<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 15, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
UNITED USN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4813 36-3947804
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
---------------
10 SOUTH RIVERSIDE PLAZA,
SUITE 401
CHICAGO, ILLINOIS 60606
(312) 906-3600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
---------------
RONALD W. GAVILLET, ESQ.
EXECUTIVE VICE PRESIDENT, STRATEGIC & EXTERNAL AFFAIRS, GENERAL COUNSEL AND
SECRETARY
UNITED USN, INC.
10 SOUTH RIVERSIDE PLAZA, SUITE 401
CHICAGO, ILLINOIS 60606
(312) 906-3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPY TO:
GARY P. CULLEN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 407-0700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
---------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES TO TO BE OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED REGISTERED PER NOTE (1) OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
14% Series B Senior
Discount Notes due
2003.................. 48,500 $622.75 $30,203,375 $9,152
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</TABLE>
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(1) The Proposed Maximum Offering Price per Note is based on the actual
Offering Price Per Note of $622.75.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 15, 1996
PROSPECTUS
UNITED USN, INC.
OFFER TO EXCHANGE ITS
14% SERIES B SENIOR DISCOUNT NOTES DUE 2003 [USN LOGO]
FOR ANY AND ALL OF ITS OUTSTANDING
14% SENIOR DISCOUNT NOTES DUE 2003
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997, UNLESS EXTENDED.
United USN, Inc. (the "Company") hereby offers, upon the terms and subject to
the conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (which together constitute the "Exchange Offer"), to exchange
$1,000 principal amount at maturity of 14% Series B Senior Discount Notes due
2003 (the "New Notes") of the Company for each $1,000 principal amount at
maturity of the issued and outstanding 14% Senior Discount Notes due 2003 (the
"Old Notes" and, together with the New Notes, the "Senior Notes") of the
Company from the holders (the "Holders") thereof. As of the date of this
Prospectus, there was $48.5 million aggregate principal amount at maturity of
the Old Notes outstanding. The terms of the New Notes are identical in all
material respects to the Old Notes, except that the New Notes have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and, therefore, will not bear legends restricting their transfer and will not
contain certain terms providing for an increase in the interest rate on the Old
Notes under certain circumstances relating to the timing of the Exchange Offer.
The New Notes will be senior unsecured obligations of the Company that will
rank senior in right of payment to all subordinated indebtedness of the
Company, including $36.0 million in aggregate principal amount at maturity of
9% Convertible Subordinated Notes due 2004 (the "Convertible Notes" and,
together with the Senior Notes, the "Notes") issued by the Company pursuant to
the terms of an indenture, dated as of September 30, 1996 (the "Convertible
Note Indenture"), by and between the Company and Harris Trust and Savings Bank,
as trustee (the "Convertible Note Trustee"). The New Notes will rank pari passu
in right of payment to all existing and future senior indebtedness of the
Company. The New Notes will be effectively subordinated to all existing and
future liabilities and obligations of the Company's subsidiaries (approximately
$5.3 million as of September 30, 1996, excluding intercompany indebtedness).
The indenture under which the New Notes are to be issued, dated as of September
30, 1996 (the "Senior Note Indenture" and, together with the Convertible Note
Indenture, the "Indentures"), between the Company and Harris Trust and Savings
Bank (the "Senior Note Trustee" and, together with the Convertible Note
Trustee, the "Trustees"), will permit the Company and its subsidiaries to
incur, under certain circumstances, additional indebtedness, including
indebtedness pursuant to a Credit Facility (as defined herein) which shall not
exceed $45 million at any one time outstanding. See "Description of the Notes."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined herein). Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission") set forth in no-action letters issued to
third parties, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any Holder thereof (other than any such Holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such Holder's business and such Holder has
no arrangement with any person to participate in the distribution of such New
Notes. Notwithstanding the foregoing, each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
(i) Old Notes tendered by it in the Exchange Offer were acquired in the
ordinary course of its business as a result of market-making or other trading
activities and (ii) it will deliver a prospectus in connection with any resale
of New Notes received in the Exchange Offer. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a
(cover page continued on next page)
-----------
SEE "RISK FACTORS," BEGINNING ON PAGE 16, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES IN THE
EXCHANGE OFFER.
-----------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
, 1997
<PAGE>
(cover page continued from previous page)
broker-dealer in connection with any resale of the New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities (other than Old Notes
acquired directly from the Company). The Company has agreed that, for a period
of 180 days after the Expiration Date (as defined herein), it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer (which shall
not include the expenses of any Holder in connection with resales of the New
Notes). Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. The Exchange Offer is subject to certain
customary conditions. In the event the Company terminates the Exchange Offer
and does not accept for exchange any Old Notes, the Company will promptly
return the Old Notes to the Holders thereof. The Company will give oral or
written notice of any extension, amendment, non-acceptance or termination of
the Exchange Offer to the Holders of the Old Notes as promptly as practicable,
such notice in the case of any extension to be issued by means of a press
release or other public announcement no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
The Company can, in its sole discretion, extend the Exchange Offer
indefinitely, subject to the Company's obligation to pay Special Interest (as
defined herein) if the Exchange Offer is not consummated by March 29, 1997 and,
under certain circumstances, file a shelf registration statement with respect
to the Old Notes. See "The Exchange Offer."
Prior to the date of this Prospectus, there has been no public market for the
Notes. The Company does not currently intend to list the New Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. Accordingly, there can be no assurance as to the development
or liquidity of any public market for the New Notes.
The Company has been advised by Smith Barney Inc., BT Securities Corporation,
Chase Securities Inc. and CIBC Wood Gundy Securities Corp. (collectively, the
"Initial Purchasers") that they intend to make a market for the Notes, the
Warrants and the Class A Common Stock; however the Initial Purchasers are not
obligated to do so. Any market-making may be discontinued at any time, and
there is no assurance that an active public market for the Notes, the Warrants
or the Class A Common Stock will develop or, that if such a market develops,
that it will continue. This Prospectus has been prepared for use by the Initial
Purchasers in connection with offers and sales of the Notes, the Warrants and
the Class A Common Stock which may be made by them from time to time in market-
making transactions at negotiated prices relating to prevailing market prices
at the time of sale. Such Initial Purchasers may act as principal or agent in
such transactions. See "Plan of Distribution."
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-
4 (the "Exchange Offer Registration Statement") under the Securities Act with
respect to the New Notes being offered by this Prospectus. This Prospectus does
not contain all of the information set forth in the Exchange Offer Registration
Statement and the exhibits and schedules thereto, certain portions of which
have been omitted pursuant to the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
such contract, agreement or other document filed or incorporated by reference
as an exhibit to the Exchange Offer Registration Statement, reference is made
to such exhibit for a more complete description of the matter involved, and
each such statement is qualified in its entirety by such reference.
The Exchange Offer Registration Statement and the exhibits and schedules
thereto may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and will also be available for inspection and
copying at the regional offices of the Commission located at 7 World Trade
Center, New York, New York 10048 and at 500 West Madison Street (Suite 1400),
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy statements and other
information regarding registrants that file electronically with the Commission.
Upon consummation of the Exchange Offer, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. Under the terms of
the Indentures pursuant to which the Old Notes and the Convertible Notes were,
and the New Notes will be, issued and the Warrant Agreement, the Company will
be required to file with the Commission, and to furnish holders of the Notes
and the Warrants with, the information, documents and other reports specified
in Sections 13 and 15(d) of the Exchange Act, including reports on Forms 10-K,
10-Q and 8-K.
2
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[INSERT MAP]
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and related notes appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information
contained in this Prospectus is presented after giving effect to all
transactions that are described in this Prospectus as occurring prior to or
simultaneously with the closing of the Exchange Offer. Unless the context
indicates otherwise, all references to the Company refer to United USN, Inc.
and its subsidiaries. Please refer to the Glossary for the definitions of
certain capitalized terms used herein and elsewhere in this Prospectus without
definition.
THE COMPANY
United USN, Inc. ("USN" or the "Company") is one of the fastest growing
providers of integrated local and long distance telecommunications services in
the United States. The Company resells telecommunications services of certain
regional Bell operating companies ("RBOCs") and certain long distance carriers
to provide an integrated solution of local and long distance services to the
underserved small and medium-sized business segment. The Company primarily
focuses its marketing efforts on businesses with telecommunications usage of
less than $5,000 per month. The Company's approach simplifies the subscriber's
telecommunications procurement and management tasks and provides for the easy
addition of customized services, such as special local and long distance
pricing and enhanced and other value-added calling and billing features
designed to meet specific subscriber needs.
The Company's goal is to be more flexible, innovative and responsive to the
needs of its subscribers than the RBOCs and the large long distance carriers,
which primarily concentrate their sales and marketing efforts on residential
and large commercial subscribers. Market research combined with the Company's
experience indicates that its target subscribers would prefer a single source
and single bill for all of their telecommunications needs. The Company provides
local service using existing telephone lines obtained from the incumbent RBOCs
at wholesale rates, which allows subscribers to switch to local service
provided by the Company without changing their existing telephone numbers or
adding new facilities or equipment. The Company provides long distance services
by purchasing bulk capacity from long distance carriers and reselling those
services to the Company's subscribers. By providing an integrated, customized
package of local, long distance and enhanced and other value-added services on
a single bill through its proprietary software and responsive subscriber care
systems, the Company believes that it provides a differentiated and competitive
product.
The Company has executed comprehensive local exchange resale agreements with
Ameritech Corporation ("Ameritech") for the greater metropolitan Chicago area,
Ohio and Michigan (collectively, the "Ameritech Resale Agreements") and with
NYNEX Corporation ("NYNEX") for the state of New York, with the opportunity to
expand into the entire territory served by NYNEX (the "NYNEX Resale
Agreement"). The Company has also entered into a limited service offering
("LSO") agreement with NYNEX for the resale of Centrex services over a private
local network which provides access to the majority of business lines in
Manhattan, New York. After a nine month systems test period with Ameritech, the
Company has commenced service in Illinois and has 16 sales professionals who
currently market the Company's local and long distance products and services in
the Chicago metropolitan area. The Company is currently in the systems test
period in New York, Michigan and Ohio and expects to begin providing local
resale services in New York and Ohio in October 1996 and in Michigan at the end
of 1996. The Company estimates, based on data compiled by the Federal
Communications Commission (the "FCC"), that the regions covered by the
Ameritech Resale Agreements and NYNEX Resale Agreement include access to over
10 million business access lines and over 25 million residential access lines.
The Company has implemented a resale task force to facilitate the negotiation
and implementation of additional long-term arrangements with the RBOCs for the
resale of telecommunications services. Additionally, the Company has contracted
with a number of long distance carriers, including MCI
4
<PAGE>
Communications Corporation ("MCI"), Sprint Corporation ("Sprint") and WorldCom
Inc. ("WorldCom"), to provide switching services and network transmission for
its long distance traffic. The Company continuously seeks to enter into
agreements with additional RBOCs, long distance carriers and enhanced and other
value-added service providers in order to aggressively build its subscriber
base as well as to provide additional services to its existing subscribers
while reducing costs.
MARKET OPPORTUNITY
The recently enacted Telecommunications Act of 1996 (the "Telecommunications
Act") is expected to result in a fundamental change in the competitive
structure of the local exchange market, greatly accelerating changes that have
been under way for several years as a result of FCC policy initiatives and
ongoing deregulatory trends at the state level. The Company believes that these
developments will result in significant opportunities for new entrants offering
integrated local and long distance telecommunications services. Due to the
Company's Ameritech Resale Agreements, the NYNEX Resale Agreement and the LSO
agreement, as well as significant time invested and experience gained in
provisioning the resale of such local exchange services, the Company believes
it enjoys a competitive advantage over other local service resellers with
respect to the provisioning of local resale services.
The Company estimates, based on industry sources, that in 1995 total revenues
from domestic local and long distance telecommunications services were
approximately $166 billion, of which approximately $96 billion was represented
by local exchange services and approximately $70 billion was represented by
long distance services. Since the divestiture of the Bell operating companies
from AT&T Corp. ("AT&T") in 1984 (the "Divestiture"), competition in the long
distance market has rapidly increased, and by 1995 AT&T had lost approximately
40% of its long distance market share to MCI, Sprint and a number of other long
distance competitors. Although the market for the provision of long distance
service has been open to competition since the Divestiture, the market for
local exchange services has until recently been essentially closed to
competition. The Company believes that competitive providers such as the
Company, by reselling local exchange services, will have the opportunity to
gain market share in the local exchange market just as long distance resellers
have gained market share in the long distance market. The Company believes that
it has several advantages that enable it to compete successfully in the new
competitive local telecommunications marketplace, including (i) locally
oriented marketing and subscriber service focusing on a defined, underserved
market segment, (ii) billing and information systems which are being interfaced
with the RBOCs and (iii) an experienced management team with significant
operational, technical, financial and regulatory expertise in both the local
and long distance telecommunications industry.
The Telecommunications Act has created an additional opportunity for the
Company to establish itself as a provider of integrated telecommunications
services before the RBOCs and the largest long distance carriers can offer
bundled local and long distance services. In order to provide long distance
services in their local service regions under the Telecommunications Act, the
RBOCs must seek FCC approval and comply with a series of regulations including
the requirement that they offer local resale and enter into interconnection
agreements with at least one facilities-based carrier. Once an RBOC obtains FCC
approval, the RBOC must provide its in-region long distance services through a
separate operating subsidiary, and such subsidiary must, among other things,
maintain separate books, records and accounts, retain different directors,
officers and employees and secure financing independent of the creditworthiness
of the RBOC's local exchange operations for at least three years. The
Telecommunications Act also prevents the largest long distance carriers from
integrating local services resold from an RBOC in a particular state with their
long distance services until the earlier of (i) February 8, 1999 or (ii) the
date the RBOCs are allowed to provide in-region long distance services in that
state.
5
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In order for facilities-based competitive access providers ("CAPs") to
provide ubiquitous local telecommunications services, such providers must
obtain access to buildings, negotiate complex interconnection agreements with
RBOCs and other local exchange carriers ("LECs"), address complex rate
structure and billing systems, provide directory listings and 911 and 411
services on their own or through the incumbent LECs, secure number portability
and create local marketing and subscriber care programs tailored for each
market. As a non-facilities based provider, the Company will not be required to
address such issues associated with operating as a facilities-based CAP in
order to provide ubiquitous local telecommunications services. As a result, the
Company believes it will be able to build a subscriber base quickly and
efficiently without incurring significant financial and management costs and
the developmental delays inherent in constructing network and transmission
facilities.
GROWTH STRATEGY
The Company's objective is to be a leading provider of integrated local and
long distance services and other telecommunications products to small and
medium-sized businesses. The Company expects to achieve this goal through the
successful implementation of its growth strategy which includes the following:
. Negotiate Attractive Resale Agreements with RBOCs. The Company seeks to
enter into additional local exchange resale agreements with RBOCs which
position it to offer a full range of local service over a broad
geographic area at a competitive cost to its targeted businesses. The
Ameritech Resale Agreements provide pricing protections designed to
maintain the competitiveness of rates and position the Company to
purchase capacity at rates at least as favorable as those of other
potential resellers of Ameritech local services. The NYNEX Resale
Agreement contains similar pricing protections. The Company intends to
negotiate similar pricing protections in all future RBOC resale
agreements. The Company believes the RBOCs will have an incentive to use
a wholesale strategy with respect to small and medium-sized businesses in
order to stabilize this revenue base and deter migration of the current
RBOCs' subscribers to facilities-based CAPs and other new entrant LECs.
. Provide Low-Cost Telecommunications Products and Services. The Company
believes its existing resale agreements will enable it to be among the
lowest cost providers of resold Ameritech and NYNEX local services. By
combining local and long distance services, the Company believes that it
is able to offer rates for integrated local and long distance services
that generally compare favorably with the rates enjoyed by large
commercial subscribers. The Company believes that as a non-facilities-
based telecommunications provider, it is able to build a subscriber base
quickly and efficiently without incurring significant financial and
management costs and the development delays inherent in constructing
network and transmission facilities.
. Focus on Large, Underserved Market. The Company primarily focuses its
marketing efforts on small and medium-sized businesses with
telecommunications usage of less than $5,000 per month. These businesses
generally do not employ in-house telecommunications specialists to manage
their telecommunications services and in most cases obtain services from
various vendors. The Company believes that the gross margins on services
provided to its target market are generally higher than for larger
commercial subscribers. Since the RBOCs and the large long distance
carriers primarily concentrate their sales and marketing efforts on
residential and large commercial subscribers, the Company believes an
opportunity to gain market share exists within its target market. As a
result, the Company plans to generate additional revenue by offering
enhanced and other value-added telecommunications products and services
to these small and medium-sized businesses.
. Rapid Market Entry. The Company intends to continue to be early to market
in providing an integrated package of local and long distance services.
The Company believes it will be able to move into new markets and
generate cash flow quickly because the Company, unlike facilities-based
CAPs, does not face large capital expenditures from building and/or
maintaining transmission facilities. Additionally, providing a ubiquitous
product offering will further enhance the Company's ability to rapidly
build a subscriber base across a large geographic area. Due to the
complexity of the provisioning process, the Company believes that the
RBOCs will have an incentive to work with competitive providers such as
the
6
<PAGE>
Company which have developed high quality management information and
billing systems that can interface with the RBOCs' systems and have
management teams with significant operational, technical, financial and
regulatory experience in the resale of local exchange service. In order to
develop a subscriber base and create brand awareness, the Company may sell
its long distance services in a new market prior to entering into a resale
agreement with an RBOC.
. Provide an Integrated Telecommunications Solution. The Company believes
that a key element in building its subscriber base while minimizing churn
is the implementation of a marketing and operating strategy which
emphasizes providing an integrated telecommunications solution to its
target market. The Company utilizes a marketing approach which combines
both direct and indirect sales efforts. The Company attracts and retains
subscribers by combining responsive subscriber care with a simple product
and pricing package to provide high-quality service at a cost which is
usually afforded to only large commercial subscribers. Specifically, the
Company will provide a single source and bill for integrated local and
long distance services and enhanced and other value-added
telecommunications services, with a single point of contact for
subscriber service, product inquiries, repairs and billing questions. The
Company believes that this marketing and subscriber service approach
reduces marketing costs, subscriber acquisition costs and churn.
. Capitalize on Experience in Provisioning the Resale of Local Service. The
Company is one of the first competitive providers to resell integrated
local and long distance telecommunications services. In contrast to the
resale of long distance service, providing local exchange service as a
reseller is a highly complex process involving: (i) providing numerous
technical and configuration options; (ii) ensuring number portability;
(iii) providing 911 and 411 services and directory listings; (iv)
providing multiple service options on an uninterrupted basis; and (v)
integrating complex rate structures and billing systems. The Company has
invested significant time in working with certain RBOCs to address these
issues and to develop systems which are designed to allow for the
implementation of its local exchange resale agreements. The Company
believes that its experience both in negotiating these agreements and in
implementing such service offerings will position it to compete
effectively.
. Geographic Market Expansion. The Company is engaged in ongoing
discussions with the RBOCs with regard to the resale of local exchange
services. The Company's decision to enter into a resale agreement with an
RBOC and expand into a new geographic region is based upon a series of
market selection criteria, including product availability, the ability of
the Company to position its products and services, the terms of the
resale agreement, the state of the regulatory environment and the
willingness of an RBOC to provide provisioning support. In an effort to
build its subscriber base and achieve additional economies of scale, the
Company continuously evaluates potential acquisitions, including other
resellers of local and/or long distance service or enhanced and other
value-added services, in both the geographic areas covered by its resale
agreements and new markets.
On September 30, 1996, the Company consummated a private placement (the
"Offering") under Rule 144A of the Securities Act, pursuant to which the
Company issued and sold (i) 48,500 Units consisting of $48.5 million aggregate
principal amount at maturity of Senior Notes and warrants (the "Initial
Warrants") to purchase 61,550 shares, subject to adjustment under certain
circumstances of Class A common stock, par value $.01 per share (the "Class A
Common Stock"), at an initial exercise price of $.01 per share, and (ii) $36.0
million in aggregate principal amount at maturity of Convertible Notes. The
Units and the Convertible Notes were issued pursuant to the terms of the
respective Indentures. The Indentures also provide that (i) in the event that,
on or prior to March 30, 1998, the Company does not consummate a Qualified
Public Offering (as defined herein), or has not been sold pursuant to a
Qualified Sale of the Company (as defined herein), the Company will be
obligated to issue to the Holders of the Senior Notes Senior Note Contingent
Warrants (the "Senior Note Contingent Warrants") exercisable for Class A Common
Stock representing up to 3% of the Common Stock of the Company on a fully
diluted basis after giving effect to the issuance of such Senior Note
Contingent Warrants and (ii) in the event that, on or prior to September 30,
1999, the Company does not consummate a Qualified Public Offering or has
7
<PAGE>
not been sold pursuant to a Qualified Sale of the Company, the Company will be
obligated to issue to the Holders of the Convertible Notes Convertible Note
Contingent Warrants (the "Convertible Note Contingent Warrants" and, together
with the Senior Note Contingent Warrants, the "Contingent Warrants")
exercisable for Class A Common Stock representing up to 2.5% of the Common
Stock of the Company on a fully diluted basis after giving effect to the
issuance of such Convertible Note Contingent Warrants. The Initial Warrants and
the Contingent Warrants are collectively referred to herein as the "Warrants."
In addition, under certain conditions, if the Company has not consummated a
Qualified Public Offering or a Qualified Public Sale of the Company has not
occurred by September 30, 1997, the Company will be required to offer to
Holders of Convertible Notes the right to acquire additional convertible
securities and warrants (the "Additional Warrants"). See "Description of the
Notes."
