in form and
substance satisfactory to you and such counsel shall have received such papers
and information as they may reasonably request to enable them to pass upon such
matters.
(d) Skadden, Arps, Slate, Meagher & Flom LLP, regulatory counsel to the
Company, shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex II(c) hereto), dated such Time of Delivery, in form
and substance satisfactory to you and such counsel shall have received such
papers and information as they may reasonably request to enable them to pass
upon such matters.
(e) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Arthur Andersen LLP
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft of the
form of letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(f) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the Company or any of its
subsidiaries taken as a whole, or any change, or any development involving a
prospective change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the
effect of
10
<PAGE> 11
which, in any such case described in Clause (i) or (ii), is in the judgment of
the Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either Federal
or New York State authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of a
national emergency or war, if the effect of any such event specified in this
Clause (iv) in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from all of the Company's directors, executive officers,
stockholders, warrantholders and optionholders listed on Schedule [ ] hereto
holding shares of common stock or options exercisable in the 180 days following
the offering, substantially to the effect set forth in Section 5(e) hereof in
form and substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement; and
(k) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (e) of this Section
and as to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred and documented; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or
11
<PAGE> 12
supplement in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use
therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman, Sachs
& Co. expressly for use therein; and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each
12
<PAGE> 13
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
subsection (d) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this subsection (d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (d) shall be deemed to
include 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 subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company (including any
person who, with his or her consent, is named in the Registration Statement as
about to become a director of the Company) and to each person, if any, who
controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company shall be entitled to a further period of
thirty-six hours within which to procure another party or other parties
reasonably satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company
that you have so arranged for the purchase of such Shares, or the Company
notifies you that it has so arranged for the purchase of such Shares, you or the
Company shall have the right to postpone such Time of Delivery for a period of
not more than
13
<PAGE> 14
seven days, in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your reasonable opinion may
thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all reasonable out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
shall then be under no further liability to any Underwriter except as provided
in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or
14
<PAGE> 15
agreement on behalf of any Underwriter made or given by you jointly or by
Goldman, Sachs & Co. on behalf of you as the representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives, at in care of Goldman,
Sachs & Co., 32 Old Slip, 9th Floor, New York, New York 10005, Attention:
Registration Department; and if to the Company shall be delivered or sent by
mail to the address of the Company set forth in the Registration Statement,
Attention: Secretary; provided, however, that any notice to an Underwriter
pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or
facsimile transmission to such Underwriter at its address set forth in its
Underwriters' Questionnaire, or telex constituting such Questionnaire, which
address will be supplied to the Company by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence with respect to this Agreement. As
used herein, the term "Business Day" shall mean any day when the Commission's
office in Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
15
<PAGE> 16
If the foregoing is in accordance with your understanding, please sign
and return to us one for the Company and each of the Representatives plus one
for each counsel, and upon the acceptance hereof by you, on behalf of each of
the Underwriters, this letter and such acceptance hereof shall constitute a
binding agreement among each of the Underwriters and the Company. It is
understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
ALLIED RISER COMMUNICATIONS CORPORATION
By:
---------------------------------
Name: David H. Crawford
Title: Chief Executive Officer
Accepted as of the date hereof
GOLDMAN, SACHS & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THOMAS WEISEL PARTNERS LLC
BY:
-----------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
16
<PAGE> 17
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
TOTAL NUMBER OF SHARES TO BE PURCHASED
FIRM SHARES IF MAXIMUM OPTION
TO BE PURCHASED EXERCISED
--------------- ----------------------
<S> <C> <C>
UNDERWRITER
- -----------
Goldman, Sachs & Co........................
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED...................
DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION................................
THOMAS WEISEL PARTNERS LLC
TOTAL....................
</TABLE>
EXHIBIT A
1
<PAGE> 18
FORM OF LOCK-UP LETTER
, 1999
-----------
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Thomas Weisel Partners LLC
c/o Goldman, Sachs & Co.
85 Broad Street
New York, NY 10004
Ladies and Gentlemen:
The undersigned understands that Goldman, Sachs & Co.
("Goldman"), as representative of the several Underwriters, has entered into an
Underwriting Agreement (the "Underwriting Agreement") with Allied Riser
Communications Corporation, a Delaware corporation (the "Company"), which
provided for the public offering (the "Public Offering") by the several
Underwriters, including Goldman, of shares (the "Shares") of Common Stock, par
value $ per share, of the Company (the "Common Stock"). The undersigned further
understands that the Company has agreed pursuant to Section 5(e) of the
Underwriting Agreement, among other things, not to offer, sell, contract to sell
or otherwise dispose of shares of Common Stock or securities convertible into
Common Stock in connection with acquisitions unless the transferee executes and
delivers to Goldman this letter.
In satisfaction of this requirement, the undersigned hereby
agrees that, without the prior written consent of Goldman on behalf of the
Underwriters, it will not, during the period commencing on the date hereof and
ending six months after the date of the final prospectus relating to the Public
Offering (the "Prospectus"), offer, sell, contract to sell or otherwise dispose
of, directly or indirectly, any shares of Common Stock or any securities that
are substantially similar to the Common Stock (other than shares of Common Stock
or other securities issued or issuable in connection with employee bonus,
benefit, option or similar plans), including but not limited to any securities
that are convertible into or exchangeable for, or that represent the right to
receive, Common Stock or any such substantially similar securities. In addition,
the undersigned agrees that, without the prior written consent of Goldman on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending six months after the date of the Prospectus, make any
demand for or exercise any right with respect to, the registration of any shares
of Common Stock or any securities that are substantially similar to the Common
Stock, including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Common Stock or any
such substantially similar securities.
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<PAGE> 19
Very truly yours,
(Name)
-------------------------------
-------------------------------
(Print Name)
-------------------------------
(Address)
Accepted as of the date
first set forth above:
Goldman, Sachs & Co.
By:
-----------------------------
3
<PAGE> 20
ANNEX I
[FORM OF ANNEX I DESCRIPTION OF COMFORT LETTER
FOR REGISTRATION STATEMENTS ON FORM S1]
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the
Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports
thereon, copies of which have been separately furnished to the
representatives of the Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus as indicated in their reports thereon copies
of which have been separately furnished to the Representatives and on
the basis of specified procedures including inquiries of officials of
the Company who have responsibility for financial and accounting
matters regarding whether the unaudited condensed consolidated
financial statements referred to in paragraph (vi)(A)(i) below comply
as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations, nothing came to their attention that cause them to believe
that the unaudited condensed consolidated financial statements do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iv) The unaudited selected financial information with respect
to the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such five fiscal years which were included for such fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing
came to their attention as a result of the foregoing procedures that
caused them to believe that this information does not conform in all
material respects with the disclosure requirements of Items 301, 302,
402 and 503(d), respectively, of Regulation S-K;
4
<PAGE> 21
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included in
the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of
income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published
rules and regulations, or (ii) any material modifications
should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree
with the corresponding items in the unaudited consolidated
financial statements from which such data and items were
derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in Clause (B)
were not determined on a basis substantially consistent with
the basis for the audited consolidated financial statements
included in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply
as to form in all material respects with the applicable
accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not
been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any changes
in the consolidated capital stock (other than issuances of
capital stock upon exercise of options and stock appreciation
rights, upon amounts of performance shares and upon
conversions of convertible securities, in each case which were
outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the
consolidated long-term debt of the Company and its
subsidiaries, or any decreases in consolidated net current
assets or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by
the Representatives, in each case as compared with amounts
shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which
are described in such letter; and
5
<PAGE> 22
(F) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (E) there were any
decreases in consolidated net revenues or operating profit or
the total or per share amounts of consolidated net income or
other items specified by the Representatives, or any increases
in any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records
of the Company and its subsidiaries, which appear in the Prospectus, or
in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain
of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found
them to be in agreement.
6
<PAGE> 1
EXHIBIT 2.1
PLAN OF COMPLETE LIQUIDATION
AND REORGANIZATION
This Plan of Complete Liquidation and Reorganization (the "Plan") is
entered into this 18th day of November, 1998, by and among RCH Holdings, Inc.,
a Texas corporation ("RCH"), Allied Riser Communications, Inc., a Texas
corporation ("Allied"), Carrier Direct, Inc., a Texas corporation ("Carrier")
and Allied Riser Communications Holdings, Inc., a Delaware corporation ("New
Allied")
R E C I T A L S:
A. RCH is the parent company and sole shareholder of Allied and
Carrier.
B. Pursuant to that certain Asset Transfer Agreement, dated November
18, 1998, between RCH and New Allied (the "Agreement"), Allied and Carrier will
completely liquidate and distribute all of their assets and liabilities to RCH,
RCH will then convey substantially all of its assets and liabilities to New
Allied in exchange for shares of common stock in New Allied (the "New Allied
Stock"), and then RCH will liquidate and distribute the New Allied Stock to its
shareholders.
C. The liquidation of Allied and Carrier is intended to qualify as a
complete liquidation of a subsidiary under section 332 of the Internal Revenue
Code of 1986, as amended (the "Code").
D. The transfer of the assets by RCH in exchange for the New Allied
Stock followed by the liquidation of RCH is intended to qualify as a tax free
reorganization pursuant to section 368(a)(1)(C) of the Code.
E. This Plan and the Agreement is intended to satisfy the requirements
for a plan of liquidation and a plan of reorganization in accordance with
Sections 332 and 368(a) of the Code.
A G R E E M E N T:
NOW, THEREFORE, for and in consideration of the premises and mutual
covenants contained in this Plan, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledge,
RCH, Allied, Carrier, and New Allied agree as follows:
1. PLAN OF COMPLETE LIQUIDATION. At such time as determined
appropriate by the Board of Directors of RCH, but prior to the transfer of
assets and liabilities to New Allied contemplated by the Agreement, RCH shall
cause Allied and Carrier to dissolve and liquidate, and to distribute all of
their respective assets and liabilities to RCH in complete redemption of the
stock which RCH holds in each. Allied and Carrier shall cease doing business
immediately upon the distribution of their assets and liabilities to RCH. As
soon thereafter as practicable, Allied and Carrier shall withdraw from the
states in which they are qualified for the transaction
<PAGE> 2
of business and file articles of dissolution with the State of Texas, the state
in which they are chartered. The complete liquidation of Allied and Carrier
shall be in accordance with Section 332 of the Code, the Agreement, the laws of
the states in which they are qualified to do business, and the State of Texas.
2. PLAN OF REORGANIZATION. Following the complete liquidation of
Carrier and Allied, RCH shall convey substantially all of its assets and
liabilities to New Allied in accordance with the Agreement. In consideration
for the transfer to it of such assets and liabilities, New Allied will transfer
to RCH such number of shares of its New Allied Stock as provided for in the
Agreement. Immediately following the receipt of such shares of New Allied
Stock, RCH will dissolve and liquidate, and distribute the shares of New Allied
Stock to its shareholders. New Allied will thereafter transfer the assets and
liabilities it receives from RCH to new wholly owned subsidiaries of New
Allied. The exchange of RCH's assets and liabilities for shares of New Allied
Stock, and the contribution of certain of such assets and liabilities to new
wholly owned subsidiaries of New Allied, shall be in accordance with Section
368(a)(1)(C) of the Code and the Agreement.
3. APPROVAL. This Plan shall not be effective until it has been
approved by the Board of Directors and the shareholders of each of RCH, Allied,
Carrier, and New Allied.
4. TERMINATION. If the Agreement is terminated, or if the properties
and assets of RCH are not transferred to New Allied in accordance with the
Agreement, then this Plan shall terminate and be of no further force and
effect.
5. GOVERNING LAW. This Plan shall be governed by, and construed in
accordance with, the laws of the State of Texas and the Internal Revenue Code.
6. COUNTERPARTS. This Plan may be executed in multiple counterparts,
all of which shall constitute one and the same agreement.
7. SUCCESSORS AND ASSIGNS. This Plan shall be binding upon, and shall
inure to the benefit of, the successors and assigns of each of the parties to
this Plan.
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<PAGE> 3
IN WITNESS WHEREOF, RCH, Allied, Carrier and New Allied have executed
this Plan as of the date first written above.
RCH HOLDINGS, INC.
a Texas corporation
By: /s/ DAVID H. CRAWFORD
-----------------------------
Name: David H. Crawford
---------------------------
Its: President
----------------------------
ALLIED RISER COMMUNICATIONS, INC.
a Texas corporation
By: /s/ TODD C. DOSHIER
-----------------------------
Name: Todd C. Doshier
---------------------------
Its: CFO
----------------------------
CARRIER DIRECT, INC.
a Texas corporation
By: /s/ TODD C. DOSHIER
-----------------------------
Name: Todd C. Doshier
---------------------------
Its: Vice President
----------------------------
ALLIED RISER COMMUNICATIONS
HOLDINGS, INC.
a Delaware corporation
By: /s/ DAVID H. CRAWFORD
-----------------------------
Name: David H. Crawford
---------------------------
Its: President
----------------------------
3
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BY-LAWS
OF
ALLIED RISER COMMUNICATIONS CORPORATION
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the
Corporation shall be in the City of Dover, County of Kent, State of Delaware.
Section 2. Other Offices. The Corporation may also have
offices at such other places, both within and without the State of Delaware, as
the Board of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders
for the election of directors or for any other purpose shall be held at such
time and place, either within or without the State of Delaware, as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The annual meetings of
stockholders shall be held on such date and at such time as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting, at which meetings the stockholders shall elect directors, and transact
such other business as may properly be brought before the meeting. Written
notice of the annual meeting stating the place, date and hour of the meeting
shall be given to each stockholder entitled to vote
<PAGE> 2
at such meeting not less than ten nor more than sixty days before the date of
the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by
law or by the certificate of incorporation of the Corporation, as amended and
restated from time to time (the "Certificate of Incorporation"), special
meetings of stockholders, for any purpose or purposes, may be called by either
(i) the Chairman of the Board of Directors, (ii) the President, or (iii) the
Board of Directors. Such request shall state the purpose or purposes of the
proposed meeting. At a special meeting of the stockholders, only such business
shall be conducted as shall be specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors.
Written notice of a special meeting stating the place, date and hour of the
meeting and the purpose or purposes for which the meeting is called shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting.
Section 4. Quorum. Except as otherwise required by law or by
the Certificate of Incorporation, the holders of a majority of the capital
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. A quorum, once established, shall
not be broken by the withdrawal of enough votes to leave less than a quorum.
If, however, such quorum shall not be present or represented at any meeting of
the stockholders, the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might
have been transacted at the meeting as originally noticed. If the adjournment
is for more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder entitled to vote at the meeting not less than ten nor
more than sixty days before the date of the meeting.
Section 5. Proxies. Any stockholder entitled to vote may do
so in person or by his or her proxy appointed by an instrument in writing
subscribed by such stockholder or by his or her attorney thereunto authorized,
delivered to the Secretary of the meeting; provided, however, that no proxy
shall be voted or acted upon after three years from its date, unless said proxy
provides for a longer period. Without limiting the manner in which a
stockholder may authorize another person or
<PAGE> 3
persons to act for him or her as proxy, either of the following shall
constitute a valid means by which a stockholder may grant such authority:
(i) A stockholder may execute a writing authorizing
another person or persons to act for him or her as proxy. Execution
may be accomplished by the stockholder or his or her authorized
officer, director, employee or agent signing such writing or causing
his or her signature to be affixed to such writing by any reasonable
means, including, but not limited to, by facsimile signature.
(ii) A stockholder may authorize another person or
persons to act for him or her as proxy by transmitting or authorizing
the transmission of a telegram or other means of electronic
transmission to the person who will be the holder of the proxy or to a
proxy solicitation firm, proxy support service organization or like
agent duly authorized by the person who will be the holder of the
proxy to receive such transmission, provided that any such telegram or
other means of electronic transmission must either set forth or be
submitted with information from which it can be determined that the
telegram or other electronic transmission was authorized by the
stockholder.
Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission authorizing another person or persons to act as proxy
for a stockholder may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used; provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
Section 6. Voting. At all meetings of the stockholders at
which a quorum is present, except as otherwise required by law, the Certificate
of Incorporation or these By-Laws, any question brought before any meeting of
stockholders shall be decided by the affirmative vote of the holders of a
majority of the total number of votes of the capital stock present in person or
represented by proxy and entitled to vote on such question, voting as a single
class. The Board of Directors, in its discretion, or the officer of the
Corporation presiding at a meeting of stockholders, in his or her discretion,
may require that any votes cast at such meeting shall be cast by written
ballot.
<PAGE> 4
Section 7. Nature of Business at Meetings of Stockholders. No
business may be transacted at an annual meeting of stockholders, other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any
duly authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any stockholder of the Company (i) who is a stockholder of
record on the date of the giving of the notice provided for in this Section 7
and on the record date for the determination of stockholders entitled to vote
at such annual meeting and (ii) who complies with the notice procedures set
forth in this Section 7.
In addition to any other applicable requirements, for
business to be properly brought before an annual meeting by a stockholder, such
stockholder must have given timely notice thereof in proper written form to the
Secretary of the Company.
To be timely, a stockholder's notice must be delivered to or mailed and
received at the principal executive offices of the Corporation, not less than
90 days prior to the anniversary date of the immediately preceding Annual
Meeting of Stockholders, provided, however, that in the event that the Annual
Meeting is called for a date that is not within 30 days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the 15th day following the day
on which such notice of the date of the Annual Meeting was mailed or such
public disclosure of the date of the Annual Meeting was made, whichever first
occurs.
To be in proper written form, a stockholder's notice to the
Secretary must set forth as to each matter such stockholder proposes to bring
before the annual meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and record address of such stockholder,
(iii) the class or series and number of shares of capital stock of the Company
which are owned beneficially or of record by such stockholder, (iv) a
description of all arrangements or understandings between such stockholder and
any other person or persons (including their names) in connection with the
proposal of such business by such stockholder and any material interest of such
stockholder in such business and (v) a representation that such stockholder
intends to appear in person or by proxy at the annual meeting to bring such
business before the meeting.
<PAGE> 5
No business shall be conducted at the annual meeting of
stockholders except business brought before the annual meeting in accordance
with the procedures set forth in this Section 7, provided, however, that, once
business has been properly brought before the annual meeting in accordance with
such procedures, nothing in this Section 7 shall be deemed to preclude
discussion by any stockholder of any such business. If the Chairman of an
annual meeting determines that business was not properly brought before the
annual meeting in accordance with the foregoing procedures, the Chairman shall
declare to the meeting that the business was not properly brought before the
meeting and such business shall not be transacted.
Section 8. List of Stockholders Entitled to Vote. The officer
of the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 9. Stock Ledger. The stock ledger of the Corporation
shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list required by Section 8 of this Article II or the
books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 10. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors and
which record date: (1) in the case of determination of stockholders entitled to
vote at any meeting of stockholders or adjournment thereof, shall not be more
than sixty nor less than ten days before the date of such meeting;
<PAGE> 6
and (2) in the case of any other action, shall not be more than sixty days
prior to such other action. If no record date is fixed: (1) the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held; and (2) the
record date for determining stockholders for any other purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 11. Inspectors of Election. In advance of any meeting
of stockholders, the Board by resolution or the Chairman or President shall
appoint one or more inspectors of election to act at the meeting and make a
written report thereof. One or more other persons may be designated as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate is present, ready and willing to act at a meeting of stockholders,
the Chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Unless otherwise required by law, inspectors may be officers,
employees or agents of the Corporation. Each inspector, before entering upon
the discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspector shall have the duties prescribed by
law and shall take charge of the polls and, when the vote is completed, shall
make a certificate of the result of the vote taken and of such other facts as
may be required by law.
Section 12. Conduct of Meetings. The Board of Directors of
the Corporation may adopt by resolution such rules and regulations for the
conduct of the meeting of the stockholders as it shall deem appropriate. Except
to the extent inconsistent with such rules and regulations as adopted by the
Board of Directors, the chairman of any meeting of the stockholders shall have
the right and authority to prescribe such rules, regulations and procedures and
to do all such acts as, in the judgment of such chairman, are appropriate for
the proper conduct of the meeting. Such rules, regulations or procedures,
whether adopted by the Board of Directors or prescribed by the chairman of the
meeting, may include, without limitation, the following: (i) the establishment
of an agenda or order of business for the meeting; (ii) the determination of
when the polls shall open and close for any given matter to be voted on at the
meeting; (iii) rules and procedures for maintaining order at the meeting and
the safety of those present; (iv) limitations on attendance at or
<PAGE> 7
participation in the meeting to stockholders of record of the Corporation,
their duly authorized and constituted proxies or such other persons as the
chairman of the meeting shall determine; (v) restrictions on entry to the
meeting after the time fixed for the commencement thereof; and (vi) limitations
on the time allotted to questions or comments by participants.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The Board of
Directors shall consist of not less than three (3) nor more than fifteen (15)
members, the exact number of which shall be determined from time to time by
resolution adopted by the Board of Directors. Except as provided in Section 3
of this Article III, directors shall be elected by the stockholders at the
annual meetings of stockholders, and each director so elected shall hold office
until such director's successor is duly elected and qualified, or until such
director's earlier resignation, removal or death. Directors need not be
stockholders. The Board of Directors may, at its discretion, determine the term
of service of directors for up to three years per term. Further, the Board of
Directors may classify the directors into two or more classes, provided that
each class shall have a term of service equal to any other class, except for
the initial term, and the terms of the members of each class to be concurrent.
Classes of directors may be staggered to provide for continuity of membership
of the Board of Directors.
Section 2. Nomination of Directors. Only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors of the Company, except as may be otherwise provided in
the Certificate of Incorporation with respect to the right of holders of
preferred stock of the Corporation to nominate and elect a specified number of
directors in certain circumstances. Nominations of persons for election to the
Board of Directors may be made at any annual meeting of stockholders, or at any
special meeting of stockholders called for the purpose of electing directors,
(a) by or at the direction of the Board of Directors (or any duly authorized
committee thereof) or (b) by any stockholder of the Company (i) who is a
stockholder of record on the date of the giving of the notice provided for in
this Section 2 and on the record date for the determination of stockholders
entitled to vote at such meeting and (ii) who complies with the notice
procedures set forth in this Section 2.
<PAGE> 8
In addition to any other applicable requirements, for a
nomination to be made by a stockholder, such stockholder must have given timely
notice thereof in proper written form to the Secretary of the Company.
To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Company (a) in the case of an annual meeting, not less than 90 days prior to
the anniversary date of the immediately preceeding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within 30 days before or after such anniversary
date, notice by the Stockholder in order to be timely must be so received not
later than the close of business on the 15th day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure of the date of the annual meeting was made, whichever first occurs;
and (b) in the case of a special meeting of stockholders called for the purpose
of electing directors, not later than the close of business on the 15th day
following the day on which notice of the date of the special meeting was mailed
or public disclosure of the date of the special meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the
Secretary must set forth (a) as to each person whom the stockholder proposes to
nominate for election as a director (i) the name, age, business address and
residence address of the person, (ii) the principal occupation or employment of
the person, (iii) the class or series and number of shares of capital stock of
the Company which are owned beneficially or of record by the person and (iv)
any other information relating to the person that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors pursuant to
Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder; and (b) as to the
stockholder giving the notice (i) the name and record address of such
stockholder, (ii) the class or series and number of shares of capital stock of
the Company which are owned beneficially or of record by such stockholder,
(iii) a description of all arrangements or understandings between such
stockholder and each proposed nominee and any other person or persons
(including their names) pursuant to which the nomination(s) are to be made by
such stockholder, (iv) a representation that such stockholder intends to appear
in person or by proxy at the meeting to nominate the persons named in its
notice and (v) any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
<PAGE> 9
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to being named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the
Company unless nominated in accordance with the procedures set forth in this
Section 2. If the Chairman of the meeting determines that a nomination was not
made in accordance with the foregoing procedures, the Chairman shall declare to
the meeting that the nomination was defective and such defective nomination
shall be disregarded.
Section 3. Vacancies. Subject to the terms of any one or more
classes or series of preferred stock, any vacancy on the Board of Directors
that results from an increase in the number of directors may be filled by a
majority of the directors then in office, provided that a quorum is present,
and any other vacancy occurring on the Board of Directors may be filled by a
majority of the Board of Directors then in office, even if less than a quorum,
or by a sole remaining director. Notwithstanding the foregoing, whenever the
holders of any one or more class or classes or series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect
directors at an annual or special meeting of stockholders, the election, term
of office, filling of vacancies and other features of such directorships shall
be governed by the Certificate of Incorporation.
Section 4. Duties and Powers. The business of the Corporation
shall be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws required to be exercised or done by the stockholders.
Section 5. Organization. At each meeting of the Board of
Directors, the Chairman of the Board of Directors, or, in his or her absence, a
director chosen by a majority of the directors present, shall act as Chairman.
The Secretary of the Corporation shall act as Secretary at each meeting of the
Board of Directors. In case the Secretary shall be absent from any meeting of
the Board of Directors, an Assistant Secretary shall perform the duties of
Secretary at such meeting; and in the absence from any such meeting of the
Secretary and all the Assistant Secretaries, the Chairman of the meeting may
appoint any person to act as Secretary of the meeting.
Section 6. Resignations and Removals of Directors. Any
director of the Corporation may resign at any time, by giving written notice to
the Chairman of
<PAGE> 10
the Board of Directors, the President or the Secretary of the Corporation. Such
resignation shall take effect at the time therein specified or, if no time is
specified, immediately; and, unless otherwise specified in such notice, the
acceptance of such resignation shall not be necessary to make it effective.
Except as otherwise required by law and subject to the rights, if any, of the
holders of shares of preferred stock then outstanding, any director or the
entire Board of Directors may be removed from office at any time, but only for
cause, and only by the affirmative vote of the holders of at least a majority
in voting power of the issued and outstanding capital stock of the Corporation
entitled to vote in the election of directors.
Section 7. Meetings. The Board of Directors of the
Corporation may hold meetings, both regular and special, either within or
without the State of Delaware. Regular meetings of the Board of Directors may
be held at such time and at such place as may from time to time be determined
by the Board of Directors and, unless required by resolution of the Board of
Directors, without notice. Special meetings of the Board of Directors may be
called by the Chairman of the Board of Directors, the Vice Chairman, if there
be one, or a majority of the directors then in office. Notice thereof stating
the place, date and hour of the meeting shall be given to each director either
by mail not less than forty-eight (48) hours before the date of the meeting, by
telephone, facsimile or telegram on twenty-four (24) hours' notice, or on such
shorter notice as the person or persons calling such meeting may deem necessary
or appropriate in the circumstances.
Section 8. Quorum. Except as may be otherwise required by
law, the Certificate of Incorporation or these By-Laws, at all meetings of the
Board of Directors, a majority of the entire Board of Directors shall
constitute a quorum for the transaction of business and the act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors. If a quorum shall not be present at any meeting
of the Board of Directors, the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting of the time and place of the adjourned meeting, until a quorum shall be
present.
Section 9. Actions of Board. Unless otherwise provided by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting, if all the members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee.
<PAGE> 11
Section 10. Meetings by Means of Conference Telephone. Unless
otherwise provided by the Certificate of Incorporation or these By-Laws,
members of the Board of Directors of the Corporation, or any committee
designated by the Board of Directors, may participate in a meeting of the Board
of Directors or such committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 10 shall constitute presence in person at such meeting.
Section 11. Committees. The Board of Directors may, by
resolution passed by a majority of the entire Board of Directors, designate one
or more committees, each committee to consist of one or more of the directors
of the Corporation, and such other members as the Board, in its discretion, may
dictate, provided, however, that only director members of such Committee shall
have authority to vote on matters coming before the Committee. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
any such committee. In the absence or disqualification of a member of a
committee, and in the absence of a designation by the Board of Directors of an
alternate member to replace the absent or disqualified member, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any
absent or disqualified member. Any committee, to the extent permitted by law
and provided in the resolution establishing such committee, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation. Each committee shall
keep regular minutes and report to the Board of Directors when required.
Section 12. Compensation. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary, or such other emoluments as the Board of
Directors shall from time to time determine. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
<PAGE> 12
Section 13. Interested Directors. No contract or transaction
between the Corporation and one or more of its directors or officers, or
between the Corporation and any other corporation, partnership, association, or
other organization in which one or more of its directors or officers are
directors or officers, or have a financial interest, shall be void or voidable
solely for this reason, or solely because the director or officer is present at
or participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because such person's
or their votes are counted for such purpose if (i) the material facts as to
such person's or their relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the
committee, and the Board of Directors or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (ii) the material facts as to such person's or their relationship or
interest and as to the contract or transaction are disclosed or are known to
the stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the Board of Directors, a committee
thereof or the stockholders. Interested directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be
chosen by the Board of Directors and shall include a President, a Secretary and
a Treasurer. The Board of Directors, in its discretion, may also choose a
Chairman of the Board of Directors (who must be a director) and one or more
Vice Presidents, Assistant Secretaries, Assistant Treasurers and other
officers. Any number of offices may be held by the same person, unless
otherwise prohibited by law, the Certificate of Incorporation or these By-Laws.
The officers of the Corporation need not be stockholders of the Corporation
nor, except in the case of the Chairman of the Board of Directors, need such
officers be directors of the Corporation.
Section 2. Election. The Board of Directors at its first
meeting held after each Annual Meeting of Stockholders shall elect the officers
of the Corporation who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time
to time by the Board of
<PAGE> 13
Directors; and all officers of the Corporation shall hold office until their
successors are chosen and qualified, or until their earlier resignation,
removal or death. Any officer elected by the Board of Directors may be removed
at any time by the affirmative vote of a majority of the Board of Directors.
Any vacancy occurring in any office of the Corporation shall be filled by the
Board of Directors. The salaries of all officers of the Corporation shall be
fixed by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers
of attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Corporation may be executed in
the name of and on behalf of the Corporation by the President or any Vice
President and any other such officer authorized by the Board of Directors may,
in the name of and on behalf of the Corporation, take all such action as any
such officer may deem advisable to vote in person or by proxy at any meeting of
security holders of any corporation in which the Corporation may own securities
and at any such meeting shall possess and may exercise any and all rights and
power incident to the ownership of such securities and which, as the owner
thereof, the Corporation might have exercised and possessed if present. The
Board of Directors may, by resolution, from time to time confer like powers
upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman
of the Board of Directors, shall preside at all meetings of the stockholders
and of the Board of Directors. Except where by law the signature of the
President or Chief Executive Officer is required, the Chairman of the Board of
Directors shall possess the same power as either the Chief Executive Officer or
the President to sign all contracts, certificates and other instruments of the
Corporation which may be authorized by the Board of Directors. The Chairman of
the Board of Directors shall also perform such other duties and may exercise
such other powers as from time to time may be assigned to him or her by these
By-Laws or by the Board of Directors.
Section 5. Chief Executive Officer. The Chief Executive
Officer shall, subject to the control of the Board of Directors and the
Chairman of the Board of Directors, have the same power as either the Chairman
of the Board of Directors or the President to sign all contracts, certificates
and other instruments of the Corporation which may be authorized by the Board
of Directors. The Chief Executive Officer shall also perform such other duties
and may exercise such other powers as from time to time may be assigned to him
or her by these By-Laws or by the Board of Directors.
<PAGE> 14
Section 6. President. The President shall, subject to the
control of the Board of Directors, the Chairman of the Board of Directors and
the Chief Executive Officer, have general supervision of the business of the
Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect. The President shall execute all bonds,
mortgages, contracts and other instruments of the Corporation requiring a seal,
under the seal of the Corporation, except where required or permitted by law to
be otherwise signed and executed and except that the other officers of the
Corporation may sign and execute documents when so authorized by these By-Laws,
the Board of Directors or the President. The President shall also perform such
other duties and may exercise such other powers as from time to time may be
assigned to him or her by these By-Laws or by the Board of Directors.
Section 7. Vice Presidents. At the request of the President
or in his or her absence or in the event of his or her inability or refusal to
act (and if there be no Chairman of the Board of Directors or Chief Executive
Officer), any Senior Vice President or, then any other Vice President if there
is more than one (in the order designated by the Board of Directors) shall
perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. Each Vice
President shall perform such other duties and have such other powers as the
Board of Directors from time to time may prescribe. If there be no Chairman of
the Board of Directors, no Chief Executive Officer and no Vice President, the
Board of Directors shall designate the officer of the Corporation who, in the
absence of the President or in the event of the inability or refusal of the
President to act, shall perform the duties of the President, and when so
acting, shall have all the powers of and be subject to all the restrictions
upon the President.
Section 8. Secretary. The Secretary shall attend all meetings
of the Board of Directors and any committees thereof, and all meetings of
stockholders, and shall record all the proceedings thereat in a book or books
to be kept for that purpose; the Secretary shall also perform like duties for
the standing committees when required. The Secretary shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed by
the Board of Directors or President, under whose supervision the Secretary
shall be. If the Secretary shall be unable or shall refuse to cause to be given
notice of all meetings of the stockholders and special meetings of the Board of
Directors, and if there be no Assistant Secretary, then either the Board of
Directors or the President may choose another officer to cause such notice to
be given. The Secretary shall have custody of the seal of the Corporation
<PAGE> 15
and the Secretary or any Assistant Secretary, if there be one, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by the signature of the Secretary or by the signature of any
such Assistant Secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his or her signature. The Secretary shall see that all books,
reports, statements, certificates and other documents and records required by
law to be kept or filed are properly kept or filed, as the case may be.
Section 9. Treasurer. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give
the Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of the office of Treasurer and for the restoration to the Corporation,
in case of the Treasurer's death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in the Treasurer's possession or under control of the Treasurer belonging
to the Corporation.
Section 10. Assistant Secretaries. Except as may be otherwise
provided in these By-Laws, Assistant Secretaries, if there be any, shall
perform such duties and have such powers as from time to time may be assigned
to them by the Board of Directors, the President, any Vice President, if there
be one, or the Secretary, and in the absence of the Secretary or in the event
of his or her disability or refusal to act, shall perform the duties of the
Secretary, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Secretary.
Section 11. Assistant Treasurers. Assistant Treasurers, if
there be any, shall perform such duties and have such powers as from time to
time may be assigned to them by the Board of Directors, the President, any Vice
President, if there be one, or the Treasurer, and in the absence of the
Treasurer or in the event of the Treasurer's disability or refusal to act,
shall perform the duties of the Treasurer,
<PAGE> 16
and when so acting, shall have all the powers of and be subject to all the
restrictions upon the Treasurer. If required by the Board of Directors, an
Assistant Treasurer shall give the Corporation a bond in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors for the
faithful performance of the duties of the office of Assistant Treasurer and for
the restoration to the Corporation, in case of the Assistant Treasurer's death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in the Assistant Treasurer's
possession or under control of the Assistant Treasurer belonging to the
Corporation.
Section 12. Other Officers. Such other officers as the Board
of Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation, (i) by the Chairman of the Board of Directors, the Chief Executive
Officer, the President or a Vice President and (ii) by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by such holder of stock in
the Corporation.
Section 2. Signatures. Any or all of the signatures on a
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
Section 3. Lost, Destroyed, Stolen or Mutilated Certificates.
The Board of Directors may direct a new certificate to be issued in place of
any certificate theretofore issued by the Corporation alleged to have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of
<PAGE> 17
stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or such person's legal representative, to advertise the
same in such manner as the Board of Directors shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be
transferable in the manner prescribed by law and in these By-Laws. Transfers of
stock shall be made on the books of the Corporation only by the person named in
the certificate or by such person's attorney lawfully constituted in writing
and upon the surrender of the certificate therefor, properly endorsed for
transfer and payment of all necessary transfer taxes; provided, however, that
such surrender and endorsement or payment of taxes shall not be required in any
case in which the officers of the Corporation shall determine to waive such
requirement. Every certificate exchanged, returned or surrendered to the
Corporation shall be marked "Cancelled," with the date of cancellation, by the
Secretary or Assistant Secretary of the Corporation or the transfer agent
thereof. No transfer of stock shall be valid as against the Corporation for any
purpose until it shall have been entered in the stock records of the
Corporation by an entry showing from and to whom transferred.
Section 5. Transfer and Registry Agents. The Corporation may
from time to time maintain one or more transfer offices or agencies and
registry offices or agencies at such place or places as may be determined from
time to time by the Board of Directors.
Section 6. Beneficial Owners. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends, and to vote as such owner, and to
hold liable for calls and assessments a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
<PAGE> 18
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by
law, the Certificate of Incorporation or these By-Laws, to be given to any
director, member of a committee or stockholder, such notice may be given by
mail, addressed to such director, member of a committee or stockholder, at such
person's address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail. Written notice may also
be given personally or by telegram, facsimile, telex or cable.
Section 2. Waivers of Notice.
(a) Whenever any notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent to notice. Attendance of a person at
a meeting, present by person or represented by proxy, shall constitute a waiver
of notice of such meeting, except where the person attends the meeting for the
express purpose of objecting at the beginning of the meeting to the transaction
of any business because the meeting is not lawfully called or convened.
(b) Neither the business to be transacted at, nor
the purpose of, any regular or special meeting of the stockholders, directors
or members of a committee of directors need be specified in any written waiver
of notice unless so required by law, the Certificate of Incorporation or these
By-Laws.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Subject to the requirements of the
Delaware General Corporate Law ("GCL") and the provisions of the Certificate of
Incorporation, dividends upon the capital stock of the Corporation may be
declared by the Board of Directors at any regular or special meeting of the
Board of Directors, and may be paid in cash, in property, or in shares of the
Corporation's capital stock. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors from time to time, in its absolute discretion,
deems proper as a reserve or reserves to meet contingencies, or for purchasing
any of the shares of capital stock, warrants, rights,
<PAGE> 19
options, bonds, debentures, notes, scrip or other securities or evidences of
indebtedness of the Corporation, or for equalizing dividends, or for repairing
or maintaining any property of the Corporation, or for any other proper
purpose, and the Board of Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
Section 3. Fiscal Year. The fiscal year of the Corporation
shall be fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or
Proceedings Other than Those by or in the Right of the Corporation. Subject to
Section 3 of this Article VIII, the Corporation shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Corporation) by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was a director or officer of the
Corporation serving at the request of the Corporation as a director or officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, such
person had no reasonable cause to believe his or her conduct was
<PAGE> 20
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that such person did not act in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his or her
conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or
Proceedings by or in the Right of the Corporation. Subject to Section 3 of this
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was a director or officer of the
Corporation serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any
indemnification under this Article VIII (unless ordered by a court) shall be
made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director or officer is proper in the
circumstances because such person has met the applicable standard of conduct
set forth in Section 1 or Section 2 of this Article VIII, as the case may be.
Such determination shall be made (i) by a majority vote of the directors who
are not parties to such action, suit or proceeding, even though less than a
quorum, or (ii) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (iii) by the
stockholders. To the extent, however, that a director or officer of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding described above, or in defense of any claim, issue
or matter therein, such person shall be indemnified
<PAGE> 21
against expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection therewith, without the necessity of authorization
in the specific case.
Section 4. Good Faith Defined. For purposes of any
determination under Section 3 of this Article VIII, a person shall be deemed to
have acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Corporation, or, with respect to
any criminal action or proceeding, to have had no reasonable cause to believe
his or her conduct was unlawful, if such person's action is based on the
records or books of account of the Corporation or another enterprise, or on
information supplied to such person by the officers of the Corporation or
another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or records
given or reports made to the Corporation or another enterprise by an
independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Corporation or another enterprise. The
term "another enterprise" as used in this Section 4 shall mean any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, employee or agent. The provisions of this
Section 4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standard of conduct set forth in Section 1 or 2 of this Article VIII, as the
case may be.
Section 5. Indemnification by a Court. Notwithstanding any
contrary determination in the specific case under Section 3 of this Article
VIII, and notwithstanding the absence of any determination thereunder, any
director or officer may apply to the Court of Chancery of the State of Delaware
or any other court of competent jurisdiction in the State of Delaware for
indemnification to the extent otherwise permissible under Sections 1 and 2 of
this Article VIII. The basis of such indemnification by a court shall be a
determination by such court that indemnification of the director or officer is
proper in the circumstances because such person has met the applicable
standards of conduct set forth in Section 1 or 2 of this Article VIII, as the
case may be. Neither a contrary determination in the specific case under
Section 3 of this Article VIII nor the absence of any determination thereunder
shall be a defense to such application or create a presumption that the
director or officer seeking indemnification has not met any applicable standard
of conduct. Notice of any application for indemnification pursuant to this
Section 5 shall be given to the Corporation promptly upon the filing of such
application. If successful, in whole or
<PAGE> 22
in part, the director or officer seeking indemnification shall also be entitled
to be paid the expense of prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by
a director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation as authorized in this Article VIII.
Section 7. Non-exclusivity of Indemnification and Advancement
of Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under the Certificate of Incorporation or any By-Law,
agreement, contract, vote of stockholders or disinterested directors or
pursuant to the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in such person's official capacity
and as to action in another capacity while holding such office, it being the
policy of the Corporation that indemnification of the persons specified in
Section 1 and 2 of this Article VIII shall be made to the fullest extent
permitted by law. The provisions of this Article VIII shall not be deemed to
preclude the indemnification of any person who is not specified in Section 1 or
2 of this Article VIII but whom the Corporation has the power or obligation to
indemnify under the provisions of the GCL, or otherwise.
Section 8. Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director or officer
of the Corporation, or is or was a director or officer of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the Corporation would have the power or
the obligation to indemnify such person against such liability under the
provisions of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article
VIII, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent
of a constituent) absorbed in a
<PAGE> 23
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors or officers, so that
any person who is or was a director or officer of such constituent corporation,
or is or was a director or officer of such constituent corporation serving at
the request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, shall stand in the same position under the
provisions of this Article VIII with respect to the resulting or surviving
corporation as such person would have with respect to such constituent
corporation if its separate existence had continued. For purposes of this
Article VIII, references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving
at the request of the Corporation" shall include any service as a director,
officer, employee or agent of the Corporation which imposes duties on, or
involves services by, such director or officer with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner such person reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
Corporation" as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VIII shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director
or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 11. Limitation on Indemnification. Notwithstanding
anything contained in this Article VIII to the contrary, except for proceedings
to enforce rights to indemnification (which shall be governed by Section 5
hereof), the Corporation shall not be obligated to indemnify any director or
officer (or his or her heirs, executors or personal or legal representatives)
or advance expenses in connection with a proceeding (or part thereof) initiated
by such person unless such proceeding (or part thereof) was authorized or
consented to by the Board of Directors of the Corporation.
Notwithstanding anything contained in this Article VIII to the
contrary, in no event shall the Corporation indemnify or advance any expenses
pursuant to this Article VIII to any person who is an "Original Shareholder"
(as defined in that certain Indemnification Agreement dated as of November 23,
1999 (as amended or modified from time to time, the "Indemnification
Agreement") among the
<PAGE> 24
Corporation, EGI-ARC Investors, L.L.C, Telecom Partners II, L.P., Crescendo
World Fund, LLC, Eagle Ventures WF, LLC, Crescendo III, L.P., Lawrence Equity
Group, LLC and the other parties thereto) with respect to or in connection with
any matter of the nature described by Section 2.1(1) of the Indemnification
Agreement.
Section 12. Indemnification of Employees and Agents. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, provide rights to indemnification and to the advancement of expenses
to employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. Amendments. These By-Laws may be altered, amended
or repealed, in whole or in part, or new By-Laws may be adopted by the Board of
Directors or by the stockholders as provided in the Certificate of
Incorporation.
Section 2. Entire Board of Directors. As used in these
By-laws generally, the term "entire Board of Directors" means the total number
of directors which the Corporation would have if there were no vacancies.
<PAGE> 1
EXHIBIT 4.1
(LOGO OF ALLIED RISER COMMUNICATIONS CORPORATION)
ALLIED RISER COMMUNICATIONS CORPORATION
Number Shares
ARCC
Common Stock
CUSIP 019496 10 8
SEE REVERSE FOR
CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.0001 PAR VALUE PER
SHARE, OF
ALLIED RISER COMMUNICATIONS CORPORATION
The shares represented by this certificate are transferable only on the
stock transfer books of the Corporation by the holder of record hereof, or by
his duly authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all the provisions of the
Certificate of Incorporation of the Corporation and any amendments thereto
(copies of which are on file with the Transfer Agent), to all of which
provisions the holder by acceptance hereof assents.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
In Witness Thereof, Allied Riser Communications Corporation has caused this
certificate to be executed by the facsimile signatures of its duly authorized
officers and has caused a facsimile of its corporate seal to be hereto affixed.
Dated:
[corporate seal]
/s/ Ried Zulager /s/ John M. Todd
SECRETARY PRESIDENT
<PAGE> 2
ALLIED RISER COMMUNICATIONS CORPORATION
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ________ Custodian ___________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ___________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ________________________ hereby sell, assign and transfer
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares
- -------------------------------------------------------------------------
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated
-----------------------------
----------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
--------------------------------
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 4.2
THIS WARRANT IS SUBJECT TO THE PROVISIONS OF A WARRANT AGREEMENT, DATE [ ],
1999, BY AND BETWEEN THE COMPANY AND [ ] THE WAR RANTS ARE
ALSO SUBJECT TO THE TERMS OF A WARRANT ACQUISITION AGREEMENT, DATED [ ],
1999, BY AND BETWEEN THE COMPANY AND [ ]. THIS WARRANT MAY
ONLY BE TRANSFERRED IN COMPLIANCE WITH AND SUBJECT TO THE CONDITIONS SPECIFIED
IN THE WARRANT AGREEMENT AND THE ACQUISITION AGREEMENT. IN ADDITION, THE SHARES
TO BE ACQUIRED UPON THE EXERCISE OF THIS WARRANT MAY ONLY BE TRANSFERRED IN
COMPLIANCE WITH AND SUBJECT TO THE TERMS OF THE WARRANT AGREEMENT. A COPY OF
THE WARRANT AGREEMENT AND THE ACQUISITION AGREEMENT WILL BE FURNISHED BY THE
COMPANY TO THE REGISTERED HOLDER HEREOF UPON WRITTEN REQUEST WITHOUT CHARGE. IN
ADDITION, THIS WARRANT AND ANY SHARES TO BE ACQUIRED UPON THE EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE TRANSFERRED, SOLD OR OTHER WISE DISPOSED OF EXCEPT WHILE A
REGISTRATION UNDER SUCH ACT IS IN EFFECT OR PURSUANT TO AN EXEMPTION THEREFROM
UNDER SUCH ACT.
No. [ ] Warrants
Warrant Certificate
ALLIED RISER COMMUNICATIONS CORPORATION
This Warrant Certificate certifies that [ ](the
"Purchaser"), or registered assigns is the registered holder of [ ] Warrants
(the "Warrants") to receive shares of Common Stock, $0.0001 par value per share
("Common Stock"), of Allied Riser Communications Corporation, a Delaware
corporation (the "Company"). Each Warrant entitles the registered holder thereof
to receive from the Company at any time (a) on or after the earliest to occur of
(i) the later of (A) six months after the closing of an initial public offering
of the Common Stock or (B) the execution of license agreements ("License
Agreements") to be executed pursuant to the Warrant Acquisition Agreement, dated
[ ], 1999 (the "Acquisition Agreement"), between the Company and the
Purchaser, for properties representing not less than 75% of the net rentable
square footage of the properties set forth on the Property Schedules (as defined
in the Acquisition Agreement) credited at the end of the Due Diligence Period
(as defined in the Acquisition Agreement) for which the Company has requested
the Purchaser to execute a License Agreement within 150 days following the last
day of the Due Diligence Period (the "Threshold Amount"), (ii) the consolidation
of the Company with or the merger of the Company into any other corporation
(other than a consolidation or merger in which the Company is the continuing
corporation) or (iii) the sale of the properties and assets of the Company or
the outstanding capital stock of the Company as, or substantially as, an
entirety to any corporation other than an affiliate of the Company and (b) on or
before 5:00 p.m. New York time on or before the tenth anniversary of this
Agreement or such other date as agreed in writing by the Company and the
registered holder hereof (the "Expiration Date"), one fully paid and
nonassessable share ("Share") of Common Stock upon surrender of this Warrant
Certificate at the office of the Company at 1700 Pacific Street, Suite 200,
Dallas, Texas 75201 (the "Company Office"), but only subject to the conditions
set forth herein and in the Warrant Agreement, dated [ ], 1999
(the "Warrant Agreement"), between the Company and the Purchaser.
THE WARRANTS ARE SUBJECT TO REDUCTION, CANCELLATION AND RETURN AS SET
FORTH IN THE ACQUISITION AGREEMENT.
The Warrants may not be sold, assigned, transferred, pledged,
encumbered, hypothecated, given or otherwise disposed of or transferred
("Transferred") during the period ending on or after the earliest to occur of
(a) the later of (i) six months after the closing of an initial public offering
of the Common Stock or (ii) the execution of License Agreements for properties
representing not less than the Threshold Amount, (b) the consolidation of the
<PAGE> 2
Company with or the merger of the Company into any other corporation (other than
a consolidation or merger in which the Company is the continuing corporation) or
(c) the sale of the properties and assets of the Company or the outstanding
capital stock of the Company as, or substantially as, an entirety to any
corporation other than an affiliate of the Company six months after the closing
of an initial public offering of the Common Stock; provided, that the Purchaser
shall be entitled to Transfer only those Warrants to which it is entitled at the
time of such Transfer after applying the adjustment provisions set forth in
Article V of the Acquisition Agreement; and, provided further, that the
Purchaser may transfer the Warrants, in whole or in part, to (x) any company
which, directly or indirectly, holds greater than 50% of the capital stock of
the Purchaser with the power to elect the Board of Directors (the "Voting
Stock") of the Purchaser (a "Parent"), (y) any subsidiary of the Purchaser or a
Parent the Voting Stock which the Purchaser or a Parent holds, directly or
indirectly, greater than 50% and (z) an affiliated fund of the Purchaser set
forth on Schedule 3 to the Warrant Agreement if such fund agrees to be bound by
the obligations of Purchaser pursuant to the Acquisition Agreement and the
Warrant Agreement. Any attempted Transfer of Warrants in violation of the
provisions of the Warrant Agreement shall be null and void and of no force and
effect, and the Warrants subject to such attempted Transfer shall remain subject
to the Warrant Agreement. Any attempted Transfer of Shares in violation of the
provisions of the Warrant Agreement shall be null and void and of no force or
effect, and the Shares subject to such attempted Transfer shall remain subject
to the Warrant Agreement.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
WITNESS the manual or facsimile signatures of the Company's duly
authorized officers.
Dated: [ ], 1999
ALLIED RISER COMMUNICATIONS
CORPORATION
By:
-------------------------------------
Todd C. Doshier
Senior Vice President and Chief
Financial Officer
<PAGE> 3
ALLIED RISER COMMUNICATIONS CORPORATION
The Warrant Agreement is hereby incorporated by reference in and made a
part of this instrument and is hereby referred to for a description of the
rights, limitation of rights, obligations, duties and immunities thereunder of
the Company and the Holders (the word "Holders" meaning the registered holders
of the Warrants).
Warrants may be exercised to receive Shares from the Company at any
time (a) on or after the earliest to occur of (i) the later of (A) six months
after the closing of an initial public offering of the Common Stock or (B) the
execution of License Agreements for properties representing not less than the
Threshold Amount, (ii) the consolidation of the Company with or the merger of
the Company into any other corporation (other than a consolidation or merger in
which the Company is the continuing corporation) or (iii) the sale of the
properties and assets of the Company or the outstanding capital stock of the
Company as, or substantially as, an entirety to any corporation other than an
affiliate of the Company six months after the closing of an initial public
offering of the Common Stock, and (b) on or before 5:00 p.m. New York time on
the Termination Date. The holder of Warrants evidenced by this Warrant
Certificate may exercise them by surrendering the Warrant Certificate, with the
form of election to receive set forth hereon properly completed and executed at
the Company Office. In the event that upon any exercise of Warrants evidenced
hereby the number of Warrants exercised shall be less than the total number of
Warrants evidenced hereby, there shall be issued to the holder hereof or its
assignee a new Warrant Certificate evidencing the number of Warrants not
exercised. No adjustment shall be made for any cash dividends on any Shares
issuable upon exercise of this Warrant.
The Company shall not be required to issue fractions of Warrants or
fractions of Shares or any certificates which evidence fractional Warrants or
fractional Shares. In lieu of such fractional Warrants and fractional Shares, a
full Warrant or a full Share, as the case may be, shall be paid to the
registered holders of the Warrants with regard to which such fractional Warrants
or fractional Shares would otherwise be issuable.
Warrant Certificates, when surrendered at the Company Office, by the
registered holder thereof in person or by legal representative by attorney duly
authorized in writing may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, for another Warrant Certificate
or Warrant Certificates of like tenor evidencing in the aggregate a like number
of Warrants.
Upon due presentment for registration of transfer of this Warrant
Certificate at the Company Office, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to the transferee in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement.
The Company may deem and treat the registered holder hereof as the
absolute owner of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise or conversion hereof and for all other purposes, and the Company shall
not be affected or in any way bound by any notice to the contrary.
<PAGE> 4
Election to Receive Form
(To be executed upon exercise of Warrant prior to
the close of business on the Expiration Date)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive _________ Shares in
accordance with the terms hereof. The undersigned requests that a certificate
representing such Shares be registered in the name of _________________________
whose address is ___________________________________________________________ and
that such certificate be delivered to _________________________________________
whose address is ____________________________________________. If said number of
Shares is less than all the Shares purchasable hereunder, the undersigned
requests that a new Warrant Certificate representing the balance of the Shares
be registered in the name of _____________________________________________ whose
address is __________________________________________________ and that such
Warrant Certificate be delivered to ___________________________________________
whose address is ____________________________________________________.
Dated: ,
------------------------- ----
Name of holder of Warrant Certificate:
--------------------------------------
(Please print)
Address:
-----------------------------
-----------------------------
Signature:
---------------------------
Note: The above signature must correspond
with the name as written upon the face
of this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever and
if the certificate representing the
Shares or any Warrant Certificate
representing Warrants not exercised is
to be registered in a name other than
that in which this Warrant Certificate
is registered, the signature of the
holder hereof must be guaranteed.
Signature Guaranteed:
<PAGE> 5
Assignment Form
For value received ______________________________ hereby sells, assigns
and transfers unto ___________________________________ the within Warrant
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ______________________________________
attorney, to transfer said Warrant Certificate on the books of the within-named
Company, with full power of substitution in the premises.
Dated: ,
------------------------- ----
--------------------------------------------
Note: The above signature must correspond
with the name as written upon the face
of this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this_____day of _____________, 1999 by and between Allied Riser Operations
Corporation, a Delaware corporation with its principal place of business at
_______________, Texas (the "Employer") and ___________________, an individual
residing at ____________________________________________("Executive").
RECITALS
WHEREAS, Employer desires to employ Executive, on an "at will" basis,
upon the terms and conditions stated herein; and
WHEREAS, in consideration for Executive's employment hereunder, Allied
Riser Communications Corporation, a Delaware corporation ("ARCC", f/k/a Allied
Riser Communications Holdings, Inc.), the parent of Employer sold to Executive
certain Restricted Shares (as hereinafter defined); and has granted, or may
grant, to Executive certain Stock Options (as hereinafter defined); and
WHEREAS, in further consideration for Executive's employment hereunder,
Executive has been granted certain pre-emptive rights pursuant to a subscription
agreement with ARCC ("Subscription Agreement") and certain "tag along" rights to
sell shares of common stock of ARCC pursuant to a stockholders" agreement
"Stockholders' Agreement") by and among the holders of capital stock in ARCC;
and
WHEREAS, in connection with the Executive's employment and in
accordance with the terms and conditions set forth herein, Employer and ARCC
have agreed to provide Executive with certain vesting and other benefits
relating to the Restricted Shares and/or Options held by Executive on the date
of certain events (as hereinafter defined); and
WHEREAS, Executive desires to be so employed by Employer upon such
terms and conditions; and
WHEREAS, Executive acknowledges and understands that during the course
of his employment, Executive will become familiar with and/or create or develop
certain confidential information of Employer which is exceptionally valuable to
Employer which is exceptionally valuable to Employer and vital to the success of
the Employer's business; and
WHEREAS, Executive acknowledges that Employer would terminate or
prohibit access to its Customers, employees and Confidential Information (as
each term is hereinafter defined) in the absence of the restrictions and
protections contained in the Subscription Agreement, which provisions are
incorporated by reference into this Agreement; and
WHEREAS, Employer and Executive desire to protect such business and
Confidential Information from disclosure to third parties or its use to the
detriment of Employer; and
WHEREAS, Executive acknowledges that the likelihood of disclosure of
such Confidential Information would be substantially reduced, and that
legitimate business interests of Employer would be protected, if Executive
refrains from competing with Employer and from soliciting its Customers and
employees during the period described in the provisions incorporated by
reference herein from the Subscription Agreement and/or Option Agreement(s), and
Executive acknowledges the reasonableness and necessity of such restrictions and
is willing to covenant that he will refrain from such actions;
1
<PAGE> 2
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants and agreements hereinafter set forth, the parties hereto acknowledge
and agree as follows:
1. EMPLOYMENT. Employer hereby agrees to employ Executive on an "at
will" basis, and Executive hereby accepts employment, upon the terms
and conditions set forth herein. During the period of Executive's
employment by Employer, Executive shall diligently and faithfully
perform the duties assigned to him from time to time by the Board of
Directors of Employer. Executive agrees to devote his full business
time, attention and energies to the diligent and satisfactory
performance of his duties hereunder. Executive will not, during the
term of his employment or during any period during which Executive is
receiving payments pursuant to Section 6(d), engage in any activity
which is intended to, or which Executive should have known was
reasonably likely to, have an adverse affect on Employer's reputation,
goodwill or business relationships or which is intended to, or which
Executive should have known was reasonably likely to, result in
economic harm to the Employer, or which, in the opinion of the Board of
Directors, would conflict with or detract from Executive's capable
performance of his duties hereunder
2. COMPENSATION. During the period of Executive's employment by
Employer, Executive shall be entitled to receive the salary and bonus,
if any, determined from time to time by the Board of Directors of
Employer.
3. RESTRICTED STOCK OWNERSHIP, STOCK OPTIONS AND VESTING.
(a) Purchase of Restricted Shares. In connection with the
execution of this Agreement, ARCC offered to sell, and Executive
purchased the number of shares set forth opposite Executive's
name on Schedule A hereto, newly-issued shares of common stock,
par value $S0.0001 per share ("Common Stock") of ARCC, at a price
of $0.0001 per share, rounded up to the nearest $0.01
("Restricted Share Purchase Price"), which shares are restricted,
non-transferable and subject to repurchase by Employer (the
"Restricted Shares") until vested in accordance with Section
3(c). Executive is not and shall not be entitled to vote with
respect to any of such unvested Restricted Shares.
(b) Stock Options. In connection with Executive's employment,
ARCC has granted, or may grant, to Executive options to purchase
shares of Common Stock of ARCC ("Stock Options") pursuant to the
ARCC Stock Option and Equity Incentive Plan (the "Plan") and
associated Stock Option agreement documents (the "Option
agreement(s)") which Stock Options shall be subject to the terms
of the Plan and such restrictions, including vesting schedule, as
shall be set forth in the Option Agreement(s).
(c) Vesting. To the extent that Executive is employed by
Employer, the Restricted Shares shall vest in Executive and the
restrictions set forth in Section 3 (a) hereof and repurchase
rights with resect to such Restricted Shares shall terminate at a
rate of 2.083% of the restricted Shares per month for a period of
48 consecutive months, such that Executive shall be 100% vested
in the Restricted Shares at the end of such 48 month period;
Stock Options shall vest in accordance with the schedule set
forth in the applicable Option Agreement(s); provided, however,
that in the event that Executive's employment is terminated by
the Company within 24 months following the date of this Agreement
pursuant to Section 6(d), then Executive shall automatically, and
without action on the part of Executive or Employer, vest in 50%
of the Restricted shares and the Stock Options.
(d) Repurchase of Restricted Shares and Forfeiture of Options.
In the event that Executive voluntarily terminates employment, or
is terminated by Employer pursuant to Sections 6(a), 6(b), or
6(c) or is terminated by Employer pursuant to Section 6(d) at any
time after 24 months following the date Executive commenced
employment with Employer, then Executive shall be entitled to
retain all Restricted Shares and Stock Options in which Executive
has vested. In the event that Executive's employment is
terminated within 24 months following the date of this Agreement
pursuant to Section 6(d), then as provided in Section 3(c)
hereof, Executive shall
2
<PAGE> 3
immediately vest and be entitled to retain 50% of the Restricted
Shares and Stock Options. In either case, pursuant to this
Agreement and without further action by Executive, ARCC shall
have the right to repurchase all unvested Restricted Shares upon
payment to executive of an amount equal to the product of the
Restricted Share Purchase Price multiplied by the number of
unvested Restricted Shares and all unvested Stock Options shall
be forfeited by Executive.
(e) Acceleration of Restricted Share and Stock Option Vesting.
In the event of a Business Combination (as hereinafter defined)
of Employer or ARCC prior to the termination or expiration of
this Agreement, then notwithstanding the Restricted Share vesting
schedule set forth in Section 3(c) hereof and the Stock Option
vesting schedule set forth in the Option Agreement(s), all of the
unvested Restricted Shares and Stock Options shall immediately
vest and ARCC'S right of repurchase shall terminate. For purposes
of this Agreement, a "Business Combination" shall mean a sale to
an unaffiliated third party of at least a majority of the
outstanding shares of Common Stock, a sale or transfer to an
unaffiliated third party of the power to elect a majority of the
members of the Board of Directors of Employer or ARCC, a sale to
an unaffiliated third party of substantially all of the assets of
Employer or ARCC, a merger or other consolidation transaction
with an unaffiliated third party following which the ability to
elect a majority of the members of the Board of Directors of
Employer or ARCC or a majority of the voting power of the
surviving corporation is not held by any party other than a
holder of record prior to a public offering of the Company's
common stock.
(f) Subscription and Stockholder's Agreement. As a condition to
the sale and issuance of the Restricted Shares, Executive shall
be required to execute a Subscription Agreement and Stockholders'
Agreement in substantially the forms attached hereto as Exhibits
A and B, which Subscription Agreement contains certain
pre-emptive rights for the benefit of Executive and certain
restrictive covenants for the benefit of Employer and which
Stockholder's Agreement contains certain restrictions on the
ability of Executive to transfer or dispose of the Restricted
shares and certain rights of Executive to sell all or a portion
of the Restricted Shares in the event of certain sales of capital
stock. The parties further agree that the vesting, repurchase and
acceleration of vesting provisions contained in Section 3(c)(d)
and(e) shall equally apply to any shares of Common Stock of ARCC
acquired by Executive pursuant to the exercise of pre-emptive or
other similar anti-dilution rights under Section 5 of the
Subscription Agreement, such that Executive shall vest, on an
identical pro rata basis, in the Restricted shares and any shares
of Common stock acquired pursuant to the exercise of pre-emptive
rights in order to preserve the intents the purposes of the
parties in granting such pre-emptive or other anti-dilution
rights prior to the complete vesting of the Restricted Shares.
4. CONFIDENTIAL INFORMATION; NON-COMPETITION AND NON-SOLICITATION
COVENANTS. Executive hereby acknowledges and agrees that the
restrictions set forth in Section 6- Covenants in Respect of Employment
and Exhibit B to the Subscription Agreement, which provisions are
incorporated by reference herein and made a part here of, are
reasonable and necessary to protect the rights of Employer, which
rights, the parties agree, are exceptionally valuable to Employer and
vital to the success of the Employer's business.
5. CONTINUING OBLIGATIONS. The obligations, duties and liabilities
of Executive pursuant to Section 6 - Covenants in Respect of Employment
and Exhibit B to the Subscription Agreement are continuing, absolute
and unconditional and shall remain in full force and effect as provided
herein. If (i) Executive's employment hereunder is terminated pursuant
to the provisions of Section 6(d), and (ii) Executive is receiving
severance benefits pursuant to the provisions of Section 6(d), and
(iii) Executive violates the provisions of Section 6 - Covenants in
Respect of Employment and Exhibit B to the Subscription Agreement, then
Executive agrees that he shall forfeit all rights to any unpaid portion
of the severance benefits provided pursuant to Section 6(d). Employer
may also exercise any additional remedies available to it under this
Agreement, whether at law or in equity, upon any such violation.
3
<PAGE> 4
6. TERMINATION
(a) Termination by Employer of Executive for Cause. Employer
shall have the right to terminate Executive's employment at any
time for "cause." For purposes hereof, "cause" shall mean that
Executive has:
(i) committed a breach of any material covenant, provision,
term, condition, understanding or undertaking set forth in
Section 1 of this Agreement or in Section 6 - Covenants in
respect of Employment or Exhibit B to the Subscription
Agreement; or
(ii) been convicted of, or plead nolo contendere to, a felony or
crime involving moral turpitude; or
(iii) committed an act of personal dishonesty or fraud in
connection with Executive's employment by the Employer; or
(iv) committed an act involving willful misconduct or negligence
on the part of Executive in connection with his employment
by the Employer.
If Employer shall terminate Executive's employment pursuant to this Section 6(a)
employer shall be obligated to pay to Executive the salary then in effect
accrued up to and including the date on which Executive's employment is so
terminated. Thereafter, Employer shall have no further obligation whatsoever to
Executive.
(b) Termination by Employer of Executive Because of Executive's
Disability, Injury, or Illness. Employer shall have the right to
terminate Executive's employment if Executive unable to perform
the duties assigned to hem by the Employer because of Executive's
disability, injury or illness; provided, however, that in the
event of such disability, injury, or illness, Executive's
inability to perform such duties must have existed for a total of
six (6) months in any consecutive twelve (12) month period before
such termination can be made effective. If Employer shall
terminate Executive's employment pursuant to this Section 6(b)
then Employer shall be obligated (i) to pay to Executive the
salary then in effect payable to Executive pursuant to this
Agreement, for a period of six (6) months following such
termination of employment.
(c) Termination by Employer as a Result of Executive's Death.
The obligations of Employer to Executive under this Agreement
(except as provided in this Section 6(c)) shall automatically
terminate upon Executive's death and Employer shall then only be
obligated to pay to Executive's estate the salary then in effect
through the date of Executive's death. Thereafter, the Employer
shall have no further obligation whatsoever to Executive's
estate.
(d) Termination of Executive for Any Other Reason. Employer
shall have the right to terminate Executive's employment for any
other reason upon thirty (30) days prior written notice to
Executive. If Executive's employment is terminated by the
Employer for any reason other than the reasons set forth in
Sections 6(a), 6(b) or 6(c) above, Employer shall be obligated to
continue to pay to executive the salary then in effect for a
period of six (6) months following such termination of
employment.
(e) Termination by Executive. Executive may resign and terminate
his employment with employer for any reason whatsoever upon
thirty (30) days prior written notice to the Employer. If
Executive's employment is so terminated, Employer shall be
obligated to continue to pay to Executive his then current salary
payable to Executive, accrued up to and including the date on
which Executive's employment is so terminated. Thereafter,
Employer shall have no further obligation to Executive whatsoever
pursuant to this Agreement.
4
<PAGE> 5
7. MISCELLANEOUS
(a) Assignment. Executive and Employer acknowledge and agree
that the covenants, terms and provisions contained in this
Agreement constitute a personal employment contract and the
rights of the parties hereunder cannot be transferred, sold,
assigned, pledged or hypothecated, except that the rights and
obligations of Employer under this Agreement may be assigned or
transferred by Employer (i) to any affiliate of Employer, or (ii)
pursuant to a sale of the business, merger, consolidation, share
exchange, sale of substantially all of the assets or on-going
business of the Employer, or other reorganization described in
Section 368 of the Internal Revenue Code, or through liquidation,
dissolution or otherwise, whether or not Employer is continuing
entity, provided that the assignee, or transferee is the
successor to all or substantially all of the assets or on-going
business of Employer and such assignee or transferee assumes the
rights and duties of the Employer, if any, as contained in this
Agreement, either contractually or as a matter of law.
(b) Entire Agreement. This Agreement, together with the
Subscription Agreement and Stockholders' Agreement contains the
entire agreement between the parties with respect to the subject
matter hereof and may not be modified except in writing by he
parties hereto; provided, however, that in the event of any
conflict between the terms of this Agreement and the Subscription
Agreement, the terms of this Agreement shall supersede and govern
in all respects. Furthermore, the parties hereto specifically
agree that all prior agreements, whether written or oral relating
to Executive's employment by Employer shall be of no further
force or effect form and after the date hereof.
(c) Severability. If any restriction or limitation in this
Agreement is deemed to be unenforceable, onerous, unduly
restrictive or unreasonable as to scope, activity, territory or
duration, by a court of competent jurisdiction, it shall not be
stricken in its entirety and held totally void and unenforceable,
but shall be deemed rewritten to the minimum extent possible in
order to limit any restriction or limitation or other term to the
minimum extent necessary in order to effectuate the intent of the
parties and shall remain enforceable to the maximum extent
permissible within reasonable bounds in order to effect such
lesser restriction as such court shall deem reasonable. If any
phrase, clause or provision of this Agreement is declared invalid
or unenforceable by a court of competent jurisdiction, and such
phrase, clause or revision is not capable of being rewritten
pursuant to the foregoing sentence, then such phrase, clause or
provision shall be deemed severed from this Agreement, but will
not affect any other provisions of this Agreement, which shall
otherwise remain in full force and effect.
(d) Notices. Any notice, request or other communication required
to be given pursuant to the provisions hereof shall be in writing
and shall be deemed to have been given when delivered in person,
or on the next succeeding business day after being delivered to a
recognized overnight courier service, or five (5) days after
being deposited in the United States mail, certified or
registered, postage prepaid, return receipt requested and
addressed to the party at its or his last known addresses. The
address of any party may be changed by notice in writing to the
other parties duly served in accordance herewith.
(e) Waiver. The waiver by Employer or Executive of any breach of
any term or condition of this Agreement shall not be deemed to
constitute the waiver of any other breach of the same or any
other term or condition hereof.
(f) Governing Law. This Agreement and the enforcement thereof
shall be governed and controlled in all respects by the laws of
the State of Delaware and any litigation concerning this
Agreement shall be before a court of competent jurisdiction
sitting in the State of Delaware.
5
<PAGE> 6
(g) WAIVER OF JURY TRIAL. Each of the parties hereto hereby
irrevocably waives any and all right to trial by jury in any
legal proceeding arising out of or relating to the Agreement or
the transactions contemplated hereby.
(h) Consent to Jurisdiction and Service of Process. The parties
hereto each hereby consent tot he jurisdiction of any state of
Federal court located within the State of Delaware and
irrevocably agree that all actions or proceedings arising out or
relating to this Agreement connection with its respective
properties, generally and unconditionally, the exclusive
jurisdiction and venue of the aforesaid courts and waives any
defense of forum non conveniens, and irrevocably agrees to be
bound by any non-appealable judgment rendered thereby in
connection with this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
EMPLOYER:
ALLIED RISER OPERATIONS CORPORATION
By:
-------------------------------------
Title:
----------------------------------
HOLDINGS:
ALLIED RISER COMMUNICATIONS CORPORATION
By:
-------------------------------------
Title:
----------------------------------
EXECUTIVE:
----------------------------------------
6
<PAGE> 7
SCHEDULE A
7
<PAGE> 1
EXHIBIT 10.2
LOCK-UP LETTER
October 8, 1999
Goldman, Sachs & Co.
Merrill Lynch & Co.
Donaldson, Lufkin & Jenrette Securities Corporation
Thomas Weisel Partners, LLC.
c/o Goldman, Sachs & Co.
85 Broad Street
New York, NY 10004
Ladies and Gentlemen:
The undersigned understands that Goldman, Sachs & Co.
("Goldman"), as representative of the several Underwriters and Allied Riser
Communications Corporation, a Delaware corporation (the "Company"), contemplate
entering into an Underwriting Agreement (the "Underwriting Agreement") to
provide for the public offering (the "Public Offering") by the several
Underwriters, including Goldman, of shares (the "Shares") of Common Stock, par
value $0.0001 per share, of the Company (the "Common Stock"). The undersigned
further understands that the Company has agreed, in connection with the Public
Offering, among other things, not to offer, sell, contract to sell or otherwise
dispose of shares of Common Stock or securities convertible into Common Stock in
connection with acquisitions unless the transferee executes and delivers to
Goldman this letter.
In satisfaction of this requirement, the undersigned hereby
agrees that, without the prior written consent of Goldman on behalf of the
Underwriters, it will not, during the period commencing on the date hereof and
ending six months after the date of the final prospectus relating to the Public
Offering (the "Prospectus"), offer, sell, contract to sell or otherwise dispose
of, directly or indirectly, any shares of Common Stock or any securities that
are substantially similar to the Common Stock (other than shares of Common Stock
or other securities issued or issuable in connection with employee bonus,
benefit, option or similar plans), including but not limited to any securities
that are convertible into or exchangeable for, or that represent the right to
receive, Common Stock or any such substantially similar securities, provided
however, that nothing in this letter or the Underwriting Agreement shall
prohibit the dissolution of the undersigned and/or its distribution of Shares to
its shareholders and stakeholders, provided further that each distributee or
stakeholder agrees to be bound by the terms of this lockup letter. In addition,
the undersigned agrees that, without the prior written consent of Goldman on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending six months after the date of the Prospectus, make any
demand for or exercise any right with respect to, the registration of any shares
of Common Stock or any securities that are substantially similar to the Common
Stock, including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Common Stock or any
such substantially similar securities.
Very truly yours,
By:
-----------------------------------
--------------------------------------
(Print Name)
--------------------------------------
(Address)
Accepted as of October 8, 1999:
Goldman, Sachs & Co.
By:
----------------------------------
<PAGE> 1
EXHIBIT 10.4.2
AMENDMENT NO. 2 AND JOINDER TO
STOCKHOLDERS' AGREEMENT
AMENDMENT NO. 2 AND JOINDER (the "AMENDMENT AND JOINDER"), dated
December 30, 1998 and effective as of November 23, 1998, by and among Allied
Riser Communications Holdings, Inc., a Delaware corporation (the "COMPANY"),
EGI-ARC Investors, L.L.C., a Delaware limited liability company ("EGI-ARC"),
Telecom Partners II, L.P., a Delaware limited partnership ("TP"), Crescendo
World Fund, LLC, a Delaware limited liability company ("CWF"), Eagle Ventures
WF, LLC, a Minnesota limited liability company ("EVW"), Crescendo III, L.P., a
Delaware limited partnership ("CIII"), Lawrence Equity Group, L.L.C., a
California limited liability company ("LEG"), Norwest Venture Partners VII,
L.P., a Minnesota limited partnership ("Norwest"), and ANDA Partnership, an
Illinois general partnership ("ANDA" and, collectively with the Company,
EGI-ARC, TP, CWF, EVW, LEG and Norwest, the "PARTIES"), to that certain
Stockholders' Agreement, as amended by Amendment No.1 thereto, (the
"STOCKHOLDERS' AGREEMENT"), dated as of November 5, 1998, by and among the
Company, EGI-ARC, TP and the other persons identified therein. All terms not
otherwise defined herein shall have the meanings given such terms in the
Stockholders' Agreement.
WHEREAS, the Company, EGI-ARC, TP and the other persons identified
therein have entered into the Stockholders' Agreement and desire to amend the
Stockholders' Agreement as provided herein;
WHEREAS, Section 5.3 of the Stockholders' Agreement permits amendment
of the Stockholders' Agreement by a written instrument signed by (i) the
Company, (ii) holders of not less than fifty percent (50%) of the outstanding
Preferred Stock, and (iii) Stockholders holding not less than fifty percent
(50%) of the total number of shares of ARC Holdings Common Stock and ARC
Holdings Common Stock Equivalents then held by all Stockholders;
WHEREAS, EGI-ARC, TP, CWF, EVW, CIII and LEG collectively hold in
excess of fifty percent (50%) of the total number of shares of ARC Holdings
Common Stock and ARC Holdings Common Stock Equivalents held by all Stockholders
as of the date hereof and accordingly can, together with the Company, enter into
this Amendment and Joinder;
WHEREAS, EGI-ARC, TP, CWF, EVW, CIII and LEG desire that each of
Norwest and ANDA become a party to the Stockholders' Agreement as a "Financial
Sponsor" thereunder, and each of Norwest and ANDA desires to become a party to
the Stockholders' Agreement as a "Financial Sponsor" thereunder, as provided
herein;
WHEREAS, Section 4.6 of the Stockholders' Agreement permits holders of
a majority of the outstanding shares of Preferred Stock to designate any
purchaser of newly issued Preferred Stock as a "Financial Sponsor" for all
purposes under the Stockholders Agreement;
WHEREAS, EGI-ARC, TP, CWF, EVW, CIII and LEG, together hold a majority
of the outstanding shares of Preferred Stock outstanding and accordingly can
designate additional Financial Sponsors pursuant to and for all purposes under
the Stockholders' Agreement;
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
herein made and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties mutually agree to amend
the Stockholders' Agreement as follows:
<PAGE> 2
1. Amendment.
a. The date "November 5" appearing in the definition of
"Transfer" in the eighth line of Section 1.1(32) is hereby deleted and replaced
with the date "November 23."
b. Section 3.1 of the Stockholders' Agreement is hereby
amended by replacing the third sentence of such Section with the following new
sentences:
"As long as either of EGI-ARC and TP hold Equity Securities
which, calculated on an "as converted" basis, represent 10% or more of
the ARC Holdings Common Stock, each shall have the right, at its
discretion, to nominate two (2) Board members. As long as any of CWF,
EVW or CIII (collectively, or individually) holds Equity Securities
which, calculated on an "as converted" basis, represent 10% or more of
the ARC Holdings Common Stock, any of CWF, EVW or EIII shall have the
right, at their discretion, to nominate on behalf of CWF, EVW and EIII
collectively, one (1) Board member. As long as Norwest holds Equity
Securities which, calculated on an "as converted" basis, represent 10%
or more of the ARC Holdings Common Stock, Norwest shall have the right,
at its discretion, to nominate one (1) Board member."
c. Section 4 of the Stockholders' Agreement is hereby amended
by adding a new Section 4.9, as follows:
"Section 4.9 SBIC Matters.
(1) Cooperation of Financial Sponsors. Each Financial
Sponsor agrees to cooperate with the Company in all reasonable respects
in complying with the terms and provisions of that certain letter
agreement between the Company and Norwest dated as of the date hereof,
regarding small business matters (the "Small Business Sideletter"),
including without limitation, voting to approve amending the
Certificate of Incorporation, the Company's by-laws or this Agreement
in a manner reasonably acceptable to the Financial Sponsors and Norwest
or any Regulated Holder (as defined in the Small Business Sideletter)
entitled to make such request pursuant to the Small Business Sideletter
in order to remedy a Regulatory Problem (as defined in the Small
Business Sideletter). Anything contained in this Section 4.9 to the
contrary notwithstanding, no Financial Sponsor shall be required under
this Section 4.9 to take any action that would adversely affect in any
material respect such Financial Sponsor's rights under this Agreement
or as a Stockholder of the Company.
(2) Covenant Not to Amend. The Company and each
Financial Sponsor agree not to amend or waive the voting or other
provisions of the Certificate of Incorporation, the Company's by-laws
or this Agreement if such amendment or waiver would cause any Regulated
Holder to have a Regulatory Problem (as defined in the Small Business
Sideletter). Norwest agrees to notify the Company as to whether or not
it would have a Regulatory Problem promptly after Norwest has notice of
such amendment or waiver. "
d. Each address for notice as set forth in Section 5.2 of the
Stockholders' Agreement is hereby amended and restated in its entirety to read
as follows:
<PAGE> 3
"(1) Notice Address for the Company:
Allied Riser Communications Holdings, Inc.
10 S. Wacker, Suite 3425
Chicago, Il 60606
Fax: (312) 454-4081
Attention: President
and:
Allied Riser Communications Holdings, Inc.
700 North Pearl Street, Suite 200
Dallas, Texas 75201
Fax: (214) 855-5905
Attention: Chief Financial Officer
With a copy to:
Crouch & Hallet, LLP
717 N. Harwood, Suite 1400
Dallas, Texas 75201
Fax: (214) 922-4193
Attention: Timothy R. Vaughan
(2) Notice Address for EGI-ARC:
EGI-ARC Investors, L.L.C.
c/o EGI Corporate Investments
Two North Riverside Plaza, Suite 600
Chicago, Illinois 60606
Fax: (312) 575-7024
(312) 454-9678
Attention
to each of: Donald Liebentritt, and
William T. White III
With a copy to:
Rosenberg & Liebentritt, P.C.
Two North Riverside Plaza, Suite 1600
Chicago, Illinois 60606
Fax: (312) 454-0335
Attention: Jon Wasserman
(3) Notice Address for TP:
Telecom Partners II, L.P.
6400 South Fiddlers Green Circle, Suite 720
Englewood, Colorado 80111
Fax: (303) 874-1110
<PAGE> 4
Attention: Steve Schovee
With a copy to:
Holland & Hart LLP
555 Seventeenth Street, Suite 3200
Denver, Colorado 80202
Fax: (303) 295-8261
Attention: Michael S. Quinn
(4) Notice Address for CWF, EVW or CIII:
c/o Crescendo Venture
Management L.L.C.
800 LaSalle Avenue, Suite 2250
Minneapolis, Minnesota 55402
Fax: (612) 607-2801
Attention: David Spreng
With a copy to:
Messerli & Kramer
1800 Fifth Street Tower
150 S. Fifth Street
Minneapolis, MN 55402
Fax: (612) 672-3777
Attention: Kevin Spreng
(5) Notice Address for LEG:
Lawrence Equity Group, LLC
C/o Joseph Sperske
3615 Country Club Terrace
Danville, California 94506
Fax: (415) 398-7499
Attention: Joseph Sperske
(6) Notice Address for Norwest:
<PAGE> 5
Norwest Venture Partners VI, L.P.
40 William Street, Suite 305
Wellesley, MA 02481-3902
Fax: (781) 237-6270
Attn: Blair Whitaker
With a copy to:
Edwards & Angell, LLP
101 Federal Street
Boston, Massachusetts 02110
Fax: (617) 439-4170
Attention: Leonard Q. Slap
(7) Notice Address for ANDA:
ANDA Partnership
Two North Riverside Plaza
Chicago, Il 60606
Fax: (312) 466-3700
Attention: Mark Slezak
With a copy to:
Rosenberg & Liebentritt, P.C.
Two North Riverside Plaza, Suite 1600
Chicago, Illinois 60606
Fax: (312) 454-0335
Attention: Jon Wasserman
d. Section 5.6 of the Stockholders' Agreement is hereby amended by
deleting clause (ii) thereof and replacing it with the following:
"(ii) each Financial Sponsor shall be entitled to assign or
delegate, as the case may be, any of its rights and obligations
hereunder to a permitted transferee of any Equity Securities by such
Financial Sponsor and no transferee other than a permitted transferee
shall succeed to any of the rights or benefits provided for in this
Agreement."
2. Designation and Joinder. (a) EGI-ARC, TP, CWF, EVW, CIII and LEG
hereby designate each of Norwest and ANDA as a "Financial Sponsor" for all
purposes under the Stockholders' Agreement, entitled to all of the rights and
subject to all of the obligations attendant thereunder to that status. Each of
Norwest and ANDA hereby consents and agrees to such designation, and further
agrees that upon execution of this Amendment and Joinder, it shall become a
party to the Stockholders' Agreement as a "Financial Sponsor" thereunder and
shall be fully bound by, and subject to, all of the covenants, terms and
conditions of the Stockholders Agreement as a "Financial Sponsor" thereunder as
though originally a party as a "Financial Sponsor" thereunder.
<PAGE> 6
(b) The execution and delivery of this Amendment and Joinder shall be
deemed to constitute "written notice to the Company" of the designation set
forth in Section 2(a) above, in satisfaction of such requirement of Section 4.6
of the Stockholders' Agreement.
3. Certain Other Agreements. To the extent not otherwise prohibited by
the Stockholders' Agreement, EGI-ARC, TP, CWF, EVW, LEG and Norwest hereby agree
that as among each other the following shall be deemed added to the
Stockholders' Agreement:
(a) at the end of the last sentence of Section 2.4, "that are
identical in all material respects as those to which the Selling
Stockholders are party in connection with such Transfer."
(b) at the end of the first sentence of Section 5.3, ",
provided, further however, that no such amendment shall treat any
holder of Preferred Stock, or such holder's rights with respect to the
Company, differently in any material respect than the other holders of
Preferred Stock approving such amendment, without the written consent
of such holder of Preferred Stock and provided further, however, that
notwithstanding the foregoing, (i) any holder of Preferred Stock may
transfer its rights to appoint a member of the Board of Directors to
any other party hereto without the consent of any other party hereto
and (ii) no amendment may be made to Article III hereof so as to reduce
the number of members to the Board that a party hereto may nominate or
remove without the consent of such party."
To the extent not otherwise inconsistent with the Stockholders' Agreement,
EGI-ARC, TP, CWF, EVW, LEG and Norwest hereby further agree to vote their shares
of ARC Common Stock to give effect to the intent of the foregoing paragraphs.
4. Miscellaneous.
(a) Reaffirmation. Except as expressly modified hereby, the Parties
hereby reaffirm each and every provision set forth in the Stockholders'
Agreement and, except as modified hereby, the Parties acknowledge and agree that
each provision and obligation therein continues in full force and effect.
References to the "Agreement" in the Stockholders' Agreement shall hereinafter
be deemed to mean such agreement as amended by this Amendment and Joinder.