The Company, a Delaware corporation, was formed and commenced operations in
April 1994. The Company's principal executive office is located at 10 S.
Riverside Plaza, Suite 401, Chicago, Illinois 60606, and its telephone number
is (312) 906-3600.
8
<PAGE>
THE EXCHANGE OFFER
Registration Rights The Old Notes were sold by the Company on September
Agreement................ 30, 1996 to Smith Barney Inc., BT Securities
Corporation, Chase Securities Inc. and CIBC Wood
Gundy Securities Corp. (collectively, the "Initial
Purchasers"), who placed the Old Notes with
institutional investors. In connection therewith,
the Company executed and delivered for the benefit
of the holders of the Old Notes a registration
rights agreement (the "Registration Rights
Agreement") providing, among other things, for the
Exchange Offer.
The Exchange Offer........ New Notes are being offered in exchange for a like
face amount of Old Notes. As of the date hereof,
$48.5 million aggregate principal amount at
maturity of Old Notes are outstanding. The Company
will issue the New Notes to Holders promptly
following the Expiration Date. See "Risk Factors--
Consequences of Failure to Exchange." Holders of
the Old Notes do not have appraisal or dissenter's
rights in connection with the Exchange Offer under
the Delaware General Corporation Law, the governing
law of the state of incorporation of the Company.
Minimum Condition......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered or accepted for exchange.
Expiration Date........... 5:00 p.m., New York City time, on ,
1997, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended.
Interest on the New Notes
and the Old Notes........
Each New Note will accrete interest at a rate of
14% per annum from its Issue Date (as defined
herein) until March 30, 2000. Thereafter, each New
Note will bear interest at the rate of 14% per
annum which will be payable in cash semiannually on
March 30 and September 30 of each year, commencing
September 30, 2000. Interest on the Old Notes
accepted for exchange will cease to accrete upon
issuance of the New Notes.
Conditions to the The Exchange Offer is subject to certain customary
Exchange Offer........... conditions, which may be waived by the Company. See
"The Exchange Offer--Conditions." The Company
reserves the right to terminate or amend the
Exchange Offer at any time prior to the Expiration
Date upon the occurrence of any such condition. NO
VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED
TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR
PROXY THEREFOR) IS BEING SOUGHT HEREBY.
Procedures for Tendering
OldNotes.................
Each Holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Old Notes and any other required
documentation to the exchange agent (the "Exchange
Agent") at the address set forth
9
<PAGE>
herein. By executing the Letter of Transmittal,
each Holder will represent to the Company, among
other things, that (i) the New Notes acquired
pursuant to the Exchange Offer by the Holder and
any beneficial owners of Old Notes are being
obtained in the ordinary course of business of the
person receiving such New Notes, (ii) neither the
Holder nor such beneficial owner is participating
in, intends to participate in or has an arrangement
or understanding with any person to participate in
the distribution of such New Notes and (iii)
neither the Holder nor such beneficial owner is an
"affiliate," as defined under Rule 405 of the
Securities Act, of the Company. Each broker-dealer
that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were
acquired by such broker or dealer as a result of
market-making activities or other trading
activities (other than
Old Notes acquired directly from the Company), may
participate in the Exchange Offer but may be deemed
an "underwriter" under the Securities Act and,
therefore, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker or dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the
Securities Act. See "The Exchange Offer--Procedures
for Tendering" and "Plan of Distribution."
Special Procedures for
Beneficial Owners........
Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered Holder
promptly and instruct such registered Holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering his Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed
bond power from the registered Holder. The transfer
of registered ownership may take considerable time.
See "The Exchange Offer--Procedures for Tendering."
Guaranteed Delivery Holders of Old Notes who wish to tender their Old
Procedures............... Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date must
tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
See "The Exchange Offer--Withdrawal of Tenders."
Acceptance of Old Notes
and Delivery of New
Notes.................... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
10
<PAGE>
Federal Income Tax The exchange of Old Notes for New Notes by
Consequences............. tendering holders will not be a taxable exchange
for federal income tax purposes, and such holders
will not recognize any taxable gain or loss or any
interest income for federal income tax purposes as
a result of such exchange.
Use of Proceeds........... There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
Effect on Holders of Old As a result of the making of this Exchange Offer,
Notes.................... and upon acceptance for exchange of all validly
tendered Old Notes pursuant to the terms of this
Exchange Offer, the Company will have fulfilled a
covenant contained in the terms of the Old Notes
and the Registration Rights Agreement and,
accordingly, the holders of the Old Notes will have
no further registration or other rights under the
Registration Rights Agreement, except under certain
limited circumstances. Holders of the Old Notes who
do not tender their Old Notes in the Exchange Offer
will continue to hold such Old Notes and will be
entitled to all the rights and limitations
applicable thereto under the Senior Note Indenture.
All untendered, and tendered but unaccepted, Old
Notes will continue to be subject to the
restrictions on transfer provided for in the Old
Notes and the Senior Note Indenture. To the extent
that Old Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for the
Old Notes not so tendered could be adversely
affected. See "Risk Factors--Consequences of
Failure to Exchange Old Notes."
Exchange Agent............ Harris Trust Company of New York is serving as
Exchange Agent in connection with the Exchange
Offer. See "The Exchange Offer--Exchange Agent."
11
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The Exchange Offer applies to $48.5 million aggregate principal amount at
maturity of Old Notes. The terms of the New Notes are identical in all material
respects to the Old Notes, except that the New Notes have been registered under
the Securities Act and, therefore, will not bear legends restricting their
transfer and will not contain certain terms providing for an increase in the
interest rate on the Old Notes under certain circumstances relating to the
timing of the Exchange Offer, which rights will terminate when the Exchange
Offer is consummated. The New Notes will evidence the same debt as the Old
Notes and will be entitled to the benefits of the Senior Note Indenture, under
which both the Old Notes were, and the New Notes will be, issued. See
"Description of the Notes."
The New Notes.............
$48.5 million aggregate principal amount at
maturity of 14% Series B Senior Discount Notes due
2003.
Maturity Date............. September 30, 2003.
Yield..................... 14% per annum (computed on a semi-annual bond
equivalent basis) and calculated from September 30,
1996.
Interest.................. The New Notes offered hereby will accrete interest
at a rate of 14% per annum, compounded
semiannually, to an aggregate principal amount of
$48.5 million by March 30, 2000. Thereafter, the
New Notes will bear interest at the rate of 14% per
annum which will be payable in cash semiannually on
March 30 and September 30 of each year, commencing
September 30, 2000. See "Description of the Notes--
Principal, Maturity and Interest."
Original Issue Discount... For federal income tax purposes, the New Notes will
be treated as having been issued with "original
issue discount" generally equal to the difference
between the issue price of the New Notes and the
sum of all payments (whether designated as
principal or interest) to be made thereon. Each
holder of a New Note must include in gross income
for federal income tax purposes a portion of such
original issue discount for each day during each
taxable year in which a New Note is held. See
"Certain Federal Income Tax Considerations."
Ranking...................
The New Notes are senior and unsecured obligations
of the Company and will rank pari passu in right of
payment with all other unsubordinated and unsecured
indebtedness of the Company. The New Notes will be
effectively subordinated to any secured
indebtedness of the Company to the extent of the
value of the assets securing such indebtedness. As
a holding company that conducts virtually all of
its business through subsidiaries, the Company
currently has no source of operating cash flow
other than dividends and distributions from its
subsidiaries. The Company's subsidiaries will have
no obligation to pay amounts due on the New Notes
and will not guarantee the New Notes; provided,
that if a subsidiary guarantees any Indebtedness
(as defined herein) of the Company, such subsidiary
will be obligated to guarantee the New Notes.
Therefore, the New Notes will be effectively
subordinated to all liabilities of the Company's
subsidiaries, including trade payables. Any rights
of the Company and its creditors, including the
holders of the New Notes, to participate in a
distribution of the
12
<PAGE>
assets of any of the Company's subsidiaries upon
any liquidation or reorganization of any such
subsidiary will be subject to the prior claims of
that subsidiary's creditors (including trade
creditors). See "Risk Factors--Holding Company
Structure; Source of Repayment of Notes; Effective
Subordination of Notes to Indebtedness of
Subsidiaries."
Sinking Fund.............. None.
Optional Redemption....... The New Notes will be redeemable at the option
of the Company, in whole or in part, at any
time on or after September 30, 2001, at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, and
Special Interest, if any, to the date of
redemption. See "Description of the Notes--
Optional Redemption."
In addition, in the event that on or prior to
September 30, 1999, the Company consummates one
or more Public Equity Offerings (as defined
herein) or issues or sells Qualified Stock of
the Company (as defined herein) to a Strategic
Investor (as defined herein), in each case in
an aggregate amount equal to or exceeding $40
million, up to a maximum of 25% of the
aggregate principal amount at Stated Maturity
of the New Notes will be redeemable at the
option of the Company at a redemption price
equal to 114% of the Accreted Value (as defined
herein) thereof plus accrued and unpaid
interest, if any, and Special Interest, if any,
thereon to the date of redemption.
Change of Control......... Upon a Change of Control (as defined in each
Indenture), each holder of New Notes will have
the right to require the Company to repurchase
all or any part of such holder's New Notes, at
101% of the Accreted Value thereof, or, in the
case of any such repurchase on or after March
30, 2000, 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, and
Special Interest, if any, thereon, to the date
of repurchase. There can be no assurance that
the Company will have the financial resources
necessary to repurchase the New Notes upon a
Change of Control. See "Description of the
Notes--Repurchase at the Option of Holders upon
a Change of Control."
Guarantees................ The Senior Note Indenture provides that any
subsidiary that guarantees Indebtedness (as
defined herein) of the Company will guarantee
(a "Senior Note Guarantee") unconditionally, on
a senior basis, the payment of principal,
premium, if any, interest and Special Interest,
if any, on the New Notes and amounts payable
upon a Change of Control or an Asset Sale Offer
(as defined herein). See "Description of the
Notes--Certain Covenants--Limitation on
Issuances of Guarantees by Restricted
Subsidiaries."
Certain Covenants......... The Senior Note Indenture will contain certain
covenants which, among other things, will
restrict the ability of the Company and certain
of its subsidiaries to incur additional
indebtedness, pay dividends or make
distributions in respect of the Company's
capital stock or make certain other restricted
payments, make investments, create restrictions
on the ability of certain subsidiaries to make
distributions on their capital stock or to
issue capital stock, create liens, enter into
transactions with affiliates or related
persons, sell assets, or consolidate, merge or
sell all or substantially all of their assets
and engage in businesses other than the
telecommunications business. These covenants
are subject to important exceptions and
qualifications. See "Description of the Notes--
Certain Covenants."
13
<PAGE>
For additional information concerning the New Notes, see "Description of the
Notes."
RISK FACTORS
Holders of Old Notes should carefully consider the matters set forth under
the caption "Risk Factors" prior to making a decision with respect to the
Exchange Offer.
14
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data for the periods
from inception of the Company in April 1994 to December 31, 1994 and for the
fiscal year ended December 31, 1995 was derived from, and should be read in
conjunction with, the consolidated financial statements of the Company and the
related notes thereto included elsewhere in this Prospectus. The selected
financial data as of and for the nine month periods ended September 30, 1996
and 1995, respectively, are derived from, and should be read in conjunction
with the unaudited financial statements of the Company and the related notes
thereto included elsewhere in this Prospectus. However, in the opinion of
management, such interim financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary to fairly present
the information presented for such periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR SEPTEMBER 30,
INCEPTION TO ENDED ------------------
DECEMBER 31, DECEMBER 31, UNAUDITED
1994 1995 1995 1996
------------ ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION
AND RATIOS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net service revenue............ $ 1,737 $ 7,884 $ 5,826 $ 7,599
Cost of services............... 1,455 9,076 6,686 6,587
-------- -------- -------- --------
Gross margin................... 282 (1,192) (860) 1,012
Sales and marketing expense.... 2,869 5,867 4,244 5,837
General and administrative
expense (1)................... 4,686 11,100 7,366 10,920
Interest expense............... 26 734 500 46
Interest and other income (2).. 152 646 423 8,572
Minority interest.............. -- 150 -- --
-------- -------- -------- --------
Net loss....................... $ (7,147) $(18,097) $(12,547) $ (7,219)
======== ======== ======== ========
Accumulated unpaid preferred
dividends..................... $ 707 $ 3,810 $ 2,679 $ --
Net loss to common shareholder. $ (7,854) $(21,907) $(15,226) $ (7,219)
Net loss per common share...... $ (65.63) $ (72.42) $ (57.82) $ (16.41)
Weighted average shares
outstanding................... 119,678 302,520 263,314 439,877
OTHER DATA:
EBITDA (3)..................... $ (7,087) $(15,901) $(11,217) $(14,385)
Depreciation and amortization.. 186 2,258 1,253 1,360
Capital expenditures........... 1,728 1,740 1,606 232
Ratio of earnings to fixed
charges (4)................... -- -- -- --
<CAPTION>
SEPTEMBER 30,
------------------
DECEMBER 31, DECEMBER 31, UNAUDITED
1994 1995 1995 1996
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 5,979 $ 13,705 $ 19,239 $ 71,390
Total assets................... 12,747 20,471 35,040 88,083
Long-term debt (net of current
maturities)................... 3,176 518 6,761 58,352
Redeemable preferred stock..... 15,306 44,396 42,127 9,853
Common stockholders' equity
(deficit)..................... (7,830) (28,768) (22,099) 14,022
</TABLE>
- --------
(1) General and administrative expense includes amortization of intangibles.
(2) Interest and other income for the nine months ended September 30, 1996
includes a gain of $8.1 million realized on the sale of the Company's
switching facilities in Ohio.
(3) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and minority interest. It is a measure commonly
used in the telecommunications industry and is presented to assist in
understanding the Company's operating results. EBITDA is not intended to
represent cash flows for the period.
(4) The ratio of earnings to fixed charges is computed by dividing pretax
income (loss) from operations before interest charges by interest expense.
Earnings were insufficient to cover fixed charges for the periods ended
December 31, 1994 and 1995 by $7.1 million and $17.4 million, respectively,
and for the nine month period ended September 30, 1995 and 1996 by $12.0
million and $7.2 million, respectively.
15
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, before tendering
their Old Notes for the New Notes offered hereby, holders of Old Notes should
consider carefully the following factors, which may be generally applicable to
the Old Notes as well as to the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. Except under certain
limited circumstances, the Company does not currently anticipate that it will
register the Old Notes under the Securities Act. Based on interpretations by
the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by any Holder thereof (other than any such Holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such New Notes are
acquired in the ordinary course of such Holder's business and such Holder has
no arrangement with any person to participate in the distribution of such New
Notes. Notwithstanding the foregoing, each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with any resale of New Notes received in exchange for Old
Notes where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities (other than Old Notes
acquired directly from the Company). The Company has agreed that, for a period
of 180 days from the Expiration Date, it will make this Prospectus available
to any broker-dealer for use in connection with any such resale. See "Plan of
Distribution." However, the ability of any Holder to resell the New Notes is
subject to applicable state securities laws as described in "Blue Sky
Restrictions on Resale of New Notes" below. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for
the Old Notes not so tendered could be adversely affected. See "The Exchange
Offer."
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer, and avoid the restrictions on transfer
of the Old Notes, Holders of Old Notes must transmit a properly completed
Letter of Transmittal, including all other documents required by such Letter
of Transmittal, to the Exchange Agent at one of the addresses set forth below
under "Exchange Agent" on or prior to the Expiration Date. In addition, either
(i) certificates for such Old Notes must be received by the Exchange Agent
along with the Letter of Transmittal or (ii) a timely confirmation of a book-
entry transfer of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company pursuant to the
procedure for book-entry transfer described herein, must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the Holder must comply
with the guaranteed delivery procedures described herein. See "The Exchange
Offer."
BLUE SKY RESTRICTIONS ON RESALE OF NEW NOTES
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or resold by any Holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration of qualification is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to
register or qualify the resale of the New Notes in any such jurisdictions.
However, an exemption is generally available for sales to registered broker-
dealers and certain institutional buyers. Other exemptions under applicable
state securities laws may also be available.
16
<PAGE>
NEGATIVE CASH FLOW AND OPERATING LOSSES; LIMITED OPERATING HISTORY
The Company has experienced pre-tax operating losses from its inception in
April 1994 through the date of this Prospectus, excluding the effect of a one-
time non-recurring gain, and has, to date, not generated positive cash flow.
For the nine months ended December 31, 1994 and the fiscal year ended December
31, 1995, the Company's pre-tax operating losses were $7.1 million and $18.1
million, respectively. These operating losses were primarily the result of the
one-time installation costs and fixed ongoing costs related to switching
facilities of the Company which were sold in February 1996, and the sales and
marketing and general and administrative expenses required to build the
Company's sales, customer, management information and marketing
infrastructure. Excluding an $8.1 million non-recurring gain on the sale of
such switching facilities, the Company would have lost $8.8 million for the
first nine months of 1996. The Company, following the Exchange Offer, expects
to realize additional operating losses on a consolidated basis while it
continues to expand and develop its service offerings and its subscriber base.
There can be no assurance that the Company will be able to develop or expand
its subscriber base or that it will achieve profitability in future years.
The Company has a limited operating history. Prospective investors,
therefore, have limited historical financial information about the Company
upon which to base an evaluation of its performance and an investment in the
New Notes offered hereby. Given the Company's limited operating history, there
can be no assurance that the Company will be able to achieve or sustain
positive cash flow from operating activities or to implement its growth
strategy.
SUBSTANTIAL LEVERAGE
The Company has and will continue to have consolidated indebtedness that is
substantial in relation to its stockholders' equity. As of September 30, 1996,
the Company had $58.6 million principal amount of long-term debt and $14.0
million of stockholders' equity. See "Capitalization."
The Company's ability to make cash payments with respect to the Notes, to
repay its obligations on the Notes at maturity and to satisfy its other debt
obligations following the Exchange Offer will depend on its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the
Company's control. The Company believes that the Company's cash flow will be
sufficient to permit the Company to meet its operating expenses and to service
its debt requirements as they become due. Significant assumptions underlie
this belief, including, among other things, that (i) the Company will succeed
in implementing its business strategy and (ii) there will be no material
adverse developments in the business, liquidity or capital requirements of the
Company. However, because the Company currently has a consolidated cash flow
deficit, there can be no assurance that the Company will be able to make cash
interest payments on the Notes commencing in 2000 or to repay its obligations
on the Notes. See "Description of the Notes." The Senior Note Indenture will
permit the Company and its subsidiaries to incur additional Indebtedness under
certain circumstances, including up to $45.0 million under a Credit Facility,
$30.0 million of which may be secured. If the Company is unable to service its
indebtedness, it will be forced to examine alternative strategies that may
include actions such as reducing or delaying capital expenditures,
restructuring or refinancing its indebtedness, the sale of assets or of the
Company's ownership interest in its subsidiaries or seeking additional equity
and/or debt financing. There can be no assurance that any of these strategies
could be effected on satisfactory terms, if at all.
FUTURE CASH OBLIGATIONS
Since inception, the Company's consolidated cash flow from operations has
been negative. As a result, the Company has financed fixed charges (including
interest on existing indebtedness) and operating expenses with the proceeds
from private sales of its equity securities. Pursuant to the terms of the
Notes, the Company will, at such time as interest is payable on the Notes, be
required to satisfy substantially higher periodic cash debt service
obligations. Commencing September 30, 1999, cash interest on the Convertible
Notes will accrue semiannually at the rate of 9% per annum (approximately $4
million per year), and commencing March 30, 2000, cash interest
17
<PAGE>
on the Senior Notes will accrue semiannually at the rate of 14% per annum
(approximately $17 million per year). The fully accreted principal amounts of
the New Notes offered hereby of $48.5 million and the Convertible Notes of
$36.0 million, will become due on September 30, 2003 and September 30, 2004,
respectively. Many factors, certain of which are beyond the Company's control,
will affect its performance and, therefore, its ability to meet its ongoing
obligations to repay the Notes and other debt. There can be no assurance that
the Company will be able to generate sufficient cash flow or otherwise obtain
funds in the future to cover interest and principal payments associated with
the Notes and its other debt obligations. See "Dividend Policy."
HOLDING COMPANY STRUCTURE; SOURCE OF REPAYMENT OF NOTES; EFFECTIVE
SUBORDINATION OF NOTES TO INDEBTEDNESS OF SUBSIDIARIES
As a holding company that conducts virtually all of its business through
subsidiaries, the Company has no source of operating cash flow other than from
dividends and distributions from its subsidiaries. In order to pay cash
interest on the Notes and to repay the principal amount of the Notes at
maturity, or to redeem or repurchase the Notes, the Company will be required
to obtain dividends or distributions from its subsidiaries, refinance its
indebtedness or raise funds in a public or private equity or debt offering.
However, the Indentures will limit the Company's ability to incur additional
indebtedness.
If the Company is required to conduct an offering of its capital stock or to
refinance the Notes, its ability to do so on acceptable terms, if at all, will
be affected by several factors, including financial market conditions and the
value and performance of the Company at the time of such offering or
refinancing, which in turn may be affected by many factors, including economic
and industry cycles. There can be no assurance that an offering of the
Company's capital stock or a refinancing of the Notes can or will be completed
on satisfactory terms, that such offering or refinancing would be sufficient
to enable the Company to make any payments with respect to the Notes if
required or that such offering or refinancing would be permitted by the terms
of the debt instruments of the Company and its subsidiaries then in effect.