(b) Additional Provisions. Sections 5.1, 5.9, 5.10, 5.11 and 5.12 of
the Stockholders' Agreement are hereby incorporated by reference into this
Amendment and Joinder, mutatis mutandis.
(c) Counterparts. This Amendment and Joinder may be executed in one or
more counterparts, each of which shall be deemed an original but both of which
together will constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 7
IN WITNESS WHEREOF, the Parties hereto have executed this Amendment and
Joinder to the Stockholders' Agreement as of the date first above written.
ALLIED RISER COMMUNICATIONS HOLDINGS, INC.
By: /s/ DAVID H. CRAWFORD
------------------------------------------
Name: David H. Crawford
Title: Chief Executive Officer
EGI-ARC INVESTORS, L.L.C.
By: GAMI Investments, Inc., its Managing
Member
By: /s/ DON LIEBENTRITT
---------------------------------
Name: Don Liebentritt
Title: Vice President
TELECOM PARTNERS II, L.P.
By: Telecom Management II, L.L.C., its
General Partner
By: /s/ STEPHEN W. SCHOVEE
---------------------------------
Name: Stephen W. Schovee
Title: Managing Member
CRESCENDO WORLD FUND, LLC
By: Crescendo Ventures World Fund, LLC,
its General Partner
By: /s/ R. DAVID SPRENG
---------------------------------
Name: R. David Spreng
Title: Managing Partner
EAGLE VENTURES WF, LLC
By: /s/ R. DAVID SPRENG
------------------------------------------
Name: R. David Spreng
Title: Managing Partner
<PAGE> 8
CRESCENDO III, L.P.
By: Crescendo Ventures III, LLC, its
General Partner
By: /s/ R. David Spreng
---------------------------------
Name: R. David Spreng
Title: Managing Partner
LAWRENCE EQUITY GROUP, L.L.C.
By: /s/ JOSEPH A. SPERSKE
------------------------------------------
Name: Joseph A. Sperske
Title: Vice President and Managing Member
NORWEST VENTURE PARTNERS VII, L.P.
By: Itasca VC Partners VII, LLP, its
General Partner
By: /s/ BLAIR WHITAKER
------------------------------------------
Name: Blair Whitaker
Title: Partner
ANDA PARTNERSHIP, an Illinois general
partnership
By: Ann Only Trust, an Illinois trust
By: /s/ MARK SLEZAK
------------------------------------------
Name: Mark Slezak
Title: Co-Trustee
By: Ann and Descendants Trust, an
Illinois trust
By: /s/ MARK SLEZAK
------------------------------------------
Name: Mark Slezak
Title: Co-Trustee
<PAGE> 1
EXHIBIT 10.4.3
AMENDMENT NO. 3 AND JOINDER TO
STOCKHOLDERS' AGREEMENT
THIS AMENDMENT NO. 3 AND JOINDER (this "Amendment and
Joinder"), dated August __, 1999, by and among Allied Riser Communications
Holdings, Inc., a Delaware corporation (the "Company"), EGI-ARC Investors,
L.L.C., a Delaware limited liability company ("EGI-ARC"), Telecom Partners II,
L.P., a Delaware limited partnership ("TP"), Crescendo World Fund, LLC, a
Delaware limited liability company ("CWF"), Eagle Ventures WF, LLC, a Minnesota
limited liability company ("EVW"), Crescendo III, L.P., a Delaware limited
partnership ("CIII"), Lawrence Equity Group, L.L.C., a California limited
liability company ("LEG"), Norwest Venture Partners VII, L.P., a Minnesota
limited partnership ("NVP"), ANDA Partnership, an Illinois general partnership
("ANDA" and together with EGI-ARC, TP, CWF, EVW, CIII, LEG and NVP, the
"Existing Financial Sponsors"), GS Capital Partners III, L.P. a Delaware limited
partnership ("Goldman") and Whitehall Street Real Estate Limited Partnership XI,
a Delaware limited partnership ("Whitehall" and together with Goldman, the
"Proposed Financial Sponsors") (collectively the Existing Financial Sponsors and
the Proposed Financial Sponsors are referred to herein as the "Parties") to that
certain Stockholders' Agreement, as amended by Amendment No. 1 and Joinder and
Amendment No. 2 and Joinder thereto (the "Stockholders' Agreement"), dated as of
November 5, 1998, by and among the Company, EGI-ARC, TP and the other persons
identified therein. All terms not otherwise defined herein shall have the
meanings given such terms in the Stockholders' Agreement.
WHEREAS, the Company, EGI-ARC, TP and the other persons
identified therein have entered into the Stockholders' Agreement as amended by
(i) Amendment No. 1 and Joinder to Stockholders' Agreement dated as of November
23, 1998 and (ii) Amendment No. 2 and Joinder to Stockholders' Agreement dated
December 30, 1998, and effective as of November 23, 1998, and such parties
desire to further amend the Stockholders' Agreement as provided herein;
WHEREAS, Section 5.3 of the Stockholders' Agreement permits
amendment of the Stockholders' Agreement by a written instrument signed by (i)
the Company, (ii) holders of not less than fifty percent (50%) of the
outstanding Preferred Stock, and (iii) Stockholders holding not less than fifty
percent (50%) of the total number of shares of ARC Holdings Common Stock and ARC
Holdings Common Stock Equivalents then held by all Stockholders;
WHEREAS, the Existing Financial Sponsors collectively hold in
excess of fifty percent (50%) of (i) the outstanding Preferred Stock and (ii)
the total number of
<PAGE> 2
shares of ARC Holdings Common Stock and ARC Holdings Common Stock Equivalents
held by all Stockholders as of the date hereof, and accordingly can, together
with the Company, enter into this Amendment and Joinder;
WHEREAS, the Existing Financial Sponsors desire that each of
the Proposed Financial Sponsors become a party to the Stockholders' Agreement as
a "Financial Sponsor" thereunder, and each of the Proposed Financial Sponsors
desires to become a party to the Stockholders' Agreement as a "Financial
Sponsor" thereunder, as provided herein;
WHEREAS, Section 4.6 of the Stockholders' Agreement permits
holders of a majority of the outstanding shares of Preferred Stock to designate
any purchaser of newly issued Preferred Stock (or any new series of preferred
stock) as a "Financial Sponsor" for all purposes under the Stockholders
Agreement;
WHEREAS, the Existing Financial Sponsors together hold a
majority of the outstanding shares of Preferred Stock outstanding and
accordingly can designate additional Financial Sponsors pursuant to and for all
purposes under the Stockholders' Agreement;
NOW, THEREFORE, in consideration of the foregoing, the mutual
promises herein made and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties mutually agree as
follows:
1. Designation and Joinder.
(a) The Existing Financial Sponsors hereby designate each of the
Proposed Financial Sponsors as a "Financial Sponsor" for all purposes under the
Stockholders' Agreement, except for Article III, entitled to all of the rights
and subject to all of the obligations attendant thereunder to that status,
except as provided herein. Each of the Proposed Financial Sponsors hereby
consents and agrees to such designation, and further agrees that upon execution
of this Amendment and Joinder, it shall become a party to the Stockholders'
Agreement as a "Financial Sponsor" thereunder and shall be fully bound by, and
subject to, all of the covenants, terms and conditions of the Stockholders
Agreement, except for Article III, as a "Financial Sponsor" thereunder as though
originally a party as a "Financial Sponsor" thereunder, except as provided
herein.
(b) The execution and delivery of this Amendment and Joinder shall be
deemed to constitute "written notice to the Company" of the designation set
forth in Section 1(a) above, in satisfaction of such requirement of Section 4.6
of the Stockholders' Agreement.
2
<PAGE> 3
2. Amendments
(a) The definition of "Preferred Stock" set forth in the preamble of
the Stockholders' Agreement is hereby amended to include Series B Company
Preferred Stock.
(b) The threshold percentage of ARC Holdings Common Stock which
triggers certain tag-along rights shall be reduced from 40% to 25% in Section
2.4 of the Stockholders' Agreement.
(c) Schedule 3 to the Stockholders' Agreement, which lists the
"Transaction Documents" is hereby amended to include the Amendment No. 2 and
Joinder to Allied Riser Communications Holdings, Inc. Stockholders' Agreement,
Joinder to Indemnification Agreement, First Amendment to Registration Rights
Agreement, Second Amendment to Registration Rights Agreement, the Amended and
Restated Certificate of Incorporation and the Certificate of Designation of
Series B Preferred Stock.
(d) For purposed of Section 5.2 of the Stockholders' Agreement, the
following shall be the address for notice for each of the Proposed Financial
Sponsors:
Notice Address for Goldman:
GS Capital Partners III, L.P.
85 Broad Street, 10th Floor
New York, New York 10004
Fax: (212)357-5505
Attention: Ben Adler
Notice Address for Whitehall:
GS Capital Partners III, L.P.
C/O Whitehall Street Real Estate Limited Partnership XI
85 Broad Street, 10th Floor
New York, New York 10004
Fax: (212)357-5505
Attention: Brahm Cramer
3
<PAGE> 4
3. Miscellaneous.
(a) Reaffirmation. Except as expressly modified hereby, the Parties
hereby reaffirm each and every provision set forth in the Stockholders'
Agreement and, except as modified hereby, the Parties acknowledge and agree that
each provision and obligation therein continues in full force and effect.
References to the "Agreement" in the Stockholders' Agreement shall hereinafter
be deemed to mean such agreement as amended by this Amendment and Joinder.
(b) Additional Provisions. Sections 5.1, 5.9, 5.10, 5.11 and 5.12 of
the Stockholders' Agreement are hereby incorporated by reference into this
Amendment and Joinder, mutatis mutandis.
(c) Counterparts. This Amendment and Joinder may be executed in one or
more counterparts, each of which shall be deemed an original but both of which
together will constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
4
<PAGE> 5
IN WITNESS WHEREOF, the Parties hereto have executed this Amendment and
Joinder to the Stockholders' Agreement as of the date first above written.
ALLIED RISER COMMUNICATIONS HOLDINGS, INC.
By:
-----------------------------------------
Name: David H. Crawford
Title: Chief Executive Officer
EGI-ARC INVESTORS, L.L.C.
By: GAMI Investments, Inc.,
its Managing Member
By:
-----------------------------------------
Name: Don Liebentritt
Title: Vice President
TELECOM PARTNERS II, L.P.
By: Telecom Management II, L.L.C.,
its General Partner
By:
-----------------------------------------
Name:
Title:
5
<PAGE> 6
CRESCENDO WORLD FUND, LLC
By: Crescendo Ventures World Fund, LLC,
its General Partner
By:
-----------------------------------------
Name:
Title:
EAGLE VENTURES WF, LLC
By:
-----------------------------------------
Name:
Title:
CRESCENDO III, L.P.
By: Crescendo Ventures III, LLC,
its General Partner
By:
-----------------------------------------
Name:
Title:
LAWRENCE EQUITY GROUP, L.L.C.
By:
-----------------------------------------
Name:
Title: President and Managing
Member
6
<PAGE> 7
NORWEST VENTURE PARTNERS VII, L.P.
By: Itasca VC Partners VII, LLP,
its General Partner
By:
-----------------------------------------
Name: John P. Whaley
Title: Partner
ANDA PARTNERSHIP, an Illinois general
partnership
By: Ann Only Trust, an Illinois trust
By:
-----------------------------------------
Name: Mark Slezak
Title: Co-Trustee
By: Ann and Descendants Trust,
an Illinois trust
By:
--------------------------------
Name: Mark Slezak
Title: Co-Trustee
GS CAPITAL PARTNERS III, L.P.
By:
-----------------------------------------
Name:
Title:
7
<PAGE> 8
WHITEHALL STREET REAL ESTATE LIMITED
PARTNERSHIP XI
By: WH Advisory, LLC XI,
its General Partner
By:
-----------------------------------------
Name:
Title:
8
<PAGE> 1
EXHIBIT 10.4.4
AMENDMENT NO. 4 AND JOINDER TO
STOCKHOLDERS' AGREEMENT
THIS AMENDMENT NO. 4 AND JOINDER (this "Amendment and Joinder"), dated
August 18, 1999, by and among Allied Riser Communications Corporation f/k/a
Allied Riser Communications Holdings, Inc., a Delaware corporation (the
"Company"), EGI-ARC Investors, L.L.C., a Delaware limited liability company
("EGI-ARC"), Telecom Partners II, L.P., a Delaware limited partnership ("TP"),
Crescendo World Fund, LLC, a Delaware limited liability company ("CWF"), Eagle
Ventures WF, LLC, a Minnesota limited liability company ("EVW"), Crescendo III,
L.P., a Delaware limited partnership ("CIII"), Lawrence Equity Group, L.L.C., a
California limited liability company ("LEG"), Norwest Venture Partners VII,
L.P., a Minnesota limited partnership ("NVP"), ANDA Partnership, an Illinois
general partnership ("ANDA" and together with EGI-ARC, TP, CWF, EVW, CIII, LEG
and NVP, the "Existing Financial Sponsors") and the parties listed on Schedule 1
attached hereto the "Proposed Financial Sponsors") (collectively the Existing
Financial Sponsors and the Proposed Financial Sponsors are referred to herein as
the "Parties") to that certain Stockholders' Agreement, as amended (the
"Stockholders' Agreement"), dated as of November 5, 1998, by and among the
Company, EGI-ARC, TP and the other persons identified therein. All terms not
otherwise defined herein shall have the meanings given such terms in the
Stockholders' Agreement.
WHEREAS, the Company, EGI-ARC, TP and the other persons identified
therein have entered into the Stockholders' Agreement as amended by (i)
Amendment No. 1 and Joinder to Stockholders' Agreement dated as of November 23,
1998, (ii) Amendment No. 2 and Joinder to Stockholders' Agreement dated December
30, 1998, and effective as of November 23, 1998, and (iii) Amendment No. 3 and
Joinder to Stockholders' Agreement dated as of August 18, 1999 and such parties
desire to further amend the Stockholders' Agreement as provided herein;
WHEREAS, Section 5.3 of the Stockholders' Agreement permits amendment
of the Stockholders' Agreement by a written instrument signed by (i) the
Company, (ii) holders of not less than fifty percent (50%) of the outstanding
Preferred Stock, and (iii) Stockholders holding not less than fifty percent
(50%) of the total number of shares of ARC Holdings Common Stock and ARC
Holdings Common Stock Equivalents then held by all Stockholders;
WHEREAS, the Existing Financial Sponsors collectively hold in excess of
fifty percent (50%) of (i) the outstanding Preferred Stock and (ii) the total
number of
<PAGE> 2
shares of ARC Holdings Common Stock and ARC Holdings Common Stock Equivalents
held by all Stockholders as of the date hereof, and accordingly can, together
with the Company, enter into this Amendment and Joinder;
WHEREAS, the Existing Financial Sponsors desire that each of the
Proposed Financial Sponsors become a party to the Stockholders' Agreement as a
"Financial Sponsor" thereunder, and each of the Proposed Financial Sponsors
desires to become a party to the Stockholders' Agreement as a "Financial
Sponsor" thereunder, as provided herein;
WHEREAS, Section 4.6 of the Stockholders' Agreement permits holders of
a majority of the outstanding shares of Preferred Stock to designate any
purchaser of newly issued Preferred Stock (or any new series of preferred stock)
as a "Financial Sponsor" for all purposes under the Stockholders Agreement;
WHEREAS, the Existing Financial Sponsors together hold a majority of
the outstanding shares of Preferred Stock outstanding and accordingly can
designate additional Financial Sponsors pursuant to and for all purposes under
the Stockholders' Agreement;
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
herein made and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties mutually agree as
follows:
1. Designation and Joinder.
(a) The Existing Financial Sponsors hereby designate each of the Proposed
Financial Sponsors as a "Financial Sponsor" for all purposes under the
Stockholders' Agreement, except for Article III, entitled to all of the rights
and subject to all of the obligations attendant thereunder to that status,
except as provided herein. Each of the Proposed Financial Sponsors hereby
consents and agrees to such designation, and further agrees that upon execution
of this Amendment and Joinder, it shall become a party to the Stockholders'
Agreement as a "Financial Sponsor" thereunder and shall be fully bound by, and
subject to, all of the covenants, terms and conditions of the Stockholders
Agreement, except for Article III, as a "Financial Sponsor" thereunder as though
originally a party as a "Financial Sponsor" thereunder, except as provided
herein.
(b) The execution and delivery of this Amendment and Joinder shall be
deemed to constitute "written notice to the Company" of the designation set
forth in Section 1(a) above, in satisfaction of such requirement of Section 4.6
of the Stockholders' Agreement.
2
<PAGE> 3
2. Amendments
(a) Schedule 3 to the Stockholders' Agreement, which lists the "Transaction
Documents" is hereby amended to include the Amendment No. 3 and Joinder to
Allied Riser Communications Holdings, Inc. Stockholders' Agreement.
(b) For purposed of Section 5.2 of the Stockholders' Agreement, the address
for notice for each of the Proposed Financial Sponsors shall be as set forth
opposite such parties name on Schedule 1 attached hereto.
(c) An additional defined term shall be added to Section 1.1 of the
Stockholders' Agreement as definition (33) thereof, and it shall read in its
entirety as follows: "Warrant Acquisition Agreement" shall mean a Warrant
Acquisition Agreement entered into between the Company and a Proposed Financial
Sponsor (as defined in Amendment No. 4 and Joinder to Stockholders' Agreement)
dated on or before August 31, 1999 pursuant to which each Proposed Financial
Sponsor acquired warrants to purchase ARC Holdings Common Stock."
(d) An additional defined term shall be added to Section 1.1 of the
Stockholders' Agreement as definition (34) thereof, and it shall read in its
entirety as follows: "Warrant Agreement" shall mean a Warrant Agreement entered
into between the Company and a Proposed Financial Sponsor (as defined in
Amendment No. 4 and Joinder to Stockholders' Agreement) dated on or before
August 31, 1999 pursuant to which each Proposed Financial Sponsor acquired
warrants to purchase ARC Holdings Common Stock."
(e) An additional four sentences shall be added to Section 2.7 as follows:
"In addition, each Financial Sponsor or transferee of each Financial Sponsor, as
the case may be, shall be permitted to transfer its warrants and the underlying
ARC Holdings Common Stock in accordance with the terms of the Warrant
Acquisition Agreement and the Warrant Agreement of such Financial Sponsor. In
the event the Financial Sponsor is EOP Operating Limited Partnership, such
Financial Sponsor shall further be permitted to Transfer Equity Securities to
Equity Office Properties Trust ("EOPT"), the managing general partner of such
Financial Sponsor, any Subsidiary of the Financial Sponsor or EOPT, any
Preferred Stock Subsidiary (as defined below) of such Financial Sponsor or EOPT,
a successor by merger to such Financial Sponsor or EOPT, or a Subsidiary or
Preferred Stock Subsidiary of a successor by merger to such Financial Sponsor or
EOPT, subject only to Section 2.6 (and not to Sections 2.2, 2.3, 2.4 or 2.5
above); provided, however, that in connection with any Transfers to any other
Financial Sponsor, all Financial Sponsors shall consent to such proposed
Transfer. In the event the Financial Sponsor is Cornerstone Properties Limited
Partnership, such Financial
3
<PAGE> 4
Sponsor shall further be permitted to Transfer Equity Securities to Cornerstone
Properties Inc. ("CPI"), the managing general partner of such Financial Sponsor,
any Subsidiary of the Financial Sponsor or CPI, any Preferred Stock Subsidiary
of such Financial Sponsor or CPI, a successor by merger to such Financial
Sponsor or CPI, or a Subsidiary or Preferred Stock Subsidiary of a successor by
merger to such Financial Sponsor or CPI, subject only to Section 2.6 (and not to
Sections 2.2, 2.3, 2.4 or 2.5 above); provided, however, that in connection with
any Transfers to any other Financial Sponsor, all Financial Sponsors shall
consent to such proposed Transfer. For purposes of this Section 2.7, Preferred
Stock Subsidiary shall mean a Person in which the applicable Financial Sponsor,
EOPT or CPI or any of their successors by merger, as the case may be, holds at
least 90% of the economic interest of such Person through non-voting common or
preferred stock or a combination of non-voting common and preferred stock."
3. Miscellaneous.
(a) Reaffirmation. Except as expressly modified hereby, the Parties hereby
reaffirm each and every provision set forth in the Stockholders' Agreement and,
except as modified hereby, the Parties acknowledge and agree that each provision
and obligation therein continues in full force and effect. References to the
"Agreement" in the Stockholders' Agreement shall hereinafter be deemed to mean
such agreement as amended by this Amendment and Joinder.
(b) Additional Provisions. Sections 5.1, 5.9, 5.10, 5.11 and 5.12 of the
Stockholders' Agreement are hereby incorporated by reference into this Amendment
and Joinder, mutatis mutandis.
(c) Counterparts. This Amendment and Joinder may be executed in one or more
counterparts, each of which shall be deemed an original but both of which
together will constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
4
<PAGE> 5
IN WITNESS WHEREOF, the Parties hereto have executed this Amendment and
Joinder to the Stockholders' Agreement as of the date first above written.
ALLIED RISER COMMUNICATIONS CORPORATION
By:
-------------------------------------
Name: David H. Crawford
Title: Chief Executive Officer
EGI-ARC INVESTORS, L.L.C.
By: GAMI Investments, Inc.,
its Managing Member
By:
-------------------------------------
Name: Don Liebentritt
Title: Vice President
TELECOM PARTNERS II, L.P.
By: Telecom Management II, L.L.C.,
its General Partner
By:
-------------------------------------
Name:
Title:
CRESCENDO WORLD FUND, LLC
By: Crescendo Ventures World Fund, LLC,
its General Partner
By:
-------------------------------------
Name:
Title:
<PAGE> 6
EAGLE VENTURES WF, LLC
By:
-------------------------------------
Name:
Title:
CRESCENDO III, L.P.
By: Crescendo Ventures III, LLC,
its General Partner
By:
-------------------------------------
Name:
Title:
LAWRENCE EQUITY GROUP, L.L.C.
By:
-------------------------------------
Name:
Title: President and Managing Member
NORWEST VENTURE PARTNERS VII, L.P.
By: Itasca VC Partners VII, LLP,
its General Partner
By:
-------------------------------------
Name: John P. Whaley
Title: Partner
<PAGE> 7
ANDA PARTNERSHIP, an Illinois general
partnership
By: Ann Only Trust, an Illinois trust
By:
-------------------------------------
Name: Mark Slezak
Title: Co-Trustee
By: Ann and Descendants Trust, an
Illinois trust
By:
-------------------------------------
Name: Mark Slezak
Title: Co-Trustee
EOP OPERATING LIMITED PARTNERSHIP
By: Equity Office Properties Trust
Its: Managing General Partner
By:
-------------------------------------
Name:
Title:
<PAGE> 8
CORNERSTONE PROPERTIES LIMITED
PARTNERSHIP
By: Cornerstone Properties Inc.
Its: General Partner
By:
-------------------------------------
Name: H. Lee Van Boven
Title: Chief Operating Officer
HINES ARC INVESTORS LIMITED PARTNERSHIP
By: Hines Interests Limited Partnership
Its: General Partner
By: Hines Holdings, Inc.
Its: General Partner
By:
-------------------------------------
Name: Jeffrey C. Hines
Title: President
DWS CAPITAL LLC
By:
-------------------------------------
Name: Douglas W. Shorenstein
Title: Managing Member
<PAGE> 9
BOSTON PROPERTIES LIMITED PARTNERSHIP
By: Boston Properties, Inc.
Its: General Partner
By:
-------------------------------------
Name: Robert E. Burke
Title: Executive Vice President
BCI GROWTH V, L.P.
By:
-------------------------------------
Name:
Title:
BCI INVESTORS, INC.
By:
-------------------------------------
Name:
Title:
FIRST UNION INVESTORS, INC.
By:
-------------------------------------
Name:
Title:
<PAGE> 10
TRIZECHAHN CORPORATION
By:
-------------------------------------
Name:
Title:
VORNADO REALTY L.P
By: Vornado Realty Trust
Its: General Partner
By:
-------------------------------------
Name:
Title:
TRANSWESTERN STRATEGIC PARTNERS, L.L.C.
By:
-------------------------------------
Name:
Title:
CHASE EQUITY ASSOCIATES, L.P.
By:
-------------------------------------
Name:
Title:
<PAGE> 11
SCHEDULE 1
<TABLE>
<S> <C>
1. TrizecHahn Corporation
2. Cornerstone Properties Limited Partnership
3. EOP Operating Limited Partnership
4. Boston Properties Limited Partnership
5. Vornado Realty L.P.
6. DWS Capital LLC
7. Transwestern Commercial Services, L.L.C.
8. Hines ARC Investors Limited Partnership
9. BCI Growth V, L.P. and BCI Investors, Inc.
10. Chase Equity Associates, L.P.
11. First Union Investors, Inc.
</TABLE>
<PAGE> 1
EXHIBIT 10.6
INDEMNIFICATION AGREEMENT
AMONG
ALLIED RISER COMMUNICATIONS HOLDINGS, INC.,
EGI-ARC INVESTORS, L.L.C.,
TELECOM PARTNERS II, L.P.,
CRESCENDO WORLD FUND, LLC,
EAGLE VENTURES WF, LLC,
CRESCENDO III, L.P.,
LAWRENCE EQUITY GROUP, LLC,
AND THE
INDIVIDUALS IDENTIFIED ON SCHEDULE 1 ATTACHED HERETO
NOVEMBER 23, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I .........................................................................................................2
DEFINITIONS .......................................................................................................2
Section 1.1 Defined Terms .................................................................................2
Section 1.2 Headings, etc. ................................................................................4
ARTICLE II ........................................................................................................5
INDEMNIFICATION AND SECURITY INTEREST .............................................................................5
Section 2.1 Indemnification by the Original Shareholders ..................................................5
Section 2.2 Representations, Warranties, Covenants and Deliveries .........................................6
Section 2.3 Grant of Security Interest ....................................................................6
Section 2.4 Claims for Indemnification ....................................................................6
Section 2.5 Payment of Indemnity Amount ...................................................................7
Section 2.6 Application of Indemnification Payments .......................................................8
Section 2.7 Expiration of Indemnification Obligations .....................................................8
Section 2.8 SOL Claims ....................................................................................8
Section 2.9 Collection of Indemnification Payments ........................................................9
ARTICLE III .......................................................................................................9
MISCELLANEOUS PROVISIONS ..........................................................................................9
Section 3.1 Further Assurances ............................................................................9
Section 3.2 Notices ......................................................................................10
Section 3.3 Amendments ...................................................................................12
Section 3.4 Inconsistent Agreements ......................................................................12
Section 3.5 Successors and Assigns .......................................................................12
Section 3.6 Severability .................................................................................12
Section 3.7 Counterparts .................................................................................12
Section 3.8 Governing Law ................................................................................12
Section 3.9 Consent to Jurisdiction and Service of Process; Appointment of Agent for Service of Process...13
Section 3.10 Entire Agreement; Nonwaiver ..................................................................13
Section 3.11 No Third-Party Beneficiaries .................................................................13
Section 3.12 Action of Original Shareholders ..............................................................13
Section 3.13 New Indemnitees ..............................................................................13
SCHEDULE 1 ORIGINAL SHAREHOLDERS .................................................................................17
SCHEDULE 2 TRANSACTION DOCUMENTS .................................................................................18
</TABLE>
i
<PAGE> 3
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT (this "Agreement"), dated as of November 23,
1998, is made and entered into by and among (i) each of the individuals listed
on Schedule 1 attached hereto, who as a shareholder of RCH Holdings, Inc., a
Texas corporation ("RCH"), will, in connection with the ARC Holdings Issuance
and RCH Liquidation (as such terms are defined below), become shareholders of
Allied Riser Communications Holdings, Inc., a Delaware corporation ("ARC
Holdings") (each such Person being an "Original Shareholder" or "Indemnitor"
and, collectively, the "Original Shareholders" or "Indemnitors"; provided,
however, that Mr. David Crawford and Mr. Jim Breen shall be "Original
Shareholders" or "Indemnitors" only in respect of and to the extent that the
circumstances or events giving rise to the applicable Loss (as defined below),
transpired subsequent to July 15, 1998); (ii) ARC Holdings; (iii) EGI-ARC
Investors, L.L.C., a Delaware limited liability company ("EGI-ARC"); (iv)
Telecom Partners II, L.P., a Delaware limited partnership ("TP"); (V) Crescendo
World Fund, LLC, a Delaware limited liability company ("CWF"); (vi) Eagle
Ventures WF, LLC, a Minnesota limited liability company ("EVW"); (vii) Crescendo
III, LP, a Delaware limited partnership ("CIII"); (viii) Lawrence Equity Group,
LLC, a California limited liability company ("LEG"), and and together with,
EGI-ARC, TP, CWF, EVW, CIII, LEG, ARC Holdings, each other Person (as defined
below) afforded the status of Financial Sponsor pursuant to Section 3.13 below,
and, with respect to clauses (iii), (iv), (v), (vi), (vii) (viii) and (ix)
above, and any such additional Financial Sponsors (as defined below), their
respective officers, directors, shareholders, members, employees, agents, and
affiliates and their respective successors, heirs and legal representatives, but
excluding in every case, the Original Shareholders, the "Indemnitees").
WHEREAS, pursuant to that certain Plan of Liquidation adopted by the
respective board of directors and shareholder of Carrier Direct, Inc., a Texas
corporation ("CD") and Allied Riser Communications, Inc., a Texas corporation
formerly known as RiserCorp, Inc. ("ARC," and, together with CD, the "Former
Subsidiaries"), dated as of November 20, 1998 (the "Former Subsidiary Plan of
Liquidation"), each of CD and ARC has liquidated into RCH (the "Subsidiary
Liquidations"); and
WHEREAS, pursuant to an Asset Transfer Agreement to be entered into
concurrently with this Agreement: (i) RCH shall transfer to ARC Holdings, and
ARC Holdings shall acquire from RCH, all of the interest of RCH in substantially
all of the assets of RCH, subject to all of the liabilities of RCH (except for
certain assets and liabilities specifically excluded thereunder) (the "Asset
Transfer"); and (ii) ARC Holdings shall issue to RCH, 50,191,806 shares of
common stock of ARC Holdings, representing at the time of such issuance 100% of
ARC Holdings' common stock) (the "ARC Holdings Issuance"); and subsequent
thereto, and subject to compliance with all applicable Federal and State
securities and blue sky laws, RCH shall completely liquidate pursuant to Section
331 of the Code and shall distribute all ARC Holdings Common Stock held by RCH
to the stockholders of RCH (the "RCH Liquidation"); and
WHEREAS, immediately following the Asset Transfer, ARC Holdings shall
contribute to Allied Riser Communications, Inc., a Delaware corporation ("New
ARC"), substantially all of ARC Holdings' assets and liabilities in exchange for
1,000 shares of New ARC common stock, par value $1.00 per share (the "ARC
Contribution"), whereupon New ARC shall become a wholly-owned subsidiary of ARC
Holdings; and
1
<PAGE> 4
WHEREAS, promptly following the consummation of the Subsidiary
Liquidations, Asset Transfer and ARC Contribution, each of EGI-ARC, TP, CWF,
EVW, CIII and LEG, (together with each other Person afforded such status
pursuant to Section 3.13 below, the "Financial Sponsors"), propose to enter into
Investment Agreements with ARC Holdings, pursuant to which each Financial
Sponsor will acquire ARC Holdings Common Stock and Series A-1 or Series A-2
Preferred Stock (collectively, the "Company Preferred") of ARC Holdings (the
"Investment Agreements"); and
WHEREAS, to induce ARC Holdings to enter into the Asset Transfer Agreement
and to induce the Financial Sponsors to enter into the respective Investment
Agreements, each of the Original Shareholders has agreed to indemnify the
Indemnitees against certain liabilities of RCH and certain predecessor
corporations, including, without limitation, breaches of representations,
warranties and covenants set forth in the Asset Transfer Agreement, and to
secure such obligation to so indemnify pursuant to that certain Stockholders'
Pledge Agreement, dated as of the date hereof, made and entered into by and
among each of the Original Shareholders, ARC Holdings and EGI-ARC, as collateral
agent for the benefit of the Financial Sponsors, ARC Holdings, and the other
Indemnitees (the "Stockholders' Pledge Agreement").
In consideration of the foregoing, the representations and warranties set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as set forth
below.
ARTICLE I
DEFINITIONS
Section 1.1 Defined Terms. As used in this Agreement, terms defined in the
heading and the recitals shall have their respective assigned meanings, and the
following capitalized terms shall have the meanings ascribed to them below:
(1) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(2) "Collateral" shall have the meaning set forth in the Stockholders'
Pledge Agreement.
(3) "Indemnified Party" shall have the meaning set forth in Section
2.4(1) hereof.
(4) "Indemnifying Party" shall have the meaning set forth in Section
2.4(1) hereof.
(5) "Indemnitees" shall have the meaning set forth in the first
paragraph of this Indemnification Agreement.
(6) "Loss" or "Losses" shall mean any and all liabilities, losses,
damages, costs and expenses incurred or to be incurred by an Indemnitee through
and after the date of a claim (including but not limited to diminution in the
value of securities and any and all amounts owing under and upon the occurrence
of a default under any Valuation Advance Note (as defined below)), interest,
penalties, attorneys', accounting and other fees and related disbursements
(including those incurred in connection with investigating or seeking
2
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indemnification hereunder or in obtaining appraisals of Pledged Share Value),
whether known, unknown, absolute, contingent or otherwise, including interest at
the Prime Rate per annum from the date such liability, loss, damage or expense
is incurred through the date of payment thereof.
(7) "Person" shall mean any individual, corporation, partnership,
limited liability company, trust, joint stock company, business trust,
unincorporated association, joint venture, governmental authority or other
entity of any nature whatsoever.
(8) "Pledged Shares" shall mean the securities pledged pursuant to the
Stockholders' Pledge Agreement.
(9) "Pledged Share Value" shall mean the aggregate value of Pledged
Shares then available as Collateral determined as follows: (i) with respect to
Pledged Shares which are of a class of securities which are publicly traded, the
average of their last sale price on the principal securities exchange on which
they are traded on each business day during the three-month period ending
immediately prior to the date of determination, or if no sales occurred on any
such date, the mean between the closing "bid" and "asked" prices on such day,
or, if traded in the over-the-counter market, their average closing "bid" price
on each day during such period, as published by the National Association of
Securities Dealers Automated Quotation System, or if such price is not
published, the mean between their closing "bid" and "asked" prices, if
available, on each day during such period, which prices may be obtained from any
reputable broker or dealer; and (ii) with respect to Pledged Shares which are
not of a class of securities which are publicly traded, such value as shall be
agreed between Indemnitees holding in the aggregate, in excess of 50% of the ARC
Holdings Common Stock held by all Indemnitees, on the one hand, and Original
Shareholders holding in the aggregate, in excess of 50% of the ARC Holdings
Common Stock held by all Original Shareholders (excluding unvested stock options
and restricted stock), on the other hand, after a 30-day period of good faith
negotiations, if such value can be so determined by mutual agreement. Absent
mutual agreement within such 30-day period as so provided, the "Pledged Share
Value" shall be determined by independent appraisal conducted by an appraiser
selected by mutual agreement of the Indemnitee holding the greatest number of
shares of ARC Holdings Common Stock and the Original Shareholder holding the
greatest number of shares of ARC Holdings Common Stock held by all Original
Shareholders (excluding unvested stock options and restricted stock); provided,
however, that if such parties cannot agree on an independent appraiser within
fifteen business days after expiration of the 30-day period, they shall each, on
such fifteenth day, select and promptly (and in any event within two business
days of the selection thereof), notify the other of the identity of their
respective selected appraiser skilled in the valuation of securities of
privately held companies who shall both endeavor in good faith to agree on such
value and, failing any such agreement within fifteen business days following
identification to the other party hereto of the selected appraiser, the two
selected appraisers shall, within 5 days, jointly select a third appraiser
skilled in the valuation of securities of privately held companies. In the event
that either party shall fail to designate an initial appraiser within the
fifteen business day period identified above, the party who shall have failed to
timely make such designation shall be deemed to have consented to the
determination of Pledged Share Value by the designee of the other party. If both
parties shall have timely designated a third appraiser, the third appraiser so
selected shall in good faith determine the Pledged Share Value within 15 days of
selection. In determining Pledged Share Value, the parties shall, and shall
instruct each appraiser designated as provided above to, ascribe no discount in
such valuation due to
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any (i) illiquidity of such Pledged Shares, or (ii) the lack of control
attendant to the number of Pledged Shares so valued. Pledged Shares shall be
valued to the extent feasible (whether by appraisal or otherwise), as of the
date conveyed (or anticipated date of conveyance) to the Indemnitees upon
exercise and foreclosure upon such Collateral. The parties shall promptly
provide and cause to be promptly provided to the designated appraisers, subject
to standard confidentiality agreements, such information as may reasonably be
requested in order to determine the Pledged Share Value. All such costs of
determining Pledged Share Value shall be borne equally by the Indemnitors party
hereto, on the one hand, and the Indemnitees party hereto, on the other hand,
who shall apportion their respective half of the costs among the beneficiaries
(or intended beneficiaries) of such valuation procedure on a pro rata basis). At
the written request of the Indemnitors, ARC Holdings shall advance to the
Indemnitors for payment to the appraiser(s), that portion of the fees and
expenses of the appraisers (but not amounts in respect of any indemnification
claims by or on behalf of any such appraiser(s)), payable by the Indemnitors;
provided, however, that such advance shall be evidenced by a Note in form and
substance satisfactory to the Company and bearing interest at the Prime Rate,
and executed by each Indemnitor (the "Valuation Advance Note"), which note shall
be recourse on a joint and several basis only against the Collateral, and;
provided further, that any defaults thereunder shall not be subject to the
limitations set forth in Section 2.1(3) below.
(10) "Predecessor Corporations" shall mean (i) the Former Subsidiaries
(ii) DPI Technology Resources, Inc., and (iii) Digital Packet Interface
Solutions, Inc.
(11) "Prime Rate" shall mean the rate published or announced from time
to time by Bank of America, Illinois (or any successor thereto) as its "prime"
rate or other similar rate.
(12) "Recourse Liabilities" shall have the meaning set forth in Section
2.1(2) hereof.
(13) "Reorganization Transaction" shall mean the November 17, 1998
Amendment to the RCH Certificate of Incorporation, the Subsidiary Liquidations,
the Asset Transfer, the ARC Holdings Issuance, the RCH Liquidation, the
transactions contemplated by the Financial Sponsor Investment Agreements, the
reallocation of equity (including dilution) attendant thereto in accordance
with, among other things, the RCH Subscription Agreements (as amended), and the
approval processes and documentation and any other communications required to be
or otherwise undertaken or used in connection therewith.
(14) "Transaction Documents" shall mean, collectively with this
Indemnification Agreement, the agreements and documents listed on Schedule 2
hereto, and any and all other agreements or other documents entered into or
delivered concurrently herewith or subsequent hereto in order to effectuate the
purpose and intent of any such documents and agreements, as the same may be
amended, restated, supplemented or otherwise modified from time to time in
accordance with the provisions thereof.
Section 1.2 Headings, etc. The headings in this Agreement are included for
convenience of reference only and shall not limit or otherwise affect the
meaning or interpretation of this Agreement. All pronouns and all variations
thereof shall be deemed to refer to the masculine, feminine or neuter, singular
or plural, as the identity of the Person may require.
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ARTICLE II
INDEMNIFICATION AND SECURITY INTEREST
Section 2.1 Indemnification by the Original Shareholders.
(1) Subject to the conditions set forth herein, each Original
Shareholder, jointly and severally, hereby agrees to indemnify and hold harmless
the Indemnitees from and against any Losses: (i) arising in respect of claims by
any shareholders or former shareholders (or Persons asserting the existence of
rights that entitle such Persons to be or to have been shareholders) of RCH or
any Predecessor Corporation, or any of their respective predecessor entities, as
a result of the Reorganization Transactions, who shall either (a) not have
approved such Reorganization Transactions, or (b) assert that the approval
process in respect of all or any portion of the Reorganization Transactions did
not comply with applicable law or that the disclosures made in connection
therewith were incomplete, inaccurate or misleading or failed to disclose all
material terms, facts and circumstances in accordance with applicable law, (ii)
arising from any breach (or any third-party allegation of facts that, if true,
would constitute such a breach) of any representations, warranties or covenants
of any party contained in the Asset Transfer Agreement, or in any documents,
certificates or agreements delivered in connection therewith or pursuant
thereto, and (iii) any Losses attributable to defaults under Valuation Advance
Notes, if any.
(2) The obligations of the Original Shareholders pursuant to this
Section 2.1, shall be nonrecourse to the Original Shareholders, and the
Indemnitees' only recourse with respect thereto shall be against the Collateral
pursuant to the terms of the Stockholders' Pledge Agreement, subject, however,
to the provisions of Section 2.5 and Section 2.8 hereof. Notwithstanding the
foregoing, the obligations of the Original Shareholders with respect to (i)
Losses arising from liabilities referred to in Section 2.1 above that were known
to an Original Shareholder but not explicitly disclosed to ARC Holdings and the
Financial Sponsors in writing in a disclosure schedule to the Asset Transfer
Agreement, (ii) any Losses arising from the fraud, willful misconduct, gross
negligence or criminal acts of any Original Shareholder, including in connection
with any intentional or grossly negligent breach of the representations,
warranties and covenants under the Asset Transfer Agreement, (the liabilities
described in the immediately preceding clauses (i) and (ii) being the "Recourse
Liabilities"), and (iii) any Losses arising from a breach of any SOL Claim, (as
defined below), shall not be limited to the Collateral pursuant to the terms of
the Stockholders' Pledge Agreement. In the event of a Recourse Liability, the
Original Shareholders shall be liable for a portion of such Recourse Liability
as provided in Section 2.9(a), and such portion shall be allocated to such
Original Shareholder or Original Shareholders whose knowledge or action (or
failure to act) created such Recourse Liability.
(3) The Original Shareholders shall not have any obligation to
indemnify the Indemnitees from and against any Loss that is not a Recourse
Liability (a) until the aggregate Losses suffered by all Indemnitees exceeds a
$500,000 aggregate "basket" (at which point the Original Shareholders shall be
obligated to indemnify the Indemnitees from and against all such Losses relating
back to the first dollar), and (b) to the extent that such Losses exceed
$9,000,000.
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Section 2.2 Representations, Warranties, Covenants and Deliveries. In order
to more effectively implement the intent and purpose of this Agreement, each
Original Shareholder hereby restates each representation, warranty and covenant
set forth in the Asset Transfer Agreement to and for the benefit of each
Indemnitee (including with respect to the delivery of documents) as though
represented, warranted, covenanted and delivered by each Original Shareholder to
each Indemnitee herein as of the date hereof. Each such representation, warranty
and covenant shall survive the date of this Agreement in accordance with Section
5.2 of the Asset Transfer Agreement.