The Old Notes are and the New Notes will be senior obligations of the
Company, pari passu in right of payment with certain other indebtedness of the
Company and not secured by any assets of the Company or its subsidiaries. The
Convertible Notes are subordinated to the Senior Notes. Otherwise, the
Convertible Notes are pari passu in right of payment with certain other
indebtedness of the Company and are not secured by any assets of the Company
or its subsidiaries. The Senior Note Indenture permits the Company to enter
into a Credit Facility under which the Company may incur up to $45.0 million
of Indebtedness, $30.0 million of which may be secured. If such Indebtedness
is secured, the Notes will be effectively subordinated to such Indebtedness to
the extent of the value of the assets securing such Indebtedness. The
Company's subsidiaries will have no obligation to pay amounts due on the Notes
and will not guarantee the Notes on their respective Issue Dates; however, if
a subsidiary guarantees any Indebtedness of the Company, such subsidiary will
be obligated to guarantee the Notes. See "Description of the Notes--Certain
Covenants" and "--Limitation on Issuances of Guarantees by Restricted
Subsidiaries." Therefore, the Notes, if not guaranteed after their respective
Issue Dates, will be effectively subordinated to all existing liabilities of
the Company's subsidiaries, including trade payables. As of September 30,
1996, the total liabilities of the Company's subsidiaries (after the
elimination of loans and advances by the Company to its subsidiaries) on a
combined consolidated basis were approximately $5.3 million. Pursuant to the
Senior Note Indenture, the Company's subsidiaries will not be able to incur
Indebtedness other than $5 million of vendor financing and guarantees of the
Credit Facility and the Company's subsidiaries may guarantee the Company's
obligations under the Credit Facility. Any rights of the Company and its
creditors, including the holders of the Notes, to participate in a
distribution of the assets of any of the Company's subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors, including trade creditors.
DEPENDENCE ON RELATIONSHIP WITH THIRD PARTY FACILITIES-BASED PROVIDERS
The Company does not own any part of a local exchange network or a long
distance network. As a result, the Company depends entirely on facilities-
based carriers for the transmission of subscriber phone calls. Although the
Company believes that its relations with its underlying carriers are good, the
termination of any of
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the Company's contracts with its carriers or a reduction in the quality or
increase in cost of such carriers' services could have a material adverse
effect on the Company's results of operations. In addition, the accurate and
prompt billing of the Company's subscribers is dependent upon the timeliness
and accuracy of call detail records provided by the carriers whose service the
Company resells. There can be no assurance that the current carriers will
continue to provide, or that new carriers will provide, accurate information
on a timely basis, the failure of which could have a material adverse effect
on the Company's results of operations. In particular, there were a number of
provisioning and billing difficulties related to the local and long distance
services provided to business subscribers in Manhattan, New York pursuant to
the NYNEX LSO agreement. The problems included failure to provision
subscribers, losing subscriber traffic information and subscribers receiving
multiple billings for the same service. Much of the difficulty was due to the
nature of the private local network with dedicated facilities designed for
resale purposes. NYNEX required the services of a third party billing vendor
to help implement the billing portion of the arrangement. The Company has now
contracted directly with that vendor for billing and systems support in order
to avoid problems associated with such provisioning. However, because other
RBOCs with which the Company may enter into agreements do not have significant
experience handling large volumes of resold local exchange traffic, there can
be no assurance as to the quality of the service that the Company will receive
or that similar problems will not occur.
In addition, physical damage, power loss and software defects of the RBOCs
may cause interruption in service and/or reduced capacity for the Company's
subscribers. In the event that the Company's long distance carriers are unable
to handle the growth in subscriber usage, the Company could transfer such
traffic to a carrier that had sufficient capacity, but there can be no
assurance that additional capacity will be available. If any of the LECs are
unable to handle the provisioning or growth in subscriber usage, then the
Company would be required to use another local carrier, which could be
difficult in light of the limited development of facilities-based competitive
local exchange networks. In the event the Company otherwise elects to use
other carriers, the charges for such services may exceed those under the
existing contracts, which could have a material adverse effect on the
Company's financial condition and results of operations. See "Business--Vendor
Agreements."
COMPETITION
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. The Company
expects that competition will intensify in the future due to regulatory
changes, including the enactment of the Telecommunications Act and the
increase in the size, resources and number of market participants. In each of
its markets, the Company faces competition for local service from larger,
better capitalized incumbent providers, many of whom have greater financial
resources than the Company. Additionally, the long distance market is
significantly more competitive than the local exchange market because the
RBOC's have historically had a monopoly position within the local exchange
market. The incumbent LECs have established relationships with their
subscribers and provide those subscribers with various transmission and
switching services that the Company, in many cases, has only recently begun to
offer.
In the local exchange market, the Company also faces competition or
prospective competition from one or more CAPs, which have significantly
greater financial resources than the Company, and from other competitive
providers, including non-facilities-based providers like the Company. For
example, AT&T, MCI and Sprint, among other carriers, have each indicated their
intention to offer local telecommunications services in major U.S. markets
using their own facilities or by resale of the LECs' or other providers'
services. In addition to these long distance service providers, entities
potentially capable of offering competitive switched services include CAPs,
cable television companies, electric utilities, other long distance carriers,
microwave carriers, wireless telephone system operators and large subscribers
who build private networks. Many facilities-based CAPs and long distance
carriers, for example, have committed substantial resources to building their
networks. By building a network, a facilities-based provider can enter the
local exchange market by using its own network or entering into
interconnection agreements or resale agreements with incumbent LECs, including
RBOCs. Such additional alternatives may provide the CAPs with greater
flexibility and a lower cost structure than the Company. In addition, those
competitive providers who enter the local exchange market by successfully
negotiating contracts with the RBOCs may have substantially greater financial
resources than the Company.
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With respect to wireless telephone system operators, the FCC recently
authorized cellular, personal communications service ("PCS"), and other
commercial mobile radio service ("CMRS") providers to offer wireless services
to fixed locations, rather than just to mobile subscribers, in whatever
capacity such CMRS providers choose. Previously, cellular providers could
provide service to fixed locations only on an ancillary or incidental basis.
This authority to provide fixed as well as mobile services will enable CMRS
providers to offer wireless local loop service and other services to fixed
locations (e.g. office and apartment buildings) in direct competition with the
Company and other providers of traditional fixed telephone service. In
addition, in August 1996 the FCC promulgated regulations that classify CMRS
providers as telecommunications carriers, thus giving them the same rights to
interconnection and reciprocal compensation under the Telecommunications Act as
other non-LEC telecommunications carriers, including the Company.
Under the Telecommunications Act and ensuing federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
availability of broad-based local resale and introduction of facilities-based
local competition are required before the RBOCs may provide in-region
interexchange long distance services in the states where they offer local
telephone service ("in-region long distance authority"). Also, the largest
interexchange carriers (AT&T, MCI, Sprint and any other carrier with 5% or more
of the pre-subscribed access lines) are prevented under the Telecommunications
Act from bundling local services resold from an RBOC in a particular state with
their long distance services until the earlier of (i) February 8, 1999 or (ii)
the date on which the RBOC whose services are being resold obtains in-region
long distance authority in that state. The RBOCs are currently allowed to offer
certain in-region "incidental" long distance services (such as cellular, audio
and visual programming and certain interactive storage and retrieval functions)
and to offer virtually all out-of-region long distance services. Once the RBOCs
are allowed to offer widespread in-region long distance services, both they and
the largest interexchange carriers will be in a position to offer single-source
local and long distance services similar to those offered or planned to be
offered by the Company. While new business opportunities will be made available
to the Company through the Telecommunications Act and other federal and state
regulatory initiatives, regulators are likely to provide the incumbent LECs
with an increased degree of flexibility with regard to pricing of their
services as competition increases. Although the Ameritech and NYNEX Resale
Agreements contain certain pricing protections, including adjustments in the
wholesale rates to be consistent with any changes in the Ameritech and NYNEX
retail rates, if the incumbent LECs elect to lower their rates and are able to
sustain lower rates over time, this may adversely affect the revenues of the
Company and place downward pressure on the rates the Company can charge. While
the Ameritech and NYNEX Resale Agreements ensure that the Company will receive
any lower rate provided to any other reseller, under the NYNEX Resale Agreement
if such lower rate is provided to a reseller committing to both a longer term
and a greater volume commitment, the Company receives the lower rate, but must
negotiate with NYNEX a reasonable transition to similar commitments. If the
Company cannot successfully negotiate such a transition with NYNEX, then the
Company may be unable to maintain the lowest rate. The Company believes the
effect of lower rates may be offset by the increased revenues available by
offering new products and services to its target subscribers, but there can be
no assurance that this will occur. In addition, if future regulatory decisions
afford the LECs excessive pricing flexibility or other regulatory relief, such
decisions could have a material adverse effect on the Company.
Competition for the Company's products and services is based on price,
quality, network reliability, service features and responsiveness to subscriber
needs. While the Company believes that it currently has certain advantages
relating to the timing, ubiquity and cost savings resulting from its resale
agreements, there can be no assurance that the Company will be able to maintain
these advantages. A continuing trend toward business combinations and alliances
in the telecommunications industry may create significant new competitors to
the Company. Many of the Company's existing and potential competitors have
financial, technical and other resources significantly greater than those of
the Company.
ABILITY TO MEET MINIMUM COMMITMENTS; TERMINATION OF AGREEMENTS
Substantially all of the resale agreements between the Company and local
exchange carriers or long distance carriers contain term and volume
commitments. The local exchange resale agreements typically provide a minimum
usage which requires the Company to have a minimum number of lines in place at
the end of the
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applicable measurement period (typically one year) (each, a "Minimum
Commitment"). The long distance resale agreements typically require the
Company to meet a minimum dollar threshold of usage in order to be eligible
for discounted rates. The inability of the Company to meet its Minimum
Commitments or thresholds may result in substantial underutilization charges,
and, in the case of the long distance agreements, a significant increase in
the rates charged to the Company. The majority of the resale agreements also
contain carryover provisions which permit the Company to carryforward volume
shortfalls and may serve to delay, or possibly eliminate, the payment of a
significant portion of any shortfall the Company may experience. While these
"carryover pools" may provide the Company with some additional time to build
its subscriber base, any underutilization charges or rate increases could have
a material adverse effect on the financial condition and results of operations
of the Company.
Historically, the Company had not met its minimum monthly threshold under
its original agreement with Sprint. As a result, the Company does not receive
the maximum discounted rates available from Sprint and therefore resells
Sprint long distance service at significantly lower margins. In addition, the
Company has not met its Minimum Commitment under the LSO agreement due to
NYNEX provisioning delays. Although the LSO agreement provides that
provisioning delays allow the Company to postpone its obligation to meet its
commitment, there can be no assurance that the failure to meet its commitment
will not result in a material adverse effect on the financial condition and
results of operations of the Company. See "Business--Vendor Agreements."
Each of the resale agreements contains termination provisions which, among
other things, require the Company to pay termination charges if the Company
terminates an agreement prior to the end of term. The incurrence of any
termination charges could have a material adverse effect on the Company's
financial condition and results of operations.
LACK OF EXPERIENCE OFFERING ADDITIONAL PRODUCTS AND SERVICES
The Company's strategy includes offering additional telecommunications
products and services, which may include, among others, resold paging and
cellular phone service and Internet access. Entry into new markets entails
risks associated with the state of development of the markets, intense
competition from companies already operating in those markets, potential
competition from companies that may have greater financial resources and
experience than the Company and increased selling and marketing expenses. The
Company has not provided any paging, cellular or Internet products or services
to date. There can be no assurance that the Company's products or services
will receive market acceptance in a timely manner, or at all, or that prices
and demand in new markets will be at a level sufficient to provide profitable
operations. See "Industry Overview: The Local Telecommunications Service
Industry," "Business--Growth Strategy" and "--Competition."
REGULATION AND RISKS OF THE TELECOMMUNICATIONS ACT
The Company is currently subject to federal and state government regulation
of its telecommunications services. The Company is regulated at the federal
level by the FCC. It is required to obtain and maintain an FCC certificate in
connection with its international services, and to file and maintain both
domestic and international tariffs containing the currently effective rates,
terms and conditions of service for its resale long distance services. The FCC
has proposed to eliminate this tariffing requirement for all interstate
nondominant carriers, except for, under certain circumstances, the RBOCs.
The intrastate long distance telecommunications operations of the Company
are also subject to various state laws and regulations. The Company must
obtain and maintain certificates of public convenience and necessity from
regulatory authorities in most states in which it offers service. In most
states, the Company must also file and obtain prior regulatory approval of
tariffs for intrastate services. In addition, the Company must update or amend
the tariffs and, in some cases, the certificates of public convenience and
necessity, when rates are adjusted or new products are added to the local and
long distance services offered by the Company. Challenges by third parties to
the Company's tariffs filed with the FCC or the state regulatory commissions
could cause the Company to incur substantial legal and administrative
expenses.
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The Telecommunications Act has already resulted in comprehensive changes in
the regulatory environment for the telecommunications industry as a whole, and
will have a material impact on the local exchange industry and the competitive
environment in which the Company operates. The Company believes that the speed
with which competition in local exchange services develops will depend on a
number of factors, including the extent to which each incumbent LEC actively
attempts to maintain its local exchange market share or to enter new lines of
business, particularly, in the case of RBOCs, the in-region long distance
business. While each incumbent LEC now has the duty to negotiate on a good-
faith basis access and interconnection agreements with facilities-based
competitors and resale agreements with competitors such as the Company, the
timing and terms of such agreements are at least in part within the control of
the LEC. A LEC that places the highest priority on maintaining its market
share in local exchange service may have less incentive to negotiate such
agreements swiftly or on terms favorable to potential competitors. Indeed,
numerous potential competitors, including AT&T, have requested, under the
provisions of the Telecommunications Act, that various state regulatory
authorities mediate their negotiations with various RBOCs because they have
been unable to reach agreement with those RBOCs for access and interconnection
to provide competitive local exchange services. The speed with which
competition in local exchange services develops will also depend on the effect
of the rules and policies recently adopted by the FCC and individual states in
implementing the relevant provisions of the Telecommunications Act and on the
outcome of judicial review of those rules and policies. In that event, the
ability of the Company to compete may be adversely affected. In addition,
resale and long distance agreements must be submitted to and approved by the
relevant state public service commission.
The concept of resale of local exchange services is a new development in the
telecommunications industry, and the Company cannot predict how the relevant
provisions of the Telecommunications Act will be interpreted and implemented
by the FCC, state regulators, courts and the incumbent LECs. No assurance can
be given that changes in current federal or state legislation or regulations
would not materially adversely affect the Company. See "Business--Government
Regulation" and "--Competition."
ABILITY TO MANAGE GROWTH; RAPID EXPANSION OF OPERATIONS
The Company's officers have had limited experience in managing companies as
large and as rapidly growing as the Company. Although the Company has not
generated significant revenue from the Ameritech and NYNEX Resale Agreements
since they have only recently been executed, the Company anticipates that such
agreements will constitute a significant source of revenue. The Company's
strategy of continuing its growth and expansion will place additional demands
upon the Company's current management and other resources and will require
additional working capital, information systems and management, operational
and other financial resources. The continued growth of the Company will depend
on various factors, including, among others, federal and state regulation of
the telecommunications industry, competition, and on the ability of LECs,
including the RBOCs, to provision the Company's additional subscribers. In
particular, the Company faced a number of problems with its LSO agreement with
NYNEX which has historically provided a substantial portion of the Company's
revenue. Although the Company believes that the majority of the provisioning
and billing problems have been resolved, there can be no assurance that the
RBOCs with which the Company has resale agreements will be able to provision
new subscribers or handle the volume of traffic and billing. Not all of the
foregoing factors are within the control of the Company. The Company's ability
to manage growth successfully will require the Company to continue to enhance
its operational, managerial, financial and information systems and controls.
The Company is in the process of modifying its billing and subscriber care
systems. It is expected that these systems will be fully operational by the
end of 1996. However, there can be no assurance that such systems will be
operational by such time or that they will be adequate to manage the Company's
anticipated
expansion. No assurance can be given that the Company will be able to manage
its expanding operations and, if the Company's management is unable to manage
growth effectively, the Company's business, operating results and financial
condition could be materially adversely affected. Furthermore, there can be no
assurance that the growth experienced by the Company in the past will
continue. See "Business--Growth Strategy."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success will depend to a significant
extent upon the abilities and continued efforts of its senior management,
particularly members of its senior management team. The Company
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has employment agreements with many senior management employees but does not
maintain key man life insurance on any of its employees except Mr. J. Thomas
Elliott, President and Chief Executive Officer of the Company. The
beneficiaries of such policies are the Initial Investors (as defined herein).
Many of the Company's executive officers and other key employees have only
recently joined the Company. The loss of the services of any of such
individuals could have a material adverse effect on the Company's results of
operations. The success of the Company will also depend, in part, upon the
Company's ability to find, hire and retain additional key management
personnel, including senior management, who are also being sought by other
businesses. The Company currently is in the process of selecting a new Chief
Financial Officer. However, there can be no assurance of the success of such
selection process. Competition for qualified personnel in the
telecommunications industry is intense. The inability to find, hire and retain
such personnel could have a material adverse effect on the Company's results
of operations. See "Management--Executive Officers and Directors."
IMPACT OF TECHNOLOGICAL CHANGE
The telecommunications industry has been characterized by rapid
technological change, frequent new service introductions and evolving industry
standards. For example, increases in technological capabilities or
efficiencies could create an incentive for more entities to enter the
facilities-based local exchange business. Similarly, such changes could result
in lower retail rates for telecommunications services, which could have a
material adverse effect on the Company's ability to price its services
competitively. Although the effect of technological change on the future
business of the Company cannot be predicted, it could have a material adverse
effect on the Company's business, results of operations and financial
condition.
ORIGINAL ISSUE DISCOUNT; POSSIBLE TAX AND OTHER LEGAL CONSEQUENCES FOR HOLDERS
OF NOTES AND THE COMPANY
The Old Notes and the Convertible Notes were issued at a substantial
discount from their principal amount at maturity. Since the New Notes are
treated as a continuation of the Old Notes for federal income tax purposes,
the New Notes will also be considered to have been issued at a substantial
discount. Cash payments of interest on the Notes will not be paid prior to
2000. However, original issue discount (i.e., the difference between the
"stated redemption price at maturity" of the Notes and the "issue price" of
the Notes) has accrued from the Issue Date of the Old Notes and the
Convertible Notes and will continue to accrue with respect to the New Notes
from the Issue Date of the Old Notes. Such original issue discount will be
includable as interest income periodically in a holder's gross income for
federal income tax purposes in advance of receipt of the cash payments to
which the income is attributable. See "Certain Federal Income Tax
Considerations--Taxation of the Senior Notes--Original Issue Discount."
Similar results may apply under state tax laws. Furthermore, the Senior Notes
are subject to the applicable high-yield discount obligation rules.
Accordingly, the Company will not be able to deduct the original issue
discount attributable to the Senior Notes until paid in cash or property or,
in certain circumstances, at all. In addition, to the extent the Notes
constitute corporate acquisition indebtedness under Section 279 of the
Internal Revenue Code, the maximum amount of interest or original issue
discount the Company can deduct with respect thereto may be limited. See
"Certain Federal Income Tax Considerations--Certain Potential Federal Income
Tax Consequences to the Company and to Corporate Holders." To the extent the
rules applicable to high-yield discount obligations or corporate acquisition
indebtedness apply, the Company's after-tax cash flow may be less than if such
original issue discount were deductible when accrued or the Notes did not
constitute corporate acquisition indebtedness.
If a bankruptcy case were commenced by or against the Company under the
United States Bankruptcy Code after the respective Issue Dates of the Notes,
the claim of a holder of the Notes with respect to the principal amount
thereof may be limited to an amount equal to the sum of (i) the initial
offering price and (ii) that portion of the original issue discount that is
not deemed to constitute "unmatured interest" for purposes of the United
States Bankruptcy Code. Any original issue discount that had not amortized as
of the date of any such bankruptcy filing would constitute "unmatured
interest."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The Old Notes and the Convertible Notes are eligible for trading in the
Private Offerings, Resale and Trading through Automated Linkages ("PORTAL")
Market by Qualified Institutional Buyers ("QIBs"). The
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New Notes will be new securities for which there currently is no market. There
can be no assurance as to the liquidity of any markets that may develop for
the New Notes, the ability of holders of the New Notes to sell their New
Notes, or the price at which holders would be able to sell their New Notes.
Future trading prices of the New Notes will depend on many factors, including,
among other things, prevailing interest rates, the Company's operating results
and the market for similar securities. Each of the Initial Purchasers has
advised the Company that it currently intends to make a market in the New
Notes. However, the Initial Purchasers are not obligated to do so and any
market making may be discontinued at any time without notice. Therefore, there
can be no assurance that any active market for the New Notes will develop. The
Company does not intend to apply for listing of the New Notes on any
securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System.
Holders of Old Notes, Convertible Notes, shares of Class A Common Stock
underlying the Convertible Notes, Initial Warrants or shares of Class A Common
Stock underlying the Initial Warrants will be able to sell or transfer such
securities only if a registration statement relating to such securities is
then in effect, or the sale or transfer of such securities is exempt from
qualification under the applicable securities laws of the states in which the
various holders thereof reside. See "Registration Rights."
CONTROL BY EXISTING STOCKHOLDERS; CERTAIN ANTITAKEOVER MATTERS
As of the date of this Prospectus, over 90% of the outstanding Class A
Common Stock is owned by the management of the Company and six institutions.