Section 2.3 Grant of Security Interest. In order to secure the obligations
of each Original Shareholder created by this Indemnification Agreement, each
Original Shareholder hereby grants to EGI-ARC (as collaterla agent), on its own
behalf and on behalf of ARC Holdings and the other potential Indemnitees, a
first priority perfected security interest in the Collateral, on the terms set
forth in the Stockholders' Pledge Agreement.
Section 2.4 Claims for Indemnification.
(1) The parties intend that all indemnification claims be made as
promptly as practicable by the party seeking indemnification (the "Indemnified
Party"). Whenever any claim shall arise for indemnification, the Indemnified
Party shall promptly notify the party from whom indemnification is sought (the
"Indemnifying Party") of the claim, and the facts constituting the basis for
such claim. The failure to so notify the Indemnifying Party shall not relieve
the Indemnifying Party of any liability that it may have to the Indemnified
Party, except to the extent the Indemnifying Party demonstrates that the defense
of such action is materially prejudiced thereby. No conduct by, or knowledge of,
any of David Crawford, Jim Breen, or Jim Harris shall be attributed to or be
ascribed to any Financial Sponsor or other Indemnitee, or be used in support of
any defense to any claimed Loss with respect thereto, nor shall this provision
be construed as implying that the conduct of any Financial Sponsor or other
Indemnitee could or should afford a defense to any claimed Loss.
(2) With respect to claims made by third parties, the Indemnifying
Party, upon acknowledgment in writing of its liability for the claim, shall be
entitled to assume control of the defense of such action or claim with counsel
reasonably satisfactory to the Indemnified Party, provided, however, that:
(a) An Indemnified Party shall be entitled to participate in
the defense of such claim and to employ counsel at its own expense (which
expense shall not be reimbursable by the Indemnitors) to assist in the
handling of such claim;
(b) No Indemnifying Party shall consent to the entry of any
judgment or enter into any settlement without the consent of each
Indemnified Party (A) if such judgment or settlement does not include as an
unconditional term thereof the giving by each claimant or plaintiff to each
Indemnified Party of a full release from all liability in respect to such
claim, or (B) if such judgment or settlement would result in the finding or
admission of any wrongdoing or violation of any law or (C) if as a result
of such consent or settlement, injunctive or other equitable relief would
be imposed against the Indemnified Party or such judgment or settlement
could interfere with or adversely affect the business, operations or assets
of the Indemnified Party;
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(c) If the Indemnifying Party does not acknowledge in writing
the liability for the claim and assume control of the defense of such claim
in accordance with the foregoing provisions within ten (10) days after
receipt of notice of the claim or, if having taken over such defense does
not in the reasonable, good faith opinion of an Indemnified Party proceed
diligently to defend such claim, then the Indemnified Party shall have the
right to defend such claim in such manner as it may deem appropriate at the
cost and expense of the Indemnifying Party pursuant to the terms of this
Agreement. The Indemnifying Party shall be bound by any defense or
settlement that the Indemnified Party shall make in good faith with respect
to such claim, and the Indemnifying Party will promptly reimburse the
Indemnified Party therefor in accordance with this Article II;
(d) Upon payment by an Indemnifying Party of any amounts due
in respect of a third-party claim, the Indemnified Party will, to the
extent of such payment, assign or cause to be assigned to the Indemnifying
Party the claims of the Indemnified Party, if any, against the third
parties in respect of which payment is made; and
(e) Each Indemnitor expressly agrees to cooperate and render
such assistance to each Indemnitee who shall request assistance in
investigating, defending or prosecuting any claim for which indemnification
is reasonably believed to be available or otherwise, regardless of whether
an Indemnitor or Indemnitee has primary responsibility for the defense or
prosecution thereof.
Section 2.5 Payment of Indemnity Amount.
Each Indemnifying Party shall pay to each Indemnified Party, within one
hundred and twenty (120) days of the date of written demand therefor (the "Due
Date"), the appropriate amount is determined as provided herein, as follows:
(1) Indemnification of a Loss which does not arise from a Recourse
Liability shall be paid, at the option of the Indemnifying Party either (i) in
cash, (ii) by transferring to the Indemnified Party Pledged Shares and other
Collateral (a) having an aggregate Pledged Share Value equal to the Loss, or (b)
with respect to Collateral which does not have a Pledged Share Value or a
Pledged Share Value not less than the dollar value (or anticipated dollar value)
of the applicable Losses, such number of Pledged Shares and other Collateral as
is deemed acceptable to the Indemnified Party; provided, however, that the
Indemnified Party shall be obligated to accept, as payment in full of such
indemnification obligation, a tender of all of the Collateral then subject to
the Stockholders' Pledge Agreement, or (iii) any combination of the foregoing.
(2) Payment of a Loss which arises from a Recourse Liability shall be
payable on the Due Date, (i) in cash, or (ii) with Pledged Shares having an
aggregate Pledged Share Value equal to the Loss or (iii) with any combination of
the foregoing.
(3) In the event the Original Shareholders shall fail to make payment
on the Due Date in respect of a Recourse Liability as required by this Section
2.5, then the Indemnitees may, in addition to pursuing remedies against the
Original Shareholders directly (subject to Section 2.9), exercise any and all
remedies with respect to the Collateral under the terms of the Stockholders'
Pledge Agreement, in which case, the Original Shareholders shall
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be liable, in accordance with Section 2.9, for the amount of the Loss which
exceeds the net proceeds realized for the Collateral after payment of all
amounts required by Section 7.5 of the Stockholders' Pledge Agreement, to be
allocated to the Original Shareholders whose knowledge or action (or failure to
act) created such Recourse Liability.
Section 2.6 Application of Indemnification Payments. Indemnification
payments shall be applied as follows:
(a) first, to the reasonable costs and expenses (including
reasonable attorneys' fees) of holding, processing and preparing for sale
or other transfer, selling, collecting and liquidating the Collateral, and
the like, to the extent not directly paid by, or recovered from the
Indemnitors;
(b) second, to the extent that any such proceeds remain after
the application described in the immediately preceding clause (a), to the
satisfaction of all obligations of each of the Indemnitors to ARC Holdings,
pursuant hereto; and
(c) third, to the extent that any such proceeds remain after
the application described in the immediately preceding clause (b), to the
satisfaction of the obligation of each of the Indemnitors to the Financial
Sponsors in the following manner: (i) if any Company Preferred is
outstanding at such time, pro rata based on the total number of shares of
Company Preferred that has been issued to the Financial Sponsors who are
Indemnites, regardless of whether some of the Company Preferred issued to
the Financial Sponsors who are Indemnites has been converted into ARC
Holdings Common Stock; or (ii) if no Company Preferred is outstanding at
such time, pro rata based on the ARC Holdings Common Stock held by the
Financial Sponsors who are Indemnites at that time.
Section 2.7 Expiration of Indemnification Obligations. The obligations of
any Indemnifying Party hereunder shall expire upon the expiration of two (2)
years from the date hereof, except that Losses in respect of breaches of any of
Sections 3.1(n), 3.1(s) and 3.1(t) of the Asset Transfer Agreement shall not
expire until the later of such two (2) year period and expiration of the
applicable statute of limitations (collectively, "SOL Claims"); provided,
however, that each such obligation shall continue beyond such two (2) year
period or applicable statute of limitation, with respect to any claim for
indemnification of which the Indemnified Party shall have transmitted written
notice within such two (2) year period, or such longer statute of limitations,
as applicable. Notwithstanding the foregoing or anything to the contrary
contained in this Agreement, in the event that the lien in respect of the
Collateral is released pursuant to Sections 10.2 of the Stockholders' Pledge
Agreement, all obligations hereunder shall be deemed Recourse Liabilities for
all purposes of this Agreement; provided, however, that such liabilities shall
(i) be joint and several obligations of each Original Shareholder, and (ii) if
such obligation relates to what otherwise would not have been a Recourse
Liability absent this sentence, be subject to the dollar limitations set forth
in Section 2.1(3) hereof (notwithstanding the express exclusion of the
application of that Section to "Recourse Liabilities").
Section 2.8 SOL Claims. In the event that an SOL Claim is timely raised
subsequent to the release of Collateral in accordance with the terms of the
Stockholders' Pledge Agreement, Losses attributable thereto shall, subject to
the limitations set forth in
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Section 2.1(3), if applicable, and, in accordance with Section 2.9, nonetheless
be recoverable from any and all assets of the Original Shareholders, on a joint
and several basis, notwithstanding such release of Collateral.
Section 2.9 Collection of Indemnification Payments.
(a) Claims in respect of Recourse Liabilities would be
satisfied:
(i) first, from the Collateral pledged by the relevant
Indemnitor(s);
(ii) second, from any and all other assets owned by the
relevant Indemnitor(s) (to the extent that full and uncontested title
thereto has been satisfactorily conveyed to the Indemnitees within one (1)
year from the date notice of the relevant claim is transmitted to the
Indemnitor(s) (it being understood that the expiration of such time period
shall not limit the Indemnitees' continued recourse thereto));
(iii) third, from any proceeds of insurance procured
pursuant to Section 4.3 of the Stockholders' Agreement (to the extent that
full and uncontested title to such proceeds has been satisfactorily
conveyed to the Indemnitees within one (1) year from the date notice of the
relevant claim is transmitted to the Indemnitor(s) (it being understood
that the expiration of such time period shall not limit the Indemnitees'
continued recourse thereto)); and
(iv) fourth, from the remaining Collateral, regardless of
the source thereof.
(b) Claims in respect of all other Losses would be satisfied;
(i) first, from any proceeds of insurance obtained
pursuant to Section 4.3 of the Stockholders' Agreement (to the extent that
full and uncontested title to such proceeds has been satisfactorily
conveyed to the Indemnitees within one (1) year from the date notice of the
relevant claim is transmitted to the Indemnitor(s) (it being understood
that the expiration of such time period shall not limit the Indemnitees'
continued recourse thereto));
(ii) second, by application against the "basket"
identified in Section 2.1(3) above (to the extent that availability
thereunder remains); and
(iii) third, from the Collateral pledged by the relevant
Indemnitors, and with respect to SOL claims, from such assets of the
Indemnitors as the Indemnitees elect to pursue.
ARTICLE III
MISCELLANEOUS PROVISIONS
Section 3.1 Further Assurances. Each Original Shareholder will cause to be
done, executed, acknowledged and delivered all such further acts, conveyances
and assurances as
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any other party hereto shall reasonably require for accomplishing the purposes
of this Agreement.
Section 3.2 Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a)
when transmitted by telecopy (with an acknowledgment of receipt generated from
the transmitting telecopy machine reflecting the date, time and number of pages
successfully transmitted) or personally delivered on a business day during
normal business hours, (b) on the business day following the date of dispatch by
overnight courier or (c) on the fifth business day following the date of mailing
by registered or certified mail, with postage prepaid, return receipt requested,
in each case addressed to each Original Shareholder at the address set forth
opposite such Original Shareholder's name on Schedule 1 hereto and to each
Indemnitee at the respective address set forth below, or in any such case to
such other address as any Original Shareholder or any Indemnitee shall have last
designated to the other parties by notice given in accordance with this Section
3.2; provided, however, that a notice of a change of address shall not be deemed
to have been given until actually received by the addressee.
(1) Notice Address for ARC Holdings:
ARC Holdings, Inc.
Two North Riverside Plaza, Suite 1900
Chicago, Illinois 60606
Fax: (312) 454-5956
Attention: President
and
ARC Holdings, Inc.
700 Pearl Street, Suite 200
Dallas, Texas 75201
Fax: (214) 855-9121
Attention: Chief Financial Officer
With copies to:
Crouch & Hallett, L.L.P.
717 N. Harwood, Suite 1400
Dallas, Texas 75201
Fax: (214) 922-4193
Attention: Timothy R. Vaughan
And with a copy to: each Financial Sponsor
(2) Notice Address for EGI-ARC:
EGI-ARC Investors, L.L.C.
c/o EGI Corporate Investments
Two North Riverside Plaza, Suite 600
Chicago, Illinois 60606
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Fax: (312) 575-7024
(312) 454-9678
Attention
to each of: Donald Liebentritt, and
William T. White III
With a copy to:
Rosenberg & Liebentritt, P.C.
Two North Riverside Plaza, Suite 1600
Chicago, Illinois 60606
Fax: (312) 454-0335
Attention: Jon Wasserman
(3) Notice Address for TP:
Telecom Partners II, L.P.
3200 Cherry Creek Drive South, Suite 450
Denver, Colorado 80209
Fax: (303) 765-1110
Attention: Steve Schovee
With a copy to:
Holland & Hart LLP
555 Seventeenth Street, Suite 3200
Denver, Colorado 80202
Fax: (303) 295-8261
Attention: Michael S. Quinn
(4) Notice Address for CWF, EVW or CIII:
c/o Crescendo Venture
Management L.L.C.
800 LaSalle Avenue, Suite 2250
Minneapolis, Minnesota 55402
Fax: (612) 607-2801
Attention: David Spreng
With a copy to:
Messerli & Kramer
1800 Fifth Street Tower
150 S. Fifth Street
Minneapolis, MN 55402
Fax: (612) 672-3777
Attention: Kevin Spreng
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(5) Notice Address for LEG:
Lawrence Equity Group, LLC
C/o Joseph Sperske
3615 Country Club Terrace
Danville, California 94506
Fax: (415) 398-7499
Attention: Joseph Sperske
Section 3.3 Amendments. This Agreement may, subject to Section 3.13 below,
be amended, and the observance of any term hereof may be waived, only by a
written instrument signed by each of the parties hereto.
Section 3.4 Inconsistent Agreements. No party hereto shall enter with any
Person into any agreement or other arrangement of any kind which is inconsistent
with the provisions of this Agreement or which may impair its ability to comply
with this Agreement.
Section 3.5 Successors and Assigns. The terms of this Agreement shall be
binding upon, and shall inure to the benefit of, the parties hereto and their
respective successors and assigns permitted hereunder; provided, however, that
no indemnification obligation of any party hereunder shall be assumed by any
other Person without the prior written consent of ARC Holdings, EGI-ARC and TP.
Section 3.6 Severability. Each provision of this Agreement shall be
considered severable and if for any reason any provision which is not essential
to the effectuation of the basic purposes of this Agreement is determined by a
court of competent jurisdiction to be invalid, unenforceable or contrary to
existing or future applicable law, such invalidity, unenforceability or
illegality shall not impair the operation of or affect those provisions of this
Agreement which are valid, enforceable and legal. In that case, this Agreement
shall be construed so as to limit any term or provision to the minimum extent
necessary so as to make it valid, enforceable and legal within the requirements
of any applicable law, and, in the event such term or provision cannot be so
limited, this Agreement shall be construed to omit such invalid, unenforceable
or illegal provisions.
Section 3.7 Counterparts. This Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered shall be an
original, but all of which together shall constitute but one and the same
instrument.
Section 3.8 Governing Law. This Agreement shall be governed by the laws of
the State of Delaware (other than its rules of conflicts of law to the extent
that the application of the laws of another jurisdiction would be required
thereby).
Section 3.9 Consent to Jurisdiction and Service of Process; Appointment of
Agent for Service of Process. The parties hereto each hereby consent to the
jurisdiction of any state or federal court located within the State of Delaware
and irrevocably agree that all actions or proceedings arising out of or relating
to this Agreement shall be litigated in such courts. Each of the parties hereto
accepts for itself and in connection with its respective properties, generally
and unconditionally, the exclusive jurisdiction and venue of the aforesaid
courts and waives any
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defense of forum non convenient, and irrevocably agrees to be bound by any
nonappealable judgment rendered thereby in connection with this Agreement. The
parties hereto agree to appoint and failing any such appointment, authorize any
other party to appoint on such Person's behalf and maintain the Corporation
Trust Company and such other persons, in each case within the State of Delaware,
as may hereinafter be selected by them who irrevocably agree in writing to so
serve as agent, to receive, on behalf of the parties hereto, service of all
process in any such proceedings in any such court, such service being hereby
acknowledged by the parties hereto to be effective and binding service in every
respect. A copy of any such process so served shall be mailed by registered mail
to the parties hereto, as provided herein, except that, unless otherwise
provided by applicable law, any failure to mail such copy shall not affect the
validity of service of process. If any agent appointed by the parties hereto
refuses to accept service, the parties hereto agree that service upon the
respective party hereto by registered mail shall constitute sufficient service.
Nothing herein shall affect the right of the parties hereto to serve process in
any other manner permitted by law.
Section 3.10 Entire Agreement; Nonwaiver. This Agreement together with the
other Transaction Documents supersedes all prior agreements between the parties
with respect to the subject matter hereof and contains the entire agreement
between the parties with respect to such subject matter. No delay on the part of
any party in exercising any right hereunder shall operate as a waiver thereof,
nor shall any waiver, express or implied, by any party of any right hereunder or
of any failure to perform or breach hereof by any other party constitute or be
deemed a waiver of any other right hereunder or of any other failure to perform
or breach hereof by the same or any other party, whether of a similar or
dissimilar nature.
Section 3.11 No Third-Party Beneficiaries. Nothing contained in this
Agreement, express or implied, is intended to or shall confer upon anyone other
than the parties (and their successors and permitted assigns) any right, benefit
or remedy of any nature whatsoever under or by reason of this Agreement, except
that each Indemnitee shall be deemed to be a third-party beneficiary hereunder.
Section 3.12 Action of Original Shareholders. The approval of Original
Shareholders representing a majority of the Pledged Shares shall be sufficient
to agree to any amendment or other action required or permitted to be taken by
the Original Shareholders hereunder, including any action or agreement necessary
to determine Pledged Share Value.
Section 3.13 New Indemnitees. The Financial Sponsors shall have the
absolute right, by agreement of Financial Sponsors owning not less than 50% of
the shares of ARC Holdings Common Stock owned by all Financial Sponsors and
notice to the Indemnitors], to (a) admit additional Persons as Indemnitees and
"Financial Sponsors" hereunder, with the same or different rights as the initial
Financial Sponsors hereunder, provided, however, that no such action shall
modify any other term or provision of this Agreement; and provided, further,
that such absolute right shall extend only until the earlier of (x) January 1,
1999 (extended to the extent necessary to comply with any applicable regulatory
requirements being diligently pursued in good faith at such time), or (y) such
time as equity investments in ARC Holdings, including the investments in ARC
Holdings equity securities by the initial Financial Sponsors party to this
agreement equal or exceed, in the aggregate, $60,000,000. Notwithstanding the
foregoing, any Financial Sponsor or affiliate thereof who purchases Company
Preferred shall, subject to clause (x) and clause (y) above, automatically be
deemed a "Financial Sponsor".
13
<PAGE> 16
Section 3.14 Other Provisions. Each of the Original Shareholders agrees
that he will not make any claim against New ARC, ARC Holdings or any affiliate
thereof or investor therein (a) by reason of the fact that he or she was serving
as a director, officer, employee or agent for any such Person or any Predecessor
Corporation or was serving at the request of any such Person or Predecessor
Corporation as a partner, trustee, director or officer, employee or agent of
another Person (whether such claim is for judgments, damages, penalties, fines,
costs, amounts paid in settlement, losses, expenses, or otherwise and whether
such claim is pursuant to any statute, charter, document, bylaws, agreement or
otherwise) with respect to any action, suit, proceeding, complaint, claim or
demand brought by ARC Holdings, New ARC, or any of the respective shareholders
(whether such action, suit, proceeding, complaint, claim, or demand is pursuant
to this Agreement, applicable law, or otherwise), and/or (b) relating to any
event or circumstance prior to the date of this Agreement, including, without
limitation, the Reorganization Transaction, but excluding rights arising under
agreements executed by such Persons as individuals in connection therewith.
14
<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Agreement or have caused
this Agreement to b executed by their respective, duly authorized officers as of
the date first above written.
ALLIED RISER COMMUNICATIONS HOLDINGS,
INC.
/s/ TODD DOSHIER
----------------------------------
By: Todd Doshier
Title: Chief Financial Officer
EGI-ARC INVESTORS, L.L.C.
By: GAMI Investments, Inc.,
It's Managing Member
/s/ DONALD J. LIEBENTRITT
----------------------------------
By: Donald J. Liebentritt
Title: Vice President
TELECOM PARTNERS II, L.P.
By: Telecom Management II, L.L.C.,
It's General Partner
/s/ STEPHEN W. SCHOVEE
----------------------------------
By: Stephen W. Schovee
Title: Managing Member
15
<PAGE> 18
CRESCENDO WORLD FUND, LLC
By: Crescendo Ventures World Fund,
LLC, It's [General Partner]
/s/ JEFFREY R. TOLLEFSON
----------------------------------
By: Jeffrey R. Tollefson
Title: Partner
EAGLE VENTURES WF, LLC
/s/ JEFFREY R. TOLLEFSON
----------------------------------
By: Jeffrey R. Tollefson
Title: Vice President
CRESCENDO III, LP
By: Crescendo Ventures II, LLC,
Its General Partner
/s/ JEFFREY R. TOLLEFSON
----------------------------------
By: Jeffrey R. Tollefson
Title: Partner
LAWRENCE EQUITY GROUP, LLC
/s/ JOSEPH A. SPERSKE
----------------------------------
By: Joseph A. Sperske
Title: Vice President
/s/ JAMES P. BREEN
-----------------------------------------
James P. Breen
/s/ DAVID H. CRAWFORD
-----------------------------------------
David H. Crawford
/s/ TODD DOSHIER
-----------------------------------------
Todd Doshier
-----------------------------------------
Anthony Gray
/s/ MIKE SCHMITT
-----------------------------------------
Mike Schmitt
/s/ CHUCK YEARGAIN
-----------------------------------------
Chuck Yeargain
-----------------------------------------
Al Zlogar
16
<PAGE> 19
Schedule 1
List of Original Shareholders
<TABLE>
<CAPTION>
Name Address
- ---- -------
<S> <C>
James P. Breen 230 Laural Avenue
Wilmette, Illinois 60091
David H. Crawford 1510 N. Dearborn Parkway
Chicago, Illinois 60610
Todd Doshier 2720 Daniel Avenue
Dallas, Texas
Mike Schmitt 6412 Armstrong
Dallas, TX 75205
Chuck Yeargain 6116 Annadale Drive
Fort Worth, Texas
</TABLE>
17
<PAGE> 20
Schedule 2
Transaction Documents
1. Amendment of RCH Holdings, Inc. Articles of Incorporation regarding
authorized stock and par value
2. Carrier Direct, Inc. and Allied Riser Communications, Inc. liquidation
documents (including Plan of Liquidation, dated immediately prior to the
Effective Date)
3. RCH Holdings, Inc. Recapitalization Documents (including Subscription
Agreements and Amendments No. 1 and No. 2 thereto)
4. RCH Holdings, Inc. Liquidation Documents (including the Plan of Liquidation
of RCH Holdings, Inc., dated immediately prior to the Effective Date)
5. Indemnification Agreement pursuant to which certain Persons indemnify
Allied Riser Communications Holdings, Inc. and Financial Sponsors
6. Stockholders' Pledge Agreement pursuant to which certain Persons pledge
certain collateral to EGI-ARC Investors, LLC (as collateral agent for the
beneficiaries thereof) to secure their indemnification obligations
7. Allied Riser Communications Holdings, Inc. Stockholders' Agreement and
Amendment No. 1 and Joinder to Allied Riser Communications Holdings, Inc.
Stockholders Agreement
8. Registration Rights Agreement
9. Employment Agreements (as specified on Exhibit H to the Investment
Agreements)
10. Investment Agreements between Allied Riser Communications Holdings, Inc.
and each Financial Sponsor
11. Certificate of Incorporation of Allied Riser Communications Holdings, Inc.
12. Bylaws of Allied Riser Communications Holdings, Inc. (Delaware)
13. Certificate of Incorporation of Allied Riser Communications, Inc.
14. Bylaws of Allied Riser Communications, Inc.
15. Allied Riser Communications Holdings, Inc. Contribution and Assumption
Documents
16. All Corporate Authorizations (Minutes, Resolutions, etc,) relating to all
of the foregoing other than by or on behalf of the Financial Sponsors
17. RCH Holdings, Inc. Proxy Statements and Related Correspondence and
Materials
18
<PAGE> 21
19. Asset Transfer and Assumption/Assignment Agreements delivered in connection
with this agreement (including with respect to intellectual property)
20. Documents Terminating Warrant rights of Zlogar, Doshier, Yeargain, Graham,
and Advest (including terminating co-management rights and rights to
related fees)
21. Indiana and California Blue Sky Filings and Qualifications (including
Federal Form D).
19
<PAGE> 1
EXHIBIT 10.6.1
JOINDER TO
INDEMNIFICATION AGREEMENT
JOINDER TO INDEMNIFICATION AGREEMENT (the "JOINDER AGREEMENT"), dated
December 30, 1998 and effective as of November 23, 1998, by and among Allied
Riser Communications Holdings, Inc., a Delaware corporation (the "COMPANY"),
EGI-ARC Investors, L.L.C., a Delaware limited liability company ("EGI-ARC"),
Telecom Partners II, L.P., a Delaware limited partnership ("TP"), Crescendo
World Fund, LLC, a Delaware limited liability company ("CWF"), Eagle Ventures
WF, LLC, a Minnesota limited liability company ("EVW"), Crescendo III, L.P., a
Delaware limited partnership ("CIII"), Lawrence Equity Group, L.L.C., a
California limited liability company ("LEG"), Norwest Venture Partners VII,
L.P., a Minnesota limited partnership ("Norwest"), and ANDA Partnership, an
Illinois general partnership ("ANDA" and collectively with the Company, EGI-ARC,
TP, CWF, EVW and Norwest, the "PARTIES"), to that certain Indemnification
Agreement (the "INDEMNIFICATION AGREEMENT"), dated as of November 23, 1998, by
and among the Company, EGI-ARC, TP and the other persons identified therein. All
terms not otherwise defined herein shall have the meanings given such terms in
the Indemnification Agreement.
WHEREAS, Section 3.13 of the Indemnification Agreement permits Financial
Sponsors owning not less than 50% of the ARC Holdings Common Stock owned by all
Financial Sponsors to admit additional Persons as Financial Sponsors and
Indemnitees under the Indemnification Agreement with the same rights as the
Financial Sponsors thereunder;
WHEREAS, EGI-ARC, TP, CWF, EVW, CIII and LEG desire that each of Norwest
and ANDA become a party to the indemnification Agreement as a Financial Sponsor
and Indemnitee thereunder, and each of Norwest and ANDA desires to become a
party to the Indemnification Agreement as a Financial Sponsor and Indemnitee
thereunder, as provided herein;
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
herein made and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties mutually agree as
follows:
1. Designation and Joinder. (a) EGI-ARC, TP, CWF, EVW, CIII and LEG
hereby designate each of Norwest and ANDA as a Financial Sponsor and
Indemnitee for all purposes under the Indemnification Agreement,
entitled to all of the rights and subject to all of the obligations
attendant thereunder to that status. Each of Norwest and ANDA hereby
consents and agrees to such designation, and further agrees that upon
execution of this Joinder Agreement, it shall become a party to the
Indemnification Agreement as a Financial Sponsor and an Indemnitee
thereunder and shall be fully bound by, and subject to, all of the
covenants, terms and conditions of the Indemnification Agreement as a
Financial Sponsor and Indemnitee thereunder as though originally a
party as a Financial Sponsor and Indemnitee thereunder.
2. Miscellaneous.
(a) Counterparts. This Joinder Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument.
(b) Governing Law. This Joinder Agreement shall be governed by the laws of
the state of Delaware (other than its rules of conflicts of law to the
extent that the application of the laws of another jurisdiction would
be required thereby).
<PAGE> 2
IN WITNESS WHEREOF, the Parties hereto have executed this Joinder to the
Indemnification Agreement as of the date first above written.
ALLIED RISER COMMUNICATIONS HOLDINGS, INC.
By: /s/David H. Crawford
-------------------------------------------
Name:
Title:
EGI-ARC INVESTORS
By: GAMI Investments, Inc., its Managing Member
By: /s/Donald J. Liebentritt
------------------------------------
Name: Don Liebentritt
Title: Vice President
TELECOM PARTNERS II, L.P.
By: Telecom Management II, L.L.C., its General
Partner
By /s/Stephen W. Schovee
------------------------------------
Name: Stephen W. Schovee
Title: Managing Member
CRESCENDO WORLD FUND, LLC
By: Crescendo Ventures World Fund, LLC, its
General Partner
By: /s/R. David Spreng
------------------------------------
Name: R. David Spreng
Title: Managing Member
EAGLE VENTURES WF, LLC
By: /s/R. David Spreng
------------------------------------
Name: R. David Spreng
Title: Managing Member
<PAGE> 3
CRESCENDO III, L.P.
By: Crescendo Ventures III, LLC, its General
Partner
By: /s/R. David Spreng
------------------------------------
Name: R. David Spreng
Title: Managing Member
LAWRENCE EQUITY GROUP, L.L.C.
By: /s/Joseph A. Spenske
----------------------------------------
Name: Joseph A. Spenske
Title: Vice President and Managing Member
NORWEST VENTURE PARTNERS VII, L.P.
By: Itaska VC Partners VII, LLP, Its General
Partner
By: /s/Blair Whitaker
----------------------------------------
Name: Blair Whitaker
Title: Partner
ANDA PARTNERSHIP, an Illinois general
partnership
By: Ann Only Trust, an Illinois trust
By: /s/Mark Slezak
----------------------------------------
Name: Mark Slezak
Title: Co-Trustee
By: Ann and Descendants, an Illinois trust
By: /s/Mark Slezak
----------------------------------------
Name: Mark Slezak
Title: Co-Trustee
<PAGE> 1
EXHIBIT 10.7
STOCKHOLDERS' PLEDGE AGREEMENT
AMONG
ALLIED RISER COMMUNICATIONS HOLDINGS, INC.,
EGI-ARC INVESTORS, L.L.C.
(AS COLLATERAL AGENT AND INDIVIDUALLY),
TELECOM PARTNERS II, L.P.,
CRESCENDO WORLD FUND, LLC,
EAGLE VENTURES WF, LLC,
CRESCENDO III, L.P.,
LAWRENCE EQUITY GROUP, L.L.C.,
AND THE
INDIVIDUALS IDENTIFIED ON SCHEDULE 1 ATTACHED HERETO
NOVEMBER 23, 1998
<PAGE> 2
STOCKHOLDERS' PLEDGE AGREEMENT
THIS STOCKHOLDERS' PLEDGE AGREEMENT, dated as of November 23, 1998, is
made and entered into by and among each of the Persons (as defined below) listed
on Schedule 1 hereto (each such Person being a "Pledgor"); Allied Riser
Communications Holdings, Inc., a Delaware corporation ("ARC Holdings"), EGI-ARC
Investors, L.L.C. ("EGI-ARC"), a Delaware limited liability company, as
collateral agent (in such capacity, the "Collateral Agent") for the benefit of
(i) EGI-ARC, in its individual capacity, (ii) Telecom Partners II, L.P., a
Delaware limited partnership, ("TP"), (iii) Crescendo World Fund, LLC, a
Delaware limited liability company ("CWF"), (iv) Eagle Ventures WF, LLC, a
Minnesota limited liability company ("EVW"), (v) Crescendo III, L.P., a Delaware
limited partnership ("CIII"), (vi) Lawrence Equity Group, LLC, a California
limited liability company ("LEG"), (vii) and (vii) each Person who is designated
as a "Financial Sponsor" in accordance with Section 3.13 of the Indemnification
Agreement (as defined below), and (viii) ARC Holdings (each of the entities
identified in the preceding clauses (i) through (viii) being a "Beneficiary"),
EGI-ARC (in its individual capacity), TP, CWF, EVW, CIII and LEG.
WHEREAS, pursuant to that certain Plan of Liquidation adopted by the
respective boards of directors and shareholder of Carrier Direct, Inc., a Texas
corporation, and Allied Riser Communications, Inc., a Texas corporation,
formerly known as RiserCorp, Inc., dated as of November 20, 1998, each has
liquidated into RCH Holdings, Inc., a Texas corporation ("RCH"); and
WHEREAS, pursuant to an Asset Transfer Agreement: (i) RCH has
transferred to ARC Holdings, and ARC Holdings has acquired from RCH, all of the
interest of RCH in substantially all of the assets of RCH, subject to all of the
liabilities of RCH (except for certain liabilities specifically excluded
thereunder) (the "Asset Transfer"); and (ii) ARC Holdings has issued to RCH, and
RCH has acquired from ARC Holdings, 50,191,806 shares of common stock of ARC
Holdings, par value $0.0001 per share ("ARC Holdings Common Stock") representing
100% of ARC Holdings' common stock); and subject to compliance with all
applicable federal and state securities and blue sky laws, RCH shall completely
liquidate pursuant to Section 331 of the Internal Revenue Code of 1986, as
amended, and shall distribute all ARC Holdings Common Stock held by RCH to the
stockholders of RCH; and
WHEREAS, immediately following the Asset Transfer, ARC Holdings has
contributed to Allied Riser Communications, Inc., a Delaware corporation ("New
ARC"), substantially all of ARC Holdings' assets and liabilities in exchange for
1,000 shares of New ARC common stock, par value $1.00 per share (the "ARC
Contribution"), whereupon New ARC became a wholly-owned subsidiary of ARC
Holdings; and
WHEREAS, promptly following the distribution of ARC Holdings Common
Stock to the Pledgors pursuant to the liquidation of RCH, each of EGI-ARC, TP,
CV, CWF, EVW, CIII and LEG (collectively, the "Financial Sponsors"), propose to
enter into Investment Agreements (the "Investment Agreements") with ARC
Holdings, pursuant to which each Financial Sponsor will acquire ARC Holdings
Common Stock and shares of ARC Holdings Series A-1 or Series A-2 Preferred
Stock; and
WHEREAS, to induce ARC Holdings to enter into the Asset Transfer
Agreement and to induce the Financial Sponsors to enter into the respective
Investment Agreements, each of the Pledgors has agreed to indemnify ARC
Holdings, the Financial Sponsors, and certain other
1
<PAGE> 3
Indemnitees, pursuant to that certain Indemnification Agreement among each of
the Pledgors, and the beneficiaries thereunder (the "Beneficiaries"), initially
dated as of the date hereof (the "Indemnification Agreement"), against certain
liabilities of RCH and certain predecessor corporations, including breaches of
representations, warranties and covenants set forth in the Asset Transfer
Agreement, with such indemnification obligations secured by, among other things,
the pledges provided for herein.
In consideration of the foregoing, the representations and warranties
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.1 Defined Terms As used in this Stockholders' Pledge
Agreement, terms defined in the heading and the recitals shall have their
respective assigned meanings, and the following capitalized terms shall have the
meanings ascribed to them below:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Collateral" shall have the meaning set forth in Article
II.
(c) "Effective Date" shall mean the date first above written.
(d) "Indemnified Party" shall have the meaning set forth in
Article VIII.
(e) "Loss" shall mean, with respect to any Beneficiary, any
Loss as defined in the Indemnification Agreement.
(f) "Obligations" shall have the meaning set forth in Article
II hereof.
(g) "Person" shall mean any individual, corporation,
partnership, limited liability company, trust, joint stock company, business
trust, unincorporated association, joint venture, governmental authority or
other entity of any nature whatsoever.
(h) "Pledged Stock" shall mean the shares listed on Schedule 1
hereto, as such schedule may be modified from time to time in accordance with
Section 5.1 hereof.
(i) "Proceeds" shall have the meaning set forth in the UCC as
in effect from time to time in the State of Delaware.
(j) "Transaction Documents" shall mean, collectively with this
Stockholders' Pledge Agreement, the agreements and documents listed on Schedule
2 hereto, and any and all other agreements or other documents entered into or
delivered concurrently herewith or subsequent hereto in order to effectuate the
purpose and intent of any such documents and agreements, as the same may be
amended, restated, supplemented or otherwise modified from time to time in
accordance with the provisions thereof.
(k) "UCC" shall mean the Uniform Commercial Code.
2
<PAGE> 4
Section 1.2 Headings, etc The headings in this Stockholders' Pledge
Agreement are included for convenience of reference only and shall not limit or
otherwise affect the meaning or interpretation of this Stockholders' Pledge
Agreement. All pronouns and all variations thereof shall be deemed to refer to
the masculine, feminine or neuter, singular or plural, as the identity of the
Person may require.
ARTICLE II
PLEDGE AND SECURITY INTEREST
In order to secure the full and complete payment and performance by
each Pledgor of each of its obligations under the Indemnification Agreement
(regardless of whether or not such stock is restricted) (collectively, the
"Obligations"), each Pledgor hereby pledges and grants to the Collateral Agent,
for the benefit of the Beneficiaries, a continuing lien and first security
interest in (a) all of the outstanding shares of common stock, options, warrants
and all other securities of RCH and ARC Holdings currently or hereafter owned or
acquired by each such Pledgor, including, without limitation, the Pledged Stock,
(b) all securities, dividends, options, warrants, subscription I rights, cash,
instruments and other distributions and all other rights or property at any time
and from time to time receivable or otherwise distributed in respect of or in
exchange for any or all of the Pledged Stock and any other property substituted
or exchanged therefor or for any Collateral, and (c) any and all Proceeds
(including, without limitation, Proceeds of, and substitutions and replacements
for, the foregoing (all of the property and rights described in the foregoing
clauses (a) through (c) being herein collectively called the "Collateral").
ARTICLE III
DEPOSIT OF CERTIFICATES FOR PLEDGED STOCK
Each of the Pledgors shall deliver or cause to be delivered (and
authorize the delivery) to the Collateral Agent, concurrently with the execution
of this Stockholders' Pledge Agreement, the certificates representing the
Pledged Stock, endorsed in blank or accompanied by appropriate instruments of
transfer or assignments duly endorsed in blank. The Collateral Agent shall not
have any duty to assure that all certificates representing the Pledged Stock
have been delivered to it or any obligation whatsoever with respect to the care,
custody or protection of any certificates or instruments which may be delivered
to it except only to exercise the same care in physically safekeeping such
certificates or instruments as it would exercise in the ordinary course of its
own business. Neither the Collateral Agent, any Beneficiary, nor any of their
respective directors, members, officers, employees or agents shall be liable for
any failure, or be obligated, to preserve or protect any rights with respect to
the Pledged Stock or to receive or give any notice with respect thereto whether
or not the Collateral Agent or Beneficiary is deemed to have knowledge of such
matters.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Each of the Pledgors represents and warrants to the Collateral Agent
and to each of the Beneficiaries as of the date of each pledge and delivery
hereunder that:
3
<PAGE> 5
Section 4.1 Transferability; Title Matters. The Collateral is free and
clear of all liens, options, warrants, puts, calls, or other rights of third
persons, and restrictions (including, without limitation, restrictions on
voting), other than (i) those liens arising under this Stockholders' Pledge
Agreement, (ii) restrictions on transferability imposed by applicable state and
federal securities laws, and (iii) restrictions under the Transaction Documents.
Upon the delivery to the Collateral Agent of the Pledged Stock, the security
interests granted to the Collateral Agent hereunder will constitute perfected
security interests therein superior and prior to all liens.
Section 4.2 Ownership of Pledged Stock. Each of the Pledgors is the
holder of record and the beneficial owner of the number of shares of issued and
outstanding ARC Holdings Common Stock or other Collateral that is set forth
opposite such Pledgor's name on Schedule 1 hereto. Such common stock or other
Collateral has been duly and validly issued and is fully paid and nonassessable.
Section 4.3 Investment; Securities Compliance. Each of the Pledgors (I)
understands that the ARC Holdings Common Stock has not been, and will not be,
registered under the Securities Act of 1933, as amended, or under any state
securities or blue sky laws, and has been issued to such Pledgor in reliance
upon federal and state exemptions for transactions not involving any public
offering, (ii) acquired the ARC Holdings Common Stock solely for its own account
for investment purposes, and not with a view to the distribution thereof, (iii)
is a sophisticated investor with knowledge and experience in business and
financial matters, (iv) has received certain information concerning ARC Holdings
and New ARC and has had the opportunity to obtain additional information as
desired in order to evaluate the merits and the risks inherent in holding the
ARC Holdings Common Stock, and (v) is able to bear the economic risk and lack of
liquidity inherent in holding the ARC Holdings Common Stock. Each Pledgor
further acknowledges that it is, as a result of being an officer, employee
and/or long standing shareholder of RCH and/or its predecessor businesses,
familiar with the business and operations of RCH (and such predecessor
businesses) and the business as proposed to be conducted by ARC Holdings and New
ARC, including the market, financial, technology and other risks associated
therewith. Each Pledgor further acknowledges and agrees that in addition to the
restrictions imposed on such Pledgor's Pledged Stock hereunder, such Pledged
Stock is further subject to, among other things, all of the restrictions on
transfer and otherwise imposed on such Pledged Stock pursuant to the
Stockholders' Agreement (as amended from time to time, the "Stockholders'
Agreement"), the applicable Subscription Agreement (as amended from time to
time, the "Subscription Agreement") and the applicable Employment Agreement (if
any) (as amended from time to time, the "Employment Agreement") to which such
Pledgor is or shall become a party, as well as all applicable federal and state
securities and blue sky laws.
Section 4.4 Title and Power to Pledge the Collateral. Each Pledgor has
good and marketable title to the Collateral and has all requisite rights, power,
and authority to execute, deliver and comply with the terms of this
Stockholders' Pledge Agreement and to pledge and deliver the Collateral to the
Collateral Agent pursuant hereto. No authorization, consent or approval of, and
no notice to or filing with, any Person is required in connection with the
execution, delivery and performance of this Stockholders' Pledge Agreement or
the exercise by the Collateral Agent of voting or other rights or remedies
provided for in this Stockholders' Pledge Agreement which has not been obtained.
4
<PAGE> 6
Section 4.5 Binding Effect. This Stockholders' Pledge Agreement
constitutes the legal, valid and binding obligation of each Pledgor enforceable
against each Pledgor in accordance with its terms.
ARTICLE V
COVENANTS
So long as any Obligations remain outstanding, each of the Pledgors
covenants and agrees with the Collateral Agent as follows:
Section 5.1 Pledge and Additional Stock. If any of the Pledgors shall
at any time acquire any additional shares of ARC Holdings Common Stock, any
other Pledged Stock or any option, warrant or other right with respect thereto,
whether such acquisition shall be by purchase, exchange, reclassification,
dividend, or otherwise, any such Pledgor shall forthwith (and without the
necessity for any request or demand by the Collateral Agent) pledge and deliver
the certificates representing such shares to the Collateral Agent, in the same
manner as described in Article III hereof and shall promptly thereafter deliver
to the Collateral Agent a certificate (which shall in each case be deemed to
supplement Schedule 1 attached hereto to reflect such additional shares)
executed by such Pledgor describing such Pledged Stock and certifying that the
same has been duly pledged with the Collateral Agent hereunder. Any such
additional shares shall constitute part of the Pledged Stock.