See "Stock Ownership." Consequently, management and the Original Purchasers
(as defined herein) have the ability to control the election of all the
members of the Company's Board of Directors and the outcome of all corporate
actions requiring stockholder approval. In addition, the Original Purchasers
have certain contractual preemptive rights upon issuance of any shares of
capital stock of the Company. Further, as a result of the Offering, Merrill
Lynch Global Allocation Fund, Inc. holds Convertible Notes and Warrants
exercisable for 267,546 shares of Class A Common Stock, or 21% of the
outstanding Class A Common Stock, on a fully diluted basis, as of the date of
this Prospectus.
Section 203 ("Section 203") of the Delaware General Corporation Law (the
"DGCL") restricts certain business combinations with any "interested
stockholder," as defined by such statute. The Company has expressly decided
not to be governed by Section 203 but may in the future change such election.
In addition, the Company may adopt certain procedural and other requirements
and/or amend its Certificate of Incorporation and/or By-laws that could
further have the effect of delaying, deterring or preventing a change in
control of the Company and/or make it more difficult for stockholders to
effect certain corporate actions, including the ability to replace incumbent
directors and to accomplish transactions opposed by the incumbent Board of
Directors. See "Description of Capital Stock."
CHANGE OF CONTROL
In the event of a Change of Control, the Company will be required to offer
to repurchase all of the outstanding Notes at 101% of the Accreted Value or
101% of principal amount, as the case may be, of the Notes plus any accrued
and unpaid interest thereon, and Special Interest, if any, to the date of
repurchase. The exercise by the holders of the Notes of their rights to
require the Company to offer to purchase Notes upon a change of control could
also cause a default under other indebtedness of the Company, even if the
change of control itself does not, because of the financial effect of such
repurchase on the Company. The Company's ability to pay cash to any of the
holders of Notes upon a repurchase may be limited by the Company's then
existing capital resources. There can be no assurance that in the event of a
change of control, the Company will have, or will have access to, sufficient
funds or will be contractually permitted under the terms of outstanding
indebtedness to pay the required purchase price for any Notes. See
"Description of the Notes."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on September 30, 1996 to the Initial
Purchasers, who placed the Old Notes with institutional investors. In
connection therewith, the Company and the Initial Purchasers entered into the
Registration Rights Agreement, pursuant to which the Company agreed, for the
benefit of the holders of the Old Notes, that the Company would, at its sole
cost, (i) within 60 days following the original issuance of the Old Notes,
file with the Commission the Exchange Offer Registration Statement (of which
this Prospectus is a part) under the Securities Act with respect to an issue
of a series of new notes of the Company identical in all material respects to
the series of Old Notes and (ii) use its best efforts to cause such Exchange
Offer Registration Statement to become effective under the Securities Act
within 120 days following the original issuance of the Old Notes. Upon the
effectiveness of the Exchange Offer Registration Statement (of which this
Prospectus is a part), the Company will offer to the holders of the Old Notes
the opportunity to exchange their Old Notes for a like principal amount of New
Notes, to be issued without a restrictive legend and which might be reoffered
and resold by the holder without restrictions or limitations under the
Securities Act. The term "Holder" with respect to the Exchange Offer means any
person in whose name Old Notes are registered on the books of the Company or
any other person who has obtained a properly completed bond power from the
registered holder.
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by any holder of such New Notes
(other than any such holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes. Any Holder who
tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). The
Company has agreed that, for a period of 180 days after the Expiration Date,
it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
Each Holder of the Old Notes (other than certain specified holders) who
wishes to exchange Old Notes for New Notes in the Exchange Offer will be
required to represent that (i) it is not an affiliate of the Company, (ii) any
New Notes to be received by it were acquired in the ordinary course of its
business and (iii) at the time of commencement of the Exchange Offer, it has
no arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the New Notes. In addition, in connection
with any resales of New Notes, any broker-dealer (an "Exchanging Dealer") who
acquired the Old Notes for its own account as a result of market-making
activities or other trading activities must deliver a prospectus meeting the
requirements of the Securities Act. The Commission has taken the position that
Exchanging Dealers may fulfill their prospectus delivery requirements with
respect to the New Notes (other than a resale of an unsold allotment from the
original sale of the Old Notes) with the prospectus contained in the Exchange
Offer Registration Statement. Under the Registration Rights Agreement, the
Company is required to allow Exchanging Dealers and other persons, if any,
subject to similar prospectus delivery requirements to use the prospectus
contained in the Exchange Offer Registration Statement in connection with the
resale of such New Notes.
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In the event that any changes in law or applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange
Offer, or if for any reason the Exchange Offer Registration Statement is not
declared effective within 120 days following the date of original issuance of
the Old Notes, or upon the request of Smith Barney Inc. under certain
circumstances, the Company will, in lieu of or in addition to effecting the
registration of the New Notes pursuant to the Exchange Offer Registration
Statement and at its expense, (i) as promptly as practicable, file with the
Commission a shelf registration statement (the "Senior Note Shelf Registration
Statement") covering resales of the Senior Notes, (ii) cause the Senior Note
Shelf Registration Statement to be declared effective under the Securities Act
by the 180th day after the original issuance of the Old Notes (or promptly in
the event of a request by an Initial Purchaser) and (iii) keep effective the
Senior Note Shelf Registration Statement until three years after its effective
date. The Company will, in the event of the filing of a Senior Note Shelf
Registration Statement, provide to each holder of Old Notes covered by the
Senior Note Shelf Registration Statement copies of the prospectus which is a
part of the Senior Note Shelf Registration Statement, notify each such holder
when the Senior Note Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of
the Old Notes. A holder of Old Notes that sells such Old Notes pursuant to the
Senior Note Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to the purchaser, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations). In
addition, each holder of Old Notes will be required to deliver information to
be used in connection with the Senior Note Shelf Registration Statement in
order to have its Old Notes included in the Senior Note Shelf Registration
Statement and to benefit from the provisions regarding Special Interest
described in the following paragraph.
If either (i) the Exchange Offer Registration Statement or the Senior Note
Shelf Registration Statement (either, a "Senior Note Registration Statement")
required to be filed is not filed with the Commission on or prior to the date
specified for such filing in the Registration Rights Agreement, (ii) any such
Exchange Offer Registration Statement or Senior Note Registration Statement
has not been declared effective by the Commission on or prior to the date
specified for such effectiveness in the Registration Rights Agreement, (iii)
the Exchange Offer has not been consummated on or prior to the date specified
in the Registration Rights Agreement, or (iv) any Exchange Offer Registration
Statement or Senior Note Registration Statement required by the Registration
Rights Agreement is filed and declared effective but shall thereafter cease to
be effective or fail to be usable for its intended purpose without being
succeeded immediately by a post-effective amendment to such Exchange Offer
Registration Statement or Senior Note Registration Statement that cures such
failure and that is itself declared effective for a period of more than 30
consecutive days (each such event referred to in clauses (i) through (iv), a
"Senior Note Registration Default"), then commencing on the day following the
date on which such Senior Note Registration Default occurs, the Company agrees
to pay to each holder of Old Notes during the first 90-day period immediately
following the occurrence of such Senior Note Registration Default additional
interest at a rate of 0.5% per annum ("Special Interest"). The amount of
Special Interest payable to each holder shall increase by an additional 0.5%
per annum for each subsequent 90-day period up to a maximum rate of 1.5% per
annum. A Senior Note Registration Default shall cease, and Special Interest
shall cease to be payable with respect to such Senior Note Registration
Default (1) upon the filing of the applicable Exchange Offer Registration
Statement or Senior Note Registration Statement in the case of clause (i)
above, (2) upon the effectiveness of the Exchange Offer Registration Statement
or Senior Note Registration Statement in the case of clause (ii) above, (3)
upon the consummation of the Exchange Offer in the case of clause (iii) above,
and (4) when the Exchange Offer Registration Statement or Senior Note
Registration Statement becomes effective or usable in the case of clause (iv)
above. Notwithstanding anything to the contrary, (i) the amount of Special
Interest payable shall not increase because more than one Senior Note
Registration Default has occurred and is pending, (ii) a holder of Old Notes
who is not entitled to the benefits of the Senior Note Shelf Registration
(i.e., such holder has not elected to include information) shall not be
entitled to Special Interest with respect to a Senior Note Registration
Default that pertains to the Senior Note Registration Statement and (iii) a
holder of Old Notes constituting an unsold allotment from the original sale of
the Old Notes or who otherwise is not entitled to participate in the Exchange
Offer shall not be entitled to Senior Note Special Interest by reason of a
Senior Note Registration Default that pertains to an exchange offer.
26
<PAGE>
All accrued Special Interest shall be paid to record holders in the same
manner in which payments of interest are made pursuant to the Senior Note
Indenture. See "Description of the Notes--Principal, Maturity and Interest."
Payment of Senior Note Special Interest is the sole remedy available to
holders of Old Notes in the event the Company does not comply with the
deadlines set forth in the Registration Rights Agreement with respect to the
conduct of an exchange offer for the Old Notes or the registration of the Old
Notes for resale under a shelf registration statement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
at maturity of New Notes in exchange for each $1,000 principal amount at
maturity of outstanding Old Notes accepted in the Exchange Offer. Holders may
tender some or all of their Old Notes pursuant to the Exchange Offer. However,
Old Notes may be tendered only in integral multiples of $1,000.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
will have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (ii) the holders of the New Notes
will not be entitled to certain rights under the Registration Rights
Agreement, including the terms providing for an increase in the interest rate
on the Old Notes under certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
consummated. The New Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the Senior Note Indenture under which the
Old Notes were, and the New Notes will be, issued.
As of the date of this Prospectus, $48.5 million aggregate principal amount
at maturity of the Old Notes was outstanding. The Company has fixed the close
of business on , 1997 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus, together with the
Letter of Transmittal, will initially be sent. As of such date, there was one
registered Holder of the Old Notes.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the DGCL or the Senior Note Indenture in connection with the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of
the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
27
<PAGE>
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof prior to 9:00 a.m., New York City time, on the next
business day after each previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or, if any of the
conditions set forth below under the caption "Conditions" shall not have been
satisfied, to terminate the Exchange Offer, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by a public announcement thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure
to the registered Holders, if the Exchange Offer would otherwise expire during
such five to ten business day period.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes offered hereby will accrete interest at a rate of 14% per
annum from their Issue Date until March 30, 2000. Thereafter, the New Notes
will bear interest at the rate of 14% per annum which will be payable in cash
semiannually on March 30 and September 30 of each year, commencing September
30, 2000. Interest on the Old Notes accepted for exchange will cease to
accrete upon issuance of the New Notes.
PROCEDURES FOR TENDERING
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
A Holder who wishes to tender Old Notes for exchange pursuant to the Exchange
Offer must transmit a properly completed and duly executed Letter of
Transmittal, or a facsimile thereof, including any other required documents,
to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date. In addition, either (i) certificates for such Old Notes must
be received by the Exchange Agent along with the Letter of Transmittal or (ii)
the Holder must comply with the guaranteed delivery procedures described
below. To be tendered effectively, the Old Notes, the Letter of Transmittal
and other required documents must be received by the Exchange Agent at the
address set forth below under "Exchange Agent" prior to 5:00 p.m., New York
City time, on the Expiration Date.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set
forth herein and in the Letter of Transmittal.
The method of delivery of the Old Notes and the Letter of Transmittal and
all other required documents to the Exchange Agent is at the election and risk
of the Holder. Instead of delivery by mail, it is recommended that Holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the Expiration Date.
No Letter of Transmittal or Old Notes should be sent to the Company. Holders
may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transactions for such Holders.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering
such owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or obtain a properly completed
bond power from the registered Holder. The transfer of registered ownership
may take considerable time.
28
<PAGE>
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
Holder as such registered Holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Old Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify Holders of defects or irregularities with respect to tenders
of Old Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
By tendering, each Holder will represent to the Company, among other things,
that (i) the New Notes to be acquired by the Holder and any beneficial owners
of Old Notes pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, (ii) the Holder and
each such beneficial owner are not participating, do not intend to participate
and have no arrangement or understanding with any person to participate in the
distribution of such New Notes and (iii) neither the Holder nor any such other
person is an "affiliate," as defined under Rule 405 of the Securities Act, of
the Company. Each broker or dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such broker
or dealer as a result of market-making activities or other trading activities
(other than Old Notes acquired directly from the Company), must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
29
<PAGE>
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes and any other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer and all other documents required by
the Letter of Transmittal are received by the Exchange Agent within five
New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes), (iii)
be signed by the Holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Old Notes register the
transfer of such Old Notes into the name of the person withdrawing the tender
and (iv) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. If certificates for Old Notes have been
delivered or otherwise identified to the Exchange Agent, then, prior to the
release of such certificates, the withdrawing Holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such Holder is an Eligible Institution. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company in its sole discretion, which determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer
and no New Notes will be issued with respect thereto unless the Old Notes so
withdrawn are validly retendered. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
payment due to withdrawal, rejection of tender or termination of the Exchange
Offer will be returned as soon as practicable to the Holder thereof without
cost to such Holder.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance
of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company, or
any material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
30
<PAGE>
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
(c) any law, statute, rule or regulation is proposed, adopted or enacted,
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company; or
(d) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and
return all tendered Old Notes to the tendering Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of Holders to withdraw such Old
Notes (see "--Withdrawal of Tenders" above) or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
Holders, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
EXCHANGE AGENT
Harris Trust Company of New York has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
By Registered or By Overnight Courier: By Hand:
Certified Mail: Harris Trust Company of New York
Harris Trust Company of New York
Harris Trust Company of New York
77 Water Street, 4th Floor Receive Window
Wall Street Station New York, NY 10005 77 Water Street, 5th
P.O. Box 1010 Floor
New York, NY 10268-1010 New York, NY
By Facsimile:
(212) 701-7636
(212) 701-7637
Confirm by telephone:
(212) 701-7618
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
31
<PAGE>
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued
in the name of, any person other than the registered Holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax
is imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered Holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value less accrued original issue discount, as reflected in the
Company's accounting records on the date of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. The expenses of the
Exchange Offer and the unamortized expenses related to the issuance of the Old
Notes will be amortized over the term of the New Notes.
OTHER
Participation in the Exchange Offer is voluntary and holders of Old Notes
should carefully consider whether to accept the terms and conditions thereof.
Holders of the Old Notes are urged to consult their financial and tax advisors
in making their own decisions on what action to take with respect to the
Exchange Offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of this Exchange Offer, the
Company will have fulfilled a covenant contained in the terms of the Old Notes
and the Registration Rights Agreement. Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer will continue to hold such Old
Notes and will be entitled to all the rights, and limitations applicable
thereto, under the Senior Note Indenture, except for any such rights under the
Registration Rights Agreement which by their terms terminate or cease to have
further effect as a result of the making of this Exchange Offer. All
untendered Old Notes will continue to be subject to the restrictions on
transfer set forth in the Senior Note Indenture. To the extent that Old Notes
are tendered and accepted in the Exchange Offer, the trading market, if any,
for any remaining Old Notes could be adversely affected. See "Risk Factors--
Consequences of Failure to Exchange."
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes in the Exchange
Offer.
DIVIDEND POLICY
The Company anticipates substantial net losses and negative cash flow for
the foreseeable future. It is anticipated that earnings, if any, which might
be generated from operations of the Company will be used to finance the growth
of the Company and that cash dividends will not be paid to holders of Common
Stock. The Senior Note Indenture will include significant limitations on the
Company's ability to pay dividends to the holders of Common Stock. See
"Description of the Notes." In addition, the terms of the 9% Preferred Stock
and the Purchase Agreements (each as defined herein) entered into in
connection with the sale of Common Stock and Preferred Stock to the Original
Investors (as defined herein) restrict the payment of dividends. See "Certain
Relationships and Related Transactions."
32
<PAGE>
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company as of September 30, 1996. This table should be
read in conjunction with the consolidated financial statements and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1996
--------------------
(UNAUDITED)
(IN THOUSANDS EXCEPT
SHARE INFORMATION)
<S> <C>
Cash and cash equivalents................................. $ 71,390
========
Long term liabilities
14% Senior Discount Notes due 2003....................... $ 48,500
Original Issue Discount--Senior Notes.................... (18,297)
9% Convertible Subordinated Notes due 2004............... 36,000
Original Issue Discount--Convertible Notes............... (8,356)
Notes and leases payable................................. 505
--------
Total long term liabilities........................... 58,352
Redeemable Preferred Stock
9% Preferred Stock, par value $1.00 per share, 30,000
shares authorized; 10,000 shares issued and outstanding;
liquidation value $1,000 per share...................... 10
Additional paid-in capital............................... 9,843
--------
Total Preferred Stock................................. 9,853
Common stockholders' equity (deficit):
Class A Common Stock, $.01 par value, 2,500,000 shares
authorized, 716,525 shares issued and outstanding at
September 30, 1996 (/1/)................................ 7
Class A Common Stock held in Treasury.................... (1)
Additional paid-in capital............................... 54,177
Accumulated deficit...................................... (40,161)
--------
Total common stockholders' equity (deficit)........... 14,022
--------
Total capitalization................................ $ 82,227
========
</TABLE>
- --------
(1) Excludes 78,987 shares reserved for issuance upon exercise of options
outstanding at November , 1996, and 61,550 shares reserved for issuance
upon exercise of the Initial Warrants.
33
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents selected historical consolidated financial data
for the period from inception of the Company in April 1994 to December 31,
1994 and for the fiscal year ended December 31, 1995. The data for the periods
ending December 31, 1994 and 1995 has been derived from consolidated financial
statements (including those set forth elsewhere in this Prospectus) which have
been audited by Deloitte & Touche LLP, independent auditors. The selected
financial data as of and for the nine month periods ended September 30, 1996
and 1995, respectively, are derived from, and should be read in conjunction
with the unaudited financial statements of the Company and the related notes
thereto included elsewhere in this Prospectus. However, in the opinion of
management, such interim financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary to fairly present
the information presented for such periods. The information set forth below
with respect to the historical financial statements should be read in
conjunction with the consolidated financial statements of the Company and the
related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
FISCAL YEAR ------------------
INCEPTION TO ENDED UNAUDITED
DECEMBER 31, DECEMBER 31, ACTUAL ACTUAL
1994 1995 1995 1996
------------ ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION
AND RATIOS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net service revenue............ $ 1,737 $ 7,884 $ 5,826 $ 7,599
Cost of services............... 1,455 9,076 6,686 6,587
-------- -------- -------- --------
Gross margin................... 282 (1,192) (860) 1,012
Sales and marketing expense.... 2,869 5,867 4,244 5,837
General and administrative
expense (1)................... 4,686 11,100 7,366 10,920
Interest expense............... 26 734 500 46
Interest and other income (2).. 152 646 423 8,572
Minority interest.............. -- 150 -- --
-------- -------- -------- --------
Net loss....................... $ (7,147) $(18,097) $(12,547) $ (7,219)
======== ======== ======== ========
Accumulated unpaid preferred
dividends..................... $ 707 $ 3,810 $ 2,679 $ --
Net loss to common
shareholders.................. $ (7,854) $(21,907) $(15,226) $ (7,219)
Net loss per common share...... $ (65.63) $ (72.42) $ (57.82) $ (16.41)
Weighted average shares
outstanding................... 119,678 302,520 263,314 439,877
OTHER DATA:
EBITDA (3)..................... $ (7,087) $(15,901) $(11,217) $(14,385)
Depreciation and amortization.. 186 2,258 1,253 1,360
Capital expenditures........... 1,728 1,740 1,606 232
Ratio of earnings to fixed
charges (4)................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
UNAUDITED
DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ -------- -------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 5,979 $ 13,705 $ 19,239 $71,390
Total assets..................... 12,747 20,471 35,040 88,083
Long-term debt (net of current
maturities)..................... 3,176 518 6,761 58,352
Redeemable preferred stock....... 15,306 44,396 42,127 9,853
Common stockholders' equity
(deficit)....................... (7,830) (28,768) (22,099) 14,022
</TABLE>
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(1)General and administrative expense includes amortization of intangibles.
(2) Interest and other income for the nine months ended September 30, 1996
includes a gain of $8.1 million realized on the sale of the Company's
switching facilities in Ohio.
(3) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and minority interest. It is a measure commonly
used in the telecommunications industry and is presented to assist in
understanding the Company's operating results. EBITDA is not intended to
represent cash flows for the period.
(4) The ratio of earnings to fixed charges is computed by dividing pretax
income (loss) from operations before interest charges by interest expense.
Earnings were insufficient to cover fixed charges for the periods ended
December 31, 1994 and 1995 by $7.1 million and $17.4 million,
respectively, and for the nine month period ended September 30, 1995 and
1996 by $12.0 million and $7.2 million, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Historical Consolidated Financial and Operating Data" and the
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company commenced operations in April 1994 as a provider of local and
long distance telecommunications services to meet the needs of small and
medium-sized business subscribers. Initially, the Company entered the local
telecommunications market as a facilities-based CAP with network facilities in
Ohio. Due to the high costs associated with the initial construction,
installation and expansion of each local network facility, including right-of-
way costs, franchise fees, interconnection charges and other operating
expenses and in light of the recent regulatory developments under the
Telecommunications Act, the Company has refocused its operations. The Company
divested its transmission facilities and certain other assets in February 1996
to pursue a non-facilities-based approach to the local telecommunications
market and has consummated various agreements with certain RBOCs and long
distance carriers for the resale of local, long distance and enhanced and
other value-added services. Although management believes that its current
strategy will have a positive effect on the Company's results of operations
over the long-term, this strategy is expected to have a negative effect on the
Company's results of operations over the short-term. The Company anticipates
losses and negative cash flow for the foreseeable future, attributable in part
to significant investments in operating, sales, marketing, management
information systems and general and administrative expenses. To date, the
Company's growth, including capital expenditures, has been funded primarily by
the capital contributions of Chase Capital Partners, CIBC Wood Gundy Ventures,
Inc., Hancock Venture Capital Associates, BT Capital Partners, Inc., Northwood
Capital Partners, LLC, Northwood Ventures and Enterprise &
Transcommunications, L.P.
The Company resells telecommunications services of certain RBOCs and certain
long distance carriers to provide an integrated telecommunications solution of
local and long distance services to the underserved small and medium-sized
business segment. This strategy affords the Company the ability to offer a
broad range of integrated services to virtually any subscriber in the United
States without incurring significant financial and management costs and the
developmental delays inherent in constructing network and transmissions
facilities.
As part of the Company's strategy to refocus its operations, the Company (i)
acquired certain assets and assumed certain liabilities of Quest America, Inc.
("Quest"), a telecommunications reseller and consulting firm, in October 1995;
(ii) negotiated for the first broad based resale agreement with Ameritech for
local services which was signed in November 1995; (iii) sold its existing
local facilities in Ohio pursuant to which it transferred all liabilities with
respect to those facilities effective December 1995; and (iv) negotiated with
NYNEX for a comprehensive local resale agreement which was signed in July
1996. The Company intends to seek other providers of local, long distance and
enhanced and other value-added services in order to increase its subscriber
base and product offerings and reduce expenses.
The Company's net service revenue, which is recognized on a resale basis,
primarily consists of sales revenue from telecommunications services which is
net of the effect of certain adjustments, including unbillable call records.
The Company bills its subscribers for local and long distance usage based on
the type of local service utilized, the number, time and duration of calls,
the geographic location of the terminating phone numbers and the applicable
rate plan in effect at the time of the call. Net service revenue for the Quest
operations, which is recognized on an agency basis, primarily consists of
commissions earned from carriers on telecommunications services provided to
their subscribers.
Cost of services includes the cost of local and long distance services
charged by carriers for recurring charges, per minute usage charges and
feature charges, as well as the cost of fixed facilities for dedicated
services
35
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and special regional calling plans. In 1995, cost of services also included
fixed and one-time charges associated with the Ohio switching facilities owned
by the Company. These costs were transferred to a third party subsequent to
December 31, 1995, when the obligations with respect to the switching
facilities were effectively transferred.
Sales and marketing expense consists of the costs of providing sales and
other support services for subscribers. General and administrative expense
consists of the costs of the billing and information systems and personnel
required to support the Company's operations and growth as well as all
depreciation and amortization expenses.
The Company has experienced significant growth in the past and, depending on
the extent of its future growth, may experience significant strain on its
management, personnel and information systems. To accommodate this growth, the
Company will continue to implement and improve operational, financial and
management information systems. In an effort to support its growth, the
Company added several senior management positions and approximately 85
employees in 1995. Also, the Company is implementing new information systems
that will provide improved recordkeeping for subscriber information and
management of uncollectible accounts and fraud control.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net service revenue increased to $7.6 million in the first nine months of
1996 from $5.8 million in the first nine months of 1995. The increase in net
service revenue was due primarily to the addition of new subscribers and the
acquisition of Quest.
Gross margin of $1.0 million for the first nine months of 1996 improved from
last year's negative margin for the same period due primarily to the
elimination of fixed costs upon the sale of the over-provisioned switching
facilities in Ohio and a reduction in the amount of unbillable minutes in New
York.
Sales and marketing expense increased to $5.8 million in the first three
quarters of 1996 from $4.2 million in the first three quarters of 1995.
General and administrative expense increased to $10.9 million in the first
nine months of 1996 from $7.4 million in the first nine months of 1995. These
increases were due to the addition of personnel and infrastructure as well as
the acquisition of Quest.
Interest and other income increased to $8.6 million in the first three
quarters of 1996 from $423,000 for the first three quarters of 1995 due to an
$8.1 million non-recurring gain on the sale of its switching facilities in
Ohio.
Interest expense decreased to $46,000 in the first three quarters of 1996
from $500,000 in the first three quarters of 1995. This decrease was
attributable to the retirement of capital lease obligations in connection with
the sale of the Company's switching facilities in Ohio.
Year Ended December 31, 1995 versus Inception to December 31, 1994
The results for fiscal 1995 are not comparable with the results for fiscal
1994 as fiscal 1995 represents a full fiscal year and fiscal 1994 represents
nine months of operations since the Company's inception in April 1994.
Net service revenue increased to $7.9 million in fiscal 1995 from $1.7
million in fiscal 1994. This increase was due to a full year of operations and
the addition of new subscribers.
Cost of services increased to $9.1 million in fiscal 1995 from $1.5 million
in fiscal 1994. The increase was due to the one-time installation costs and
fixed ongoing costs related to the Ohio switching facilities, as well as
increased costs associated with an increase in the number of subscribers.
36
<PAGE>
Sales and marketing expense increased to $5.9 million in fiscal 1995 from
$2.9 million in fiscal 1994 due to increased personnel and related expenses
required to build the sales and marketing infrastructures, and the inclusion
of expenses related to the operations of Quest.
General and administrative expense increased to $11.1 million in fiscal 1995
from $4.7 million in fiscal 1994. Increased general and administrative
expenses were primarily due to depreciation and amortization and other
expenses related to the acquisition of Quest and increased personnel and
expenses required to build the Company's customer service and administrative
infrastructures.
Interest and other income increased to $646,000 in fiscal 1995 from $152,000
in fiscal 1994, due to significantly higher investable cash balances in fiscal
1995 as well as fiscal 1995 being a full year.
Interest expense increased to $734,000 in fiscal 1995 from $26,000 in fiscal
1994. This increase was due to interest expense associated with the
capitalized leases for the Ohio switch sites which began in December 1994.
RECENT DEVELOPMENTS
The Company had cash and cash equivalents of approximately $67.6 million at
October 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
cash from its investors. As of September 30, 1996, the Company had cash and
cash equivalents of $71.4 million and working capital of $68.6 million. The
Company's operating activities utilized cash of approximately $14.2 million
for the nine months ended September 30, 1996, $14.3 million for the year
ended December 31, 1995 and $6.1 million for the period ended December 31,
1994.
The Company's investing activities have consisted primarily of property and
equipment purchases of $1.7 million each for the year ended December 31, 1995
and for the period ended December 31, 1994. These expenditures were primarily
for fiber optic rings, leasehold improvements and furniture in Ohio that were
sold as of December 31, 1995. In addition, the Company entered into capital
leases of $3.4 million and $3.1 million in 1995 and 1994, respectively,
related to the Ohio switch sites. Effective December 31, 1995 these leases
were assumed by another party in connection with the sale of the Ohio
facilities. The Company remains liable on these leases, but the Company
believes that it has secured adequate protection from the assignee. In
February 1996, the Company received $9.5 million in proceeds from the December
1995 sale of the Ohio facilities.
In 1994 and 1995, the Company's financing activities consisted primarily of
raising capital in the form of Common Stock and Preferred Stock placements to
venture capital organizations. During 1994 and 1995, the Company raised $14.2
million and $26.3 million, respectively, net of issuance costs. In 1995, the
Company also assumed notes payable to investors in the Quest acquisition. On
September 30, 1996, the Company raised an additional $10 million from the
Original Purchasers and also raised $55 million in conjunction with the
Offering.
The Company believes that the net proceeds from the Offering, together with
existing sources of liquidity, will be, in part, sufficient to fund its
capital expenditures, working capital and other cash requirements through the
foreseeable future. To the extent that the funds generated by the Offering,
together with existing sources of liquidity, are insufficient to fund the
Company's activities in the long term, the Company may need to raise
additional funds through public or private financing. There can be no
assurance that additional financing will be available or, if available, will
be on terms acceptable to the Company.
37
<PAGE>
The Company incurred net losses of $18.1 million and $7.1 million in 1995
and 1994, respectively. Accordingly, no provision for current Federal or state
income taxes has been made to the financial statements. At December 31, 1995
and 1994, the Company had net operating loss carry-forwards for income tax
purposes of approximately $24.1 million and $6.9 million, respectively. The
ability of the Company or the Company's subsidiaries, as the case may be, to
utilize their net operating loss carry-forwards to offset future taxable
income may be subject to certain limitations contained in the Internal Revenue
Code of 1986, as amended (the "Code"). These operating losses begin to expire
in 2009 for Federal income tax purposes. Of the net operating loss carry-
forwards remaining at December 31, 1995, $12.3 million can be applied only
against future taxable income of the Company's subsidiary USN Communications
Northeast, Inc. (formerly United Telemanagement Services, Inc.) ("USNCN"). In
addition, if the Company or the Company's subsidiaries experience an
"ownership change" within the meaning of Section 382 of the Code, the net
operating loss carry-forwards allocable to such entity will be subject to an
annual limitation in an amount generally equal to the value of the entity
immediately before the ownership change at the long-term tax-exempt rate (the
"Section 382 limitation"). Any unused Section 382 limitation in one year is
added to the limitation for the next year. Generally, an ownership change
occurs with respect to an entity if the aggregate increase in the percentage
stock ownership (by value) of such entity by one or more of its five-percent
stockholders exceeds 50 percentage points within a testing period. The tax
laws for determining whether an ownership change of an entity has occurred are
complex and subject to differing interpretations in certain respects. It is
possible that the Company or the Company's subsidiaries have experienced an
ownership change under Section 382 of the Code and that the Company or the
Company's subsidiaries may experience an ownership change as a result of the
Company's future transactions including, but not limited to, the issuance of
the Warrants and consummation of one or more public offerings of Common Stock.
In such event, the ability of the Company or the Company's subsidiaries to
utilize their operating loss carry-forwards to offset future taxable income
would be subject to limitations as discussed above.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
New accounting standards have been issued by the Financial Accounting
Standards Board that may apply to the Company in fiscal 1996. Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets," requires a review of long-term tangible and intangible
assets (such as goodwill) for impairment of recorded value and resulting write
downs if value is impaired.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), establishes accounting and disclosure
requirements using a fair value based method of accounting for stock-based
employee compensation plans. Under SFAS 123, the Company may either adopt the
new fair value based method or provide pro forma disclosure of net income
(loss) as if the accounting provisions of SFAS 123 had been adopted. The
Company intends to elect the intrinsic method of accounting for stock-based
employee compensation plans as allowed under SFAS 123 and Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees."
These statements are not expected to have a material effect on the Company's
financial position or results of operations.
38
<PAGE>
INDUSTRY OVERVIEW:
THE LOCAL TELECOMMUNICATIONS SERVICE INDUSTRY
The current structure of the U.S. telecommunications market resulted largely
from the divestiture of AT&T, then referred to as the "Bell System." Pursuant
to the Divestiture, the RBOCs were separated from the long distance provider
AT&T, resulting in the creation of two distinct industries: local exchange and
interexchange (commonly known as long distance). Following the Divestiture,
each RBOC continued to offer local telephone and other telecommunications
services only within Local Access and Transport Areas ("LATAs"), and was
generally prohibited from providing telecommunications services between LATAs.
Prior to the Divestiture, the Bell operating companies and other LECs not
affiliated with the Bell System had government-regulated monopolies for most
local telephone services. The Divestiture encouraged the growth of competition
for long distance services and terminal network equipment by prohibiting the
RBOCs from entering these markets, but the RBOCs retained monopoly control
over the market for local telephone services. Since the Divestiture in 1984,
competition in the long distance market has rapidly increased, and by 1995
AT&T had lost approximately 40% of its long distance market share to MCI,
Sprint and a number of other long distance competitors.
The Divestiture did not directly provide for competition in local markets.
After the Divestiture, however, a number of factors served to promote
competition in the local telecommunications market, including (i) increasing
subscriber desire for alternatives to the services provided by the LECs,
particularly among business subscribers, prompted in part by competition in
the long distance market; (ii) technological advances in the transmission of
data and video requiring greater capacity and reliability levels than the
existing copper-based LEC networks were able to accommodate; (iii) a monopoly
position and rate of return-based pricing structure which provided little
incentive for the LECs to upgrade their networks or meet specialized
subscriber needs; (iv) the development of fiber optics and digital electronic
technology, which combined the ability to economically build a high-capacity
digital network with the ability to transmit voice, data and video signals at
high speeds; and (v) the significant "access charges" that long distance
carriers were required to pay to originate and terminate long distance
telephone calls on the RBOCs' networks.
The first competitors in the local market were the CAPs, which provided
special access services by installing fiber optic facilities connecting long
distance carriers' "points of presence" (or "POPs") within a metropolitan area
and, in some cases, connecting subscribers (primarily large businesses) to
long distance carriers' POPs. CAPs also provided private line services
connecting multiple locations of a single subscriber within a local market
area with dedicated fiber optic lines. CAPs used the technological advantage
and substantial capacity and economies of scale inherent in fiber optic
technology to offer subscribers service that initially was generally less
expensive and of higher quality than could be obtained from the LECs, due in
part to the LECs' more antiquated copper-based facilities and higher overhead
costs. In addition, CAPs generally offered shorter installation and repair
intervals and improved reliability in comparison to the LECs. In recent years,
the LECs have been steadily upgrading the technology of their networks,
including increasing the amount of fiber used in such networks, thereby
decreasing the competitive advantage held by the CAPs in the special access
and private line markets. As CAPs proliferated during the latter part of the
1980's, federal and some state regulators issued rulings which permitted and
sometimes encouraged local competition and opened some local market segments
to new entrants. However, legal and tariff restrictions historically prevented
entry on a resale basis and limited competitive local entry to facilities-
based providers.
The Telecommunications Act, which was enacted on February 8, 1996, is
considered to be the most comprehensive reform of the nation's
telecommunications laws and will substantially affect the development of
competition for local telecommunications services. Specifically, certain
provisions of the Telecommunications Act provide for: (i) the removal of legal
barriers to entry to the local telecommunications services market; (ii) the
interconnection of incumbent LEC networks with competitors' networks; (iii)
the establishment of procedures and requirements to be followed by the RBOCs,
including the requirement that RBOCs offer local services for resale in order
to enter into the long distance and telecommunications equipment manufacturing
markets; and
39
<PAGE>
(iv) the relaxation of the regulation of certain telecommunications services
provided by LECs and others. The Company believes the Telecommunications Act
will promote significant growth in the local telecommunications market as new
market entrants, including resellers, provide expanded service offerings and
increased levels of subscriber service.
In addition to the Telecommunications Act and other FCC actions and
proposals, an increasing number of states have encouraged competition in
various aspects of the local telecommunications market. While the majority of
state initiatives were originally limited to private line and special access
services, many states are in the process of changing their statutes or
regulations to permit competition for switched services, including basic local
exchange telephone services. By the time the Telecommunications Act was
enacted, approximately half the states had removed legal prohibitions on the
provision of competitive local exchange service. Those states that have not
made these changes are required to do so under the Telecommunications Act. The
Company believes, based on data compiled by the FCC, that the passage of the
Telecommunications Act combined with earlier state regulatory developments,
has expanded the market for competitive local providers from dedicated
services, which was estimated to have been approximately $5 billion in 1995,
to include the local switched access market for business subscribers, which
was estimated to have comprised approximately $55 billion of the approximately
$96 billion represented by local exchange services in 1995.
The Telecommunications Act further increases the opportunities available to
competitive local providers by requiring the RBOCs and other incumbent LECs to
offer various network elements such as switching, transport and loops (i.e.,
the facilities connecting a subscriber's premises to a LEC central office) on
an unbundled and non-discriminatory basis. RBOCs also are required to offer
their retail services at wholesale rates for resale by other companies,
including the Company. By offering such services, the RBOCs are also meeting
certain of the requirements contained in the Telecommunications Act in order
to gain FCC approval to provide in-region long distance services. The Company
believes regulatory reform, together with increased demand from the large
underserved small and medium-sized business market, will provide growth
opportunities for local telecommunications resellers who meet the RBOCs'
requirements for integrated billing and information systems and have
significant management and operational expertise. This new market opportunity
will permit competitive providers who can manage the operational and marketing
implementation to offer a full range of local telecommunications services,
including local calling, custom calling features and intra-LATA toll services
to virtually any subscriber in the United States. The Company believes that
carriers such as the Company reselling local exchange services have the
opportunity to gain market share in the local exchange market just as long
distance resellers have gained market share in the long distance market. In
addition, competitors other than the Company, including the major
interexchange carriers, will be able to take advantage of the unbundling and
resale requirements imposed on the RBOCs and other incumbent LECs under the
Telecommunications Act, thereby facilitating entry of competitors that
previously have not invested in local distribution facilities.
40
<PAGE>
BUSINESS
INTRODUCTION
The Company is one of the fastest growing providers of integrated local and
long distance telecommunications services in the United States. The Company
resells telecommunications services of certain RBOCs and certain long distance
carriers to provide an integrated solution of local and long distance services
to the underserved small and medium-sized business segment. The Company
primarily focuses its marketing efforts on businesses with telecommunications
usage of less than $5,000 per month. The Company's approach simplifies the
subscriber's telecommunications procurement and management tasks and provides
for the easy addition of customized services, such as special local and long
distance pricing and enhanced and other value-added calling and billing
features designed to meet specific subscriber needs.
The Company's goal is to be more flexible, innovative and responsive to the
needs of its subscribers than the RBOCs and the large long distance carriers,
which primarily concentrate their sales and marketing efforts on residential
and large commercial subscribers. Market research combined with the Company's
experience indicates that its target subscribers would prefer a single source
and single bill for all of their telecommunications needs. The Company
provides local service using existing telephone lines obtained from the
incumbent RBOCs at wholesale rates, which allows subscribers to switch to
local service provided by the Company without changing their existing
telephone numbers or adding new facilities or equipment. The Company provides
long distance services by purchasing bulk capacity from long distance carriers
and reselling those services to the Company's subscribers. By providing an
integrated, customized package of local, long distance and enhanced and other
value-added services on a single bill through its proprietary software and
responsive subscriber care systems, the Company believes that it provides a
differentiated and competitive product.
The Company has executed comprehensive local exchange resale agreements,
including the Ameritech Resale Agreements for the greater metropolitan Chicago
area, Ohio and Michigan and the NYNEX Resale Agreement for the state of New
York, with the opportunity to expand into the entire territory served by
NYNEX. The Company has also entered into an LSO agreement with NYNEX for the
resale of Centrex services over a private local network which provides access
to the majority of business lines in Manhattan, New York. After a nine month
systems test period with Ameritech, the Company has commenced service in
Illinois and has 16 sales professionals who currently market the Company's
local and long-distance products and services in the Chicago metropolitan
area. The Company is currently in the systems test period in New York,
Michigan and Ohio and expects to begin providing local resale services in New
York and Ohio in October 1996 and in Michigan at the end of 1996. The Company
estimates, based on data compiled by the FCC, that the regions covered by the
Ameritech Resale Agreements and the NYNEX Resale Agreement include access to
over 10 million business access lines and over 25 million residential access
lines. The Company has implemented a resale task force to facilitate the
negotiation and implementation of additional long-term arrangements with the
RBOCs for the resale of telecommunications services. Additionally, the Company
has contracted with a number of long distance carriers, including MCI, Sprint
and WorldCom, to provide switching services and network transmission for its
long distance traffic. The Company continuously seeks to enter into agreements
with additional RBOCs, long distance carriers and enhanced and other value-
added service providers in order to aggressively build its subscriber base as
well as to provide additional services to its existing subscribers while
reducing costs. See "--Vendor Agreements."
MARKET OPPORTUNITY
The recently enacted Telecommunications Act is expected to result in a
fundamental change in the competitive structure of the local exchange market,
greatly accelerating changes that have been under way for several years as a
result of FCC policy initiatives and ongoing deregulatory trends at the state
level. The Company believes that these developments will result in significant
opportunities for new entrants offering integrated local and long distance
telecommunications services. Due to the Company's Ameritech Resale Agreements,
the NYNEX Resale Agreement and the LSO agreement, as well as significant time
invested and experience gained in provisioning the resale of such local
exchange services, the Company believes it enjoys a competitive advantage over
other local service resellers with respect to the provisioning of local resale
services.
41
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The Company estimates, based on industry sources, that in 1995 total
revenues from domestic local and long distance telecommunications services
were approximately $166 billion, of which approximately $96 billion was
represented by local exchange services and approximately $70 billion was
represented by long distance services. Since the Divestiture of the Bell
operating companies from AT&T in 1984, competition in the long distance market
has rapidly increased and by 1995 AT&T had lost approximately 40% of its long
distance market share to MCI, Sprint and a number of other long distance
competitors. Although the market for the provision of long distance service
has been open to competition since the Divestiture, the market for local
exchange services has until recently been essentially closed to competition.
The Company believes that competitive providers such as the Company, by
reselling local exchange services, will have the opportunity to gain market
share in the local exchange market just as long distance resellers have gained
market share in the long distance market. The Company believes that it has
several advantages that enable it to compete successfully in the new
competitive local telecommunications marketplace, including (i) locally
oriented marketing and subscriber service focusing on a defined, underserved
market segment, (ii) billing and information systems which are being
interfaced with the RBOCs and (iii) an experienced management team with
significant operational, technical, financial and regulatory expertise in both
the local and long distance telecommunications industry.