Section 5.2 Applications, Approvals and Consents. Each Pledgor will, at
the expense of ARC Holdings, so long as (i) no claims have been made and remain
unresolved in full under the Indemnification Agreement, and (ii) no Pledgor
shall be in breach of any obligations thereunder, hereunder or under such
Pledgor's Employment Agreement (if any), Subscription Agreement or Stockholders'
Agreement (the "Expense Condition"), and otherwise, at such Pledgor's expense,
promptly execute and deliver, or cause the execution and delivery of, all
applications, certificates, instruments, registration statements, and all other
documents and papers the Collateral Agent may reasonably request in connection
with the obtaining of any consent, approval, registration, qualification, or
authorization of any Person necessary or appropriate for the effective exercise
of any rights under this Stockholders' Pledge Agreement. Without limiting the
generality of the foregoing, each of the Pledgors agrees that in the event the
Collateral Agent shall exercise its right to sell, transfer, or otherwise
dispose of or take any other action in connection with any of the Collateral
pursuant to this Stockholders' Pledge Agreement, each of the Pledgors shall
execute and deliver all applications, certificates, and other documents the
Collateral Agent may request and shall otherwise promptly, fully, and diligently
cooperate with the Collateral Agent and any other necessary Persons, in making
any application for the prior consent or approval of any Person to the exercise
by the Collateral Agent of any of such rights relating to all or any part of the
Collateral.
Section 5.3 Security Interest and Lien. Each of the Pledgors (A) will
preserve, warrant, and defend title to and ownership of the Pledged Stock and
the lien and security interest created hereby in the Collateral against the
claims of all Persons whomsoever and maintain and preserve such lien and
security interest at all times during the term of this Stockholders' Pledge
Agreement; (B) will not at any time sell, assign, pledge, transfer or otherwise
dispose of or contract to sell, assign, transfer or otherwise dispose of its
right, title and interest in and to any of the Collateral; (C) will not at any
time, directly or indirectly, create, assume, or suffer to exist any lien,
warrant, put, option, or other rights of third Persons and restrictions, other
than the liens created by this Stockholders' Pledge
5
<PAGE> 7
Agreement and the Stockholders' Agreement, in and to the Collateral or any part
thereof; and (D) will not do or suffer any matter or thing whereby the lien
created by this Stockholders' Pledge Agreement in and to the Collateral might or
could be impaired.
ARTICLE VI
THE AGENT
Section 6.1 Authorization and Action. Each of the Beneficiaries hereby
designates and appoints EGI-ARC to act as its collateral agent hereunder, and
authorizes the Collateral Agent to take such actions as agent on such
Beneficiary's behalf and to exercise such powers as are delegated to the
Collateral Agent by the terms of this Stockholders' Pledge Agreement together
with such powers as are reasonably incidental thereto. The Collateral Agent
shall not have any duties or responsibilities, except those expressly set forth
herein, or any fiduciary relationship with any of the Beneficiaries, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities on the part of the Collateral Agent shall be read into this
Stockholders' Pledge Agreement or otherwise exist for the Collateral Agent. In
performing its functions and duties hereunder, the Collateral Agent shall act
solely in its own behalf as a Beneficiary and as agent for the Beneficiaries and
does not assume nor shall be deemed to have assumed any obligation or
relationship of trust or agency with or for any Pledgor or any of the Pledgors'
successors or assigns. The Collateral Agent shall not be required to take any
action which exposes the Collateral Agent to personal liability or which is
contrary to this Stockholders' Pledge Agreement, any other Transaction Document
or applicable law. The appointment and authority of the Collateral Agent
hereunder shall terminate upon the indefeasible payment in full of all
Obligations or the termination of this Stockholders' Pledge Agreement, whichever
shall first occur. Each of the Beneficiaries hereby authorizes the Collateral
Agent to execute each of the UCC financing statements on behalf of each of the
Beneficiaries (the terms of which shall be binding on each of the
Beneficiaries).
Section 6.2 Delegation of Duties. The Collateral Agent may execute any
of its duties under this Stockholders' Pledge Agreement by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties.
Section 6.3 Successor Agent. The Collateral Agent (other than ARC
Holdings, if ARC Holdings becomes the Collateral Agent hereunder in accordance
with this Section 6.3) may, upon five days' notice to the Beneficiaries, resign
as Collateral Agent. If the Collateral Agent shall resign, then a majority of
the Beneficiaries during such five-day period shall appoint a successor
collateral agent. If for any reason no successor Collateral Agent is appointed
during such five-day period, then effective upon the termination of such five
day period, ARC Holdings shall perform all of the duties of the Collateral Agent
hereunder and under the other Transaction Documents, subject to removal as
Collateral Agent by vote of Beneficiaries holding a majority in number of issued
and outstanding shares of ARC Holdings Series A-1 and A-2 Preferred Stock. After
the effectiveness of any retiring Collateral Agent's resignation hereunder as
Collateral Agent, the retiring Collateral Agent shall be discharged from its
duties and obligations and the provisions of this Article VI shall continue in
effect for its benefit with respect to any actions taken or omitted to be taken
by it while it was Collateral Agent under this Stockholders' Pledge Agreement.
Section 6.4 General Immunity. Neither the Collateral Agent nor any of
its respective shareholders, members, directors, partners, officers, agents,
attorneys or employees shall be liable to any of the Beneficiaries for any
action taken or omitted to be taken by it or them hereunder or
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under any other Transaction Document or in connection herewith or therewith
except for its or their own gross negligence or willful misconduct as finally
determined in a judgment of a court of competent jurisdiction.
Section 6.5 Collateral Agent's Reimbursement and Indemnification. Each
Beneficiary agrees to reimburse and indemnify the Collateral Agent for such
Beneficiary's pro rata share (based on the number of issued and outstanding
shares of ARC Holdings Series A-1 and A-2 Preferred Stock owned by such
Beneficiary relative to the total number of all such preferred securities issued
and outstanding) of any expenses incurred by the Collateral Agent on behalf of
any of the Beneficiaries, in connection with the administration and enforcement
of, this Stockholders' Pledge Agreement or the liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind and nature whatsoever which may be imposed on, incurred by or
asserted against such Collateral Agent in its capacity as such in any way
relating to or arising out of this Stockholders' Pledge Agreement, any other
Transaction Document or any other document delivered in connection with this
Stockholders' Pledge Agreement or any other Transaction Document or the
transactions contemplated hereby or thereby by the enforcement of any of the
terms hereof or of any other Transaction Document or of any such other
documents; provided that no Beneficiary shall be liable for any of the foregoing
to the extent they arise from the gross negligence or willful misconduct of the
Collateral Agent as finally determined in a final judgment of a court of
competent jurisdiction.
ARTICLE VII
RIGHTS OF THE PLEDGOR AND THE COLLATERAL AGENT
Section 7.1 Dividends and Other Distributions.
(a) Unless and until a Loss shall occur and be
continuing, the Pledgor shall be entitled to receive directly (subject to each
Pledgor's obligations under Section 5.1), but shall retain as part of the
Collateral:
(i) all cash dividends on the Pledged Stock;
(ii) all other or additional stock or securities or
property paid or distributed by way of dividend, exercise, or
conversion in respect of the Collateral;
(iii) all other or additional stock or other
securities or property (including cash) paid or distributed in
respect of the Collateral by way of stock-split, spin-off,
split-up, reclassification, combination of shares or similar
rearrangement; and
(iv) all other or additional stock or other
securities or property which may be paid in respect of the
Collateral by reason of any consolidation, merger, exchange of
stock, conveyance of assets, liquidation or similar corporate
reorganization or other disposition of the Collateral.
(b) If a Loss has occurred and is continuing, the
Collateral Agent shall continue, in accordance with Section 5.1 hereof, to be
entitled to receive all payments or distributions of whatever kind made upon or
with respect to any Collateral and all such sums, dividends,
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distributions and other such payments shall be paid to the Collateral Agent. All
such sums, dividends, distributions and other such payments shall, if received
by any Person other than the Collateral Agent after the occurrence of a Loss, be
held in trust for the benefit of the Collateral Agent and shall forthwith be
delivered to the Collateral Agent in the exact form received (accompanied by
proper instruments of assignment and/or undated stock and/or bond powers
executed by each of the Pledgors in accordance with the Collateral Agent's
instructions) to be held subject to the terms of this Stockholders' Pledge
Agreement.
Section 7.2 Voting Rights. Unless and until a Loss shall occur and be
continuing, the Pledgors shall have the sole and exclusive right to vote and
give consents with respect to all the Collateral and to consent to, ratify, or
waive notice of any and all meetings of the shareholders of ARC Holdings (to the
extent such Collateral would entitle the Pledgor thereof to vote); provided,
however, that none of the Pledgors shall cast any vote or give any consent,
waiver or ratification or take any other action which would violate or be
inconsistent with the terms of the Indemnification Agreement, this Stockholders'
Pledge Agreement, any Subscription Agreement, any Employment Agreement, any
Investment Agreement or any of the terms of any of the other Transaction
Documents or any instrument or agreement relating to the Obligations, or which
would have the effect of impairing the position or interests of the Collateral
Agent. Upon the occurrence and during the continuance of a Loss, all such rights
of each of the Pledgors to vote and to give consents, waivers and ratifications
shall cease and all such rights shall thereupon become vested in the Collateral
Agent and the Collateral Agent shall have the sole right to exercise such
rights.
Section 7.3 Right of Sale after a Loss. Upon the occurrence and during
the continuance of a Loss, unless such Loss is timely paid pursuant to the terms
of the Indemnification Agreement, subject to compliance with applicable law, the
Collateral Agent may (i) transfer, convey and assign to ARC Holdings, and/or
(ii) sell (including, without limitation, to any or all of the Beneficiaries),
in each case, without recourse to judicial proceedings, with the right to bid
for and buy, the Collateral or any part thereof, upon 10 days' notice (which
notice is agreed to be reasonable notice for the purposes hereof) to each of the
Pledgors of the time and place of sale, for cash, upon credit or for future
delivery, at the Collateral Agent's option and in the Collateral Agent's
complete discretion:
(a) At public sale, including a sale at any broker's board or
exchange;
(b) At private sale in any commercially reasonable manner
which will not require the Collateral, or any part thereof, to be registered in
accordance with the Act or the rules and regulations promulgated thereunder, or
any other law or regulation. The Collateral Agent is also hereby authorized, but
not obligated, to take such actions, give such notices, obtain such consents,
and do such other things as it may deem required or appropriate in the event of
sale or disposition of any of the Collateral, and each of the Pledgors agrees
that the Collateral Agent shall not be liable or accountable to any of the
Pledgors for any discount allowed by reason of the fact that such Collateral is
sold in compliance with any applicable limitation or restriction of any
governmental regulatory authority or official. Each of the Pledgors understands
that the Collateral Agent may in its discretion approach a restricted number of
potential purchasers and that a sale under such circumstances may yield a lower
price for the Collateral, or any portion thereof, than would otherwise be
obtainable if the same were registered and sold in the open market. Any such
private sale shall not by reason thereof be deemed not to have been made in a
commercially reasonable manner. In the event of any such sale under the
circumstances described in this Section 7.3(b), the Collateral Agent shall not
incur any responsibility or liability for selling the whole or any part of the
Collateral at a price which the Collateral Agent may deem reasonable under the
circumstances,
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notwithstanding the possibility that a substantially higher price might be
realized if any such sale were a public sale. Each of the Pledgors agrees that
in the event the Collateral Agent shall so sell the Collateral, or any portion
thereof, at such private sale or sales, the Collateral Agent shall have the
right to rely upon the advice and opinion of any Person who regularly deals in
or evaluates stock of the type constituting the Collateral as to the price
obtainable in a commercially reasonable manner upon such a private sale thereof.
In the case of any sale by the Collateral Agent of the
Collateral on credit or for future delivery, the Collateral sold may be retained
by the Collateral Agent until the selling price is paid by the purchaser, but
the Collateral Agent shall not incur liability in case of failure of the
purchaser to take up and pay for the Collateral so sold.
In connection with the sale of any of the Collateral, the
Collateral Agent is authorized, but not obligated, to limit prospective
purchasers to the extent deemed necessary or desirable by the Collateral Agent
to render such sale exempt from the registration requirements of the Act and any
applicable state securities laws. In the event that, in the opinion of the
Collateral Agent, it is necessary or advisable to have such securities
registered under the provisions of such Act, or any similar law relating to the
registration of securities, each of the Pledgors agrees, at its own expense, to
(i) execute and deliver all such instruments and documents, and to do or cause
to be done such other acts and things, as may be necessary or, in the opinion of
the Collateral Agent, advisable, to register such securities under the
provisions of such Act or any applicable similar law relating to the
registration of securities, and each of the Pledgors will use its best efforts
to cause the registration statement relating thereto to become effective and to
remain effective for such period as the Collateral Agent shall reasonably
request, and to make all amendments thereof and/or to the related prospectus
which, in the opinion of the Collateral Agent, are necessary or desirable, all
in conformity with the requirements of such Act or any applicable similar law
relating to the registration of securities and the rules and regulations of the
Securities and Exchange Commission applicable thereto; (ii) use its best efforts
to qualify such securities under state "blue sky" and securities laws, all as
reasonably requested by the Collateral Agent; (iii) at the request of the
Collateral Agent, indemnify and hold harmless the Collateral Agent, any
shareholders, members, directors, underwriters, employees, officers, agents,
attorneys and accountants (collectively, the "Indemnified Parties") from and
against any loss, liability, claim, damage, and expense (including, without
limitation, reasonable fees and expenses of counsel incurred in connection
therewith) under such Act or otherwise, insofar as such loss, liability, claim,
damage, or expense arises out of or is based upon any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such securities were registered under such Act or other
securities laws, any preliminary prospectus or final prospectus contained
therein, or arises out of or is based upon any omission or alleged omission to
state therein a material fact required to be stated or necessary to make the
statements therein not misleading, such indemnification to remain operative
regardless of any investigation made by or on behalf of any Indemnified Party;
provided, however, that the Pledgors shall not be liable in any case to the
extent that any such loss, liability, claim, damage, or expense arises out of or
is based upon an untrue statement or alleged untrue statement or an omission or
an alleged omission made in reliance upon and in conformity with written
information furnished to the Pledgors by an Indemnified Party specifically for
use in such registration statement or preliminary or final prospectus; (iv) use
best efforts to cause ARC Holdings to make available to its security holders, as
soon as practicable, an earnings statement that will satisfy the provisions of
Section 11(a) of such Act; and (v) do or cause to be done all such other acts
and things as may be necessary to make such sale of the Collateral or any part
thereof valid and binding and in compliance with applicable law.
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Section 7.4 Remedies. If a Loss shall have occurred and be continuing,
the Collateral Agent shall be entitled to exercise all of the rights, powers and
remedies (whether vested in it by this Stockholders' Pledge Agreement, the
Indemnification Agreement, by law, in equity, by statute or otherwise,
including, without limitation, all rights and remedies of a secured party of a
debtor in default under the UCC in effect in the applicable jurisdiction from
time to time or any other relevant jurisdiction at that time) for the protection
and enforcement of its rights in respect of the Collateral, and, to the extent
permitted by applicable law, the Collateral Agent shall be entitled, without
limitation, to exercise the following rights, which each of the Pledgors hereby
agrees to be commercially reasonable:
(a) to exercise all of the rights, powers, and remedies in
respect of the Collateral otherwise exercisable under Section 7.3 above and this
Section 7.4 by each of the Pledgors;
(b) to transfer all or any part of the Collateral into the
Collateral Agent's name or the name or names of its nominee or nominees without
any indication that such Collateral is subject to the security interest
hereunder;
(c) to vote all or any part of the Collateral and give all
consents, waivers and ratifications in respect of the Collateral and otherwise
act with respect thereto as though it were the outright owner thereof, and in
furtherance thereof each of the Pledgors shall, at the request of the Collateral
Agent, execute and deliver to the Collateral Agent irrevocable proxies, in form
and substance satisfactory to the Collateral Agent, authorizing the Collateral
Agent to vote the Collateral;
(d) at any time or from time to time to sell, assign and
deliver, or grant options to purchase, all or any part of the Collateral in one
or more parcels, or any interest therein, at any public or private sale at any
exchange, broker's board or at any of the Collateral Agent's offices or
elsewhere, without demand of performance, advertisement or notice of intention
to sell or of the time or place of sale or adjournment thereof or to redeem or
otherwise (all of which are hereby expressly and irrevocably waived by each of
the Pledgors) except as may be required by mandatory provisions of law, for
cash, on credit or for other property, for immediate or future delivery without
any assumption of credit risk, and for such price or prices and on such terms as
the Collateral Agent may determine. Each of the Pledgors agrees, to the extent
that notice of sale shall be required by law, that 10 days' notice to each of
the Pledgors of the time and place of any public sale or the time after which
any private sale is to be made shall constitute reasonable notification;
provided, however, that the Collateral Agent may give any shorter notice that is
commercially reasonable under the circumstances;
(e) to settle, adjust, compromise and arrange all accounts,
controversies, questions, claims and demands whatsoever in relation to all or
any part of the Collateral;
(f) with respect to the Collateral, to execute all such
contracts, agreements, deeds, documents and instruments, to bring, defend and
abandon all such actions, suits and proceedings, and to take all actions in
relation to all or any part of the Collateral as the Collateral Agent may
determine;
(g) to appoint managers, agents and officers for any of the
purposes mentioned in the foregoing provisions of this Article VII and to
dismiss the same, all as the Collateral Agent may determine; and
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(h) generally, to take all such other action as the Collateral
Agent may determine as incidental or conducive to any of the matters or powers
mentioned in the foregoing provisions of this Section 7.4 and which the
Collateral Agent may lawfully do and to use the name of each of the Pledgors for
the purposes aforesaid and in any proceedings arising therefrom.
Section 7.5 Application of Proceeds. The Collateral Agent shall apply
the proceeds of the Collateral, including the proceeds of any sales or other
disposition of the Collateral, or any part thereof, under this Article VII, as
follows:
(a) first, to the reasonable costs and expenses (including
reasonable attorneys' fees) of holding, processing and preparing for sale or
other transfer, selling, collecting and liquidating the Collateral, and the
like, to the extent not recovered from the Pledgors hereunder;
(b) second, to the extent that any such proceeds remain after
the application described in the immediately preceding clause (a), to the
satisfaction of all Obligations of each of the Pledgors to ARC Holdings,
pursuant to the Indemnification Agreement; and
(c) third, to the extent that any such proceeds remain after
the application described in the immediately preceding clause (b), to the
satisfaction of all Obligations of each of the Pledgors to the Financial
Sponsors and Beneficiaries pursuant to Section 2.6(c) of the Indemnification
Agreement.
Section 7.6 Governance. All rights and remedies available to the
Collateral Agent with respect to the grant, foreclosure and enforcement of the
security interest and lien granted hereby and with respect to any action
permitted hereunder may be exercised solely by the Collateral Agent.
ARTICLE VIII
INDEMNITY
Each of the Pledgors shall: (i) pay all reasonable out-of-pocket costs
and expenses of the Collateral Agent, each of the Beneficiaries, and each of
their respective members, shareholders, partners, officers, directors,
employees, representatives, attorneys and agents, other than such costs and
expenses of the other shareholders, partners, officers, directors, employees,
representatives, attorneys and agents of ARC Holdings to the extent such person
is a Pledgor or Pledgor representative (each such Person whose costs and
expenses are provided for above being hereinafter referred to as an "Indemnified
Party") incurred in connection with (a) the enforcement of, or (b) any
renegotiation or restructuring of, this Stockholders' Pledge Agreement and any
amendment, waiver or consent relating thereto (including, without limitation,
the fees and disbursements of counsel for each Indemnified Party); (ii) pay and
hold each Indemnified Party harmless from and against any and all present and
future stamp or documentary taxes or any other excise or property taxes, charges
or similar levies which arise from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to, this
Stockholders' Pledge Agreement and save the Collateral Agent and each
Indemnified Party harmless from and against any and all liabilities with respect
to or resulting from any delay or omission (other than to the extent
attributable to the Indemnified Parties) to pay any such taxes, charges or
levies; and (iii) indemnify the Collateral Agent and each Indemnified Party from
and hold the Collateral Agent and each Indemnified Party harmless against any
and all costs, losses, liabilities, claims, damages or expenses actually
incurred by any of them (whether or not any of them is designated a party
thereto) arising out of or by reason of any investigation, litigation or other
proceeding related to this
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Stockholders' Pledge Agreement or any transaction contemplated hereby,
including, without limitation, the fees and disbursements of counsel incurred in
connection with any such investigation, litigation or other proceeding.
Notwithstanding anything in this Stockholders' Pledge Agreement to the contrary,
none of the Pledgors shall be responsible to any Indemnified Party, for any
losses, damages, liabilities or expenses which result solely from such
Indemnified Party's gross negligence or willful misconduct as determined in a
final judgment of a court of competent jurisdiction. Each of the Pledgors'
obligations under this Article VIII shall survive any termination of this
Stockholders' Pledge Agreement. Notwithstanding clauses (i) and (ii) above, so
long as the Expense Condition is satisfied, ARC Holdings shall pay and hold each
Pledgor harmless from and against any and all costs and expenses referred to in
clause (i) (b) (to the extent that such renegotiation is primarily for the
benefit of the Collateral Agent and Beneficiaries, and initiated by, the
Collateral Agent) and clause (ii) of this Article VIII to the extent otherwise
payable by Pledgors pursuant to such clause.
ARTICLE IX
COVENANT NOT TO ISSUE UNCERTIFICATED SECURITIES
Each of the Pledgors represents and warrants to the Collateral Agent
that all of the common stock forming part of the Pledged Stock is in
certificated form (as contemplated by Article 8 of the Uniform Commercial Code
as in effect in the State of Delaware), and covenants to the Collateral Agent
that it will not seek to convert all or any part of its existing common stock
into uncertificated form (as contemplated by Article 8 of the UCC as in effect
in the State of Delaware).
ARTICLE X
MISCELLANEOUS
Section 10.1 Further Assurances. Each of the Pledgors, at its expense,
shall from time to time execute and deliver to the Collateral Agent all such
other assignments, certificates, supplemental documents, and financing
statements, and shall do all other acts or things as the Collateral Agent may
reasonably request in order to more fully create, evidence, perfect, continue,
and preserve the validity and priority of the lien and security interest herein
created or to otherwise obtain the full benefits of this Stockholders' Pledge
Agreement.
Section 10.2 Term. This Stockholders' Pledge Agreement and the lien
arising hereunder (i) shall become effective as of the date hereof upon the
execution hereof, and (ii) shall continue in full force and effect until the
first to occur of (x) a Qualifying Public Offering (as defined in ARC Holdings'
Certificate of Incorporation), (y) a sale of ARC Holdings securities such that
no Beneficiary continues to own any ARC Holdings securities or a sale (directly
or indirectly) of all or substantially all of the assets of ARC Holdings, and
(z) the second year anniversary of the date of execution of this Stockholders'
Pledge Agreement. Notwithstanding clauses (x), (y), and (z) above in this
Section 10.2, or the occurrence of any of the events or circumstances described
therein, this Stockholders' Pledge Agreement and the lien arising hereunder,
shall, in the event notice of any claimed loss under the Indemnification
Agreement is given prior to such occurrence, continue in full force and effect
until the indefeasible payment in full of all of the Obligations to the
Collateral Agent and Beneficiaries in respect of indemnification claims made
within the two (2) year period commencing on the date of execution of this
Stockholders' Pledge Agreement. Upon the release of such lien as described in
the preceding sentence, the Collateral Agent, at the request and sole expense of
each
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of the Pledgors, shall execute and deliver such documents and instruments as may
be necessary to evidence such termination and release.
Section 10.3 Waivers. Except to the extent expressly otherwise provided
herein or in the Indemnification Agreement, each of the Pledgors waives, to the
extent permitted by applicable law, (i) any right to require the Collateral
Agent to proceed against any other person, to exhaust its rights in any other
Collateral, or to pursue any other right which the Collateral Agent may have,
(ii) with respect to the Obligations, presentment and demand for payment,
protest, notice of protest and non-payment, and notice of the intention to
accelerate, and (iii) all rights of marshalling in respect of any and all of the
Collateral.
Section 10.4 Obligations Not Affected. The obligations of each of the
Pledgors hereunder shall be continuing and irrevocable, absolute and
unconditional, primary and original, immediate and not contingent and shall
remain in full force and effect without regard to and shall not be released,
discharged or in any way affected by any circumstance or condition including,
without limitation, the occurrence of any one or more of the following events:
(a) any lack of the validity or enforceability of any of the
Obligations under any of the Transaction Documents or any provision thereof or
the absence of any action to enforce the same;
(b) any change in the time, manner or place of performance or
payment of, or in any other term of, all or any of the Obligations or any other
modification, supplement or amendment of or any consent to any departure from
the terms and conditions of any of the Transaction Documents;
(c) any exchange, release or nonperfection of any security for
any Obligation or the acceptance of any security therefor;
(d) the waiver by any Beneficiary of, or any extension by any
Beneficiary of the time for, payment, performance, discharge or observance by
any Pledgor of any Obligation or of any default in any of the above, or any
extension, indulgence or renewal of any Obligation by any Beneficiary;
(e) any bankruptcy, insolvency, winding up, dissolution,
liquidation, receivership, or reorganization of, or similar proceedings
affecting any Pledgor or its respective assets or any resulting release or
discharge of any of the Obligations;
(f) the recovery of any judgment against any Person or any
action to enforce the same;
(g) any failure, omission or delay in the enforcement of the
obligations of any Person under any Transaction Document (or any other
agreement) or any provision thereof;
(h) any set-off, counterclaim, deduction, defense, abatement,
suspension, deferment, diminution, recoupment, limitation or termination
available with respect to any Obligation, and, to the extent permitted by
applicable law, irrespective of any other circumstances that might otherwise
limit recourse by or against any Pledgor or any other Person;
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(i) the obtaining, amendment or release of or consent to any
departure from the obligation of any other Person, in addition to any Pledgor,
with respect to any Obligation;
(j) any compromise, alteration, amendment, modification,
extension, renewal, release or other change, or consent or other action, or
delay or omission or failure to act, in respect of any of the terms, covenants
or conditions of any Transaction Document or Obligation, or any other agreement
or any related document referred to therein, or any assignment or transfer of
any thereof;
(k) any other circumstance that might otherwise constitute a
legal or equitable defense available to or a discharge of a guarantor or surety
with respect to any Obligation;
(l) any manner of application of Collateral, or Proceeds
thereof, to all or any of the Obligations, or any manner of sale or other
disposition of any Collateral for all or any of the Obligations or any other
assets of any Pledgor, or any furnishing or acceptance of additional Collateral
or any release of any existing security;
(m) any regulatory change or other governmental action
(whether or not adverse);
(n) the partial payment or performance of the Obligations
(whether as a result of the exercise of any right, remedy, power or privilege or
otherwise) shall be accepted or received; or
(o) any default, failure or delay, whether as a result of
actual or alleged force majeure, commercial impracticability or otherwise, in
the performance of the Obligations, or by any other act or circumstance (other
than performance) which may or might in any manner or to any extent vary the
risk of any Pledgor, or which would otherwise operate as a discharge of the
Pledgor as a matter of law.
Section 10.5 Financing Statement. The Collateral Agent shall be
entitled at any time to file this Stockholders' Pledge Agreement or a carbon,
photographic, or other reproduction of this Stockholders' Pledge Agreement, as a
financing statement, but the failure of the Collateral Agent to do so shall not
impair the validity or enforceability of this Stockholders' Pledge Agreement.
Section 10.6 Survival of Representations and Warranties. The
representations and warranties of each Pledgor set forth in Article IV shall
survive the effective date of this Stockholders' Pledge Agreement indefinitely.
Section 10.7 Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a)
when transmitted by telecopy (with an acknowledgment of receipt) or personally
delivered on a business day during normal business hours, (b) on the business
day following the date of dispatch by overnight courier or (c) on the third
business day following the date of mailing by registered or certified mail, with
postage prepaid, return receipt requested, in each case addressed to (i) any of
the Pledgors at the respective address set forth opposite such Pledgor's name on
Schedule 1, or (ii) any of the Beneficiaries or the Collateral Agent at the
respective address set forth below, or in any such case to such other address as
such Pledgor, such Beneficiary or the Collateral Agent shall have last
designated to the other party by notice given in accordance with this Section
10.7; provided, however, that a notice
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of a change of address shall not be deemed to have been given until actually
received by the addressee.
(a) Notice Address for EGI-ARC and/or the Collateral Agent:
EGI-ARC Investors, L.L.C.
c/o EGI Corporate Investments
Two North Riverside Plaza, Suite 600
Chicago, Illinois 60606
Fax: (312) 575-7024
(312) 454-9678
Attention to each of:
Donald Liebentritt, and
William T. White III
With a copy to:
Rosenberg & Liebentritt, P.C.
Two North Riverside Plaza, Suite 1600
Chicago, Illinois 60606
Fax: (312) 454-0335
Attention: Jon Wasserman
And copies to each of the Financial Sponsors.
(b) Notice Address for ARC Holdings:
ARC Holdings, Inc.
Two North Riverside Plaza, Suite 1900
Chicago, Illinois 60606
Fax: (312) 454-5956
Attention: President
With copies to:
Crouch & Hallett, L.L.P.
717 N. Harwood, Suite 1400
Dallas, Texas 75201
Fax: (214) 922-4193
Attention: Timothy R. Vaughan
And copies to each of the Financial Sponsors.
(c) Notice Address for TP:
Telecom Partners II, L.P.
3200 Cherry Creek Drive South, Suite 450
Denver, Colorado 80209
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Fax: (303) 765-1110
Attention: Steve Schovee
With a copy to:
Holland & Hart LLP
555 Seventeenth Street, Suite 3200
Denver, Colorado 80202
Fax: (303) 295-8261
Attention: Michael S. Quinn
(d) Notice Address for CWF, EVW and CIII:
c/o Crescendo Venture
Management, L.L.C.
800 LaSalle Avenue, Suite 2250
Minneapolis, Minnesota 55402
Fax: (612)607.2801
Attention: David Spreng
With a copy to:
Messerli & Kramer
1800 Fifth Street Tower
150 S. Fifth Street
Minneapolis, Minnesota 55402
Fax: (612) 672-3777
Attention: Kevin Spreng
(e) Notice Address for LEG:
Lawrence Equity Group, LLC,
c/o Joseph A. Sperske,
3615 Country Club Terrace
Danville, California 94506
Fax: (415) 398-7499
Attention: Joseph A. Sperske
(f) Notice Address for the Financial Sponsors:
Notice as provided in each of (a), (c), (d), and (e),
as provided above.
Section 10.8 Amendments. This Stockholders' Pledge Agreement may be
amended, and the observance of any term hereof may be waived, only by a written
instrument signed by (a) the Collateral Agent, (b) Financial Sponsors holding
not less than 50% of the ARC Holdings Common Stock held by all Financial
Sponsors party hereto, and (c) Pledgors holding not less than 50% of the ARC
Holdings Common Stock held by all Pledgors.
16
<PAGE> 18
Section 10.9 Inconsistent Agreements. No Pledgor shall enter with any
Person into any agreement or other arrangement of any kind which is inconsistent
with the provisions of this Stockholders' Pledge Agreement or which may impair
its ability to comply with this Stockholders' Pledge Agreement.
Section 10.10 Successors and Assigns. This Stockholders' Pledge
Agreement shall be binding upon and inure to the benefit of each of the
Pledgors, the Collateral Agent, each of the Beneficiaries, all future holders of
the Obligations and each of their respective successors and assigns, except that
none of the Pledgors may assign or transfer any of its rights or obligations
under this Stockholders' Pledge Agreement without the prior written consent of
the Collateral Agent.
Section 10.11 Severability. Each provision of this Stockholders' Pledge
Agreement shall be considered severable and if for any reason any provision
which is not essential to the effectuation of the basic purposes of this
Stockholders' Pledge Agreement is determined by a court of competent
jurisdiction to be invalid, unenforceable or contrary to existing or future
applicable law, such invalidity, unenforceability or illegality shall not impair
the operation of or affect those provisions of this Agreement which are valid,
enforceable and legal. In that case, this Stockholders' Pledge Agreement shall
be construed so as to limit any term or provision to the minimum extent
necessary so as to make it valid, enforceable and legal within the requirements
of any applicable law, and, in the event such term or provision cannot be so
limited, this Stockholders' Pledge Agreement shall be construed to omit such
invalid, unenforceable or illegal provisions.
Section 10.12 Counterparts. This Stockholders' Pledge Agreement may be
executed in any number of counterparts and by the different parties hereto on
separate counterparts, each of which when so executed and delivered shall be an
original, but all of which shall together constitute one and the same
instrument.
Section 10.13 Governing Law. This Stockholders' Pledge Agreement shall
be governed by the laws of the State of Delaware (other than its rules of
conflicts of law to the extent that the application of the laws of another
jurisdiction would be required thereby).
Section 10.14 Consent to Jurisdiction and Service of Process;
Appointment of Agent for Service of Process. Each Pledgor hereby consents to the
jurisdiction of any state or federal court located within the State of Delaware
and irrevocably agrees that all actions or proceedings arising out of or
relating to this Stockholders' Pledge Agreement shall be litigated in such
courts. Each Pledgor accepts for itself and in connection with its respective
properties, generally and unconditionally, the exclusive jurisdiction and venue
of the aforesaid courts and waives any defense of forum non conveniens, and
irrevocably agrees to be bound by any nonappealable judgment rendered thereby in
connection with this Stockholders' Pledge Agreement. The parties hereto agree to
appoint and failing any such appointment, authorize any other party to appoint
on such Person's behalf and maintain the Corporation Trust Company and such
other persons, in each case within the State of Delaware, as may hereinafter be
selected by them who irrevocably agree in writing to so serve as agent, to
receive, on behalf of the parties hereto, service of all process in any such
proceedings in any such court, such service being hereby acknowledged by the
parties hereto to be effective and binding service in every respect. A copy of
any such process so served shall be mailed by registered mail to the parties
hereto, as provided herein, except that, unless otherwise provided by applicable
law, any failure to mail such copy shall not affect the validity of service of
process. If any agent appointed by the parties hereto refuses to accept service,
the parties hereto agree that service upon the respective party hereto by
registered mail shall constitute sufficient
17
<PAGE> 19
service. Nothing herein shall affect the right of the parties hereto to serve
process in any other manner permitted by law.
Section 10.15 Waiver of Jury Trial. Each of the parties hereto hereby
irrevocably waives any and all right to trial by jury in any legal proceeding
arising out of or relating to this Stockholders' Pledge Agreement or the
transactions contemplated hereby.
Section 10.16 No Waiver; Remedies Cumulative. No failure or delay on
the part of the Collateral Agent in exercising any right, power or privilege
hereunder, and no course of dealing between any of the Pledgors and the
Collateral Agent, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Collateral Agent of any right or remedy hereunder on
any one occasion shall not be construed as a bar to any right or remedy that the
Collateral Agent would otherwise have on any future occasion. The rights and
remedies herein expressly provided are cumulative and may be exercised singly or
concurrently and as often and in such order as the Collateral Agent deems
expedient and are not exclusive of any rights or remedies that the Collateral
Agent would otherwise have, whether by security agreement or now or hereafter
existing under applicable law. No notice to or demand on any of the Pledgors in
any case shall entitle any of the Pledgors to any other or further notice or
demand in similar or other circumstances or constitute a waiver of the rights of
the Collateral Agent to any other or future action in any circumstances without
notice or demand.
Section 10.17 Entire Agreement; Nonwaiver. This Stockholders' Pledge
Agreement together with the other Transaction Documents supersedes all prior
agreements between the parties with respect to the subject matter hereof and
contains the entire agreement between the parties with respect to such subject
matter. No delay on the part of any party in exercising any right hereunder
shall operate as a waiver thereof, nor shall any waiver, express or implied, by
any party of any right hereunder or of any failure to perform or breach hereof
by any other party constitute or be deemed a waiver of any other right hereunder
or of any other failure to perform or breach hereof by the same or any other
party, whether of a similar or dissimilar nature.
Section 10.18 Tax Aspects. The parties agree that, for all federal,
state and local income and other tax purposes, (i) each of the Pledgors shall
constitute the owner of the Collateral and (ii) all items of income, gain and
loss in respect of the Collateral shall be income, gain or loss, as the case may
be, of each of the Pledgors, both before and after any Loss.
18
<PAGE> 20
IN WITNESS WHEREOF, the parties have caused this Stockholders' Pledge
Agreement to be executed by their respective, duly authorized officers as of the
date first above written.
ALLIED RISER COMMUNICATIONS HOLDINGS, INC.
/s/ TODD DOSHIER
------------------------------------
By: Todd Doshier
Its: Chief Financial Officer
EGI-ARC INVESTORS, L.L.C.
(as collateral agent and in its individual
capacity)
By: GAMI Investments, Inc.,
Its Managing Member
/s/ DONALD J. LIEBENTRITT
------------------------------------
By: Donald J. Liebentritt
Its: Vice President
TELECOM PARTNERS II, L.P.
By: Telecom Management II, L.L.C.,
Its: General Partner
/s/ STEPHEN W. SCHOVEE
------------------------------------
By: Stephen W. Schovee
Its: Managing Member
<PAGE> 21
CRESCENDO WORLD FUND, LLC
By: Crescendo Ventures World Fund,
LLC
Its: Managing Member
/s/ JEFFREY R. TOLLEFSON
------------------------------------
By: Jeffrey R. Tollefson
Its: Partner
EAGLE VENTURES WF, LLC
/s/ JEFFREY R. TOLLEFSON
------------------------------------
By: Jeffrey R. Tollefson
Its: Vice President
CRESCENDO III, L.P.
By: Crescendo Ventures III, LLC
Its: General Partner
/s/ JEFFREY R. TOLLEFSON
------------------------------------
By: Jeffrey R. Tollefson
Its: Partner
LAWRENCE EQUITY GROUP, LLC
/s/ JOSEPH A. SPERSKE
------------------------------------
By: Joseph A. Sperske
Its: Vice President
<PAGE> 22
/s/ JAMES P. BREEN
-----------------------------------------
James P. Breen
/s/ DAVID H. CRAWFORD
-----------------------------------------
David H. Crawford
/s/ TODD DOSHIER
-----------------------------------------
Todd Doshier
/s/ MIKE SCHMITT
-----------------------------------------
Mike Schmitt
/s/ CHUCK YEARGAIN
-----------------------------------------
Chuck Yeargain
<PAGE> 23
SCHEDULE 1
LIST OF PLEDGED STOCK ISSUED BY
ALLIED RISER COMMUNICATIONS HOLDINGS, INC.
<TABLE>
<CAPTION>
CERTIFICATE NUMBER OF
NAME ADDRESS NUMBER CLASS SHARES
- ------------------ -------------------- ------------ ------------------- ----------
<S> <C> <C> <C> <C>
James P. Breen 230 Laurel Avenue 12 ARC Holdings Common 3,800,000
Wilmette, IL 60091 Stock
David H. 1510 Dearborn Pkwy, 24 ARC Holdings 6,600,000
Crawford Apt. #401 Common STock
Chicago, IL
60610
Todd Doshier 2720 Daniel Avenue 31 ARC Holdings 6,529,712
Dallas, TX Common Stock
Mike Schmitt 6412 Armstrong ARC Holdings 3,850,369
Dallas, TX 75205 99 Common Stock
Chuck Yeargain 6116 Annadale Drive, 128 ARC Holdings 4,775,165
Fort Worth TX Common Stock
</TABLE>
<PAGE> 1
EXHIBIT 10.8
SERIES A-1 PREFERRED STOCK AND COMMON STOCK
INVESTMENT AGREEMENT
DATED DECEMBER 30, 1998
AND EFFECTIVE AS OF NOVEMBER 23, 1998
BETWEEN
ALLIED RISER COMMUNICATIONS HOLDINGS, INC.
AND
NORWEST VENTURE PARTNERS VII, L.P.
<PAGE> 2
TABLE OF CONTENTS
SECTION 1.
AUTHORIZATION AND CLOSING.
<TABLE>
<S> <C> <C>
A. Authorization of the Series A-1 Preferred and the Common Stock.............1
B. Purchase and Sale of the Series A-1 Preferred and the Common Stock.........1
C. The Closing. ..............................................................1
SECTION 2.
CLOSING CONDITIONS
A. Representations and Warranties; Covenants..................................2
B. Certificate of Incorporation...............................................2
C. Bylaws.....................................................................2
D. Subsidiary Organizational Documents........................................2
E. Reorganization.............................................................2
F. Indemnification Agreement and Stockholders' Pledge Agreement. .............2
G. Registration Rights Agreement..............................................2
H. Stockholders' Agreement....................................................2
I. Employment Agreements and Subscription Agreements..........................3
J. Securities Law Compliance..................................................3
K. Authorization and Reservation of Common Stock............................. 3
L. Authorization and Reservation of Company Preferred.........................3
M. Sale of Company Preferred and Common Stock.................................3
N. Opinion of The Company's Counsel...........................................3
O. Repayment of Funded Debt...................................................3
P. Concurrent Purchases.......................................................4
Q. Certain Operating Agreements. .............................................4
R. Warrants...................................................................4
S. Board Composition..........................................................4
T. Second Round Documents ....................................................4
U. Closing Documents .........................................................4
V. Proceedings................................................................5
W. Waiver.....................................................................5
SECTION 3.
COVENANTS.
A. Financial Statements and Other Information.................................5
B. Inspection of Property.....................................................8
C. Attendance at Board Meetings.............................................. 8
D. Use of Proceeds............................................................9
E. Negative Covenants. .......................................................9
F. Affirmative Covenants. ...................................................12
G. Intellectual Property Rights..............................................13
H. Current Public Information................................................13
I. FIRPTA....................................................................13
J. Certain Preemptive Rights.................................................14
K. Authorized and Reserved Common Stock and Company Preferred................15
L. Designation of Directors..................................................15
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 4.
TRANSFER OF RESTRICTED SECURITIES.
A. General Provisions........................................................15
B. Rule 144A.................................................................15
C. Legend Removal............................................................15
SECTION 5.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
A. Organization and Corporate Power..........................................16
B. Capital Stock and Related Matters.........................................16
C. Subsidiaries..............................................................17
D. Authorization; No Breach..................................................17
E. Assets....................................................................17
F. Other Representations, Warranties, Covenants and Deliveries...............17
G. Closing Date..............................................................18
SECTION 6.
DEFINITIONS.
A. Definitions...............................................................18
SECTION 7.
MISCELLANEOUS.