The Telecommunications Act has created an additional opportunity for the
Company to establish itself as a provider of integrated telecommunications
services before the RBOCs and the largest long distance carriers can offer
bundled local and long distance services. In order to provide long distance
services in their local service regions under the Telecommunications Act, the
RBOCs must seek FCC approval and comply with a series of regulations including
the requirement that they offer local resale and enter into interconnection
agreements with at least one facilities-based carrier. Once an RBOC obtains
FCC approval, the RBOC must provide its in-region long distance services
through a separate operating subsidiary, and such subsidiary must, among other
things, maintain separate books, records and accounts, retain different
directors, officers and employees and secure financing independent of the
creditworthiness of the RBOC's local exchange operations for at least three
years. The Telecommunications Act also prevents the largest long distance
carriers from integrating local services resold from an RBOC in a particular
state with their long distance services until the earlier of (i) February 8,
1999 or (ii) the date the RBOCs are allowed to provide in-region long distance
services in that state.
In order for facilities-based CAPs to provide ubiquitous local
telecommunications services, such providers must obtain access to buildings,
negotiate complex interconnection agreements with RBOCs and other LECs,
address complex rate structure and billing systems, provide directory listings
and 911 and 411 services on their own or through the incumbent LECs, secure
number portability and create local marketing and subscriber care programs
tailored for each market. As a non-facilities-based provider, the Company will
not be required to address such issues associated with operating as a
facilities-based CAP in order to provide ubiquitous local telecommunications
services. As a result, the Company believes it will be able to build a
subscriber base quickly and efficiently without incurring significant
financial and management costs and the developmental delays inherent in
constructing network and transmission facilities.
GROWTH STRATEGY
The Company's objective is to be a leading provider of integrated local and
long distance services and other telecommunications products to small and
medium-sized businesses. The Company expects to achieve this goal through the
successful implementation of its growth strategy which includes the following:
.Negotiate Attractive Resale Agreements with RBOCs. The Company seeks to
enter into additional local exchange resale agreements with RBOCs which
position it to offer a full range of local service over a broad
geographic area at a competitive cost to its targeted businesses. The
Ameritech Resale Agreements provide pricing protections designed to
maintain the competitiveness of rates and position the Company to
purchase capacity at rates at least as favorable as those of other
potential resellers of Ameritech local services. The NYNEX Resale
Agreement contains similar pricing protections. The Company intends to
negotiate similar pricing protections in all future RBOC resale
agreements. The Company believes the RBOCs will have an incentive to use
a wholesale strategy with respect to small
42
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and medium-sized businesses in order to stabilize this revenue base and
deter migration of the current RBOCs' subscribers to facilities-based
CAPs and other new entrant LECs.
.Provide Low-Cost Telecommunications Products and Services. The Company
believes its existing resale agreements will enable it to be among the
lowest cost providers of resold Ameritech and NYNEX local services. By
combining local and long distance services, the Company believes that it
is able to offer rates for integrated local and long distance services
that generally compare favorably with the rates enjoyed by large
commercial subscribers. The Company believes that as a non-facilities-
based telecommunications provider, it is able to build a subscriber base
quickly and efficiently without incurring significant financial and
management costs and the developmental delays inherent in constructing
network and transmission facilities.
.Focus on Large, Underserved Market. The Company primarily focuses its
marketing efforts on small and medium-sized businesses with
telecommunications usage of less than $5,000 per month. These businesses
generally do not employ in-house telecommunications specialists to manage
their telecommunications services and in most cases obtain services from
various vendors. The Company believes that the gross margins on services
provided to its target market are generally higher than for larger
commercial subscribers. Since the RBOCs and the large long distance
carriers primarily concentrate their sales and marketing efforts on
residential and large commercial subscribers, the Company believes an
opportunity to gain market share exists within its target market. As a
result, the Company plans to generate additional revenue by offering
enhanced and other value-added telecommunications products and services
to these small and medium-sized businesses.
.Rapid Market Entry. The Company intends to continue to be early to market
in providing an integrated package of local and long distance services.
The Company believes it will be able to move into new markets and
generate cash flow quickly because the Company, unlike facilities-based
CAPs, does not face large capital expenditures from building and/or
maintaining transmission facilities. Additionally, providing a ubiquitous
product offering will further enhance the Company's ability to rapidly
build a subscriber base across a large geographic area. Due to the
complexity of the provisioning process, the Company believes that the
RBOCs will have an incentive to work with competitive providers such as
the Company which have developed high quality management information and
billing systems that can interface with the RBOCs' systems and have
management teams with significant operational, technical, financial and
regulatory experience in the resale of local exchange service. In order
to develop a subscriber base and create brand awareness, the Company may
sell its long distance services in a new market prior to entering into a
resale agreement with an RBOC.
.Provide an Integrated Telecommunications Solution. The Company believes
that a key element in building its subscriber base while minimizing churn
is the implementation of a marketing and operating strategy which
emphasizes providing an integrated telecommunications solution to its
target market. The Company utilizes a marketing approach which combines
both direct and indirect sales efforts. The Company attracts and retains
subscribers by combining responsive subscriber care with a simple product
and pricing package to provide high-quality service at a cost which is
usually afforded to only large commercial subscribers. Specifically, the
Company will provide a single source and bill for integrated local and
long distance services and enhanced and other value-added
telecommunications services, with a single point of contact for
subscriber service, product inquiries, repairs and billing questions. The
Company believes that this marketing and subscriber service approach
reduces marketing costs, subscriber acquisition costs and churn.
.Capitalize on Experience in Provisioning the Resale of Local Service. The
Company is one of the first competitive providers to resell integrated
local and long distance telecommunications services. In contrast to the
resale of long distance service, providing local exchange service as a
reseller is a highly complex process involving: (i) providing numerous
technical and configuration options; (ii) ensuring number portability;
(iii) providing 911 and 411 services and directory listings; (iv)
providing multiple service options on an uninterrupted basis; and (v)
integrating complex rate structures and billing systems. The Company has
invested significant time in working with certain RBOCs to address these
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issues and to develop systems which are designed to allow for the
implementation of its local exchange resale agreements. The Company
believes that its experience both in negotiating these agreements and in
implementing such service offerings will position it to compete
effectively.
.Geographic Market Expansion. The Company is engaged in ongoing discussions
with the RBOCs with regard to the resale of local exchange services. The
Company's decision to enter into a resale agreement with an RBOC and
expand into a new geographic region is based upon a series of market
selection criteria, including product availability, the ability of the
Company to position its products and services, the terms of the resale
agreement, the state of the regulatory environment and the willingness of
an RBOC to provide provisioning support. In an effort to build its
subscriber base and achieve additional economies of scale, the Company
continuously evaluates potential acquisitions, including other resellers
of local and/or long distance service or enhanced and other value-added
services, in both the geographic areas covered by its resale agreements
and new markets.
SUBSCRIBERS AND MARKETING
The Company's subscribers include small and medium-sized businesses which
principally have telecommunications usage of less than $5,000 per month. The
Company believes that the RBOCs historically have chosen not to concentrate
their sales and marketing efforts on this business segment, which the Company
believes represents a significant portion of the local service market. The
Company has sought to establish itself as a recognized brand name for its
products and services emphasizing responsive subscriber support systems,
competitive product and pricing packages and a targeted marketing strategy.
The Company's services are sold through a multi-channel marketing approach,
which combines both direct and indirect sales efforts. The Company believes
this marketing approach increases market coverage and reduces marketing costs,
subscriber acquisition costs and churn. The Company focuses on the
structuring, management and control of the marketing program which allows the
Company to modify its marketing programs to effectively integrate with the
billing and information systems of the RBOCs.
The Company is building a highly motivated and experienced sales force in
each of the markets in which it operates. The Company recruits salespeople
with experience in selling competitive telecommunications services in the
markets where they are based. The Company's sales force is trained in-house
with a rigorous subscriber-focused training program that promotes activity-
based selling with a scripted 13 step program for subscriber acquisition. The
sales force makes calls to prospective subscribers, conducts an extensive
analysis of their existing bill, calling patterns, contracts and future needs
and prepares and presents a formal recommendation and proposal. Salespeople
are given an incentive through a commission structure, with a target of 40% of
a salesperson's compensation based on such person's performance. Currently,
the Company employs a total of 107 sales and customer service personnel with
approximately 65 dedicated to direct sales, 18 senior salespersons with
management responsibilities, 15 in account development and enhancement and
nine in maintenance and general administrative support. The organizational
structure at each office includes a sales director and three to four sales
managers with sales teams reporting to each sales manager.
The Company also plans to include distributors and resellers in its sales
and marketing program. Distributors will generally enter into agreements
providing for commissions based on the business they generate for the Company.
Typically, such distributors are equipment consultants, distributors of
interconnect equipment or other communications suppliers that have an existing
customer base to which the Company's products and services would appeal (such
as Internet access providers). Resellers of the Company's services will
purchase the Company's products and services on a wholesale basis that will
enable the Company to enter markets with minimal cost or risk where resellers
have already built strong direct relationships with their subscribers.
MANAGEMENT INFORMATION SYSTEMS
Introduction
The Company is committed to the development and successful implementation of
proprietary billing and subscriber care systems that provide accurate and
timely information to both the Company and its subscribers. The provisioning
interface of the Company's management information systems has been developed
in
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cooperation with Ameritech and NYNEX, with which the Company has entered into
resale agreements. The Company believes this method of development is a
critical element to successfully providing local telecommunications services
and is an advantage, as the RBOCs will have an incentive to work with
resellers that have sophisticated billing and information systems that can
interface with the RBOCs' systems. The Company believes its experience in
developing these systems will allow it to offer services quickly in new
markets. The existing billing and subscriber care systems have been developed
in a client/server environment allowing for flexibility to accommodate an
expanding subscriber base, efficient entry into new markets and rapid
development of additional functionality.
As a result of the Ameritech Resale Agreements and the NYNEX Resale
Agreement, as well as changes in the Company's subscriber base and product
mix, the Company is modifying its billing and subscriber care systems. The
Company anticipates that these new systems will be implemented and utilized in
the Company's markets by the end of 1996. The new systems are being developed
to run in a multi-site wide area network configuration allowing the Company to
decentralize data processing and subscriber care activities as desired. Due to
the modular nature of this hardware and software setup, new servers may be
added to the Company's system to meet the increasing need for processing power
in order to accommodate subscriber growth. The Company believes that its new
systems will be a strategic asset to its growth strategy through their ability
to:
. Enhance the Company's ability to serve subscribers in a timely and
efficient manner;
. Provide sophisticated information tailored to subscriber requirements;
. Identify usage patterns and feature availability to reduce churn and
enhance marketing efforts;
. Enable subscriber care representatives to access information on-line; and
. Integrate information across departments and divisions.
The systems are designed to provide access to a broad range of information
on individual subscribers, including their volume, patterns of usage and
billing history. This same information is used by the Company to identify
subscriber trends and will allow for proactive support of the Company's
marketing efforts.
Billing and Management Systems
The Company currently outsources the rating, printing and mailing of
subscriber bills. Since these functions require a high volume of processing in
a limited time frame, the Company has determined that the most economical way
to process bills is to share the hardware resources with others. The
subscriber usage information for billing and the tables and procedures used in
the rating of call records are maintained separately by the Company to manage
the ongoing needs of each subscriber.
Standard management reports are generated for every billing cycle. These
reports cover system status which include statistics of all call records such
as invalid calls, carrier minute records and cost and duplicate records.
Management receives trend reports comparing current to previous months
processing and database matching reports. In order to minimize errors and
subscriber complaints, early "mismatch" reports are generated to identify and
correct potential errors before bills are mailed to subscribers. The Company
also generates account reports which detail payments and adjustments, credit
limits, aging, status, invoice analysis, commission summaries, cash tracking,
traffic and usage reports and rate profiles. Management's receipt of such
detailed and up-to-date information allows for proactive business and
marketing decisions and allows management to better predict and meet
subscriber needs.
Provisioning and Subscriber Information/Subscriber Care
Provisioning of subscribers is accomplished through the Company's
proprietary systems. The new communications gateway systems are designed to
interface with the RBOCs' systems through a variety of delivery mechanisms
including Internet mail, direct connect, fax and network data mover.
Information regarding new subscribers will be electronically requested from
the RBOCs and long-distance carriers, evaluated by the
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Company in terms of credit risk and potential revenue and subsequently
processed into the Company's subscriber care system. In addition, the
Company's information systems generate margin analysis reports on existing
businesses of the Company and accounts receivable information which is posted
to the accounting system for standard general ledger processing. Aging reports
allow the Company to manage 30, 60, 90 and 120 day receivable status and
assign risks to potential new subscribers by building subscriber profiles. The
new systems, when implemented, are designed to assist in the timely posting of
receivable information to each account.
Maintenance and repair information will be contained within the system and
will be linked to the subscriber setup, billing and credit history as well as
past maintenance and repair reports. Maintenance and repair reports will be
generated for all subscriber problems and allow the Company to track the
frequency and type of problems encountered and allow management to improve the
service to the Company's subscribers.
The Company believes there are several benefits to its method of data
processing. Initial access to subscriber information gives the Company the
time to discuss other features that may enhance the subscriber's services.
Information regarding subscriber charges is available for review in order to
highlight new marketing opportunities or potential areas of concern. The
Company believes that this will allow it to market more effectively and cross
sell new or enhanced features. Historical bill images are kept and made
available to the subscriber care advisor, as well as to the subscriber, for
review and adjustments.
VENDOR AGREEMENTS
Introduction
The Company has executed comprehensive local exchange resale agreements,
including the Ameritech Resale Agreements for the greater metropolitan Chicago
area, Ohio and Michigan, and the NYNEX Resale Agreement for the state of New
York, with the opportunity to expand into the entire territory served by
NYNEX. Additionally, the Company has entered into an LSO agreement with NYNEX
for the resale of Centrex over a private local network which provides access
to a majority of the business lines in Manhattan, New York. The Company
estimates, based on data compiled by the FCC, that the regions covered by the
Ameritech Resale Agreements and the NYNEX Resale Agreement include access to
over 10 million business access lines and over 25 million residential access
lines. The Company has implemented a resale task force to facilitate the
negotiation and implementation of long-term arrangements with the RBOCs for
the resale of telecommunications services. The Company continuously seeks to
enter into agreements with additional RBOCs, long distance carriers and
enhanced and other value-added service providers in order to aggressively
build its subscriber base as well as to provide additional services to its
existing subscribers while reducing costs.
The Company currently has long distance resale agreements with MCI, Sprint
and WorldCom. Such agreements allow the Company to offer its subscribers
integrated local and long distance telecommunications services. In addition,
such agreements have allowed the Company to enter and establish itself as a
telecommunications provider in strategically targeted markets prior to
establishing a local exchange resale agreement.
Ameritech Resale Agreements
Pursuant to the Ameritech Resale Agreements, the Company purchases local
exchange services at discounted rates based on a ten-year term. These
agreements contain pricing protections designed to maintain the
competitiveness of the Company's discounted rates and position the Company to
purchase capacity at rates at least as favorable as those of competitors that
may eventually negotiate a resale agreement. The level of discounts of the
resold services provided under these agreements vary based on the state and
the nature of services resold (i.e., access lines, local calls, toll calls or
features).
Services offered for resale include most of the telecommunications products
and services engineered and provided by Ameritech, such as local exchange
calling and attendant features including call waiting, call
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forwarding, caller ID and three-way calling. The rates for these services are
filed with the public utilities commission of each respective state. The
Company also has an agreement with Ameritech for the resale of certain non-
tariffed services to its subscribers, including inside wire maintenance.
The Ameritech Resale Agreements include a Minimum Commitment of resold
business access lines per region covered. The Minimum Commitment in Illinois
is 150,000 business access lines and in Ohio and Michigan, 100,000 business
access lines and 10,000 residential lines. The Minimum Commitment is not a
limitation on the Company's overall ability to sell access lines at discounted
rates. However, if the Company fails to meet its Minimum Commitment, the
Company is subject to an underutilization charge equal to the number of
unutilized lines multiplied by a fixed average business line rate. The
measurement period of the Minimum Commitment does not commence, however, until
the completion of a three month trial or "beta period" and an 18 month "ramp
up" period which gives the Company the ability to build its subscriber base.
In addition, the Ameritech Resale Agreements provide a "carryforward"
provision designed to minimize the potential for any liability resulting from
a failure to meet the Minimum Commitment by carrying forward underutilization
amounts which may be met in the future.
If the Company does not meet its Minimum Commitment by the end of the ten-
year term with the benefit of the carryforward provision, the Company has the
option to either pay a penalty based on the aggregate number of unutilized
lines or subscribe on a monthly basis to an equivalent number of lines during
the next three-year period. In the event the Company terminates any of the
Ameritech Resale Agreements prior to their expiration, the Company is subject
to a termination charge.
NYNEX Resale Agreement
On July 9, 1996, the Company executed a resale agreement with NYNEX to
provide for the resale of local exchange services for the state of New York,
with the opportunity to expand into the entire territory served by NYNEX, at
discounted rates based on a ten-year term. The NYNEX Resale Agreement contains
pricing protections designed to maintain the competitiveness of discounted
rates provided to the Company. Under the NYNEX Resale Agreement, the Company
receives the lowest rate and/or most favorable term provided to any reseller;
however, if a lower rate is provided to a reseller committing to both a longer
term and a greater volume commitment, the Company receives the lower rate but
must negotiate with NYNEX a reasonable transition to similar commitments. If
the Company cannot successfully negotiate such a transition with NYNEX, then
the Company may be unable to maintain the lowest rate. The level of discounts
of resold services varies based on the nature of the services. The NYNEX
Resale Agreement contains a Minimum Commitment of 100,000 business access
lines. When provisioning is available within the other regions of the NYNEX
territory, the NYNEX Resale Agreement will be amended to reflect the agreed
Minimum Commitment and discount for the new region. All other terms will
remain unchanged. In the event the Company does not satisfy the Minimum
Commitment after a beta period and ramp-up period, the Company is subject to
an underutilization charge. However, the NYNEX Resale Agreement also contains
a carryforward provision designed to minimize the potential of an
underutilization charge.
NYNEX Limited Service Offering
Since 1994, the Company has offered Centrex over a private local network,
which allows the Company to provide integrated local exchange service and long
distance service, on a resale basis to the majority of business lines of
Manhattan, New York. The Company has access to 23 NYNEX switches over a
private local network and dedicated lines at discounted rates based on volume
of traffic. The Company believes the LSO agreement will complement services
provided under the NYNEX Resale Agreement by allowing the Company to package
specifically tailored telecommunications services.
Long Distance Agreements
The Company uses a variety of long distance carriers to provide a wide range
of long distance telecommunications services. Services offered for resale
include a variety of inbound, outbound, calling card and international
services. In addition, the Company also resells teleconferencing, debit cards,
branded operator
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services and private line services. The agreements with long distance vendors
typically contain term and volume commitments in consideration of the
discounts offered to the Company.
The Company's primary long distance carrier agreement is with MCI and
contains a 33-month term. It requires the Company to achieve certain monthly
dollar targets in order to qualify for discounted rates on carrier services.
After a nine-month "ramp-up" period, the agreement provides for an annual
commitment which on a monthly basis exceeds the target required for discounts.
If the Company's usage is less than the monthly target, the Company's usage
for such month will be subject to non-discounted rates and an underutilization
charge equal to 15% of the difference between the monthly commitment and the
Company's usage for such month. If the Company does not meet its annual
commitment during any annual period of the term, the Company may carryforward
up to 10% of the annual commitment for a period of up to three months in the
following annual period. The Company also has an agreement with WorldCom for
the provision of international service.
Enhanced and Other Value-Added Telecommunications Services
The Company is in the process of negotiating agreements to offer on a resale
basis enhanced and other value-added services such as Internet access, paging,
cellular, 800 follow-me services, voicemail and cellular. In addition, the
Company has entered into a memorandum of understanding for the exclusive
rights to distribute a European Windows-based teleconferencing product which
allows the conference host to conduct a conference call using point and click
graphics directly from a personal computer without having to make
teleconference reservations.
COMPETITION
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. The Company
expects that competition will intensify in the future due to regulatory
changes, including the enactment of the Telecommunications Act and the
increase in the size, resources and number of market participants. In each of
its markets, the Company faces competition for local service from larger,
better capitalized incumbent providers, many of whom have greater financial
resources than the Company. Additionally, the long distance market is already
significantly more competitive than the local exchange market, because the
RBOCs have historically had a monopoly position within the local exchange
market. The incumbent LECs have established relationships with their
subscribers and provide those subscribers with various transmission and
switching services that the Company, in many cases, has only recently begun to
offer.
In the local exchange market, the Company also faces competition or
prospective competition from one or more CAPs, which have significantly
greater financial resources than the Company, and from other competitive
providers, including non-facilities-based providers like the Company. For
example, AT&T, MCI and Sprint, among other carriers, have each indicated their
intention to offer local telecommunications services in major U.S. markets
using their own facilities or by resale of the LECs' or other providers'
services. In addition to these long distance service providers, entities
potentially capable of offering switched services include CAPs, cable
television companies, electric utilities, other long distance carriers,
microwave carriers, wireless telephone system operators and large subscribers
who build private networks. Many facilities-based CAPs and long distance
carriers, for example, have committed substantial resources to building their
networks. By building a network, a facilities-based provider can enter the
local exchange market by using its own network, or entering into
interconnection agreements or resale agreements with incumbent LECs, including
RBOCs. Such additional alternatives may provide the CAPs with greater
flexibility and a lower cost structure than the Company.
With respect to wireless telephone system operators, the FCC recently
authorized cellular, PCS, and other CMRS providers to offer wireless services
to fixed locations, rather than just to mobile subscribers, in whatever
capacity such CMRS providers choose. Previously, cellular providers could
provide service to fixed locations only on an ancillary or incidental basis.
This authority to provide fixed as well as mobile services will enable CMRS
providers to offer wireless local loop service and other services to fixed
locations (e.g., office and apartment buildings) in direct competition with
the Company and other providers of traditional fixed telephone service. In
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addition, in August 1996 the FCC promulgated regulations that classify CMRS
providers as telecommunications carriers, thus giving them the same rights to
interconnection and reciprocal compensation under the Telecommunications Act
as other non-LEC telecommunications carriers, including the Company.
Under the Telecommunications Act and ensuing federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
availability of broad-based local resale and introduction of facilities-based
local competition are required before the RBOCs may provide in-region
interexchange long distance services. Also, the largest long distance carriers
(AT&T, MCI, Sprint and any other carrier with 5% or more of the pre-subscribed
access lines) are prevented under the Telecommunications Act from bundling
local services resold from an RBOC in a particular state with their long
distance services until the earlier of (i) February 8, 1999 or (ii) the date
on which the RBOC whose services are being resold obtains in-region long
distance authority in that state. The RBOCs are currently allowed to offer
certain in-region "incidental" long distance services (such as cellular, audio
and visual programming and certain interactive storage and retrieval
functions) and to offer virtually all out-of-region long distance services.
Once the RBOCs are allowed to offer widespread in-region long distance
services, both they and the largest interexchange carriers will be in a
position to offer single-source local and long distance services similar to
those offered or planned to be offered by the Company. While new business
opportunities will be made available to the Company through the
Telecommunications Act and other federal and state regulatory initiatives,
regulators are likely to provide the incumbent LECs with an increased degree
of flexibility with regard to pricing of their services as competition
increases. Although the Ameritech Resale Agreements and the NYNEX Resale
Agreements contain certain pricing protections, including adjustments in the
wholesale rates to be consistent with any changes in the Ameritech and NYNEX
retail rates, if the incumbent LECs elect to lower their rates and sustain
lower rates over time, this may adversely affect the revenues of the Company
and place downward pressure on the rates the Company can charge. While the
Ameritech and NYNEX Resale Agreements ensure that the Company will receive any
lower rate provided to any other reseller, under the NYNEX Resale Agreement if
such lower rate is provided to a reseller committing to both a longer term and
a greater volume commitment, the Company receives the lower rate, but must
negotiate with NYNEX a reasonable transition to similar commitments. If the
Company cannot successfully negotiate such a transition with NYNEX, then the
Company may be unable to maintain the lowest rate. The Company believes the
effect of lower rates may be offset by the increased revenues available by
offering new products and services to its target subscribers, but there can be
no assurance that this will occur. In addition, if future regulatory decisions
afford the LECs excessive pricing flexibility or other regulatory relief, such
decisions could have a material adverse effect on the Company.
Competition for the Company's products and services is based on price,
quality, network reliability, service features and responsiveness to
subscriber needs. While the Company believes that it currently has certain
advantages relating to the timing, ubiquity and cost savings resulting from
its resale agreements, there is no assurance that the Company will be able to
maintain these advantages. A continuing trend toward business combinations and
alliances in the telecommunications industry may create significant new
competitors to the Company. Many of the Company's existing and potential
competitors have financial, technical and other resources significantly
greater than those of the Company.
GOVERNMENT REGULATION
The Company is subject to varying degrees of federal, state, local and
international regulation. In the United States, the Company is most heavily
regulated by the states, especially for the provision of local exchange
services. The Company must be separately certified in each state to offer
local exchange services. No state, however, subjects the Company to price cap
or rate-of-return regulation. FCC approval is required for the resale of
international facilities and services. The FCC has determined that nondominant
carriers, such as the Company, are required to file interstate tariffs on an
ongoing basis, setting forth the Company's rates and operating procedures.
Such tariffs can currently be modified on one day's notice. The FCC recently
issued regulations to eliminate this tariff filing requirement for all
nondominant carriers, such as the Company and all other nondominant
interexchange carriers (except possibly the RBOCs in certain circumstances),
effective in late 1996 or early 1997. The FCC has recently ruled, subject to
its consideration of the issue in another pending FCC
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proceeding, that RBOCs providing out-of-region long distance service through
separate subsidiaries from their local telephone operations qualify for
nondominant treatment. Out-of-region RBOC services provided through
unseparated entities, however, are subject to full dominant carrier
regulation, including the requirement to submit cost support with tariffs and
to file tariffs on at least 15 to 45 days' notice, depending on various
factors. The FCC has not yet indicated whether RBOC in-region service, when
authorized, will be subject to dominant or nondominant regulatory status. See
"Risk Factors--Regulation and Risks of the Telecommunications Act."
Legislation. On February 8, 1996, President Clinton signed into law the
Telecommunications Act, comprehensive federal telecommunications legislation
affecting all aspects of the telecommunications industry. The
Telecommunications Act establishes a national policy that promotes local
exchange competition. The Telecommunications Act requires that local and state
barriers to entry into the local exchange market be removed and establishes
broad uniform standards under which the FCC and the state commissions are to
implement local competition and co-carrier arrangements in the local exchange
market. Under certain conditions and subject to reasonable exceptions,
incumbent LECs will be required to make available for resale to new entrants
all services offered by the LEC on a retail basis. The Telecommunications Act
also imposes significant obligations on the RBOCs and other incumbent LECs,
including the obligation to interconnect their networks with the networks of
competitors. Each incumbent LEC would be required not only to open its network
but also to "unbundle" the network. The FCC issued regulations in August 1996
defining a minimum set of elements which must actually be unbundled, and each
state may augment this list if it wishes. The pricing of these unbundled
network elements and services will determine whether it is economically
attractive to use these elements.
In addition to the required network unbundling applicable to all incumbent
LECs, the RBOCs have an added incentive to open their local exchange networks
to facilities-based competition because the Telecommunications Act provides
for the removal of the current ban on RBOC provision of in-region inter-LATA
toll service and equipment manufacturing. This ban will be removed only after
the RBOC demonstrates to the FCC, which must consult with the Department of
Justice and the relevant state commissions, that the RBOC has (1) met the
requirements of the Telecommunications Act's 14-point competitive checklist
and (2) entered into an approved interconnection agreement with at least one
unaffiliated, facilities-based competitor in some portion of the state
pursuant to which such competitor provides both business and residential
service (or that by a date certain no such competitors have "requested"
interconnection as defined in the Telecommunications Act). RBOC in-region
services must be provided through a separate subsidiary for three years,
unless extended by the FCC. If the FCC determines that the RBOC's entry into
in-region provision of long distance in that state is in the public interest,
it must authorize the RBOC to provide such services.
Under the 14-point competitive checklist, in order to obtain in-region long
distance authority an RBOC must first demonstrate to the FCC, among other
things, that, within a particular state, it offers competing LECs the
following: interconnection as required under the Telecommunications Act; non-
discriminatory access to unintegrated network elements at just and reasonable
rates; non-discriminatory access to its poles, ducts, conduits, and rights-of-
way; unintegrated local loop transmission, unintegrated local transport, and
unintegrated local switching; non-discriminatory access to 911 services;
directory assistance, operator call completion services, and white pages
directory listings for competing local carriers' subscribers; non-
discriminatory access to call routing databases; number portability (i.e., the
ability of a subscriber to keep the same telephone number when switching local
telephone service providers); dialing parity (i.e., the ability of subscribers
of one telephone service provider to call subscribers of other providers
without dialing access codes); reciprocal compensation arrangements for the
termination of calls between competing local networks; and permitting resale
of its telecommunications services.
While state-by-state regulatory activity has to date brought resale co-
carrier arrangements or initiatives to various degrees of completion in
approximately 25 states, the Telecommunications Act is intended to accelerate
the process and create a competitive environment in all markets, eliminating
state and local statutory and regulatory barriers to entry. This preemption of
state laws barring local competition and the relaxation of regulatory
restraints should enhance the Company's ability to expand its service
offerings nationwide. In contrast, by removing barriers to entry into the
local exchange market and at the same time enabling multiple carriers to
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compete with the Company in the provision of local and long distance services,
ultimately allowing the RBOCs and large interexchange carriers to offer their
own packages of single-source local/long distance services, the
Telecommunications Act will substantially increase the competition the Company
will face.
The Company, as a multi-market competitive provider already active in
emerging resale environments, is now given legislative support to complement
its expansion of services in markets across the country. In addition to
providing the Company with a national framework to achieve local exchange
resale carrier status in local exchange markets, the Telecommunications Act
permits the Company, as a telecommunications carrier with less than 5% of
nationwide presubscribed access lines, to continue to offer single-source
combined packages of local and long distance services. In contrast, AT&T, MCI
and Sprint may not bundle in an RBOC's territory their local services resold
from an RBOC and in-region long distance service until the earlier of (i)
February 8, 1999 or (ii) the date the RBOC is authorized to enter the inter-
LATA long distance market in that state.
The Telecommunications Act also creates a new Federal-State Joint Board for
the purpose of making recommendations to the FCC regarding the implementation
of a largely revised universal service program. All telecommunications
carriers, including the Company, that provide interstate services are required
to contribute, on an equitable and nondiscriminatory basis, to the
preservation and advancement of universal service pursuant to a specific and
predictable universal service mechanism to be established by the FCC. The FCC
may exempt certain classes of carriers from having to contribute to the
universal service fund. The Company is unable to predict the final formula for
universal service contribution or its own level of contribution.
Federal Regulation. The Telecommunications Act in some sections is self-
executing, but in most cases the FCC must issue regulations that identify
specific requirements before the Company and its competitors can proceed to
implement the changes the Telecommunications Act prescribes. The FCC already
has commenced several of these rulemaking proceedings. The outcome of these
various ongoing FCC rulemaking proceedings could materially affect the
Company's operations.
The Company actively monitors all pertinent FCC proceedings and has
participated in some of these proceedings. The Telecommunications Act provides
that individual state utility commissions can, consistent with FCC
regulations, prohibit resellers from reselling a particular service to
specific categories of subscribers to whom the incumbent LEC does not offer
that service at retail. In August 1996, the FCC issued detailed regulations
providing that many such limitations are presumptively unreasonable and that
states may enact such prohibitions on resale only in certain limited
circumstances. In particular, the FCC concluded that while it would be
permissible to prohibit the resale of certain residential or other subsidized
services to end users that would be ineligible to receive such services
directly from the LEC, all other "cross-class" selling restrictions, including
those on volume discount and flat-rated offerings to business customers, would
be presumed unreasonable. An incumbent LEC may rebut this presumption,
however, by demonstrating that the class restriction is reasonable and
nondiscriminatory. The FCC also rejected claims by several incumbent LECs to
provide for several exceptions to the general resale obligation. For instance,
it refused to create a general exception for all promotional or discounted
offerings, including contract and customer-specific offerings. The FCC did,
however, conclude that short-term promotional prices (i.e., those offered for
90 days or less) are not "retail rates" and thus are not subject to the
wholesale rate obligation. Incumbent LECs may not offer consecutive 90-day
promotions to avoid these resale obligations.
The Telecommunications Act also provides that state commissions shall be
given an opportunity to determine the wholesale rates for local
telecommunications services (i.e., the rates charged by incumbent LECs to
resellers such as the Company) on the basis of retail rates less "avoided
costs," i.e., marketing, billing, collection and other administrative costs
avoided by the incumbent LEC when it sells at wholesale. In August 1996 the
FCC issued detailed regulations identifying such avoided costs, and also
included in such category "avoidable" costs. To determine the specific value
of avoided and avoidable costs applicable to each service of a particular
incumbent LEC, the FCC required the state public service commissions to
conduct detailed cost studies consistent with the FCC regulations governing
what constitutes avoided and avoidable costs. Until such time that these costs
studies are completed, the FCC established an interim default discount of
between 17% and
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<PAGE>
25%. Accordingly, until such time that a state determines the actual level of
avoided and avoidable costs pursuant to the FCC's regulations, it may require
incumbent LECs to discount their retail offerings by 17% to 25%, provided that
actual cost studies are completed within a reasonable time. The
Telecommunications Act also provides that state commissions shall determine
the rates charged for unintegrated elements of the incumbent LEC's network on
the basis of cost plus a reasonable profit. In August 1996, the FCC declined
to issue detailed regulations governing the relationship between these two
pricing standards, leaving the interpretation and implementation of the two
standards to the states. The Company is unable to predict the final form of
such state regulation, or its potential impact on the Company or the local
exchange market in general.
In August 1996, the FCC also issued regulations that, among other things,
set minimum standards governing the terms and prices of interconnection and
access to unbundled incumbent LEC network elements. These regulations
indirectly affect the price at which the Company's new facilities-based
competitors may ultimately provide service. At the same time, the FCC imposed
minimum obligations regarding the duty of incumbent LECs to negotiate
interconnection or resale arrangements in good faith.
A number of RBOCs, state regulatory commissions and other parties have filed
requests for reconsideration by the FCC of various parts of the rules
announced by the FCC in August 1996, including those provisions (a) limiting
competitors' ability to purchase for resale certain types of service that the
RBOC is no longer marketing to new customers ("grandfathered services"), and
(b) establishing pricing methodologies and interim default rates for resold
services and unbundled network elements. The FCC is conducting a proceeding to
consider the various petitions for reconsideration, and a decision is expected
in the first half of 1997. In addition, many of the same parties and certain
other parties have filed court appeals challenging the same FCC rules. All the
court appeals have been consolidated before the Eighth Circuit Federal Court
of Appeals, which has stayed the effect of certain parts of the rules
(including the provisions establishing pricing methodologies and default rates
for resold services and unbundled network elements) pending its decision in
the appeals. The court's decision is not expected before the middle of 1997.
The Company cannot predict at this time the outcome of the appeals or
reconsideration processes. The outcome of either process could materially
affect the Company's business.
In July 1995, the FCC mandated that over the course of the next year
responsibility for administering and assigning local telephone numbers be
transferred from the RBOCs and a few other LECs to a neutral entity. In August
1996, the FCC issued regulations which address certain of these issues, but
leave others for decision by the states and the still-to-be selected neutral
numbering plan administrator. The new FCC numbering regulations (a) prohibit
states from creating new area codes that could unfairly hinder LEC competitors
(including the Company) by requiring their customers to use 10 digit dialing
while existing incumbent LEC customers use 7 digit dialing, and (b) prohibit
incumbent LECs (which are still administering central office numbers pending
selection of the neutral administrator) from charging "code opening" fees to
competitors (such as the Company) unless they charge the same fee to all
carriers including themselves. In addition, each carrier is required to
contribute to the cost of numbering administration through a formula based on
net telecommunications revenues. In July 1996, the FCC released rules to
permit both residential and business consumers to retain their telephone
numbers when switching from one local service provider to another (known as
"number portability"). LECs are required to implement number portability in
the top 100 markets by October 1, 1997 and to complete it by December 31,
1998. In smaller markets, LECs must implement within six months of a request
therefor commencing December 31, 1998. In addition, the FCC recently
authorized cellular and other CMRS to provide for other wireless services to
fixed locations (rather than to mobile subscribers), including offering
wireless local loop service, in whatever capacity such provider determines.
Previously, many CMRS providers could provide fixed services on only an
ancillary or incidental basis. In addition, in August 1996 the FCC promulgated
regulations that classify CMRS providers as telecommunications carriers, thus
giving them the same rights to interconnection and reciprocal compensation
under the Telecommunications Act as other non-LEC telecommunications carriers,
including the Company.
State Regulation. Historically, certain of the Company's resold local and
long distance services were classified as intrastate and therefore subject to
state regulation. As its local service business and product lines
52
<PAGE>
expand, the Company will be offering more intrastate service and will
increasingly be subject to state regulation. The Telecommunications Act
maintains the authority of individual state utility commissions to impose
their own regulation of local exchange services so long as such regulation is
not inconsistent with the requirements of the Telecommunications Act. In all
states where certification is required, the Company's operating subsidiaries
are certificated as common carriers. In all states, the Company believes that
it operates with the appropriate state regulatory authorization. The Company
currently is authorized to provide intrastate toll or a combination of local
and intrastate toll service in more than 35 states. These authorizations vary
in the scope of the intrastate services permitted.
The Telecommunications Act provides that the Company's resale agreements
must be submitted to the applicable state utility commission for approval, and
it places strict limitations on the bases on which a state commission can
reject such an agreement. If the state commission does not act within 90 days
after the agreement is submitted for approval, then the agreement is deemed
approved. In addition, if a state commission fails to act to enforce an
agreement, the FCC can (upon request of a party) take jurisdiction over the
matter. A state commission's decisions regarding implementation and
enforcement of an agreement are appealable to the federal district court in
that state.
PROPERTIES
The Company leases facilities in seven offices in the following cities:
Boston and Newton, Massachusetts, Chicago, Illinois, Cleveland and Columbus,
Ohio and New York City for an aggregate of $10,300 per month. The Company
expects to lease a sales office in the fourth quarter of 1996 in the Detroit
metropolitan area. The Company's current offices comprise approximately 61,000
square feet of office space. The Company maintains its corporate headquarters
in Chicago, Illinois. Although the Company's facilities are adequate at this
time, the Company believes that it may have to lease additional facilities,
particularly in new metropolitan areas where the Company enters RBOC resale
agreements.
EMPLOYEES
As of October 31, 1996, the Company employed over 250 people. The Company's
employees are not unionized, and the Company believes its relations with its
employees are good. In connection with its marketing and sales efforts and the
conduct of its other business operations, the Company uses third party
contractors, some of whose employees may be represented by unions or
collective bargaining agreements. The Company believes that its success will
depend in part on its ability to attract and retain highly qualified
employees.
LEGAL MATTERS
From time to time the Company is party to routine litigation and proceedings
in the ordinary course of its business. The Company and its subsidiaries are
not aware of any current or pending litigation that the Company believes would
have a material adverse effect on the Company's results of operations or
financial condition. The Company and its subsidiaries continue to participate
in regulatory proceedings before the FCC and state regulatory agencies
concerning the authorization of services and the adoption of new regulations.
53
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides certain information regarding the executive
officers, directors and certain key personnel of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Thomas C. Brandenburg... 60 Chairman of the Board
J. Thomas Elliott....... 49 President, Chief Executive Officer and Director
Ronald W. Gavillet...... 37 Executive Vice President, Strategic & External Affairs,
General Counsel and Secretary
Steven J. Parrish....... 40 Executive Vice President, Operations of USNCN
Thad J. Pellino......... 34 Vice President, Marketing
Neil A. Bethke.......... 36 Vice President, Information Systems
Eric G. Roden........... 40 Regional General Manager--Operations, NYNEX Region
Richard J. Brekka....... 35 Director
Donald J. Hofmann, Jr... 38 Director
Paul S. Lattanzio....... 33 Director
William P. Glasgow...... 38 Director
William A. Johnston..... 45 Director
Eugene A. Sekulow....... 65 Director
</TABLE>
Each director serves until his successor is duly elected and qualified.
Officers serve at the discretion of the Board of Directors.
Thomas C. Brandenburg, Chairman of the Board, served as President of the
Company from its inception in 1994 until April 1996 and as Chairman of the
Board since 1994. Prior to joining the Company, Mr. Brandenburg was the co-
founder and principal of a telecommunications consulting firm with a service
bureau-based enhanced service company. In 1983, Mr. Brandenburg was the co-
founder and principal of LiTel Communications Inc. (now LCI International).
Mr. Brandenburg is a graduate of the University of Notre Dame.
J. Thomas Elliott, President and Chief Executive Officer, has been the Chief
Executive Officer since April 1996. Mr. Elliott joined the Company in 1995 as
a result of the acquisition of certain assets and assumption of certain
liabilities of Quest, a company which he co-founded. From 1991 to 1993, Mr.
Elliott was Senior Vice-President of Sales and Marketing of Wiltel
Communications Systems. From 1990 to 1991, Mr. Elliott was President and Chief
Executive Officer of Call Net Inc. (Canada's first alternative long distance
company) and Lightel Inc., its affiliate fiber optic facility provider.
Subsequently, these companies were combined to form Sprint Canada. Prior to
1990, Mr. Elliott was Chairman and Chief Executive Officer of
TIE/Telecommunications Canada Ltd., a telephone equipment manufacturing
company. Mr. Elliott holds a bachelor's and master's degree in economics from
the University of Windsor.
Ronald W. Gavillet, Executive Vice President, Strategic & External Affairs,
General Counsel and Secretary, has performed the Company's legal, regulatory
and strategic functions since 1994. Prior to joining the Company, Mr. Gavillet
spent more than four years, from 1985 to 1987 and from 1992 to 1994, with MCI
in a number of senior legal and regulatory positions. While at MCI, Mr.
Gavillet developed and implemented the firm's regulatory policies in Illinois,
Indiana, Michigan, Ohio and Wisconsin and negotiated sales agreements with
national accounts. From 1987 to 1992, Mr. Gavillet was an attorney with the
law firms of Skadden, Arps, Slate, Meagher & Flom and Hopkins & Sutter (where
he was a partner). His practice primarily focused on providing counsel to
competitive telecommunications entrants. Mr. Gavillet holds a B.A. and B.S.
from Southern Illinois University, a J.D. from Catholic University of
America's Columbus School of Law and a Master of Management degree from
Northwestern University's Kellogg School of Management and serves on the
Telecommunications Resellers Association Local Services Council.