A. Expenses..................................................................21
B. Remedies..................................................................21
C. Purchaser Representations.................................................21
D. Consent to Amendments.....................................................22
E. Survival of Representations and Warranties................................22
F. Successors and Assigns. ..................................................22
G. Severability..............................................................23
H. Counterparts..............................................................23
I. Descriptive Headings; Interpretation. ....................................23
J. Governing Law.............................................................23
K. Notices...................................................................23
L. Understanding Among the Purchasers........................................24
M. Integration...............................................................24
N. Capital and Surplus; Special Reserves.....................................24
O. Treatment of Company Preferred............................................24
</TABLE>
iii
<PAGE> 4
LIST OF EXHIBITS
Exhibit A -Concurrent Purchases
Exhibit B -Allied Riser Communications Holdings, Inc. Certificate of
Incorporation
Exhibit C - Allied Riser Communications Holdings, Inc. Bylaws
Exhibit D - Allied Riser Communications, Inc. Organizational Documents
Exhibit E -Indemnification Agreement and Stockholders' Pledge Agreement
Exhibit F -Registration Rights Agreement
Exhibit G -Stockholders' Agreement and Amendment No. 1 and Joinder Thereto
Exhibit H -Three Forms of Employment Agreements, and Schedule of Necessary
Signatories (Specifying the Applicable Form), and Specifying Certain
Terms Thereof; and Four forms of Subscription Agreement, Amendment
No. 1 and Amendment No. 2 Thereto, and Schedule of Necessary
Signatories (Specifying Applicable Form)
Exhibit I -Opinions of Allied Riser Communications Holdings, Inc. Counsel
Exhibit J -Allied Riser Communications Holdings, Inc. Officers' Certificate
Exhibit K -Joinder to Indemnification Agreement, Waiver and Consent, and
Amendment No. 2 and Joinder to Stockholders' Agreement and First
Amendment to Registration Rights Agreement
Exhibit L -Material Differences Between Forms of Investment Agreements
iv
<PAGE> 5
ALLIED RISER COMMUNICATIONS HOLDINGS, INC.
SERIES A-1 PREFERRED STOCK AND COMMON STOCK INVESTMENT AGREEMENT
THIS AGREEMENT is made December 30, 1998 and effective as of
November 23, 1998, between Allied Riser Communications Holdings, Inc., a
Delaware corporation (the "Company"), and Norwest Venture Partners VII, L.P.
("Purchaser"). Except as otherwise indicated herein, capitalized terms used
herein have the meanings ascribed to such terms in Section 6 hereof.
The parties hereto agree as follows:
SECTION 1. AUTHORIZATION AND CLOSING.
A. Authorization of the Series A-1 Preferred and the Common
Stock. The Company has authorized the issuance and sale (i) to the Purchaser of
15 shares of the Company's Series A-1 Preferred Stock ("Series A-1
Preferred"), and 65,619,675 shares of the Company's Common Stock, par value
$0.0001 per share ("Common Stock"), and (ii) to the other Persons identified on
Exhibit A attached hereto (the "Concurrent Purchasers"), that number of shares
of Common Stock and Series A-1 Preferred (all such Series A-1 Preferred and
Company Series A-2 Preferred, and all such additional Series A-1 Preferred and
Series A-2 Preferred as may be issued from time to time being hereinafter
referred to collectively as the "Company Preferred") as is set forth on such
Exhibit A, in each such case with respect to Concurrent Purchases, for the
consideration set forth on such Exhibit, and having the rights and preferences
set forth in Exhibit B attached hereto.
B. Purchase and Sale of the Series A-1 Preferred and the
Common Stock. At the Closing, the Company shall sell to the Purchaser and,
subject to the terms and conditions set forth herein, the Purchaser shall
purchase from the Company (i) the number of shares of Series A-1 Preferred for
the consideration set forth on Exhibit A, and (ii) the number of shares of
Common Stock for the consideration set forth on Exhibit A.
C. The Closing. The closing of the purchase and sale of the
Series A-1 Preferred and the Common Stock to Purchaser (the "Closing") shall
take place at the offices of Rosenberg & Liebentritt, P.C., Two North Riverside
Plaza, Suite 1600, Chicago, Illinois, at 10:00 a.m. (local time) on December 30,
1998, and effective as of November 23, 1993 (the "Effective Date"), or at such
other place or on such other date as may be mutually agreeable to the Company,
the Purchaser and the Concurrent Purchasers, it being agreed and acknowledged by
the parties hereto that the Company and each Concurrent Purchaser desires to
cause the Closing to occur as soon as is reasonably practicable following the
satisfaction or waiver of the respective Closing Conditions. At the Closing, the
Company shall deliver to the Purchaser stock certificates evidencing the Series
A-1 Preferred and the Common Stock to be purchased by the Purchaser, in each
case, registered in the Purchaser's or its nominee's name, upon payment of the
purchase price thereof by wire transfer of immediately available funds to a bank
account of the Company designated by the Company to the Purchaser prior to
Closing.
SECTION 2. CLOSING CONDITIONS. The obligation of the Purchaser
to purchase and pay for the Series A-1 Preferred and the Common Stock at the
Closing is subject to the satisfaction as of the Closing of each of the
following conditions in this Section 2:
1
<PAGE> 6
A. Representations and Warranties; Covenants. The
representations and warranties contained in Section 5 hereof shall be true and
correct at and as of the Effective Date as though then made and the Company
shall have performed in all respects all of the covenants required to be
performed by it hereunder prior to the Closing.
B. Certificate of Incorporation. The Company's Certificate of
Incorporation (the "Certificate of Incorporation") shall be as set forth in
Exhibit B hereto, and shall be in full force and effect under the laws of the
State of Delaware as of the Closing.
C. Bylaws. The Company's bylaws shall be in the form of
Exhibit C attached hereto, (the "Company Bylaws") and shall be in full force and
effect under the laws of the State of Delaware as of the Closing.
D. Subsidiary Organizational Documents. The certificate of
incorporation and bylaws of Allied Riser Communications, Inc., a wholly-owned
subsidiary of the Company incorporated and existing under the laws of the State
of Delaware ("New ARC"), shall be as set forth in Exhibit D hereto, and shall be
in full force and effect under the laws of the State of Delaware as of the
Closing (the "Subsidiary Organizational Documents").
E. Reorganization. The Reorganization (i) shall have been
completed (excluding completion of the RCH Liquidation (as defined in the
Indemnification Agreement)), in accordance with all federal, Texas, Delaware,
California, Indiana and other applicable laws, and (ii) shall have been approved
unanimously by the board of directors and by the shareholders of RCH Holdings,
Inc. at a duly noticed and convened special meeting of shareholders, and, to the
extent necessary or desirable, the board of directors and shareholder of each
Former Subsidiary. No Person shall have commenced exercise of appraisal or
similar rights with respect to the Reorganization, or, to the best knowledge of
the Company and its officers after due inquiry, threatened to exercise such
rights (other than any such threats or exercises as have been affirmatively
withdrawn in writing, with copies of such withdrawals having been provided to
Purchaser). All governmental and third party consents necessary in connection
with the Reorganization, the transactions contemplated hereby and in connection
with the Concurrent Purchases, shall have been properly obtained in writing or
proper provision made therefor, all to the satisfaction of Purchaser, and no
litigation shall have been commenced in respect of any such transaction, and to
the best knowledge of the Company and its officers after due inquiry, threatened
in connection therewith.
F. Indemnification Agreement and Stockholders' Pledge
Agreement. The Indemnification Agreement and Stockholders' Pledge Agreement in
the forms attached hereto as Exhibit E (including the Collateral, as defined
therein), shall have been executed and delivered by each of James Breen, David
Crawford, Todd Doshier, Mike Schmitt, and Chuck Yeargain, and such agreements
shall be in full force and effect as of the Closing.
G. Registration Rights Agreement. The Company and each
Concurrent Purchaser shall have entered into and delivered a registration rights
agreement in the form of Exhibit F attached hereto (including the applicable
Current Modification Agreement, the "Registration Rights Agreement"), and the
Registration Rights Agreement shall be in full force and effect as of the
Closing.
H. Stockholders' Agreement. The Company, each Concurrent
Purchaser, and each of the Company's other stockholders (including the spouse of
any such stockholder residing or previously residing in a community property
state) who shall have received or who
2
<PAGE> 7
shall be purchasing and receiving Common Stock on the date of this Agreement,
shall have entered into and delivered a stockholders' agreement in the form of
Exhibit G attached hereto (the "Stockholders' Agreement"), and the Stockholders'
Agreement shall be in full force and effect as of the Closing.
I. Employment Agreements and Subscription Agreements. (x) New
ARC shall have entered into the employment agreements as set forth on, and in
accordance with the terms of, Exhibit H attached hereto, with each of the other
applicable parties thereto (collectively, the "Employment Agreements"), (y) each
Person who shall have received or who shall be purchasing and receiving Common
Stock on or after the date of this Agreement pursuant to the RCH Liquidation (as
defined in the Indemnification Agreement) shall have executed the appropriate
form of Subscription Agreement (as amended in a manner satisfactory to the
Purchaser through the date of acceptance by the Company, the "Subscription
Agreements") as set forth on and in accordance with the terms of Exhibit H
attached hereto, and each such subscription shall have been accepted by RCH
Holdings, and (z) each such Employment Agreement and Subscription Agreement
shall be in full force and effect as of the Closing.
J. Securities Law Compliance. The Company shall have made all
filings under all applicable federal and state securities laws and obtained all
approvals and satisfied all temporal notice requirements, in each case,
necessary to consummate the issuance of the Company Preferred and the Common
Stock pursuant to the terms of this Agreement in compliance with such laws and
as necessary and desirable to issue and distribute all other securities in
connection with the Reorganization.
K. Authorization and Reservation of Common Stock. The Company
shall have duly authorized and reserved for issuance, a number of shares of
Common Stock sufficient in Purchaser's opinion, to accommodate shares issuable
in connection with the exercise of Company stock options and the conversion of
Series A-1 and Series A-2 Preferred (including future issuances in subsequent
financing transactions and issuances in respect of dividends on Company
Preferred payable in Company Preferred).
L. Authorization and Reservation of Company Preferred. The
Company shall have duly authorized and reserved for issuance, a number of shares
of Series A-1 Preferred and A-2 Preferred sufficient in Purchaser's opinion, to
accommodate future financing transactions and dividends on Company Preferred
payable in the form of Company Preferred.
M. Sale of Company Preferred and Common Stock. The Company
shall have simultaneously sold to each Concurrent Purchaser the Preferred Stock
and Common Stock to be purchased by or on behalf of such Persons identified on
Exhibit A attached hereto at the Closing and shall have received payment
therefor in full in accordance therewith.
N. Opinion of The Company's Counsel. The Purchaser shall have
received from Crouch & Hallett, L.L.P., counsel for the Company, (i) an opinion
with respect to the matters set forth in Exhibit I attached hereto (which
opinion may rely as to factual matters on certificates of other Persons), and
(ii) the opinion referred to in Section 4.1(a)(i) of the Asset Transfer
Agreement, in each case, addressed to the Purchaser, dated the date of the
Closing, and in form and substance reasonably satisfactory to Purchaser and its
counsel.
O. Repayment of Funded Debt. The Company shall have caused
S.Z. Investments, L.L.C., to be repaid in full, or shall have made adequate
provision for the prompt
3
<PAGE> 8
repayment of, all amounts owing in respect of the Credit Agreement (as defined
in the Asset Transfer Agreement).
P. Concurrent Purchases. The final forms of the Investment
Agreements of each Concurrent Purchaser shall be in form and substance
reasonably satisfactory to Purchaser.
Q. Certain Operating Agreements. The Company or a predecessor
to the Company, shall have entered into and provided the Purchaser with true,
correct and fully executed copies of, each of the EOPT Agreements, and each such
agreement shall (i) be in full force and effect in accordance with the terms
thereof, and (ii) to the extent necessary or desirable, be assignable to New
ARC.
R. Warrants. All rights of Advest, Inc., Mr. Graham, Todd
Doshier, Chuck Yeargain, and Al Zlogar otherwise entitling any such Person to
(a) equity or the contractual right to receive equity, consideration based on
the value of equity of the Company or any Company Affiliate or predecessor, or
(b) consideration in respect of the investment by any other Person in the debt
or equity of the Company, any Company Affiliate or in respect of any similar
transaction or any "finders" fee shall have been extinguished to the
satisfaction of Purchaser and written evidence satisfactory to Purchaser shall
have been provided to Purchaser.
S. Board Composition. The Purchaser's designee(s) to the
Company's board of directors, if any, shall be elected simultaneously with the
Closing, and the New ARC board of directors shall have been reconstituted in a
manner complying with the Stockholders' Agreement.
T. Second Round Documents. The appropriate parties shall have
executed and delivered the Current Modification Agreements.
U. Closing Documents. The Company shall have delivered or
caused to be delivered to the Purchaser all of the following documents:
(i) an Officers' Certificate, dated the date of the
Closing, stating that the conditions specified in Section 1 and
Sections 2.A through 2.V, inclusive, have been fully satisfied;
(ii) certified copies (a) of the resolutions duly
adopted by the Company's board of directors authorizing the execution,
delivery and performance of this Agreement and each of the other
agreements contemplated hereby, the filing and effectiveness of the
Certificate of Incorporation, the issuance and sale of the Series A-1
Preferred, the Series A-2 Preferred, the issuance of the Common Stock,
the reservation for issuance of Company Preferred and Common Stock
meeting the standards set forth in Sections 2.K and 2.L above, and the
consummation of all other transactions (including the Concurrent
Purchases and the Reorganization Transactions (excluding completion of
the RCH Liquidation)) to which the Company and/or New ARC is a party
and contemplated by this Agreement, and (b) documentation evidencing
the unanimous board and shareholder approvals referred to in Section
2.E above;
4
<PAGE> 9
(iii) certified copies of the Certificate of
Incorporation, Company Bylaws and New ARC Organizational Documents, in
each case, as in effect at the Closing;
(iv) fully executed copies of each of the Employment
Agreements and Subscription Agreements, as in effect at the Closing;
(v) copies of all consents and approvals of each
Person required to consummate the Reorganization Transactions, the
transactions contemplated hereunder, and in connection with each of the
Concurrent Purchases;
(vi) certificates representing the Common Stock and
Series A -1 Preferred Stock to be issued to the Purchaser in accordance
with Section 1.B hereof, registered in the Purchaser's or its nominee's
name;
(vii) copies of the Asset Transfer Agreement and
Liquidation Documents, Indemnification Agreement, and Stockholders'
Pledge Agreement (including all certificates representing the initial
collateral thereunder in accordance with the terms thereof), in each
case, in full force and effect;
(viii) satisfactory documentation regarding the
matters identified in Section 2.R above;
(ix) the legal opinions referred to in Section 2.N;
(x) fully executed copies of each agreement referred
to in Section 2.Q above, accompanied by consents to assignment, where
appropriate or necessary, in each case in full force and effect; and
(xi) such other documents relating to the
transactions contemplated by this Agreement (including the Concurrent
Purchases), and the Reorganization, as Purchaser or its counsel may
request.
V. Proceedings. All corporate and other proceedings taken or
required to be taken by the Company and any other Person (including New ARC) in
connection with the transactions contemplated hereby, by the Reorganization
Transactions and in the Concurrent Purchases transaction documents to be
consummated at or prior to the Closing and all documents incident thereto shall
be reasonably satisfactory in form and substance to Purchaser and its counsel.
W. Waiver. Any condition specified in this Section 2 may be
waived by the Purchaser; provided that no such waiver shall be effective against
any such Person unless it is explicitly set forth in a writing executed by such
Person.
SECTION 3. COVENANTS.
A. Financial Statements and Other Information. The Company
shall deliver to Purchaser, so long as Purchaser and/or its Affiliates own three
(3) or more shares of Company Preferred or 5% or more of the issued and
outstanding Common Stock (such Purchaser being a "Qualifying Holder"):
5
<PAGE> 10
(i) as soon as available but in any event within 30
days after the end of each monthly accounting period in each fiscal
year, unaudited consolidating and consolidated statements of income and
cash flows of the Company and its Subsidiaries for such monthly period
and for the period from the beginning of the fiscal year to the end of
such month, and unaudited consolidating and consolidated balance sheets
of the Company and its Subsidiaries as of the end of such monthly
period, setting forth in each case comparisons to the Company's annual
budget (beginning in fiscal 1999), and to the corresponding period in
the preceding fiscal year (which, for fiscal year 1999, shall be a
comparison to the Company's projections for fiscal 1999), and all such
statements shall be prepared in accordance with generally accepted
accounting principles, consistently applied, and shall be certified by
the Company's chief financial officer;
(ii) as soon as available but in any event within 45
days after the end of each quarterly accounting period in each fiscal
year, unaudited consolidating and consolidated statements of income and
cash flows of the Company and its Subsidiaries for such quarterly
period and for the period from the beginning of the fiscal year to the
end of such quarter, and consolidated balance sheets of the Company and
its subsidiaries as of the end of such quarterly period, setting forth
in each case comparisons to the annual budget and to the corresponding
period in the preceding fiscal year, and all such statements shall be
prepared in accordance with generally accepted accounting principles,
consistently applied, and shall be certified by the Company's chief
financial officer;
(iii) within 90 days after the end of each fiscal
year, audited consolidating and consolidated statements of income and
cash flows of the Company and its Subsidiaries for such fiscal year,
and consolidating and consolidated balance sheets of the Company and
its Subsidiaries as of the end of such fiscal year, setting forth in
each case comparisons to the Company's annual budget (beginning in
fiscal 1999),and to the preceding fiscal year, all prepared in
accordance with generally accepted accounting principles, consistently
applied, and accompanied by (a) with respect to the consolidated
portions of such statements (and not with respect to budgets and/or
projections), an unqualified opinion of Arthur Andersen LLP or such
other independent accounting firm of recognized national standing
approved by the Company's board of directors, (b) a certificate from
such accounting firm, addressed to the Company's board of directors,
stating that in the course of its examination nothing came to its
attention that caused it to believe that there was any default by the
Company or any Subsidiaries in the fulfillment of or compliance with
any of the terms, covenants, provisions or conditions of any material
agreement to which the Company or any Subsidiaries is a party or, if
such accountants have reason to believe any default by the Company or
any Subsidiaries exists, a certificate specifying the nature and period
of existence thereof, and (c) a copy of such firm's annual management
letter to the board of directors;
(iv) promptly upon receipt thereof, any additional
reports, management letters or other detailed information concerning
significant aspects of the Company's operations or financial affairs
given to the Company by its independent accounts (and not otherwise
contained in other materials provided hereunder);
(v) at least 45 days (but not more than 90 days)
prior to the beginning of each fiscal year, beginning in the fourth
quarter of fiscal 1999, a budget plan (and in the case of fiscal year
1999, on December 1, 1998, a draft budget plan), including a
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timetable of key events, will have been submitted to the Company's
board of directors for approval for the preparation of annual budgeted
statements of income and cash flows and budgeted balance sheets, which
budgeted financial statements will have been submitted to the Company's
board of directors for approval prior to the beginning of such fiscal
year and will have been approved by the Company's board of directors
prior to the thirtieth day of such fiscal year, prepared on a monthly
basis for the Company and its Subsidiaries for such fiscal year
(displaying anticipated statements of income and cash flows and balance
sheets), and promptly upon preparation thereof any other significant
budgets prepared by or on behalf of the Company and any revisions of
such annual or other budget (each of which shall be reviewed and
approved by the Company's board of directors);
(vi) promptly (but in any event within five (5)
business days) after the discovery by an executive officer of the
Company, or receipt of notice by the Company, of any default under any
material agreement to which the Company or any of its Subsidiaries is a
party or any other material adverse change, event or circumstance
affecting the Company or any Company Subsidiary (including, without
limitation, the filing of any material litigation against the Company
or any Company Subsidiary or the existence of any dispute with any
Person which involves a reasonable likelihood of such litigation being
commenced), an Officer's Certificate specifying the nature and period
of existence thereof and what actions the Company and its Subsidiaries
have taken and propose to take with respect thereto;
(vii) within ten (10) days after transmission
thereof, copies of all registration statements and all regular, special
or periodic reports which it files, or any of its officers or directors
file with respect to the Company or any Company Subsidiary, with the
Securities and Exchange Commission or with any securities exchange on
which any of its securities are then listed, and copies of all press
releases and other statements made available generally by the Company
or any Subsidiary to the public concerning material developments in the
Company's and its Subsidiaries' businesses; and
(viii) with reasonable promptness, such other
information and financial data concerning the Company or its
Subsidiaries as any Qualifying Holder may reasonably request.
Each of the financial statements referred to in this Section A shall fairly
present the financial condition and results of operations of the Company and its
Subsidiaries as of the dates thereof and for the periods reflected therein and
shall be true and correct in all material respects, subject in the case of the
unaudited financial statements to changes resulting from normal year-end
adjustments (consistent in nature and amount with past practice) for recurring
accruals (none of which would, individually or in the aggregate, be materially
adverse to the financial condition, operating results, assets, operations or
business prospects of the Company and its Subsidiaries taken as a whole) and
lack of footnotes.
Notwithstanding the foregoing, the provisions of this Section A shall cease to
be effective so long as the Company (a) is subject to the periodic reporting
requirements of the Securities Exchange Act and continues to comply with such
requirements, and (b) promptly provides to each Person otherwise entitled to
receive information pursuant to this Section A all reports and other materials
filed by the Company and each Subsidiary with the Securities and Exchange
Commission pursuant to the periodic reporting requirements of the Securities
Exchange Act; provided that so long as any Company Preferred remains
outstanding, the Company shall
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continue to deliver to each Qualifying Holder, the information specified in
Sections A(v) and A(vi) above, and copies of all press releases and other
statements made available generally by the Company or any Company Subsidiary to
the public concerning material developments in the Company's and its
Subsidiaries' businesses.
Except as otherwise required by law or judicial order or decree or by any
governmental agency or authority, each Person entitled to receive information
regarding the Company and its Subsidiaries under Sections 3.A, 3.B and 3.C shall
use its best efforts to maintain the confidentiality of all nonpublic
information obtained by it hereunder which the Company has designated in writing
as proprietary or confidential in nature (at the time such information is
provided, or, in the case of oral disclosures, orally identified as confidential
at the time of disclosure and designated in writing as such within 30 days after
such oral disclosure), provided that each such Person (i) may, to the extent
required by law, disclose such information in connection with the sale or
transfer or proposed sale or transfer of any Company Preferred or Common Stock
if such Person's transferee agrees in writing to be bound by the provisions
hereof, and (ii) may disclose such information to any partner, subsidiary, or
Affiliate of such Person or to officers, directors or employees of the foregoing
(provided that such Persons are bound by confidentiality provisions similar to
those described herein) for the purpose of evaluating its investment in the
Company so long as such Person is advised of the confidential nature of the
information.
If Purchaser is requested to disclose any of the confidential information, and
Purchaser is advised by counsel that it must disclose such information or else
stand liable for contempt or other penalty or censure, Purchaser will promptly
notify the Company of such request so that the Company may seek a protective
order or other appropriate remedy. Purchaser agrees to cooperate with the
Company, at the Company's expense, in its efforts to obtain such remedies, but
this provision will not be construed to require Purchaser to undertake
litigation or other legal proceedings. If such protective order or other remedy
is not promptly obtained, any information that is required to be disclosed may
be disclosed by Purchaser pursuant to the advice of counsel.
For purposes of this Agreement, "confidential information" shall not include (i)
information that becomes publicly available (other than as a result of breach of
this Section 3.A), (ii) any information which Purchaser is required to disclose
under applicable law or regulation, including any regulation applying to any
stock exchange in which it or its Affiliates' shares are listed, or as a result
of an order or request of any competent jurisdiction, governmental or other
authority, or (iii) any information that the Purchaser can demonstrate was
legally already in its possession prior to the Purchaser's receipt of such
information from another party or the Company.
B. Inspection of Property. The Company shall permit any
representatives designated by Purchaser, so long as Purchaser is a Qualifying
Holder, upon reasonable notice and during normal business hours, to (i) visit
and inspect any of the properties of the Company and its Subsidiaries, (ii)
examine the corporate and financial records of the Company or its Subsidiaries
and make copies thereof or extracts therefrom and (iii) discuss the affairs,
finances and accounts of any such Person with the directors, officers, key
employees and independent accountants of the Company and its Subsidiaries.
C. Attendance at Board Meetings. So long as Purchaser is a
Qualifying Holder, the Company shall give Purchaser written notice of each
meeting of its board of directors and each committee thereof (or the board of
directors of any such committee of any Company Subsidiary) at least three (3)
business days prior to the date of each such meeting,
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<PAGE> 13
and the Company or such Subsidiary as applicable, shall permit a representative
of each such Person not otherwise represented on the board or such committee to
attend as an observer all meetings of its board of directors and all committees
thereof; provided that in the case of telephonic meetings conducted in
accordance with the Company's or such Company Subsidiary's bylaws and applicable
law, each such Person need receive only actual notice thereof at least 48 hours
prior to any such meeting, and each such Person's representative shall be given
the opportunity to listen to such telephonic meetings. Each representative shall
be entitled to receive all written materials and other information (including,
without limitation, copies of meeting minutes) given to directors in connection
with such meetings at the same time such materials and information are given to
the directors. If the Company proposes to take any action by written consent in
lieu of a meeting of its board of directors or of any committee thereof, the
Company shall give written notice thereof to each such Person prior to the
effective date of such consent describing in reasonable detail the nature and
substance of such action. Notwithstanding the foregoing, the board of directors
may, in its discretion and under special circumstances as determined by the
board, direct that no such notice, right to attend or right to receive materials
be honored, in which case, the Company shall have no liability to the Purchaser
(in its capacity as such) for any failure to give any such notice, permit such
attendance, or provide such materials.
D. Use of Proceeds. The proceeds from the purchase of the
Company Preferred and Common Stock hereunder and by the Concurrent Purchases
shall be used for general corporate purposes.
E. Negative Covenants. So long as any of the Company Preferred
issued hereunder remains outstanding, the Company shall not, without the prior
written consent of the holders of at least 60% of the then outstanding shares of
Company Preferred:
(i) directly or indirectly declare or pay any
dividends or make any distributions upon any of its capital stock or
other equity securities other than on the Company Preferred pursuant to
the terms of the Certificate of Incorporation, except for dividends
payable in shares of Common Stock issued upon the outstanding shares of
Common Stock in accordance with the terms of the Certificate of
Incorporation;
(ii) directly or indirectly redeem, purchase or
otherwise acquire, or permit any Company Subsidiary to redeem, purchase
or otherwise acquire, any of the Company's or any Company Subsidiary's
capital stock or other equity securities (including, without
limitation, warrants, options and other rights to acquire such capital
stock or other equity securities) other than Company Preferred pursuant
to the terms of the Certificate of Incorporation and purchases pursuant
to Section 5.16 of the Asset Transfer Agreement, dated as of November
23, 1998, between the Company and RCH Holdings, Inc., or directly or
indirectly redeem, purchase or make any payments with respect to any
stock appreciation rights, phantom stock plans or similar rights or
plans, except for repurchases of Common Stock from employees of the
Company and its Subsidiaries upon termination of employment pursuant to
arrangements approved by the Company's board of directors;
(iii) sell, lease or otherwise dispose of, or permit
any Subsidiary to sell, lease or otherwise dispose of, more than 20% of
the consolidated assets of the Company and its Subsidiaries (computed
on the basis of fair market value, as determined by the Company's board
of directors in its reasonable good faith judgment)
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<PAGE> 14
in any transaction or series of related transactions, or sell or
permanently dispose of any of its or any Subsidiary's Intellectual
Property Rights;
(iv) liquidate, dissolve or effect a recapitalization
or reorganization in any form of transaction (including, without
limitation, any reorganization into a limited liability company, a
partnership or any other non-corporate entity which is treated as a
partnership for federal income Tax purposes);
(v) acquire any interest in any company or business
(whether by purchase of assets, purchase of stock, merger or otherwise)
or enter into any joint venture, or permit any Subsidiary to acquire
any interest in any company or business (whether by a purchase of
assets, purchase of stock, merger or otherwise) or enter into any joint
venture, unless such acquisition or joint venture (an "Acquisition")
has received (after full and complete disclosure of all material
information regarding the proposed Acquisition, including capital
budgets, to the Company's board of directors) the approval of the
Company's board of directors;
(vi) enter into, or permit any Subsidiary to enter
into, the ownership, active management or operation of any business
other than those businesses (a) currently conducted by the Company or
conducted by any of the Predecessor Corporations within one (1) year
prior to the Reorganization Transaction, or (b) proposed to be
conducted in the Proxy;
(vii) except for any indebtedness which has been
previously approved pursuant to a Company budget approved by the board
of directors of the Company, create, incur, assume or suffer to exist,
or permit any Subsidiary to create, incur, assume or suffer to exist,
any indebtedness exceeding an aggregate principal amount of $1,000,000
outstanding at any time on a consolidated basis, without obtaining the
approval of the Company's board of directors;
(viii) except for any expenditure which has been
approved by the Company's board of directors in a budget as described
above, authorize or make, or permit any Subsidiary to authorize or
make, any expenditure in any single transaction or any series of
related transactions for $1,000,000 or more during any calendar year
without obtaining the approval of the Company's board of directors;
(ix) fail to maintain in full force and effect with
good and responsible insurance companies adequate insurance covering
risks of such types and in such amounts as are customary for
corporations of similar size engaged in similar lines of business
(including, without limitation, (A) product liability coverage, and (B)
directors and officers liability insurance coverage of at least $10
million per claim (which limit shall not include coverage, if any,
available pursuant to any insurance procured pursuant to Section 4.3 of
the Stockholders' Agreement), or such other amounts determined by the
board of directors of the Company, which policies shall name the
Company as beneficiary thereof), it being agreed and understood that
the procurement of any insurance through the Purchaser, any Concurrent
Purchaser, or any such Person's Affiliate, shall not in and of itself
be deemed to have satisfied this requirement;
(x) except as expressly contemplated by this
Agreement, make any amendment to the Certificate of Incorporation, the
Company's bylaws or file any resolution with the Delaware Secretary of
State containing any provisions, which would
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<PAGE> 15
increase the number of authorized shares of Company Preferred or
adversely affect or otherwise impair the rights or relative preferences
and priorities of the holders of Series A-1 Preferred under this
Agreement, the Certificate of Incorporation, or the Company's bylaws;
(xi) merge or consolidate with any Person or, except
as permitted by Section (v) above, permit any Subsidiary to merge or
consolidate with any Person (other than a wholly-owned Subsidiary),
without the approval of the Company's board of directors;
(xii) enter into, amend, modify or supplement, or
permit any Subsidiary to enter into, amend, modify or supplement, any
agreement, transaction, commitment or arrangement with any of its or
any Subsidiary's officers, directors, employees or Affiliates or with
any individual related by blood, marriage or adoption to any such
individual or with any entity in which any such Person or individual
owns a beneficial interest, except as approved by disinterested
directors after full disclosure;
(xiii) with respect to any employee, fail to use
reasonable efforts to enter into and maintain valid and enforceable
noncompetition, nonsolicitation, nondisclosure, and intellectual
property assignment agreements with such employees in the form(s)
approved by the Company's board of directors, it being agreed and
understood that any such approval by the Company's board of directors
shall not in and of itself, be deemed to have satisfied this
requirement;
(xiv) amend, modify or waive any provision of any
employee stock, stock option or similar agreement or any employment,
non-compete, nonsolicitation, nondisclosure or intellectual property
assignment agreement or fail to enforce the provisions of any employee
stock, stock option or similar agreement or any employment,
non-compete, nondisclosure or intellectual property assignment
agreement or fail to exercise any of its rights or remedies thereunder;
(xv) fail to maintain a Compensation Committee of the
Company's board of directors which committee shall determine
compensation packages for all top level management employees of the
Company and each of its Subsidiaries (for purposes hereof, "top level
management employees" shall mean those persons determined to be top
level management employees by the Company's board of directors);
(xvi) except as expressly contemplated by this
Agreement or by the Concurrent Purchases, authorize, issue or enter
into any agreement providing for the issuance (contingent or otherwise)
of, (a) any notes or debt securities containing equity features
(including, without limitation, any notes or debt securities
convertible into or exchangeable for capital stock or other equity
securities, issued in connection with the issuance of capital stock or
other equity securities or containing profit participation features),
(b) any additional shares of Company Preferred, or (c) any capital
stock or other equity securities (or any securities convertible into or
exchangeable for any capital stock or other equity securities) which in
any case are senior to or on a parity with the Company Preferred with
respect to the payment of dividends, redemptions or distributions upon
liquidation or otherwise;
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(xvii) except as contemplated by this Agreement or
the Stockholders' Agreement, change the authorized size of its board
of directors;
(xviii) increase the number of shares of Common Stock
issuable pursuant to stock option plans or stock ownership plan's above
26,539,513 (as such number is proportionately adjusted for stock
splits, combinations and dividends affecting the Common Stock),
otherwise amend or modify any stock option plan or employee stock
ownership plan established as of or after the Closing, or adopt any new
stock option plan or employee stock ownership plan or issue any shares
of Common Stock to its or its Subsidiaries' employees other than as
contemplated by the Stockholders' Agreement;
(xix) use the proceeds from the sale of the Company
Preferred and Common Stock to the Purchaser and Concurrent Purchasers
other than as provided in Section 3.D above, or as approved by the
board of directors;
(xx) make or permit any Company Subsidiary to make
an assignment for the benefit of creditors or admit in writing its
inability to pay its debts generally as they become due; or petition or
apply to any tribunal for the appointment of a custodian, trustee,
receiver or liquidator of the Company or any Company Subsidiary or of
any substantial part, of the assets of the Company or any Company
Subsidiary, or commence any proceeding (other than a proceeding for the
voluntary liquidation and dissolution of a Company Subsidiary) relating
to the Company or any Company Subsidiary under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction; or
(xxi) take any action which would adversely alter or
change any of the rights, preferences or privileges of the Series A-1
Preferred or the Series A-2 Preferred.
F. Affirmative Covenants. So long as any shares of the Company
Preferred issued hereunder remain outstanding, the Company shall, and shall
cause each Subsidiary to, unless it has received the prior written consent of
the holders of at least 60% of the then outstanding shares of Company Preferred:
(i) at all times cause to be done all things
necessary to maintain, preserve and renew its corporate existence and
all licenses, authorizations and permits necessary or desirable to the
conduct of its businesses, the failure of which could reasonably be
expected to have a material adverse effect upon the financial
condition, operating results, assets, operations or business prospects
of the Company or Company Subsidiaries;
(ii) maintain and keep its material properties in
reasonably good repair, working order and condition;
(iii) pay and discharge when payable all Taxes,
assessments and governmental charges imposed upon its properties or
upon the income or profits therefrom (in each case before the same
becomes delinquent and before penalties accrue thereon) and all claims
for labor, materials or supplies which if unpaid would by law become a
lien upon any of its property, unless and to the extent that the same
are being contested in good faith and by appropriate proceedings and
adequate reserves
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(as determined in accordance with generally accepted accounting
principles, consistently applied) have been established on its books
with respect thereto;
(iv) comply with all other obligations which it
incurs or succeeds to pursuant to any contract or agreement, whether
oral or written, express or implied, as such obligations become due,
unless and to the extent that (a) the same are being contested in good
faith and by appropriate proceedings, and (b) adequate reserves (as
determined in accordance with generally accepted accounting principles,
consistently applied) have been established on its books with respect
thereto;
(v) comply with all applicable laws, rules and
regulations of all governmental authorities, the violation of which
could reasonably be expected to have a material adverse effect upon the
financial condition, operating results, assets, operations or business
prospects of the Company or Company Subsidiary; and
(vi) maintain proper books of record and account
which present fairly in all material respects its financial condition
and results of operations and make provisions on its financial
statements for all such proper reserves as in each case are required in
accordance with generally accepted accounting principles, consistently
applied.
G. Intellectual Property Rights. The Company shall, and shall
cause each Subsidiary to, possess and maintain all material Intellectual
Property Rights necessary or desirable to the conduct of their respective
businesses and own all right, title and interest in and to, or have a valid
license for, all such Intellectual Property Rights. Without limiting the
generality of the foregoing, as soon as reasonably practicable after the
Closing, the Company will file (i) appropriate recordation of change of name
and/or assignment documents in the U.S. Patent and Trademark Office against each
of the Company's federal trademark applications and registrations and (ii)
appropriate change of name documents with InterNIC with respect to the domain
name "arc.com". Neither the Company nor any Subsidiary shall take any action, or
fail to take any action, which would result in the invalidity, abandonment,
misuse or unenforceability of such Intellectual Property Rights or which would
infringe upon or misappropriate any rights of other Persons.
H. Current Public Information. At all times after the Company
or any Company Subsidiary has filed a registration statement with the Securities
and Exchange Commission pursuant to the requirements of either the Securities
Act or the Securities Exchange Act, the Company or applicable Subsidiary shall
file all reports required to be filed by it under the Securities Act and the
Securities Exchange Act and the rules and regulations adopted by the Securities
and Exchange Commission thereunder and shall take such further action as the
Purchaser may reasonably request, all to the extent required to enable the
Purchaser to sell (subject to any applicable restrictions in the Stockholders'
Agreement) Restricted Securities pursuant to (i) Rule 144 adopted by the
Securities and Exchange Commission under the Securities Act (as such rule may be
amended from time to time) or any similar rule or regulation hereafter adopted
by the Securities and Exchange Commission or (ii) a registration statement on
Form S-2 or S-3 or any similar registration form hereafter adopted by the
Securities and Exchange Commission. Upon request, the Company shall deliver to
or as directed by Purchaser, a written statement as to whether it has complied
with such requirements
I. FIRPTA. The Company's capital stock does not constitute a
United States real property interest as that term is defined in Section
897(c)(1)(A)(ii) of the IRC. The
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<PAGE> 18
preceding representation is based on a determination by the Company that the
Company is not and has not been a United States real property holding
corporation (as that term is defined in Section 897(c)(2) of the IRC) since the
date of its incorporation. The Company acknowledges that Purchaser may be a
foreign entity or have foreign Persons as partners or members and that the
Company may be required to file or cause to be filed in the future with the
Internal Revenue Service certain statements with its United States income Tax
Returns required under Section 1.897-2(h) of the Treasury Regulations. The
Company shall use reasonable efforts consistent with sound business practice to
avoid becoming a "United States real property holding corporation" within the
meaning of Section 897(c)(2) of the IRC (it being understood that such standard
shall not preclude the Company from leasing sites and undertaking leasehold
improvements in the ordinary course of business).
So long as the Company is not a "United States real property
holding corporation," the Company shall attach to its income Tax Return each
year a statement informing the IRS of that fact as described in Section
1.897-2(h) (4) of the Treasury Regulations and shall send a copy of such
statement to Purchaser. In addition, upon Purchaser's reasonable request, the
Company shall provide Purchaser with a statement that the Company is or is not a
"United States real property holding corporation" as of the date specified by
the Purchaser (or as of the date of the request if the Purchaser does not
specify a date). The Company shall not inform the Internal Revenue Service of
Purchaser's request for such a statement unless the Company is required to do so
by Section 897 of the IRC or the applicable regulations thereunder or otherwise
by applicable law.
In the event the Company in the future becomes a "United
States real property holding corporation," the Company shall promptly notify
Purchaser in writing of such fact. Thereafter, upon written request from
Purchaser, the Company shall provide information, documentation and assistance
to Purchaser reasonably related to the Company's status as a "United States real
property holding corporation," including but not limited to an affidavit stating
(if true) that the equity interest held by Purchaser is of a class that is
regularly traded (as defined by Sections 1.897-1(n) and 1.897-9T of the Treasury
Regulations) on an established securities market (as defined by Section
1.897-1(m) of the Treasury Regulations).
J. Certain Preemptive Rights. At and after such time as
aggregate equity investments in the Company, including pursuant to this
Agreement and the Concurrent Purchases, in the aggregate, equal or exceed
$60,000,000, and so long as Purchaser owns Common Stock, such Purchaser shall,
in connection with the issuance of additional Company equity securities to
non-employees exclusively for cash in a transaction prior to any Qualifying
Public Offering (as defined in the Certificate of Incorporation) (a "Triggering
Issuance"), have the right to irrevocably subscribe for and purchase from the
Company for cash, additional equity securities of the same kind, in the same
relative proportions, at the same per share price and on such other terms and
conditions identical in all material respects (except for differences necessary
or desirable as a result of the regulatory status of a Purchaser, which
differences will be implemented in as equitable a manner as practicable) as such
equity securities are offered and sold in the Triggering Issuance; provided,
however, that such Purchaser shall only be permitted to make such purchases as
are necessary, after giving effect to (a) the Triggering Issuance, (b)
Purchaser's exercise of this preemptive right, and (c) all concurrent exercises
of similar rights available under this Agreement and under any other agreements,
to maintain such Purchaser's proportionate interest in the Company after such
issuance at the same level as immediately prior thereto. For purposes of this
Section 3.J, "proportionate interest" shall be determined based on the number of
shares of Common Stock purchased and still owned by the relevant Person
(excluding Preferred Stock and Common Stock issued upon conversion of
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<PAGE> 19
Company Preferred, and treating any shares of Common Stock sold by such Person
as shares issued upon conversion, to the extent that such person has converted
Company Preferred). Upon the revocable determination by the Company's board to
issue additional equity securities under circumstances creating these rights,
the board shall determine whether purchases pursuant to this Section 3.J shall
(a) commensurately reduce issuances pursuant to the Triggering Issuance, (b) be
offered in addition to issuances pursuant to the Triggering Issuance, or (c) be
accomplished by some combination of clauses (a) and (b) above, and, thereafter,
the board shall promptly notify each party to an Investment Agreement or any
such other agreement giving rise to such right and work in good faith to
expeditiously implement these rights.
K. Authorized and Reserved Common Stock and Company Preferred.
The Company agrees to take and to cause to be taken all action necessary to
assure that a sufficient quantity of Series A-1 Preferred and Series A-2
Preferred is timely authorized and reserved for issuance as dividends on
outstanding Company Preferred and to assure that a sufficient quantity of Common
Stock is timely authorized and reserved for issuance to accommodate conversion
of Company Preferred (including Company Preferred issued in the future and
issued as dividends on Company Preferred). All such shares of Common Stock and
Company Preferred so issuable will, after being issued, be duly and validly
issued, fully paid and nonassessable and free of all Taxes, liens and charges.
The Company shall take all action as may be necessary to assure that all such
shares of Company Preferred and Common Stock may be so issued without violation
of any laws or governmental regulations.
L. Designation of Directors. The Company shall use its best
efforts to cause any directors designated by the Purchaser as provided in the
Stockholders' Agreement to be elected to the board of directors of the Company,
in accordance with the terms of the Stockholders' Agreement.
SECTION 4. TRANSFER OF RESTRICTED SECURITIES.
A. General Provisions. Restricted Securities are transferable
only pursuant to (i) public offerings registered under the Securities Act, (ii)
Rule 144 or Rule 144A of the Securities and Exchange Commission (or any similar
rule or rules then in force) if such rule is available and (iii) subject to the,
Stockholders' Agreement, any other legally available means of transfer.
B. Rule 144A. Upon the request of Purchaser, the Company shall
promptly supply to Purchaser or its prospective transferees all information
regarding the Company required to be delivered in connection with a transfer
pursuant to Rule 144A of the Securities and Exchange Commission.
C. Legend Removal. In connection with the transfer of any
Restricted Securities (other than a transfer described in Section 4.A.(i) or
(ii) above), the holder thereof shall deliver written notice to the Company
describing in reasonable detail the transfer or proposed transfer, together with
an opinion of counsel which (to the Company's reasonable satisfaction) is
knowledgeable in securities law matters to the effect that such transfer of
Restricted Securities may be effected without registration of such Restricted
Securities under the Securities Act. In addition, if the holder of the
Restricted Securities delivers to the Company an opinion of counsel that no
subsequent transfer of such Restricted Securities shall require registration
under the Securities Act, the Company shall promptly upon such contemplated
transfer deliver new certificates for such Restricted Securities which do not
bear the Securities Act legend set forth in Section 4.1 of the Stockholders'
Agreement under the caption "First
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<PAGE> 20
Legend". If the Company is not required to deliver new certificates for such
Restricted Securities not bearing such legend, the holder thereof shall not
transfer the same until the prospective transferee has confirmed to the Company
in writing its agreement to be bound by the conditions contained in this Section
4 and Section 4.1 of the Stockholders' Agreement.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As a
material inducement to the Purchaser to enter into this Agreement and purchase
the Series A-1 Preferred and the Common Stock hereunder, the Company hereby
represents and warrants that:
A. Organization and Corporate Power. Each of the Company and
the Company Subsidiary is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and is qualified to do
business in every jurisdiction in which the ownership of its property or conduct
of business requires it to qualify. The Company possesses all requisite power
and authority and all material licenses, permits and authorizations necessary to
own and operate its properties, to carry on its business as now conducted and
presently proposed to be conducted and to carry out the transactions
contemplated by this Agreement. The copies of the Certificate of Incorporation
and Bylaws of each of the Company and the company Subsidiary which have been
furnished to the Purchaser are current, correct, complete and in full force and
effect.
B. Capital Stock and Related Matters.
(i) As of the Closing and immediately thereafter
(giving effect to the Concurrent Purchases), the authorized capital stock of the
Company shall consist of (a) seven hundred fifty (750) shares of Series A-1
Preferred, fifty one (51) of which shall be issued and outstanding at the
Closing), (b) two hundred fifty (250) shares of Series A-2 Preferred, fifteen
(15) of which shall be issued and outstanding at the Closing, and (c) one
billion (1,000,000,000) shares of Common Stock, of which four hundred two
million, four hundred sixty seven thousand, three hundred and thirty nine
(402,467,339) shares shall be issued and outstanding as of the Closing. Up to
ten million five hundred fifty thousand (10,550,000) shares of Common Stock
shall be reserved for issuance to a Chief Operating Officer, Chief Technology
Officer, General Counsel and Vice President of Information Technology, which
positions the Company is presently seeking to fill. As of the Closing, except
pursuant to the Transaction Documents, neither the Company nor the Company
Subsidiary will have outstanding any stock or securities convertible or
exchangeable for any shares of its capital stock or containing any profit
participation features, nor shall it have outstanding any rights or options to
subscribe for or to purchase its capital stock or any stock or securities
convertible into or exchangeable for its capital stock or any stock appreciation
rights or phantom stock plans. The attached Capitalization Schedule accurately
sets forth the following information, both before and after the Closing
hereunder and under the Concurrent Purchases, with respect to all outstanding
Company securities and rights to acquire the Company's capital stock: the
holder, the number of shares covered, and the status of such security as
restricted or unrestricted stock. As of the Closing, all of the outstanding
shares of the Company's capital stock shall be validly issued, fully paid and
nonassessable.
(ii) Except pursuant to the Transaction Documents,
there are no statutory or, contractual stockholders preemptive rights or rights
of refusal with respect to the issuance of the Series A-1 Preferred, the Series
A-2 Preferred or the Common Stock hereunder or the issuance of the Common Stock
upon conversion of the Company Preferred. The Company has not violated any
applicable federal or state securities laws in connection with the
16
<PAGE> 21
offer, sale or issuance of any of its capital stock, and, assuming that the
Purchaser's representations in Section 7.C are true and correct, the offer, sale
and issuance of the Company Preferred and the Common Stock hereunder and upon
conversion of the Company Preferred, and the issuance and distribution of Common
Stock in connection with the Reorganization Transactions do not require
registration under the Securities Act or any applicable state securities laws.
To the best of the Company's knowledge, there are no other agreements between
the Company's stockholders with respect to the voting or transfer of the
Company's capital stock or with respect to any other material aspect of the
Company's affairs, except for the Stockholders' Agreement.
C. Subsidiaries. The Company and New ARC (which is wholly
owned by the Company), were, as of the Effective Date, newly formed, solely for
purposes of the transactions contemplated by the Transaction Documents. Neither
the Company nor New ARC has, or has had, any ownership interest in any other
Person (other than the Company's ownership of all of the equity securities of
New ARC).
D. Authorization; No Breach. The execution, delivery and
performance of this Agreement and all other agreements contemplated hereby to
which the Company or Company Subsidiary is a party have been duly authorized by
the board of directors and shareholders of the Company. This Agreement and all
other agreements contemplated hereby to which the Company or Company Subsidiary
is a party each constitutes a valid and binding obligation of the Company or
Company Subsidiary, enforceable in accordance with its terms. The execution and
delivery by the Company of this Agreement and all other agreements contemplated
hereby to which the Company and/or Company Subsidiary is a party, the offering,
sale and issuance of the Company Preferred and Common Stock hereunder, in
connection with the Reorganization Transactions and in connection with the
Concurrent Purchases, as well as the issuance of the Common Stock upon
conversion of the Company Preferred, the adoption of the Certificate of
Incorporation and the Company's bylaws and the fulfillment of and compliance
with the respective terms hereof and thereof by the Company, do not and will not
(i) conflict with or result in a breach of the terms, conditions or provisions
of, (ii) constitute a default under, (iii) result in the creation of any lien,
security interest, charge or encumbrance upon the Company's or Company
Subsidiary's capital stock or assets pursuant to, (iv) give any third party the
right to modify, terminate or accelerate any obligation under, (v) result in a
violation of, or (vi) require any authorization, consent, approval, exemption or
other action by or notice to any court or administrative or governmental body or
agency pursuant to, the charter or bylaws of the Company or Company Subsidiary,
or any law, statute, rule or regulation to which the Company or Company
Subsidiary is subject, or any agreement, instrument, order, judgment or decree
to which the Company or Company Subsidiary is subject.
E. Assets. As a result of the Reorganization Transactions, the
Company and Company Subsidiary have good and marketable title to, or a valid
leasehold interest in, the properties and assets used by RCH Holdings Inc. and
the Predecessor Corporations immediately prior to the Reorganization, subject
only to liens in favor of S.Z. Investments, L.L.C. (which existed immediately
prior to the Effective Date but were released subsequent thereto), liens for
current property Taxes not yet due and payable, and liens immaterial to the
conduct of business of the Company and Company Subsidiary as described in the
Proxy.
F. Other Representations, Warranties, Covenants and
Deliveries. The Company hereby (a) restates to and for the benefit of Purchaser
each representation, warranty and covenant of RCH Holdings, Inc. and the Company
set forth in the Asset Transfer Agreement (including with respect to the
delivery of documents) as though represented,
17
<PAGE> 22
warranted, covenanted, and delivered by the Company to Purchaser at and as of
the Effective Date, and (b) represents and warrants to the Purchaser that this
Agreement is identical in all material respects in form and substance to each of
the Investment Agreements with the Company entered into (i) concurrently
herewith, and (ii) on the Effective Date, except with respect to matters
identified on Exhibit L.
G. Closing Date. The representations and warranties of the
Company contained in this Section 5 and elsewhere in this Agreement and all
information contained in any exhibit, schedule or attachment hereto or in any
writing delivered by, or on behalf of, the Company to Purchaser shall be true
and correct in all respects on the date of the Closing as though then made,
except as affected by the transactions expressly contemplated by this Agreement
and the Concurrent Purchases and except that representations made as of another
specific date need only be true and correct as of the date made.
SECTION 6. DEFINITIONS.
A. Definitions. For the purposes of this Agreement, the
following terms have the meanings set forth below:
"Affiliate" of any particular Person means any other Person
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"Asset Transfer Agreement" means the Asset Transfer Agreement,
dated November 17, 1998, between RCH Holdings, Inc and the Company.
"Concurrent Purchases" means the transactions contemplated by
the Concurrent Purchasers pursuant to agreements substantially in the form of
this Investment Agreement.
"Current Modification Documents" means the documents attached
hereto as Exhibit K.
"EOPT Agreements" means the agreements granting the Company
and Company Subsidiary the right to install the Company's network architecture
in not less than 40 office properties owned or managed by Equity Office
Properties Trust or Affiliates thereof, including the related parent guarantee.
"Former Subsidiaries" means Allied Riser Communications, Inc.
(F/K/A RiserCorp, Inc.) and DPI Technology Resources, Inc.
"Indemnification Agreement" means the Indemnification
Agreement, dated November 23, 1998, among the Company, EGI-ARC Investors, Inc.,
Telecom Partners II, L.P., Crescendo World Fund, LLC, Eagles Ventures WF, LLC,
Crescendo III, L.P., Lawrence Equity Group, LLC and the other parties thereto,
in the form attached hereto as Exhibit E, as amended from time to time, as
modified by the Current Modification Documents.
"Intellectual Property Rights" means all (i) patents, patent
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of
18
<PAGE> 23
the goodwill (if any) associated therewith, (iii) copyrights (registered or
unregistered) and copyrightable works and registrations and applications for
registration thereof, (iv) mask works and registrations and applications for
registration thereof, (v) computer software, data, data bases and documentation
thereof, (vi) trade secrets and other confidential information (including,
without limitation, ideas, formulas, compositions, inventions (whether
patentable or unpatentable and whether or not reduced to practice), know-how,
manufacturing and production processes and techniques, research and development
information, drawings, specifications, designs, plans, proposals, technical
data, copyrightable works, financial and marketing plans and customer and
supplier lists and information), (vii) other intellectual property rights and
(viii) copies and tangible embodiments thereof (in whatever form or medium).
"IRC" means the Internal Revenue Code of 1986, as amended, and
any reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"Liquidation Documents" means the Plan of Liquidation relating
to the liquidation of the Former Subsidiaries into RCH Holdings, Inc., all as
described in the Asset Transfer Agreement, and including all documents and
transactions related thereto.
"Officers' Certificate" means a certificate signed by each of
the Company's President, Chief Financial Officer, and Vice President of Finance
stating that (i) the officers signing such certificate have each made or have
caused to be made such investigations as are necessary in order to permit him to
verify the accuracy of the information set forth in such certificate and (ii) to
the best of such officer's knowledge, after due inquiry, such certificate does
not misstate any material fact and does not omit to state any fact necessary to
make the certificate not misleading.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Predecessor Corporations" means each of RCH Holdings, Inc.,
Allied Riser Communications, Inc. (f/k/a RiserCorp., Inc.), Carrier Direct,
Inc., DPI Technology Resources, Inc., Digital Packet Interface Solutions, Inc.
and each of their respective predecessors.
"Reorganization" and "Reorganization Transactions" means the
Reorganization Transaction as defined in the Indemnification Agreement,
excluding only the purchase and sale by Purchaser contemplated by this Agreement
and by the Agreements attached hereto as Exhibit L.
"Restricted Securities" means (i) the Company Preferred and
Common Stock issued hereunder and to the Concurrent Purchasers, (ii) the Common
Stock issued upon conversion of Company Preferred, and (iii) any securities
issued with respect to the securities referred to in clauses (i), (ii) or (iii)
above by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular Restricted Securities, such securities
shall cease to be Restricted Securities when they have (a) been effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them, (b) been distributed to the public through
a broker, dealer or market maker pursuant to Rule 144 (or any similar provision
then in force) under the Securities Act or become eligible for sale pursuant to
19
<PAGE> 24
Rule 144(k) (or any similar provision then in force) under the Securities Act or
(c) been otherwise transferred and new certificates for them not bearing the
Securities Act legend set forth as the "First Legend" in Section 4.1 of the
Stockholders' Agreement have been delivered in accordance therewith
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"Securities and Exchange Commission" includes any governmental
body or agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of
1934, as amended, or any similar federal law then in force.
"Stockholders' Agreement" means the Stockholders' Agreement
among the Company, EGI-ARC Investors, Inc., Telecom Partners II, L.P., and the
other parties thereto, as modified by the Current Modification Documents.
"Stockholders' Pledge Agreement" means the Stockholders'
Pledge Agreement among the Company, EGI-ARC Investors, L.L.C. (as collateral
agent and in its individual capacity), and the other parties thereto.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association or other business
entity.
"Tax" or "Taxes" means federal, state, county, local, foreign
or other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other Taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to Tax, and interest attributable
thereto) whether disputed or not.
"Tax Return" means any return, information report or filing
with respect to Taxes, including any schedules attached thereto and including
any amendment thereof.
"Transaction Documents" means the Asset Transfer Agreement and
each document referred to on Exhibit A thereto, in each case, as modified by the
Current Modification Documents.
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<PAGE> 25
SECTION 7. MISCELLANEOUS.
A. Expenses. The Company agrees to pay on demand as
reimbursement to Purchaser, (i) the out-of-pocket travel and similar expenses of
Purchaser's employees and Affiliates arising in connection with the due
diligence and negotiation, documentation and execution of this Agreement and the
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby, (ii) the fees and expenses of counsel to Purchaser, arising
in connection with the negotiation, documentation and execution of this
Agreement and the Transaction Documents and the consummation of the transactions
contemplated hereby and thereby (which fees and expenses identified in clause
(i) above and in this clause (ii) shall not exceed $30,000.00 in the aggregate),
(iii) the reasonable fees and expenses incurred with respect to any amendments
or waivers (whether or not the same become effective) under or in respect of
this Agreement and the Transaction Documents, the other agreements contemplated
hereby or in the Certificate of Incorporation (including, without limitation, in
connection with any proposed merger, sale or recapitalization of the Company or
Subsidiary), (iv) stamp and other Taxes which may be payable in respect of the
execution and delivery of this Agreement or the issuance, delivery or
acquisition of any shares of capital stock issued or issuable hereunder (whether
at the Closing or thereafter), (v) the reasonable fees and expenses incurred
with respect to the successful enforcement of the rights granted under this
Agreement, the agreements contemplated hereby, or the Certificate of
Incorporation and other Transaction Documents, and (vi) the reasonable fees and
expenses incurred by Purchaser or its Affiliates in any filing with any
governmental agency with respect to its investment in the Company or in any
other filing with any governmental agency with respect to the Company which
mentions such Person (it being understood that such expense provision shall not
apply to any SEC filings made by the Purchaser in the ordinary course as a
result of holding any publicly traded securities in the Company); including,
without limitation, any filings at any time while such Person owns Company
Preferred or Common Stock, required under the Hart-Scott-Rodino Antitrust
Improvement Act.
B. Remedies. The Purchaser shall have all rights and remedies
set forth in this Agreement, the Certificate of Incorporation and all rights and
remedies which such holder has been or is subsequently granted at any time under
any other agreement or contract and all of the rights which such holder has
under any law. Any Person having any rights under any provision of this
Agreement shall be entitled to enforce such rights specifically (without posting
a bond or other security), to recover damages by reason of any breach of any
provision of this Agreement and to exercise all other rights granted by law. The
Company agrees to indemnify and hold the Purchaser, its officers, partners and
Affiliates harmless against any loss, liability, damage or expense (including
reasonable legal fees and costs) which such Purchaser may suffer, sustain or
become subject to as a result of or in connection with the breach by the Company
of any representation, warranty, covenant or agreement of the Company contained
in this Agreement, the Certificate of Incorporation or the Transaction
Documents.
C. Purchaser Representations. Purchaser hereby represents and
warrants that (i) (A) such Purchaser is duly organized and (B) such Purchaser's
execution, delivery and performance of this Agreement has been duly authorized
by all necessary partnership action required on the part of Purchaser, (ii)
Purchaser's execution, delivery and performance of this Agreement will not, in
any material respect, breach or conflict with or cause a default under, any
applicable law or other agreement or instrument to which Purchaser is a party or
by which it is bound, (iii) it has full power and authority to execute, deliver
and perform this Agreement and to purchase the Company Preferred and Common
Stock to be purchased by Purchaser
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<PAGE> 26
hereunder, (iv) this Agreement constitutes the valid and legally binding
obligation of Purchaser, enforceable against Purchaser in accordance with its
terms, (v) it is acquiring the Restricted Securities purchased hereunder or
acquired pursuant hereto for its own account with the present intention of
holding such securities for purposes of investment, and that it has no intention
of selling such securities in a public distribution in violation of the federal
securities laws or any applicable state securities laws, provided that nothing
contained herein shall prevent the Purchaser and subsequent holders of
Restricted Securities from transferring such securities in compliance with the
provisions of Section 4 hereof, (vi) its financial condition is such that such
Purchaser is able to bear the risk of holding the Company Preferred and Common
Stock to be received by Purchaser for an indefinite period of time, (vii) it has
such knowledge and experience in financial and business matters and in making
investments of this type and that Purchaser is capable of evaluating the merits
and risks of purchasing the Company Preferred and the Common Stock, (viii) it
has been provided access to such information and documents of the Company as
such Purchaser has requested and has been afforded an opportunity to ask
questions of and receive answers from representatives of the Company concerning
the terms and conditions of this Agreement and the purchase of the Company
Preferred and the Common Stock and (ix) it is an "accredited investor" within
the meaning of such term set forth in Rule 501(a) of the Securities Act for the
Company Preferred and Common Stock being purchased hereby.
D. Consent to Amendments. Except as otherwise expressly
provided herein, the provisions of this Agreement may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the holders of at least 75% of the then outstanding shares of Company
Preferred and all current and future holders of Company Preferred and Common
Stock shall be bound by such written consents; provided, however, that no such
amendment shall treat the Purchaser or the Purchaser's rights with respect to
the Company, differently in any material respect than the holders of Company
Preferred executing such written consent, without the written consent of the
Purchaser. No other course of dealing between the Company and the holder of
Company Preferred, or any delay in exercising any rights hereunder or under the
Certificate of Incorporation shall operate as a waiver of any rights of any such
holders. For purposes of this Agreement, shares of Company Preferred held by the
Company or any Subsidiaries shall not be deemed to be outstanding.
E. Survival of Representations and Warranties; Schedules and
Exhibits. All representations and warranties contained or incorporated herein or
made in writing by any party in connection herewith shall survive the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby, regardless of any investigation made by Purchaser or on its
behalf and even if the Purchaser knows or had reason to know of any such
misrepresentation or breach of warranty or covenant as of the Closing. Nothing
in the Schedules or Exhibits hereto or incorporated herein, shall be deemed
adequate to disclose an exception to a representation or warranty made herein or
therein, unless such Schedule or Exhibit identifies the exception with
particularity and describes the relevant facts in detail. Without limiting the
generality of the foregoing, the mere listing (or inclusion of a copy) of a
document or other item shall not be deemed adequate to disclose an exception to
a representation or warranty made herein or in such incorporated materials
(unless the representation or warranty has to do the with existence of the
document or other item itself).
F. Successors and Assigns. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Agreement by or
on behalf of either of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the
22
<PAGE> 27
parties hereto whether so expressed or not. In addition, and whether or not any
express assignment has been made, the provisions of this Agreement which are for
the Purchaser's benefit as a purchaser or holder of Company Preferred, and/or
Common Stock are also for the benefit of, and enforceable by, any subsequent
holder of such Company Preferred and/or such Common Stock.
G. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
H. Counterparts. This Agreement may be executed simultaneously
in one or more counterparts (either or both of which may be by facsimile), any
one of which need not contain the signatures of both parties, but both such
counterparts taken together shall constitute one and the same Agreement. At any
time after the date hereof, any Person purchasing Company Preferred will be
required to execute an agreement similar to the Stockholders' Agreement and
agreeing to be bound by the terms and conditions of such Agreement.
I. Descriptive Headings; Interpretation. The descriptive
headings of this Agreement are inserted for convenience only and do not
constitute a substantive part of this Agreement. The use of the word "including"
in this Agreement shall be by way of example rather than by limitation.
J. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW RULES OR PROVISIONS THAT WOULD
CAUSE THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION OTHER THAN THE STATE
OF DELAWARE.
K. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given or the date delivered when
delivered personally to the recipient, and on the business day following the
date of transmission, when sent to the recipient by reputable overnight courier
service (charges prepaid) and on the business day following the date of
transmission, when sent to the recipient by facsimile transmission (confirmed by
the facsimile operator). Such notices, demands and other communications shall be
sent to Purchaser and each Concurrent Purchaser at the address and/or facsimile
number indicated on the Schedule of Purchasers and to the Company at the address
and/or facsimile number indicated below:
Allied Riser Communications Holdings, Inc.
10 S. Wacker Drive, Suite 3425
Chicago, IL 60606
Fax: (312) 454-4081
Attention: President
with a copy to:
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<PAGE> 28
Crouch & Hallett, L.L.P.
717 N. Harwood, Suite 1400
Dallas, Texas 75201
Fax: (214) 922-4193
Attention: Timothy R. Vaughan
or to such other address and/or facsimile number or to the attention of such
other person as the recipient party has specified by prior written notice to the
sending party.
L. Understanding Among the Purchasers. The determination of
the Purchaser to purchase the Company Preferred and Common Stock pursuant to
this Agreement has been made by such Purchaser independent of any other
Purchaser or prior purchaser and independent of any statements or opinions as to
the advisability of such purchase or as to the properties, business, prospects
or condition (financial or otherwise) of the Company, New ARC, or any
predecessor which may have been made or given by any Concurrent Purchaser or
prior purchaser or by any agent or employee of any Concurrent Purchaser or prior
purchaser. In addition, it is acknowledged by the Purchaser that no other
Concurrent Purchaser or prior purchaser has acted as an agent of the Purchaser
in connection with making its investment hereunder and that no such Person shall
be acting as an agent of such Purchaser in connection with monitoring its
investment hereunder.
M. Integration. This Agreement, together with the Transaction
Documents, constitutes the entire agreement between the Company and the
Purchaser with respect to the subject matter covered hereby and thereby and
supersedes all prior or contemporaneous oral or written agreements, arrangements
or understandings.
N. Capital and Surplus; Special Reserves. The Company agrees
that the capital of the Company (as such term is used in Section 154 of the
General Corporation Law of Delaware) in respect of the Company Preferred issued
pursuant to this Agreement and the Concurrent Purchases shall be equal to the
aggregate initial liquidation value of such shares and that it shall not
increase the capital of the Company with respect to any shares of the Company's
capital stock at any time on or after the date of this Agreement. The Company
also agrees that it shall not create any special reserves under Section 171 of
the General Corporation Law of Delaware without the prior written consent of the
holders of at least 60% of the then outstanding shares of Company Preferred.
O. Treatment of Company Preferred. The Company covenants and
agrees that so long as federal income Tax laws prohibit a deduction for
distributions made by the Company with respect to preferred stock (i) it shall
treat all distributions paid by it on the Company Preferred as non-deductible
dividends on all of its Tax Returns and (ii) it shall treat the Company
Preferred as preferred stock in all of its financial statements and other
reports and shall treat all distributions paid by it on the Company Preferred as
dividends on preferred stock in such statements and reports.
* * * * * * * *
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<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have executed this
Series A -1 Preferred Stock Investment Agreement on the date first written
above.
25
<PAGE> 30
EXHIBIT A
CONCURRENT PURCHASES
<TABLE>
<CAPTION>
Shares of
Shares of Series Series A-2 Shares of
A-1 Preferred Preferred Common Stock Total
Purchased at Purchased at Purchased at Purchase
Purchaser Closing Closing Closing Price
<S> <C> <C> <C> <C>
TELECOM PARTNERS II, L.P. 2 0 $2,000,000
8,749,290 $874.93
CRESCENDO WORLD FUND, LLC .9543 0 $954,300
4,174,724 $417.48
EAGLE VENTURES WF, LLC .0457 0 $45,700
199,921 $20.00
CRESCENDO III, L.P. 4 0 $4,000,000
17,498,580 $1,749.86
ANDA PARTNERSHIP 3 0 $3,000,000
13,123,935 $1,312.40
NORWEST VENTURE PARTNERS VII, 15 0 $15,000,000
L.P.
65,619,675 $6,561.97
</TABLE>
<PAGE> 31
Addresses:
1. Norwest Venture Partners VII, L.P.
40 William Street, Suite 305
Wellesley, MA 02481-3902
Fax: (781) 237-6270
Attention: Blair Whitaker
With a copy to:
Edwards & Angell, LLP
101 Federal Street
Boston, Massachusetts 02110
Fax: (617) 439-4170
Attention: Leonard Q. Slap
2. Telecom Partners II, L.P.
3200 Cherry Creek Drive South
Suite 450
Denver, Colorado 80209
Fax: (303) 765-1110
Attention: Steve Schovee
With a copy to:
Holland & Hart LLP
555 Seventeenth Street, Suite 3200
Denver, Colorado 80202
Fax: (303) 295-8261
Attention: Michael S. Quinn
3. Crescendo World Fund, LLC,
Eagle Ventures WF, LLC, and
Crescendo III, L.P.
c/o Crescendo Venture
Management, L.L.C.
800 LaSalle Avenue, Suite 2250
Minneapolis, Minnesota 55402
Fax: (612) 607-2801
Attention: David Spreng
<PAGE> 32
With a copy to:
Messerli & Kramer
1800 Fifth Street Tower
150 S. Fifth Street
Minneapolis, MN 55402
Fax: (612) 672-3777
Attention: Kevin Spreng
4. ANDA Partnership
Two North Riverside Plaza
Chicago, IL 60606
Fax: (312) 466-3700
Attention: Mark Slezak
With a copy to:
Rosenberg & Liebentritt, P.C.
Two North Riverside Plaza
Chicago, IL 60606
Fax: (312) 454-0335
Attention: Jon Wasserman
<PAGE> 33
Schedule of Other 1998 Investment Agreements
1. Investment Agreement, dated as of December 30, 1998, by and between ARC and
EGI-ARC Investors, L.L.C.
2. Investment Agreement, dated as of December 30, 1998, by and between ARC and
Telecom Partners II, L.P.
3. Investment Agreement, dated as of December 30, 1998, by and between ARC and
Crescendo World Fund, LLC
4. Investment Agreement, dated as of December 30, 1998, by and between ARC and
Eagle Ventures WF, LLC
5. Investment Agreement, dated as of December 30, 1998, by and between ARC and
Crescendo III, L.P.
6. Investment Agreement, dated as of December 30, 1998, by and between ARC and
Lawrence Equity Group, L.L.C.
7. Investment Agreement, dated as of December 30, 1998, by and between ARC and
ANDA Partnership
<PAGE> 1
EXHIBIT 10.9
WAIVER AND CONSENT
WAIVER AND CONSENT (the "WAIVER AND CONSENT"), dated December 30, 1998 and
effective as of November 23, 1998, by and among Allied Riser Communications
Holdings, Inc., a Delaware corporation (the "COMPANY"), EGI-ARC Investors,
L.L.C., a Delaware limited liability company ("EGI-ARC"), Telecom Partners II,
L.P., a Delaware limited partnership ("TP"), Crescendo World Fund, LLC, a
Delaware limited liability company ("CWF"), Eagle Ventures WF, LLC, a Minnesota
limited liability company ("EVW"), Crescendo III, L.P., a Delaware limited
partnership ("CIII"), Lawrence Equity Group, L.L.C., a California limited
liability company ("LEG", and collectively with EGI-ARC, TP, CWF, and EVW, the
"FINANCIAL SPONSORS"). All terms not otherwise defined herein shall have the
meanings given such terms in that certain Investment Agreement by and between
EGI-ARC and the Company dated as of November 23, 1998.
WHEREAS, THE Company desires to issue to TP, CWF, EVW, CIII, Norwest
Venture Partners VII, L.P., a Minnesota limited partnership ("Norwest") and ANDA
Partnership, an Illinois general partnership "(ANDA"), shares of Company Series
A-1 Preferred Stock; and
WHEREAS, each Financial Sponsor is party to an Investment Agreement with
the Company, dated as of November 23, 1998, (each an "Investment Agreement" and
collectively, the "Investment Agreements") and Section 3(E) of the Investment
Agreements prohibits the issuance by the Company of Additional Shares of Company
Preferred Stock without the prior written consent of holders of at least 60% of
the then outstanding shares of Company Preferred; and
WHEREAS, Section 3(J) of the Investment Agreements provides that after such
time as investments in the company equal or exceed $60,000,000, and so long as
Purchaser owns Common Stock, such Purchaser shall, in connection with the
issuance of additional Company equity securities to non-employees exclusively
for cash, have the right to purchase form the Company additional shares of
Common Stock on the terms set forth in the Investment Agreements (the
"Preemptive Right"); and
WHEREAS, the Financial Sponsors desire to consent to the issuance of
Company Series A-1 Preferred Stock to TP, CWF, EVW, CIII, Norwest and ANDA and
desire to waive any Preemptive Rights they may have solely in connection with
the issuance of said shares of stock to TP, CWF, EVW, CIII, Norwest and ANDA as
of the date hereof.
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
herein made and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Financial Sponsors mutually
agree as follows:
1. Consent. The Financial Sponsors, who together hold as of the date hereof
in excess of 60% of the outstanding shares of Company Preferred, hereby consent
to the issuance of additional shares of Series A-1 Preferred Stock to each of
TP, CWF, EVW, CIII, Norwest and ANDA in the amounts set forth on Exhibit A
hereto.
2. Waiver. The Financial Sponsors hereby waive the Preemptive Rights
provided pursuant to Section 3(J) of the Investment Agreements between the
Company and each of the Financial Sponsors, respectively, solely in connection
with the issuance of Series A-1 Preferred Stock referenced above and issued as
of the date hereof, it being acknowledged that nothing
<PAGE> 2
herein shall serve to waive any preemptive right afforded to the Financial
Sponsors in connection with any other issuance of Company equity securities.
3. Miscellaneous.
(a) Counterparts. This Waiver and Consent may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(b) Governing Law. This Waiver and Consent shall be governed by the laws of
the state of Delaware (other than its rules of conflicts of law to the extent
that the application of the laws of another jurisdiction would be required
thereby).
2
<PAGE> 3
IN WITNESS WHEREOF, the Parties have executed this Waiver and Consent as of the
date first above written.
ALLIED RISER COMMUNICATIONS HOLDINGS, INC.
By: /s/ David H. Crawford
----------------------------------------
Name:
Title:
EGI-ARC INVESTORS
By: GAMI Investments, Inc., its Managing
Member
By: /s/ Donald J. Liebentritt
----------------------------------------
Name: Don Liebentritt
Title: Vice President
TELECOM PARTNERS II, L.P.
By: Telecom Management II, L.L.C., its
General Partner
By /s/ Stephen W. Schovee
----------------------------------------
Name: Stephen W. Schovee
Title: Managing Member
CRESCENDO WORLD FUND, LLC
By: Crescendo Ventures World Fund, LLC, its
General Partner
By: /s/ R. David Spreng
----------------------------------------
Name: R. David Spreng
Title: Managing Member
EAGLE VENTURES WF, LLC
By: /s/ R. David Spreng
----------------------------------------
Name: R. David Spreng
Title: Managing Member
3
<PAGE> 4
CRESCENDO III, L.P.
By: Crescendo Ventures III, LLC, its General
Partner
By: /s/ R. David Spreng
----------------------------------------
Name: R. David Spreng
Title: Managing Member
LAWRENCE EQUITY GROUP, L.L.C.
By: /s/ Joseph A. Spenske
----------------------------------------
Name: Joseph A. Spenske
Title: Vice President and Managing Member
4
<PAGE> 5
EXHIBIT A
<TABLE>
<CAPTION>
Shares of
Shares of Series Series A-2 Shares of
A-1 Preferred Preferred Common Stock Total
Purchased at Purchased at Purchased at Purchase
Purchaser Closing Closing Closing Price
- --------- ------- ------- ------- -----
<S> <C> <C> <C> <C>
TELECOM
PARTNERS II, L.P. 2 0 $ 2,000,000
8,749,290 $ 874.93
CRESCENDO
WORLD FUND, LLC .9543 0 $ 954,300
4,174,724 $ 417.48
EAGLE VENTURES
WF, LLC .0457 0 $ 45,700
199,921 $ 20.00
CRESCENDO III, L.P. 4 0 $ 4,000,000
17,498,580 $ 1,749.86
ANDA PARTNERSHIP 3 0 $ 3,000,000
13,123,935 $ 1,312.40
NORWEST VENTURE
PARTNERS VII, L.P. 15 0 $15,000,000
65,619,675 $ 6,561.97
</TABLE>
<PAGE> 1
EXHIBIT 10.10
ALLIED RISER COMMUNICATIONS CORPORATION
1999 AMENDED AND RESTATED STOCK OPTION AND EQUITY INCENTIVE PLAN
Allied Riser Communications Corporation, a Delaware corporation (the
"Company"), hereby establishes a stock incentive plan to be known as the Allied
Riser Communications Corporation 1999 Amended and Restated Stock Option and
Equity Incentive Plan (the "Plan"). The Plan shall become effective on June 1,
1999, as adopted by the Board of Directors of the Company (the "Board"),
subject to the approval of the Company's stockholders in accordance with
Section 17(a) hereof.
1. PURPOSE.
The Company desires to attract and retain the best available
executives and employees, officers, directors and consultants for itself and
its subsidiaries and to encourage the highest level of performance by such
individuals in order to serve the best interests of the Company and its
stockholders. The Plan is expected to contribute to the attainment of these
objectives by offering eligible individuals the opportunity to acquire stock
ownership interests in the Company, and other rights with respect to stock of
the Company, and to thereby provide them with incentives to put forth maximum
efforts for the success of the Company and its subsidiaries.
2. FORM OF AWARDS.
Awards under the Plan may be granted in any one or all of the
following forms: (i) Options to purchase shares of the Company's common stock,
par value $.0001 per share ("Common Shares"), which options may be either
incentive stock options ("ISOs") meeting the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock
options ("NSOs") which do not meet the requirements of Code Section 422 (unless
otherwise indicated, references in the Plan to "Options" shall include both
ISOs and NSOs); (ii) stock appreciation rights ("SARs"), as described in
Section 8, which may be awarded either in tandem with Options ("Tandem SARs")
or on a stand-alone basis ("Nontandem SARs"); (iii) Common Shares which are
restricted as provided in Section 10 ("Restricted Shares"); (iv) rights to
receive or purchase Common Shares in the future, as described in Section 11
("Deferred Shares"); and (v) tax offset payments ("Tax Offset Payments"), as
described in Section 12.
3. MAXIMUM SHARES AVAILABLE.
(a) Number of Shares . The maximum aggregate number of Common Shares
available for award under the Plan, including Common Shares awarded as Tax
Offset Payments, is 5,000,000, subject to adjustment pursuant to Section 14.
Common Shares issued pursuant to the Plan may be authorized but unissued
shares, issued shares reacquired by the Company, or a combination thereof. In
the event that prior to the end of the period during which Options may be
granted under the Plan, any Option or any Nontandem SAR under the Plan expires
unexercised or is terminated, surrendered or canceled (other than an Option
which is canceled in connection with the exercise of a Tandem SAR) without
being exercised in whole or in part for any reason, or any Restricted Shares or
Deferred Shares are forfeited, or if such awards are settled in cash in lieu of
Common Shares, then such shares or units may, at the discretion of the
Committee (to the extent permissible under Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Act"), if applicable) be made available for
subsequent awards under the Plan, upon such terms as the Committee may
determine.
4. ADMINISTRATION.
(a) Committee. The Plan shall be administered by a committee (the
"Committee") appointed by the Board and consisting of not less than two (2)
members of the Board; provided, that, however, (i) with respect to any grantee
of an award that constitutes an "equity security" under the Act who is subject
to Section 16 of the Act, the members of the Committee shall all be
"non-employee" directors (within the meaning of Rule 16b-3(b)(3)(i) under the
Act), and (ii) with respect to any grantee of an award that is intended by the
Committee to constitute "qualified
<PAGE> 2
performance-based compensation" (within the contemplation of Treasury
Regulation Section 1.162-27(e)(2)), who is a "covered employee" (within the
meaning of Treasury Regulation Section 1.162-27(c)(2)), the members of the
Committee shall all be "outside directors" (within the meaning of Treasury
Regulation Section 1.162(e)(3)).
(b) Powers of Committee. Subject to the express provisions of the
Plan, the Committee shall have the power and authority (i) to grant Options and
to determine the purchase price of the Common Shares covered by each Option,
the term of each Option, the number of Common Shares to be covered by each
Option and any performance objectives or vesting standards applicable to each
Option, (ii) to designate Options as ISOs or NSOs and to determine which
Options, if any, shall be accompanied by Tandem SARs; (iii) to grant Tandem
SARs and Nontandem SARs and to determine the terms and conditions of such
rights; (iv) to grant Restricted Shares and Deferred Shares and to determine
the term of the Restricted Period and Deferral Period (as such terms as defined
in Sections 10 and 11, respectively) and other conditions and restrictions
applicable to such shares; (v) to determine the amount of, and to make, Tax
Offset Payments; and (viii) to determine the individuals to whom, and the time
or times at which, Options, SARs, Restricted Shares and Deferred Shares will be
granted. A majority of the Committee shall constitute a quorum, and the action
of the members of the Committee present at any meeting of the Committee at
which a quorum is present, or acts unanimously approved in writing, shall be
the acts of the Committee.
The Committee may delegate to one or more executive officers of the
Company the authority to grant awards under this Plan to employees of the
Company who, on the Date of Grant, are not subject to Section 16 of the Act and
are not "covered employees" as such terms is defined for purposes of Section
162(m) of the Code, and in connection therewith to have the same powers as the
Committee; provided, however, that (i) the exercise price for any Option or the
purchase price of any Restricted Share or Deferred Share granted by action of
an executive officer or officers pursuant to such delegation of authority shall
not be less than the Fair Market Value per Common Share on the Date of Grant
and (ii) unless expressly approved in advance by the Committee, such delegation
of authority shall not include the authority to accelerate vesting, extend the
period for exercise or otherwise alter the terms of an award. To the extent
that one or more executive officers of the Company have been authorized to
grant awards under the Plan, the term "Committee" shall be deemed to refer to
such executive officers.
(c) Delegation. The Committee may delegate to one or more of its
members or to any other person or persons such ministerial duties as it may
deem advisable. The Committee may also employ attorneys, consultants,
accountants or other professional advisors and shall be entitled to rely upon
the advice, opinions or valuations of any such advisors.
(d) Interpretations. The Committee shall have sole discretionary
authority to interpret the terms of the Plan, to adopt and revise rules,
regulations and policies to administer the Plan and to make any other factual
determinations which it believes to be necessary or advisable for the
administration of the Plan. All actions taken and interpretations and
determinations made by the Committee in good faith shall be final and binding
upon the Company, all individuals who have received awards under the Plan and
all other interested persons.
(e) Liability; Indemnification. No member of the Committee, nor any
individual to whom ministerial duties have been delegated, shall be personally
liable for any action, interpretation or determination made with respect to the
Plan or awards made thereunder, and each member of the Committee shall be fully
indemnified and protected by the Company with respect to any liability he or
she may incur with respect to any such action, interpretation or determination,
to the extent permitted by applicable law and to the extent provided in the
Company's Certificate of Incorporation and Bylaws, as amended from time to
time.
2
<PAGE> 3
5. ELIGIBILITY.
Awards shall be limited to employees, officers and directors of, and
consultants to, the Company and its present and future subsidiaries, and
individuals who have agreed to commence serving in such capacities with the
Company or its subsidiaries; provided, however, that ISOs may not be granted to
any individual who is not an employee of the Company or its subsidiaries. In
determining the individuals to whom awards shall be granted and the number of
Common Shares to be covered by each award, the Committee shall taken into
account the nature of the services rendered by such individuals, their present
and potential contributions to the success of the Company and its subsidiaries
and such other factors as the Committee in its sole discretion shall deem
relevant. As used in this Plan, the term "subsidiary" shall mean any
corporation which at the time qualifies as a subsidiary of the Company under
the definition of "subsidiary corporation" set forth in Section 424(f) of the
Code, or any successor provision hereafter enacted.
Individuals to whom awards have been granted by the Committee are
referred to herein as "Participants." The date on which an award is granted to
a Participant hereunder is as set forth in the written agreement described in
Section 16 hereof and is referred to herein as the "Date of Grant." The Date of
Grant for an ISO shall not precede the date on which the individual's
employment relationship with the Company or a subsidiary is established.
6. STOCK OPTIONS.
(a) Grant of Options. Options may be granted under this Plan for the
purchase of Common Shares. Options shall be granted in such form and upon such
terms and conditions, including the satisfaction of corporate or individual
performance objectives and other vesting standards, as the Committee shall from
time to time determine. An Option, or portion thereof, that is not designated
as an ISO, or that does not satisfy all of the requirements of Section 422 of
the Code, shall be an NSO. Successive grants may be made to a Participant
regardless of whether any vested Options previously granted to such Participant
remain unexercised.
(b) Option Price. The option price of each Option to purchase Common
Shares shall be determined by the Committee at the time of grant; provided,
however, that the option price for an ISO shall not be less than 100 percent of
the Fair Market Value (as defined in Section 17(a)) of the Common Shares
subject to such ISO determined as of the Date of Grant. The option price so
determined shall also be applicable in connection with the exercise of any
Tandem SAR granted with respect to such Option.
(c) Term of Options. The term of each Option granted under the Plan
shall not exceed ten (10) years from the Date of Grant, subject to earlier
termination as provided in Section 9, except as otherwise provided in Section
7(a) with respect to ten (10) percent stockholders of the Company.
(d) Exercise of Options. An Option may be exercised, in whole or in
part, at such time or times as the Committee shall determine. The Committee
may, in its discretion, accelerate the exercisability of any Option at any
time. Options may be exercised by a Participant by giving written notice to the
Committee stating the number of Common Shares with respect to which the Option
is being exercised and tendering payment therefor. Payment for the Common
Shares issuable upon exercise of the Option shall be made in full in cash, or
by certified check or, if the Committee, in its sole discretion, permits, in
Common Shares (valued at Fair Market Value on the date of exercise). As soon as
reasonably practicable following such exercise, a certificate representing the
Common Shares purchased, registered in the name of the Participant, shall be
delivered to the Participant.
(e) Early Exercise of Options. The Option may, at the discretion of
the Committee, as set forth in the Option Agreement for such Option (as
described in Section 16), be exercisable, in part or in full, at any time prior
to the vesting of such Option. Any unvested shares so purchased may be subject
to repurchase rights in favor of the Company and any other restrictions the
Committee determines to be appropriate.
3
<PAGE> 4
(f) Dividend Equivalents. On or after the Date of Grant of any NSO,
the Committee may provide for the payment to the Participant of dividend
equivalents thereon in cash or Common Shares on a current, deferred or
contingent basis, or the Committee may provide that dividend equivalents shall
be credited against the option price.
(g) Cancellation of SARs. Upon exercise of all or a portion of an
Option, the related Tandem SARs shall be canceled with respect to an equal
number of Common Shares.
(h) Disposition of Forfeited Stock Options. Any Common Shares subject
to Options forfeited by a Participant shall not thereafter be eligible for
purchase by the Participant but may be made subject to Option grants to other
Participants.
(i) Use of Promissory Notes and Loans. The Committee may, in its sole
discretion, impose terms and conditions, including conditions relating to the
manner and timing of payments, on the exercise of Options. Such terms and
conditions may include, but are not limited to, permitting a Participant to
deliver to the Company his promissory note as full or partial payment for the
exercise of an Option; provided, that with respect to any promissory note given
as payment or partial payment for the exercise of an ISO, all terms of such
note shall be determined at the time an Option is granted and set forth in the
Option Agreement. The Committee, in its sole discretion, may authorize the
Company to arrange or guaranty loans to a Participant by a third party.
7. SPECIAL RULES APPLICABLE TO ISOS.
(a) Ten Percent Stockholder. Notwithstanding any other provision of
this Plan to the contrary, no employee may receive an ISO under the Plan if
such employee, at the time the award is granted, owns (after application of the
rules contained in Section 424(d) of the Code) stock possessing more than ten
(10) percent of the total combined voting power of all classes of stock of the
Company or its subsidiaries, unless (i) the option price for such ISO is at
least 110 percent of the Fair Market Value of the Common Shares subject to such
ISO on the Date of Grant and (ii) such ISO is not exercisable after the date
five (5) years from the date such ISO is granted.
(b) Limitation on Grants. The aggregate Fair Market Value (determined
with respect to each ISO at the time such ISO is granted) of the Common Shares
with respect to which ISOs are exercisable for the first time by an employee
during any calendar year (under this Plan or any other plan of the Company or a
subsidiary) shall not exceed $100,000.
(c) Limitations on Time of Grants. No grant of an ISO shall be made
under this Plan after the termination date set forth in Section 17(k) hereof.
8. SARS.
(a) Grants of SARs. Tandem SARs may be awarded by the Committee in
connection with any Option granted under the Plan, either at the time the
Option is granted or thereafter at any time prior to the exercise, termination
or expiration of the Option. Nontandem SARs may also be granted by the
Committee at any time. At the time of grant of a Nontandem SAR, the Committee
shall specify the number of Common Shares covered by such right and the base
price of Common Shares to be used in connection with the calculation described
in Section 8(d) below. The base price of a Nontandem SAR shall be not less than
100 percent of the Fair Market Value of a Common Share on the Date of Grant.
SARs shall be subject to such terms and conditions not inconsistent with the
other provisions of this Plan as the Committee shall determine.
(b) Limitations on Exercise. A Tandem SAR shall be exercisable only to
the extent that the related Option is exercisable and shall be exercisable only
for such period as the Committee may determine (which period
4
<PAGE> 5
may expire prior to the expiration date of the related Option). Upon the
exercise of all or a portion of a Tandem SAR, the related Option shall be
canceled with respect to an equal number of Common Shares. Common Shares
subject to Options or portions thereof, surrendered upon exercise of a Tandem
SAR, shall not be available for subsequent awards under the Plan. A Nontandem
SAR shall be exercisable during such period as the Committee shall determine.
(c) Surrender or Exchange of Tandem SARs. A Tandem SAR shall entitle
the Participant to surrender to the Company unexercised the related Option, or
any portion thereof, and to receive from the Company in exchange therefor that
number of Common Shares having an aggregate Fair Market Value equal to (A) the
excess of (i) the Fair Market Value of one (1) Common Share as of the date the
Tandem SAR is exercised over (ii) the option price per share specified in such
Option, multiplied by (B) the number of Common Shares subject to the Option, or
portion thereof, which is surrendered. Cash shall be delivered in lieu of any
fractional shares.
(d) Exercise of Nontandem SARs. The exercise of a Nontandem SAR shall
entitle the Participant to receive from the Company that number of Common
Shares having an aggregate Fair Market Value equal to (A) the excess of (i) the
Fair Market Value of one (1) Common Share as of the date on which the Nontandem
SAR is exercised over (ii) the base price of the shares covered by the
Nontandem SAR, multiplied by (B) the number of Common Shares covered by the
Nontandem SAR, or the portion thereof being exercised. Cash shall be delivered
in lieu of any fractional shares.
(e) Settlement of SARs. As soon as is reasonably practicable after the
exercise of an SAR, the Company shall (i) issue, in the name of the
Participant, stock certificates representing the total number of full Common
Shares to which the Participant is entitled pursuant to Subsection 8(c) or 8(d)
hereof and cash in an amount equal to the Fair Market Value, as of the date of
exercise, of any resulting fractional shares, and (ii) if the Committee causes
the Company to elect to settle all or part of its obligations arising out of
the exercise of the SAR in cash pursuant to Subsection 8(f), deliver to the
Participant an amount in cash equal to the Fair Market Value, as of the date of
exercise, of the Common Shares it would otherwise be obligated to deliver.
(f) Cash Settlement. The Committee, in its discretion, may cause the
Company to settle all or any part of its obligation arising out of the exercise
of an SAR by the payment of cash in lieu of all or part of the Common Shares it
would otherwise be obligated to deliver in an amount equal to the fair market
value of such shares on the date of exercise.
9. EFFECT OF TERMINATION OF EMPLOYMENT OR SERVICE ON OPTIONS.
(a) Termination of Employment. In the event that a Participant's
employment or service as a non-employee director or consultant with the Company
or a subsidiary shall be terminated (for reasons other than death or
disability) or in the event such Participant shall resign from employment or
service as a non-employee director or consultant, vested Options and SARs held
by such Participant may be exercised at any time within ninety (90) days after
such employment or service ended, unless, in the case of an NSO, the exercise
period is extended by the Committee; provided, however, if the Company severs
the employment or service relationship with the Participant for "Cause" (as
defined in Section 9(e)), the Participant's right to exercise vested Options
and SARs shall terminate simultaneously with such severance of employment or
service. In no event, however, may an Option or SAR be exercised after the
expiration date of the Option or SAR as designated by the Committee pursuant to
Section 6(c) or 8(b).
(b) Disability. In the event that a Participant's employment or
service as a non-employee director or consultant with the Company or one of its
subsidiaries shall be terminated as a result of the disability of the
Participant (within the meaning of Section 422(c)(6) of the Code), vested
Options and SARs may be exercised at any time during the first twelve (12)
months after such Participant terminated employment or ceased serving as a
non-employee director or consultant, unless, in the case of an NSO, the
exercise period is extended by the Committee. In no event, however, may the
Option or SAR be exercised after the expiration date of the Option or SAR as
designated by the Committee pursuant to Section 6(c) or 8(b).
(c) Death. If a Participant dies while employed by or serving as a
non-employee director or consultant of the Company or one of its subsidiaries
or within ninety (90) days after the termination of such
5
<PAGE> 6
employment or cessation of such director's term or service as a consultant,
vested Options and SARs may be exercised by the Participant's estate or by the
person who acquires the right to exercise such Option or SAR on his or her
death by bequest or inheritance. Such exercise may occur at any time within one
(1) year after the date of the Participant's death, unless, in the case of an
NSO, the exercise period is extended by the Committee. In no event, however,
may the Option or SAR be exercised after the expiration date of the Option or
SAR as designated by the Committee pursuant to Section 6(c) or 8(b).
(d) Nonvested Options. Unless accelerated in accordance with Section
6(d), nonvested Options and SARs shall terminate immediately upon the
Participant's termination of employment or cessation of service as a
non-employee director or consultant with the Company and its subsidiaries for
any reason whatsoever, including death or disability.
(e) Cause. For purposes of the Plan, "Cause" shall mean (i) the
conviction by the Participant of a felony involving an intentional act of
fraud, embezzlement or theft in connection with the Participant's duties or
otherwise in the course of the Participant's employment with or service for the
Company or one of its subsidiaries; (ii) intentional and wrongful damaging of
property, contractual interests or business relationships of the Company or its
subsidiaries; (iii) intentional and wrongful disclosure of secret processes or
confidential information of the Company or its subsidiaries in violation of any
agreement with or policy of the Company or subsidiary; and (iv) intentional
conduct constituting a material violation of a policy or practice generally
applicable to employees of the Company or its subsidiaries, where the
consequences of such violation have, or are reasonably likely to have, a
significant adverse effect on the Company or its subsidiaries.
10. RESTRICTED SHARES.
(a) Grant of Restricted Shares. The Committee may from time to time
cause the Company to grant or sell Restricted Shares under the Plan to
Participants, subject to such restrictions, conditions and other terms as the
Committee may determine. Each grant or sale may be made without additional
consideration from the Participant or in consideration of a payment by the
Participant that is less than the Fair Market Value of the Common Shares on the
Date of Grant.
(b) Restrictions. (a) At the time a grant or sale of Restricted Shares
is made, the Committee shall establish a period of time (the "Restricted
Period") applicable to such Restricted Shares. Each grant or sale of Restricted
Shares may be subject to a different Restricted Period. The Committee may, in
its sole discretion, at the time a grant or sale is made, prescribe
restrictions in addition to or other than the expiration of the Restricted
Period, including the satisfaction of corporate or individual performance
objectives, which may be applicable to all or any portion of the Restricted
Shares. Except as provided in the last sentence of this Subsection (b), the
Committee may also, in its sole discretion, shorten or terminate the Restricted
Period or waive any other restrictions applicable to all or a portion of such
Restricted Shares. None of the Restricted Shares may be sold, transferred,
assigned, pledged or otherwise encumbered or disposed of during the Restricted
Period or prior to the satisfaction of any other restrictions prescribed by the
Committee with respect to such Restricted Shares. With respect to grants of
Restricted Shares intended to qualify as performance-based compensation for
purposes of Section 162(m) of the Code, the Committee shall have no discretion
to shorten or terminate the Restricted Period or to waive any other
restrictions applicable to all or a portion of such Restricted Shares.
(c) Restricted Stock Certificates. If the Committee deems it necessary
or appropriate, the Company may issue, in the name of each Participant to whom
Restricted Shares have been granted, stock certificates representing the total
number of Restricted Shares to the Participant, provided that such certificates
bear an appropriate legend or other restriction on transfer. The Secretary of
the Company shall hold such certificates, properly endorsed for transfer, for
the Participant's benefit until such time as the Restricted Shares are
forfeited to
6
<PAGE> 7
the Company, or the restrictions lapse.
(d) Rights of Holders of Restricted Shares. Except as determined by
the Committee either at the time Restricted Shares are awarded or at any time
thereafter prior to the lapse of the restrictions, holders of Restricted Shares
shall have the right to vote such shares and to receive any dividends with
respect to such shares, and all other ownership rights, subject to the
restrictions of Subsection (a). All distributions, if any, received by a
Participant with respect to Restricted Shares as a result of any stock
split-up, stock distribution, a combination of shares, or other similar
transaction shall be subject to the restrictions of this Section 10.
(e) Forfeitures Except as the Committee may at any time provide, any
Restricted Shares granted to a Participant pursuant to the Plan shall be
forfeited if the Participant terminates employment with, or ceases to serve as
a non-employee director of or consultant to, the Company or its subsidiaries
prior to the expiration or termination of the Restricted Period and the
satisfaction of any other conditions applicable to such Restricted Shares. Upon
such forfeiture, the Secretary of the Company shall either cancel or retain in
its treasury the Restricted Shares that are forfeited to the Company.
(f) Delivery of Restricted Shares. Upon the expiration or termination
of the Restricted Period and the satisfaction of any other conditions
prescribed by the Committee, the restrictions applicable to the Restricted
Shares shall lapse and a stock certificate for the number of Restricted Shares
with respect to which the restrictions have lapsed shall be delivered, free of
all such restrictions, to the Participant or the Participant's beneficiary or
estate, as the case may be.
(g) Performance-Based Objectives. At the time of the grant of
Restricted Shares to a Participant, and prior to the beginning of the
performance period to which performance objectives relate, the Committee may
establish performance objectives based on any one or more of the following:
price of Common Stock, shareholder return, return on equity, return on
investment, return on capital, sales productivity, sales growth, economic
profit, economic value added, net income, operating income, gross margin,
sales, earnings per share, market share or such other factors as the Committee
deems appropriate and that will qualify under Section 162(m) of the Code. These
factors shall have a minimum performance standard below which, and a maximum
performance standard above which, no payments will be made. These performance
goals may be based on an analysis of historical performance and growth
expectations for the business, financial results of other comparable
businesses, and progress towards achieving the long-range strategic plan for
the business. These performance goals and determination of results shall be
based entirely on financial measures. The Committee may not use any discretion
to modify award results except as permitted under Section 162(m) of the Code.
11. DEFERRED SHARES.
(a) Award of Deferred Shares. The Committee may authorize grants or
sales of Deferred Shares to Participants upon such terms and conditions as the
Committee may determine. Each grant or sale shall constitute the agreement by
the Company to issue or transfer Common Shares to the Participant in the future
in consideration of the performance of services, subject to the fulfillment
during the Deferral Period, as defined in Subsection 11(b) below, of such
conditions as the Committee may specify. Each grant or sale may be made without
additional consideration from the Participant or in consideration of a payment
by the Participant that is less than the Fair Market Value of a Common Share on
the Date of Grant.
(b) Deferred Period. Each grant or sale shall provide that the
Deferred Shares covered thereby shall be subject to a Deferral Period, which
shall be determined by the Committee on the Date of Grant. During the Deferral
Period, the Participant shall not have any
7
<PAGE> 8
rights of ownership in the Deferred Shares, shall not have any right to vote
the Deferred Shares and, except as provided in Section 13, shall not have any
right to transfer any rights under the subject award, but the Committee may on
or after the Date of Grant authorize the payment of dividend equivalents on the
Deferred Shares in cash or additional Common Shares on a current, deferred or
contingent basis.
12. TAX OFFSET PAYMENTS.
The Committee shall have the authority at the time of any award under
this Plan or anytime thereafter to make Tax Offset Payments to assist
Participants in paying income taxes incurred as a result of their participation
in this Plan. The Tax Offset Payments, which, if awarded, may be in cash or
Common Shares, shall be determined by multiplying a percentage established by
the Committee by all or a portion (as the Committee shall determine) of the
taxable income recognized by a Participant upon (i) the exercise of an NSO or
an SAR, (ii) the disposition of shares received upon exercise of an ISO, (iii)
the lapse of restrictions on Restricted Shares or (iv) the transfer of Common
Shares following the expiration of a Deferral Period. The percentage shall be
established, from time to time, by the Committee at that rate which the
Committee, in its sole discretion, determines to be appropriate and in the best
interests of the Company to assist Participants in paying income taxes incurred
as a result of the events described in the preceding sentence. Tax Offset
Payments shall be subject to the restrictions on transferability under Section
13.
13. TRANSFERABILITY
No Option or SAR may be transferred, assigned, pledged or hypothecated
(whether by operation of law or otherwise), except as provided by will or the
applicable laws of descent and distribution, and no Option or SAR shall be
subject to execution, attachment or similar process. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of an Option or an SAR not
specifically permitted herein shall be null and void and without effect. An
Option or SAR may be exercised by a Participant only during his or her
lifetime, or following his or her death as provided for in Section 9.
Notwithstanding the provisions of this Section 13, Options (other than
ISOs), SARs, Restricted Shares and Deferred Shares shall be transferable by a
Participant, without payment of consideration therefor by the transferee, to
any one or more members of the Participant's immediate family (or to one or
more trusts established solely for the benefit of one or more members of the
Participant's immediate family or to one or more partnerships in which the only
partners are members of the Participant's immediate family); provided, however,
that (i) no such transfer shall be effective unless reasonable prior notice
thereof is delivered to the Company and such transfer is thereafter effected in
accordance with any terms and conditions that shall have been made applicable
thereto by the Company or the Committee and (ii) any such transferee shall be
subject to the same terms and conditions hereunder as the Participant. For
purposes of this Section 13, "immediately family" shall have the meaning
ascribed thereto by Rule 16(a)-1(e) under the Act.
14. ADJUSTMENTS FOR CHANGES IN CAPITALIZATION.
In the event any changes are made to the number of Common Shares
(whether by reason of merger, consolidation, reorganization, recapitalization,
stock dividend in excess of ten percent (10%) at any single time, stock split,
combination of shares, exchange of shares, change of corporate structure or
otherwise), appropriate adjustments shall be made in (i): the number of Common
Shares theretofore made subject to grants of Options, SARs, Restricted Shares
or Deferred Shares, and in the purchase price of said Options, SARs, Restricted
Shares or Deferred Shares; and (ii) the aggregate number of Common Shares
pursuant to which grants of Options, SARs, Restricted Shares or Deferred Shares
may be made. If any of the foregoing adjustments shall result in a fractional
share, the fraction shall be disregarded, and the Company shall have no
obligation to make any cash or other payment with respect to such a fractional
share.
8
<PAGE> 9
15. AMENDMENT AND TERMINATION.
The Board may suspend, terminate, modify or amend the Plan, provided
that any amendment that would materially increase the aggregate number of
Common Shares which may be issued under the Plan shall be subject to the
approval of the Company's stockholders, except that any such increase or
modification that may result from adjustments authorized by Section 14 does not
require such approval. If the Plan is terminated, the terms of the Plan shall,
notwithstanding such termination, continue to apply to awards granted prior to
such termination. No suspension, termination, modification or amendment of the
Plan may, without the consent of the Participant to whom an award shall
theretofore have been granted, adversely affect the rights of such Participant
under such award.
16. WRITTEN AGREEMENT.
Each award of Options, Stock Appreciation Rights, Restricted Shares,
Deferred Shares and Tax Offset Payments shall be evidenced by a written
agreement ("Option Agreement"), executed by the employee and the Company, and
containing such restrictions, terms and conditions, if any, as the Committee
may require. In the event of any conflict between a written agreement and the
Plan, the terms of the Plan shall govern.
17. MISCELLANEOUS PROVISIONS.
(a) Stockholder Approval. The stockholders of the Company shall duly
approve this Plan within twelve (12) months after its adoption by the Board. If
such stockholder approval is not obtained, then any grants made hereunder shall
be automatically rescinded.
(b) Fair Market Value. For purposes of the Plan, "Fair Market Value"
shall mean (i) if the Common Shares are listed on an established stock exchange
or exchanges (including for this purpose, the NASD National Market), the
closing price quoted on the NASD National Market or such similar exchange, as
the case may be, on the date in question and determined by the Committee, or,
if no sale price was quoted in any such Index for such date, then as of the
next preceding date on which such a sale price was quoted; (ii) if the Common
Shares are not then listed on an exchange or the NASDAQ National Market, the
average of the closing bid and asked prices per share for the stock in the
over-the-counter market as quoted on The NASDAQ Small Cap or OTC Electronic
Bulletin Board, as appropriate, on such date; (iii) if the Common Shares are
not then listed on an exchange or quoted in the over-the-counter market, an
amount determined in good faith by the Board or the Committee; provided,
however, that when appropriate, the Committee, in determining Fair Market Value
of the Common Shares, may take into account such factors as it may deem
appropriate under the circumstances. Notwithstanding the foregoing, the Fair
Market Value of Common Stock for purposes of grants of ISOs shall be determined
in compliance with applicable provisions of the Code.
(c) Tax Withholding. The Company shall have the right to require
Participants or their beneficiaries or legal representatives to remit to the
Company an amount sufficient to satisfy federal, state and local withholding
tax requirements, or to deduct from all payments under this Plan, including Tax
Offset Payments, amounts sufficient to satisfy all withholding tax
requirements. Whenever payments under the Plan are to be made to a Participant
in cash, such payments shall be net of any amounts sufficient to satisfy all
federal, state and local withholding tax requirements. The Committee may, in
its discretion, permit a Participant to satisfy his or her tax withholding
obligation either by (i) surrendering shares owned by the Participant or (ii)
having the Company withhold from shares otherwise deliverable to the
Participant. Shares surrendered or withheld shall be valued at their Fair
Market Value as of the date on which income is required to be recognized for
income tax purposes.
9
<PAGE> 10
(d) Compliance With Section 16(b) and Section 162(m). In the case of
Participants who are or may be subject to Section 16 of the Act, it is the
intent of the Company that any award granted hereunder satisfy and be
interpreted in a manner that satisfies the applicable requirements of Rule
16b-3, so that such persons will be entitled to the benefits of Rule 16b-3 or
other exemptive rules under Section 16 of the Act and will not be subjected to
liability thereunder. If any provision of the Plan or any award would otherwise
conflict with the intent expressed herein, that provision, to the extent
possible, shall be interpreted and deemed amended so as to avoid such conflict.
To the extent of any remaining irreconcilable conflict with such intent, such
provision shall be deemed void as applicable to Participants who are or may be
subject to Section 16 of the Act. If any award hereunder is intended to qualify
as performance-based for purposes of Section 162(m) of the Code, the Committee
shall not exercise any discretion to increase the payment under such award
except to the extent permitted by Section 162(m) and the regulations
thereunder.
(e) Successors. The obligations of the Company under the Plan shall be
binding upon any successor corporation or organization resulting from the
merger, consolidation or other reorganization of the Company, or upon any
successor corporation or organization succeeding to substantially all of the
assets and businesses of the Company. In the event of any of the foregoing, the
Committee may, at its discretion prior to the consummation of the transaction,
cancel, offer to purchase, exchange, adjust or modify any outstanding awards,
at such time and in such manner as the Committee deems appropriate and in
accordance with applicable law.
(f) General Creditor Status. Participants shall have no right, title,
or interest whatsoever in or to any investments which the Company may make to
aid it in meeting its obligations under the Plan. Nothing contained in the
Plan, and no action taken pursuant to its provisions, shall create or be
construed to create a trust of any kind, or a fiduciary relationship between
the Company and any Participant or beneficiary or legal representative of such
Participant. To the extent that any person acquires a right to receive payments
from the Company under the Plan, such right shall be no greater than the right
of an unsecured general creditor of the Company. All payments to be made
hereunder shall be paid from the general funds of the Company and no special or
separate fund shall be established and no segregation of assets shall be made
to assure payment of such amounts except as expressly set forth in the Plan.
(g) No Right to Employment. Nothing in the Plan or in any written
agreement entered into pursuant to Section 16, nor the grant of any award,
shall confer upon any Participant any right to continue in the employ of the
Company or a subsidiary or to be entitled to any remuneration or benefits not
set forth in the Plan or such written agreement or interfere with or limit the
right of the Company or a subsidiary to modify the terms of or terminate such
Participant's employment at any time.
(h) Notices. Notices required or permitted to be made under the Plan
shall be sufficiently made if sent by registered or certified mail addressed
(i) to the Participant at the Participant's address as set forth in the books
and records of the Company or its subsidiaries, or (ii) to the Company or the
Committee at the principal office of the Company.
(i) Severability. In the event that any provision of the Plan shall be
held illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
(j) Governing Law. To the extent not preempted by federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of Delaware.
(k) Term of Plan. Unless earlier termination pursuant to Section 16
hereof, the Plan shall terminate on the earlier of the tenth (10th) anniversary
of the date of adoption of the Plan by the Board or May 31, 2009.
10
<PAGE> 1
EXHIBIT 10.12
WAIVER AND CONSENT
WAIVER AND CONSENT (this "Waiver and Consent"), dated August 18, 1999,
by and among Allied Riser Communications Corporation f/k/a Allied Riser
Communications Holdings, Inc., a Delaware corporation (the "Company"), EGI-ARC
Investors, L.L.C., a Delaware limited liability company ("EGI-ARC"), Telecom
Partners II, L.P., a Delaware limited partnership ("TP"), Crescendo World Fund,
LLC, a Delaware limited liability company ("CWF"), Eagle Ventures WF, LLC, a
Minnesota limited liability company ("EVW"), Crescendo III, L.P., a Delaware
limited partnership ("CIII"), Lawrence Equity Group, L.L.C., a California
limited liability company ("LEG"), Norwest Venture Partners VII, L.P., a
Minnesota limited partnership ("NVP") and ANDA Partnership, an Illinois general
partnership ("ANDA") and, collectively with EGI-ARC, TP, CWF, EVW, CIII, LEG and
NVP, the "Previous Financial Sponsors"). All terms not otherwise defined herein
shall have the meanings given such terms in that certain Investment Agreement by
and between EGI-ARC and the Company dated as of November 23, 1998.
WHEREAS, the Company desires to issue to those persons listed on
Schedule 1 attached hereto (the "New Financial Sponsors"), shares of Series B
Preferred Stock, par value $0.0001 per share (the "Series B Preferred") and
shares of Company Common Stock, par value $0.0001 per share (the "Common Stock")
pursuant to Investment Agreements dated as of August 18, 1999 (the "New
Financial Sponsors' Investment Agreements");
WHEREAS, the Company desires to issue to those New Financial Sponsors
listed on Schedule 2 attached hereto (the "Real Estate Financial Sponsors"),
warrants (the "Warrants") to acquire Common Stock pursuant to Warrant Agreements
dated on or before August 31, 1999 (the "Warrant Agreements") and pursuant to
Warrant Acquisition Agreements dated on or before August 31, 1999 (the "Warrant
Acquisition Agreements")
WHEREAS, each Previous Financial Sponsor is party to an Investment
Agreement with the Company (each, an "Investment Agreement" and collectively,
the "Investment Agreements"), pursuant to which each Previous Financial Sponsor
acquired (i) Series A-1 Preferred Stock or Series A-2 Preferred Stock, each with
par value $0.0001 per share (collectively, the "Series A Preferred Stock" and,
collectively with
<PAGE> 2
the Series B Preferred, the "Company Preferred") or Series B Preferred and (ii)
Common Stock;
WHEREAS, pursuant to Section 3.E or 3.D of each of the Investment
Agreements the issuance by the Company of equity securities which are on parity
with the Company Preferred with respect to the payment of dividends, redemptions
or distributions upon liquidation or otherwise, is prohibited without the prior
written consent of holders of at least the percentage of outstanding Company
Preferred that is not Series B Preferred plus five percent (5%);
WHEREAS, Section 3.J of each of the Investment Agreements provides that
after such time as investments in the Company equal or exceed a certain
threshold, and so long as the Purchasers under each such Investment Agreement
own Common Stock, each such Purchaser shall, in connection with the issuance of
additional Company equity securities to non-employees exclusively for cash, have
the right to purchase in the same relative proportions from the Company
additional equity securities on the same terms as such equity securities are
being offered to non-employees (the "Preemptive Right"); and
WHEREAS, the Previous Financial Sponsors desire to consent to (i) the
issuance of shares of Series B Preferred and Common Stock, including Common
Stock issuable upon conversion of Series B Preferred, to each of the New
Financial Sponsors and (ii) the issuance of Warrants, and the Common Stock
issuable upon exercise of Warrants, to each of the Real Estate Financial
Sponsors;
WHEREAS, the Previous Financial Sponsors desire to waive any Preemptive
Rights they may have solely in connection with (i) the issuance of shares of
Series B Preferred and Common Stock, including Common Stock issuable upon
conversion of Series B Preferred, to each of the New Financial Sponsors pursuant
to the New Financial Sponsors' Investment Agreements and (ii) the issuance of
Warrants, and the Common Stock issuable upon exercise of Warrants, to each of
the Real Estate Financial Sponsors pursuant to the Warrant Agreements and
Warrant Acquisition Agreements.
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
herein made and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Previous Financial Sponsors
mutually agree as follows:
2
<PAGE> 3
1. Consent. The Previous Financial Sponsors, who together hold as of
the date hereof in excess of the percentage of outstanding Company Preferred
that is not Series B Preferred plus five percent (5%), hereby consent to (i) the
issuance of shares of Series B Preferred and shares of Common Stock to the New
Financial Sponsors in the amounts set forth opposite their names on Schedule 1
attached hereto (ii) the issuance of Common Stock to the New Financial Sponsors
issuable upon the conversion of Series B Preferred, in accordance with the
Certificate of Designation of the Series B Preferred, (iii) the issuance of
Warrants to the Real Estate Financial Sponsors in accordance with the Warrant
Agreements and Warrant Acquisition Agreements and (iv) the issuance of Common
Stock to the Real Estate Financial Sponsors issuable upon the exercise of the
Warrants, in accordance with the Warrant Agreements and Warrant Acquisition
Agreements.
2. Waiver. The Previous Financial Sponsors hereby waive any Preemptive
Rights they may have provided pursuant to Section 3.J of the Investment
Agreements between the Company and each of the Previous Financial Sponsors,
respectively, solely in connection with (i) the issuance of Series B Preferred
and Common Stock referenced above and issued as of the date of the closings of
the New Financial Sponsors' Investment Agreements or upon conversion, as the
case may be, (ii) the issuance of the Warrants referenced above and issued as of
the date of the closings of the Warrant Agreements and Warrant Acquisition
Agreements and (iii) the issuance of Common Stock upon exercise of Warrants in
accordance with the Warrant Agreements and Warrant Acquisition Agreements, it
being acknowledged that nothing herein shall serve to waive any preemptive right
afforded to the Previous Financial Sponsors in connection with any other
issuance of Company equity securities.
3. Miscellaneous.
(a) Counterparts. This Waiver and Consent may be executed in one or
more counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument.
(b) Governing Law. This Waiver and Consent shall be governed by the
laws of the state of Delaware (other than its rules of conflicts of law
to the extent that the application of the laws of another jurisdiction
would be required thereby).
[SIGNATURE PAGE FOLLOWS]
3
<PAGE> 4
IN WITNESS WHEREOF, the Parties have executed this Waiver and Consent
as of the date first written above.
ALLIED RISER COMMUNICATIONS
CORPORATION
By:
-------------------------------------
Name: David H. Crawford
Title: Chief Executive Officer
EGI-ARC INVESTORS, L.L.C.
By: GAMI Investments, Inc.
Its: Managing Member
By:
-------------------------------------
Name: Don Liebentritt
Title: Vice President
TELECOM PARTNERS II, L.P.
By: Telecom Management II, L.L.C.
Its: General Partner
By:
-------------------------------------
Name:
Title:
<PAGE> 5
CRESCENDO WORLD FUND, LLC
By: Crescendo Ventures World Fund, LLC
Its: General Partner
By:
-------------------------------------
Name:
Title:
EAGLE VENTURES WF, LLC
By:
-------------------------------------
Name:
Title:
CRESCENDO III, L.P.
By: Crescendo Ventures III, LLC
Its: General Partner
By:
-------------------------------------
Name:
Title:
LAWRENCE EQUITY GROUP, L.L.C.
By:
-------------------------------------
Name:
Title:
NORWEST VENTURE PARTNERS VII, L.P.
By: Itasca VC Partners VII, LLP
Its: General Partner
By:
-------------------------------------
Name: John P. Whaley
Title: Partner
<PAGE> 6
ANDA PARTNERSHIP,
an Illinois general partnership
By: Ann Only Trust, an Illinois trust
By:
-------------------------------------
Name: Mark Slezak
Title: Co-Trustee
By: Ann and Descendants Trust, an
Illinois trust
By:
-------------------------------------
Name: Mark Slezak
Title: Co-Trustee
<PAGE> 7
SCHEDULE 1
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
NEW FINANCIAL SPONSORS SHARES OF SERIES B SHARES OF COMPANY
PREFERRED STOCK COMMON STOCK
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
TrizecHahn Corporation 3 5,346,438
- ------------------------------------------------------------------------------------------------------
Cornerstone Properties Limited Partnership 1.5 2,673,219
- ------------------------------------------------------------------------------------------------------
EOP Operating Limited Partnership 2 3,564,292
- ------------------------------------------------------------------------------------------------------
Boston Properties Limited Partnership 1.5 2,673,219
- ------------------------------------------------------------------------------------------------------
Vornado Realty L.P. 6 10,692,877
- ------------------------------------------------------------------------------------------------------
DWS Capital LLC 3 5,346,438
- ------------------------------------------------------------------------------------------------------
Transwestern Commercial Services, L.L.C. 1 1,782,146
- ------------------------------------------------------------------------------------------------------
Hines ARC Investors Limited Partnership 6 10,692,877
- ------------------------------------------------------------------------------------------------------
BCI Growth V, L.P. and BCI Investors, Inc. 2.5 4,455,365
- ------------------------------------------------------------------------------------------------------
Chase Equity Associates, L.P. 2 3,564,292
- ------------------------------------------------------------------------------------------------------
First Union Investors, Inc. 2.5 4,455,385
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 8
SCHEDULE 2
REAL ESTATE FINANCIAL SPONSORS
TrizecHahn Corporation
Cornerstone Properties Limited Partnership
EOP Operating Limited Partnership
Boston Properties Limited Partnership
Vornado Realty L.P.
Transwestern Investment Company, L.L.C.
Hines ARC Warrants Holding Limited Partnership
Hamilton Partners Office Management
Shorenstein Company, L.P.
Para Met Plaza Associates
Metropolitan Life Insurance Company
Fisher Brothers Financial and Development Company
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated January 11, 1999 (except with respect to the fifth paragraph of Note 2, as
to which the date is October 12, 1999, and Note 12 as to which the dates are
April 29, 1999 for the matters discussed in the first two paragraphs, and
September 20, 1999 for the matter discussed in the third paragraph), on the
consolidated financial statements of Allied Riser Communications Corporation as
of December 31, 1997 and 1998 and for the period from inception (December 19,
1996) through December 31, 1997 and for the year ended December 31, 1998 (and to
all references to our Firm), included in or made a part of this Amendment No. 3
to the Registration Statement No. 333-85597 on Form S-1.
/S/ ARTHUR ANDERSEN LLP
Dallas, Texas
October 20, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 187,919
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 191,309
<PP&E> 1,260,830
<DEPRECIATION> 10,477
<TOTAL-ASSETS> 1,486,613
<CURRENT-LIABILITIES> 3,178,050
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> (1,741,568)
<TOTAL-LIABILITY-AND-EQUITY> 1,486,613
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,438,552
<OTHER-EXPENSES> (27,116)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,196
<INCOME-PRETAX> (1,497,211)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,497,211)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,497,211)
<EPS-BASIC> (7.45)
<EPS-DILUTED> (7.45)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 41,371,453
<SECURITIES> 0
<RECEIVABLES> 22,102
<ALLOWANCES> 2,123
<INVENTORY> 0
<CURRENT-ASSETS> 41,529,826
<PP&E> 13,514,300
<DEPRECIATION> 509,674
<TOTAL-ASSETS> 55,571,517
<CURRENT-LIABILITIES> 3,836,597
<BONDS> 0
66,451,781
0
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<PAGE> 1
EXHIBIT 99.1
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement"), dated as of
January ___, 1997, is entered into by and among RCH Holdings, Inc., a Texas
corporation ("RCH"); DPI Technology Resources, Inc.. a Texas corporation
("Technology"); and Digital Packet Interface Solutions, Inc., a Texas
corporation ("Solutions") (RCH, Technology and Solutions are sometimes
collectively referred to as the "Constituent Corporations").
ARTICLE ONE
1.01 In accordance with the provisions of the applicable laws of the
Texas Business Corporation Act (the "TBCA"), respective jurisdictions under
which the Constituent Corporations are organized, at the Effective Time of the
Merger (as hereinafter defined), the Constituent Corporations shall be merged
into a single corporation, RCH, which shall be the Surviving Corporation, and
RCH, as the Surviving Corporation, shall continue to exist under and be
governed by the laws of the State of Texas.
1.02 Except as may otherwise be set forth herein, the corporate
existence and identity of RCH, as the Surviving Corporation, with all its
purposes, powers, franchises, privileges, rights and immunities, shall continue
unaffected and unimpaired by the Merger, and the corporate existence and
identity of each of Technology and Solutions, with all of its purposes, powers,
franchises, privileges, rights and immunities, at the Effective Time of the
Merger shall be merged with and into RCH, as the Surviving Corporation, and the
Surviving Corporation shall be vested fully therewith, and the separate
corporate existence and identity of each of Technology and Solutions shall
thereafter cease except to the extent continued by statute.
1.03 It is intended that the Merger shall constitute a statutory
merger within the meaning of Section 368a(1)(A) of the Internal Revenue Code of
1986, as amended.
ARTICLE TWO
2.01 The Merger shall become effective (hereinbefore and hereinafter
called the "Effective Time of the Merger") upon the issuance by the Secretary
of State of the State of Texas of a Certificate of Merger.
<PAGE> 2
ARTICLE THREE
3.01 The Articles of Incorporation of RCH in effect at the Effective
Time of the Merger shall constitute the Articles of Incorporation of the
Surviving Corporation until further amended, altered or repealed in the manner
provided by law.
3.02 The Bylaws of RCH in effect at the Effective Time of the Merger
shall be the Bylaws of the Surviving Corporation until amended, altered or
repealed in the manner provided therein or by law.
3.04 The officers and directors of RCH in office at the Effective Time
of the Merger shall be the officers and directors of the Surviving Corporation
until their successors are elected and qualified in accordance with the Bylaws
of the Surviving Corporation.
ARTICLE FOUR
4.01 The manner and basis of converting the capital stock of the
Constituent Corporations immediately outstanding prior to the Effective Time of
the Merger shall be as follows:
(a) Each share of the Technology's Common Stock that shall be
outstanding immediately prior to the Effective Time of the Merger,
shall at the Effective Time of the Merger, by virtue of the Merger and
without any action on the part of the holder thereof, automatically be
converted into 20 shares of fully paid and nonassessable share of
Surviving Corporation's Common Stock.
(b) Each share of Solution's Common Stock that shall be
outstanding immediately prior to the Effective Time of the Merger,
shall at the Effective Time of the Merger, by virtue of the Merger and
without any action on the part of the holder thereof, automatically be
converted into and represent the right to receive, and will be
exchangeable for, 9.916299015 shares of fully paid and nonassessable
share of the Surviving Corporation's Common Stock; and
(c) All of the shares of capital stock of RCH that shall be
issued and outstanding immediately prior to the Effective Time of the
Merger shall at the Effective Time of the Merger be cancelled and
retired and shall cease to exist and all certificates representing
such shares shall be cancelled, and no cash
2
<PAGE> 3
or securities or other property shall be issued in the Merger in
respect of such shares.
4.02 To the extent that appraisal rights are available under the Texas
Business Corporation Act (the "TBCA"), shares of the Constituent Corporation's
capital stock that are issued and outstanding immediately prior to the
Effective Time of the Merger and that have not been voted for adoption of the
Merger and with respect of which appraisal rights have been properly demanded
in accordance with the applicable provisions of the TBCA ("Dissenting Shares")
shall not be converted into the right to receive the consideration provided for
in Section 4.01 hereof at or after the Effective Time of the Merger unless and
until the holder of such shares withdraws his demand for such appraisal (in
accordance with the applicable provisions of the TBCA) or becomes ineligible
for such appraisal, then, as of the Effective Time of the Merger or the
occurrence of such event, whichever later occurs, such holder's Dissenting
Shares shall cease to be Dissenting Shares and shall be converted into and
represent the right to receive the consideration provided for in Section 4.01
hereof. After the Effective Time of the Merger, the Surviving Corporation will
pay the statutory obligations of the Constituent Corporations to holders of
Dissenting Shares.
ARTICLE FIVE
5.01 At the Effective Time of the Merger, the Surviving Corporation
shall possess all of the rights, privileges, powers, franchises and licenses of
a public as well as of a private nature; and all property, real, personal and
mixed, and all debts due on whatever account, and all other choses in action
and all and every other interest, of or belonging to each of the Constituent
Corporations shall be taken and be deemed to be transferred to and vested in
the Surviving Corporation without further act or deed.
5.02 Title to any real or personal property, whether by deed or
otherwise, vested in either of the Constituent Corporations, shall not revert
or be in anyway impaired by reason hereof; provided, that all rights of
creditors and all liens upon any property of the Constituent Corporations shall
be preserved unimpaired, limited in lien to the property affected by such liens
immediately before the Effective Time of the Merger. The Surviving Corporation
shall, at the Effective Time of Merger and thereafter, be responsible and
liable for all debts, liabilities and duties of the Constituent Corporations,
and any claim existing or action or proceeding pending by or against any
Constituent Corporation may be prosecuted against the Surviving Corporation.
3
<PAGE> 4
5.03 If at any time the Surviving Corporation shall deem or be advised
that additional grants, assignments, confirmations or assurances are necessary
or desirable to vest or to perfect or confirm of record or otherwise in the
Surviving Corporation the title to any property of either Constituent
Corporation, the officers, or any of them, or the directors of such Constituent
Corporation may execute and deliver any and all such deeds, assignments,
confirmations and assurances and do all things necessary or proper so as best
to prove, confirm and ratify title to such property in the Surviving
Corporation or otherwise to carry out the purposes of the Merger and the terms
of this Agreement. The Surviving Corporation shall have the same power and
authority to act in respect to any debt, liabilities and duties of the
Constituent Corporations as the Constituent Corporations would have had, had
they continued in existence.
5.04 The Surviving Corporation agrees that it may be served with
process in the State of Texas in any proceeding for enforcement of any
obligation of any of the Constituent Corporations, as well as for enforcement
of any obligation of the Surviving Corporation arising from the Merger,
including any suit or other proceeding to enforce the right of any dissenting
stockholder.
ARTICLE SIX
6.01 This Agreement shall be submitted at the earliest practicable
date to the shareholders of the Constituent Corporations for adoption and, if
adopted by the vote required by the law of the respective State under which
each Constituent Corporation is organized, shall be made effective as soon as
practicable thereafter.
6.02 The directors of any of the Constituent Corporations may, in
their sole discretion, abandon the Merger subject to the right of third parties
under any contracts relating thereto, without further action or approval from
the shareholders of their respective corporations, at any time before the
Effective Time of the Merger as provided by the laws of each of the States
under which the Constituent Corporations are organized.
ARTICLE SEVEN
7.01 This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed to be original, but all of which
together shall constitute one and the same instrument.
7.02 This Agreement constitutes the entire agreement between the
parties and supersedes all prior agreements and understandings, oral and
written, between the parties with respect to its subject matter.
4
<PAGE> 5
IN WITNESS WHEREOF, each of the Constituent Corporations has caused
this Agreement to be executed by and on its behalf and in its corporate name as
of the date first above written.
RCH HOLDINGS, INC.
(Texas corporation)
By: /s/ MICHAEL SCHMITT
-------------------------------------
Michael Schmitt
President
DPI TECHNOLOGY RESOURCES, INC.
(Texas corporation)
By: /s/ AL ZLOGAR
-------------------------------------
Al Zlogar
President
DIGITAL PACKET INTERFACE SOLUTIONS, INC.
(Texas corporation)
By: /s/ MICHAEL SCHMITT
-------------------------------------
Michael Schmitt
President
5