54
<PAGE>
Steven J. Parrish, Executive Vice President, Operations of USNCN, joined the
Company in January 1996 initially as a consultant and assumed a full-time
position. Prior to joining the Company, Mr. Parrish spent more than 12 years
with Illinois Bell in various planning and operations positions. Mr. Parrish
moved to Ameritech in 1991 where he helped start the Information Industry
Services business unit as Vice President of Business Development and Vice
President of Marketing and Sales for Network Providers. Mr. Parrish holds a
bachelor's degree in electrical engineering from the University of Illinois
and an MBA from the Illinois Institute of Technology.
Thad J. Pellino, Vice President, Marketing, joined the Company in August
1995. From 1988 through 1995, Mr. Pellino was with MCI where he held a variety
of marketing and business development positions, which included responsibility
for the design of customized telecommunication packages for mid-size and long
distance carriers. Mr. Pellino received his bachelor's degree in
marketing/business administration from the University of Illinois.
Neil A. Bethke, Vice President, Information Systems, joined the Company
initially as a consultant in 1995 and assumed a full-time position in May
1996. From 1994 to 1996 Mr. Bethke served as principal for New Resources
Corporation, a medium-sized consulting company specializing in client/server
technology development for large service-oriented companies. From 1988 to
1994, Mr. Bethke served at Quantum Chemical Corporation and Sara Lee
Corporation as Director of MIS, responsible for the reengineering of business
processes through document routing and wide area network database management.
Mr. Bethke holds a B.S. from the University of Wisconsin.
Eric G. Roden, Regional General Manager--Operations, NYNEX Region, joined
the Company in August 1996. From 1995 until joining the Company, Mr. Roden was
Vice President, Operations/Engineering of MFS Telecom, Inc. From 1993 to 1995,
Mr. Roden was Vice President, Operations/Engineering of Northeast Networks,
Inc. and from 1989 to 1993, Mr. Roden was Director, Network
Services/Engineering of Eastern Telelogic Corp.
Richard J. Brekka, Director, has been a director of the Company since April
1994. He is a Managing Director of CIBC Wood Gundy Capital, the merchant
banking division of Canadian Imperial Bank of Commerce, and is a director and
the President of CIBC Wood Gundy Ventures, Inc. ("CIBC"), an indirect wholly
owned subsidiary of Canadian Imperial Bank of Commerce. Mr. Brekka joined CIBC
in February 1992. Prior to joining CIBC, Mr. Brekka was an officer of Chase
Manhattan's merchant banking group from February 1988 until February 1992.
Currently, Mr. Brekka serves on the board of directors of Orion Network
Systems, Inc., MultiTechnology Systems, Inc., Telesystem International
Wireless N.Y., and HLC-Internet, Inc. Mr. Brekka received a B.S. in finance
from the University of Southern California, and an M.B.A. from the University
of Chicago.
Donald J. Hofmann, Jr., Director, has been a director of the Company since
April 1994. Mr. Hofmann has been a General Partner of the predecessor to Chase
Capital Partners since 1992. Prior to joining Chase Capital Partners, he was
head of MH Capital Partners, Inc., the equity investment arm of Manufacturers
Hanover.
Paul S. Lattanzio, Director, was appointed a director of the Company in
August 1995. Currently, Mr. Lattanzio is a Managing Director of BT Capital
Partners, Inc., an affiliate of Bankers Trust New York Corp. Mr. Lattanzio has
been employed by BT Capital Partners, Inc. or an affiliate since 1984. Mr.
Lattanzio received his B.S. in economics from the University of Pennsylvania's
Wharton School of Business.
William P. Glasgow, Director, was appointed a director of the Company in
August 1995. Currently, Mr. Glasgow is President of Prime Management Group.
Prior to joining Prime Management in 1983, Mr. Glasgow was Marketing
Consultant for Mid-Coast Cable Television. Mr. Glasgow is a graduate of
Vanderbilt University and the University of Texas Graduate School of Business.
55
<PAGE>
William A. Johnston, Director, was elected a director of the Company in June
1994. Mr. Johnston is a general partner of the funds managed by Hancock
Venture Partners, Inc. Mr. Johnston joined Hancock Venture Partners, Inc. in
1983 after working in the John Hancock Corporate Finance Department.
Currently, Mr. Johnston serves on the advisory boards of The Centennial Funds,
Austin Ventures, and Highland Capital Partners, as well as on the board of
directors of Centennial Security, Inc., HLC-Internet, Inc., MultiTechnology
Corp., The Marks Group, Inc., and Masada Security Corporation.
Internationally, he serves on the board of directors of Telesystem
International Wireless Corporation and Esprit Telecom. Mr. Johnston received a
bachelor's degree from Colgate University and a master's degree from Syracuse
University School of Management.
Eugene A. Sekulow, Director, was elected a director of the Company in August
1995. Mr. Sekulow served as Executive Vice President of NYNEX International
Corporation from December 1991 to 1993. From 1986 to 1991, he served as
President of NYNEX International Company. Since his retirement from NYNEX in
1993, Mr. Sekulow has founded his own telecommunications consultancy where he
has been retained by European, U.S., Japanese, Southeast Asian and Canadian
companies. Mr. Sekulow attended the University of Stockholm and the University
of Oslo. He earned an M.A. in political science and economics and a Ph.D. from
Johns Hopkins University.
The Board of Directors of the Company consists of nine persons, including
one outside director, two appointed by Mr. Thomas Brandenburg, one appointed
by each of the Initial Investors, one appointed by BT and one appointed by
Enterprises. In connection with the consummation of the Offering, the Company
agreed to nominate, and to take all reasonable actions to cause to be elected,
within 120 days of the consummation of the Offering, an additional director of
the Company who has experience in the telecommunications industry.
DIRECTORS' COMPENSATION
The Company's policy is not to pay compensation to its directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established an Audit Committee and a Compensation and Stock
Option Committee. Each of these committees is responsible to the full Board of
Directors, and its activities are therefore subject to approval of the Board
of Directors. The functions performed by these committees are summarized
below.
The Audit Committee is responsible for reviewing the Company's internal
accounting controls, meeting and conferring with the Company's certified
public accountants, and reviewing the results of the accountants' auditing
engagement.
The Compensation and Stock Option Committee determines base compensation and
discretionary cash bonuses for the Company's senior executives. These
determinations are subject to the approval or ratification of the full Board
of Directors. The Compensation and Stock Option Committee also determines the
number and terms of stock options to be granted to employees, directors and
consultants of the Company under the Company's stock option plans. See "--
Benefit Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Stock Option Committee consists of Messrs. Brandenburg,
Brekka, Hofmann and Johnston, none of whom is currently an employee or officer
of the Company. Mr. Brandenburg served as Chief Executive Officer of the
Company during fiscal year 1995. No executive officer of the Company served
during fiscal year 1995 as a member of a compensation committee or as a
director of any entity of which any of the Company's directors serves as an
executive officer.
56
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the cash and
non-cash compensation during fiscal year 1995 earned by or awarded to the
Chief Executive Officer and to the five other most highly compensated
executive officers of the Company whose combined salary and bonus exceeded
$100,000 during the fiscal year ended December 31, 1995 (the "Named Executive
Officers").
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
--------------- ALL OTHER
SALARY BONUS COMPENSATION
-------- ------ ------------
<S> <C> <C> <C>
Thomas C. Brandenburg
Chairman and Former Chief Executive Officer...... $167,692 -- --
J. Thomas Elliott
President and Chief Executive Officer (1)........ 139,165 -- $75,000
Ronald W. Gavillet
Executive Vice President, Strategic & External
Affairs,
General Counsel and Secretary.................... 135,000 -- --
Kevin J. Burke
Former Vice President, Network Engineering and
Technical Support................................ 123,808 -- --
Thad J. Pellino
Vice President, Marketing (2).................... 31,058 $5,625 --
Robert J. Luth
Executive Vice President and Former Chief
Financial Officer................................ 141,635 -- 69,806(3)
</TABLE>
- --------
(1) Includes Mr. Elliott's compensation as an officer of Quest prior to the
acquisition of its business by the Company. The $75,000 amount included as
other compensation represents the amount Mr. Elliott received for
consulting services to the Company prior to the Company's acquisition of
the business of Quest.
(2) Commenced employment with the Company in August 1995.
(3) Includes amounts reimbursed by the Company for life and disability
insurance premiums and temporary living expenses.
OPTION GRANTS
There were no grants of stock options to any of the Named Executive Officers
during the year ended December 31, 1995.
On June 28, 1996, Mr. Elliott was granted 11,000 shares of restricted Common
Stock (the "Restricted Stock"), of which one-third vests immediately, one-
third vests in January 1997 and one-third vests in January 1998. Also on such
date Mr. Elliott was granted 7,500 options, Mr. Gavillet was granted 6,150
options, Mr. Parrish was granted 3,850 options, Messrs. Pellino and Bethke
were each granted 2,000 options, and certain other employees were granted a
total of 3,250 options. In connection with the conversion of the Series A
Preferred Stock and Series A-2 Preferred Stock, Messrs. Elliott, Gavillet,
Parrish, Pellino and Bethke were granted 11,691, 9,863, 2,275, 1,182 and 1,182
options, respectively, and certain other employees were granted a total of
4,208 options. All options described in this paragraph are to purchase a
corresponding number of shares of Class A Common Stock at an exercise price of
$1.50 per share and were granted pursuant to the 1994 Plan (as defined
herein). See "Certain Relationships and Related Transactions--
Recapitalization."
In connection with the issuance of the 9% Preferred Stock (as defined
herein) and the consummation of the Offering, Messrs. Elliott, Gavillet,
Parrish, Pellino and Bethke were granted 18,234, 11,996, 600, 312 and 312
additional options, respectively, and certain other employees were granted a
total of 1,111 additional options, to purchase a corresponding number of
shares of Class A Common Stock at an exercise price of $1.50 per share. Such
options are exercisable only upon conversion from time to time of the 9%
Preferred Stock, in the case of all such employees, or, as the case may be
with respect to Messrs. Elliott and Gavillet, of the Convertible Notes, into
shares of Class A Common Stock.
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<PAGE>
As of October 31, 1996, options to purchase 8,613 shares of Class A Common
Stock at an exercise price of $1.10 per share were exercisable.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth the information with respect to the Named
Executive Officers concerning the exercise of options during fiscal year 1995
and unexercised options held as of December 31, 1995.
<TABLE>
<CAPTION>
OPTION EXERCISES DURING 1995
-------------------------------------------------
NUMBER OF EXERCISABLE
OPTIONS AT FISCAL YEAR-
SHARES END
ACQUIRED ON VALUE -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald W. Gavillet......... 0 0 1,925 1,925
Robert J. Luth (1)......... 0 0 1,925 1,925
</TABLE>
- --------
(1) On March 31, 1996, Robert J. Luth exercised options for 2,000 shares at an
exercise price of $1.10 per share.
BENEFIT PLANS
1994 Stock Option Plan
In September 1994, the Board of Directors adopted the 1994 Stock Option Plan
(the "1994 Plan"), which was subsequently approved by the stockholders in
September 1994. A total of 54,551 shares of Class A Common Stock have been
reserved for issuance under the 1994 Plan. The purposes of the 1994 Plan are
to attract and retain qualified personnel, to provide additional incentives to
employees, officers and directors of the Company and its affiliates and to
promote the success of the Company's business. Under the 1994 Plan, the
Company may grant incentive or non-qualified stock options to employees,
officers and directors. However, to the extent that the aggregate fair market
value of the Class A Common Stock issued to any person exceeds $100,000, such
options must be treated as nonqualified stock options. In connection with the
Recapitalization and the conversion of the Series A Preferred Stock and Series
A-2 Preferred Stock, as described above, an additional 24,436 shares of Class
A Common Stock were reserved for issuance under the 1994 Plan, bringing the
total number of reserved shares to 78,987.
Options granted under the 1994 Plan generally become exercisable six months
after the date of the grant at a rate of 25% of the shares subject to the
option and thereafter, at a rate of 25% at the end of each six month period
for a total of two years. The maximum term of a stock option under the 1994
Plan is ten years. If an optionee terminates his or her service for reasons
other than death, disability, retirement, resignation or discharge for cause,
the optionee may exercise only those option shares vested as of the date of
termination. If, however, an optionee retires without prior Board of Directors
approval or is terminated for cause, all options previously not exercised
expire and are forfeited. In addition, the Company has the option to
repurchase all or any part of the shares issued or issuable upon exercise, if
an optionees employment terminates for any reason whatsoever.
The 1994 Plan may be amended at any time by the Board of Directors, although
certain amendments require the consent of the participants of the 1994 Plan.
The 1994 Plan will terminate in September 2004, unless earlier terminated by
the Board of Directors.
401(k) Plan
In January 1995, the Company adopted the Employee 401(k) Profit Sharing Plan
(the "401(k) Plan") covering all of the Company's employees. Pursuant to the
401(k) Plan, employees may elect to reduce their current compensation by up to
the lesser of 15% of eligible compensation or the statutorily prescribed
annual limit ($9,500 in 1996) and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional contributions to the 401(k) Plan by the Company on behalf of all
participants. The Company has not made any contributions to date. The 401(k)
Plan is intended to qualify under Section 401 of the Code so that
contributions by employees or by the Company to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn,
and contributions by the Company, if any, will be deductible by the Company
when made.
58
<PAGE>
EMPLOYMENT AGREEMENTS
In July 1996, Messrs. J. Thomas Elliott, President and Chief Executive
Officer and Ronald W. Gavillet, Executive Vice President, Strategic & External
Affairs, General Counsel and Secretary entered into employment agreements with
the Company. The terms of such agreements are for a period of three years
subject to automatic one-year renewals at each anniversary unless otherwise
notified by the Company. The agreements establish a base salary to be paid
each year which may be increased annually at the discretion of the Board of
Directors. The annual base salaries of Messrs. Elliott and Gavillet are
$195,000 and $185,000, respectively. In addition, subject to the attainment of
certain performance objectives, each is entitled to an annual bonus. The
agreements provide certain preemptive rights such that, if the Company raises
capital by selling shares of any class of stock, each executive will have a
right to purchase a certain percentage (3.8% for Mr. Elliott and 2.5% for Mr.
Gavillet) of such shares on the same terms and conditions as the shares are
being sold to others. The agreements also provide that if the current
shareholders sell any of their shares of Company stock to a third party under
certain circumstances, each executive has a right to sell the same percentage
of his shares of Company stock as the percentage of their shares that the
current shareholders are selling, on the same terms and for the same
consideration. If the employment of either executive is terminated by the
Company without "Cause" or by the executive with "Good Reason" or during a
"Window Period" (each as defined in the respective agreement); (i) all amounts
earned, accrued or owing to the executive shall be paid as soon as
practicable, (ii) the Company must pay a lump sum equal to one year's base
salary and, if the executive complies with the noncompete and nonsolicitation
provisions of the agreement for the two-year period following termination,
will pay the executive an additional one year's base salary in equal
installments over that two-year period, and (iii) the Company must maintain in
full force and effect all employee benefit plans for the benefit of the
executive for the longer of a two-year period or the remaining term of the
executive's agreement. If the executive's employment is terminated under any
other circumstances, the executive will not receive any of the above-described
severance pay and benefits. Upon a Change in Control the executive's options
will become exercisable and the restrictions on Mr. Elliott's Restricted
Shares will lapse. Under each employment agreement, a "Change in Control"
occurs if (i) a person or entity becomes the beneficial owner of 35% or more
of the combined voting power of the Company's securities, (ii) the current
directors, or individuals who are approved by two-thirds of the current
directors, cease to constitute a majority of the board of the Company or (iii)
certain mergers or liquidations of the Company occur. Messrs. Elliott and
Gavillet have agreed not to compete with the Company in the network
telecommunications services business or to solicit customers or employees of
the Company for their term of employment with the Company and for an
additional period of two years thereafter.
Each of the other key employees (including Steven J. Parrish, Executive Vice
President, Operations, Thad J. Pellino, Vice President of Marketing and Neil
A. Bethke, Vice President of Information Systems) have also entered into
employment agreements with the Company as of July 18, 1996. The terms of the
employment agreements are for a period of two years subject to automatic one-
year renewal upon each anniversary unless otherwise notified by the Company.
Each agreement specifies the base salary to be received by the executive, and
provides for annual adjustment of base salary by the Board of Directors. The
following annual base salaries were approved effective July 31, 1996: Mr.
Parrish - $140,000, Mr. Bethke - $125,000 and Mr. Pellino - $110,000. Each
executive is also entitled to annual bonuses in the range of 15% to 30% of
base salary, subject to the attainment of certain performance objectives. If
the Company terminates the employment of any such officer without "Cause" or,
if, the officer terminates his employment with "Good Reason" (both as defined
in the respective agreements), the officer is entitled to receive benefits and
payments similar to those discussed above for Messrs. Elliott and Gavillet. No
"Window Period" will apply to such officers. Upon a Change in Control, the
executive's options will become exercisable. Each officer has agreed not to
compete with the Company in the network telecommunications services business
or to solicit customers or employees of the Company during the term of his
employment and for a period of one year following voluntary or involuntary
termination.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FORMATION OF THE COMPANY
The Company was incorporated in April 1994. On April 20, 1994, Chase Capital
Partners ("Chase") and CIBC became principal investors in the Company pursuant
to a stock purchase agreement (as amended, the "Purchase Agreement") whereby
the Company sold each investor 2,475 shares of Series A Preferred Stock at a
price of $1,000 per share and 25,000 shares of Common Stock at a price of
$1.00 per share. On June 10, 1994, Hancock Venture Capital Associates
("Hancock," and together with Chase and CIBC the "Initial Investors") became
party to the Purchase Agreement as a purchaser of 2,475 shares of Series A
Preferred Stock at a price of $1,000 per share and 23,210 shares of Common
Stock at a price of $1.077 per share. See "Description of Capital Stock--
Common Stock" and "--Preferred Stock."
On November 2, 1994, an additional 7,425 shares of the Company's Series A
Preferred Stock and 69,630 shares of the Company's Common Stock were issued to
the Initial Investors for a total purchase price of $7,500,000, on the same
terms.
Pursuant to the Purchase Agreement, the Initial Investors are entitled to
certain contractual preemptive rights and registration rights. Except for the
issuances of Common Stock pursuant to (i) options granted to senior
management, (ii) an acquisition of another business or (iii) a public offering
of equity securities under the Securities Act, if the Company authorizes the
issuance of any equity securities or any securities containing options or
rights to acquire such securities (other than stock dividends), the Company is
required first to offer a portion of such securities to each Initial Investor.
The Company must offer such securities in an amount equal to the total number
of shares purchased by the Initial Investors pursuant to the Purchase
Agreement (including any shares derived therefrom) divided by the total number
of shares outstanding, at the most favorable price and term at which such
securities are offered to any party ("Preemptive Rights").
For so long as any Original Purchaser (as defined herein) owns any Investor
Preferred Stock or Investor Common Stock (as such terms are defined in the
Purchase Agreement), the Company is precluded from, without obtaining the
prior approval of Initial Investors holding at least 66 2/3% of the
outstanding Investor Common Stock, among other things, (i) issuing notes, debt
securities or equity securities of the Company's subsidiaries other than
Preferred Stock ranking junior to the Series A Preferred Stock; (ii) merging,
selling or effecting a recapitalization of the Company; (iii) making or
permitting any subsidiary to make certain loans, advances or guarantees; (iv)
directly or indirectly declaring or paying any dividends or distributions
except for dividends and distributions on the Preferred Stock pursuant to the
Certificate of Designation or for dividends on the Common Stock which are
payable in shares of Common Stock; and (v) directly or indirectly redeeming,
purchasing or acquiring any Common Stock, warrants, options or other rights
except for the puts described in this paragraph. In addition, in the event of
a change of control (as defined in the Purchase Agreement) or at any time five
years after the initial investments, the Original Purchasers holding 30% of
the Investor Common Stock have a put right and a call right which requires the
Company to buy or sell, as the case may be, 25% or more of the Investor
Preferred Stock or Investor Common Stock; provided, that pursuant to the
Recapitalization, no such put or call right shall be exercisable so long as
any of the Notes are outstanding.
Pursuant to a Registration Agreement dated April 20, 1994, as amended and
restated on June 22, 1995 (the "Investors Registration Agreement"), Original
Purchasers holding at least 33 1/3% of the equity securities of the Company
subject to the Investors Registration Agreement may, subject to certain
limitations, require the Company to register all or part of their Common Stock
for public resale. These holders have the right to request (i) up to four
registrations on Form S-1 or any similar form (provided that each such
offering must equal at least $10 million) and (ii) an unlimited number of
"short-form" registrations on Form S-2 or S-3 or any similar form (provided
that each such offering must equal the lesser of $5 million or 20% of the
Registrable Securities (as defined in the Purchase Agreement) then
outstanding); and, in addition, these holders have the right to include their
shares, subject to certain limitations, in any registration of shares of
Common Stock by the Company under the Securities Act (collectively, the
"Registration Rights"). The Company is required to bear all registration
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expenses, other than underwriters' discounts and commissions, for all Company-
initiated registrations and for demand registrations if certain minimum
offering requirements exist. The Investors Registration Agreement provides for
standard cutback and holdback provisions regarding the shares held by the
Original Purchasers.
In connection with the Offering, the Original Purchasers, by the requisite
vote, waived their Preemptive Rights and Registration Rights.
On April 20, 1994, the Company also entered into ancillary agreements with
the Initial Investors and USNCN. The stockholders agreement with the Initial
Investors as amended on June 10, 1994 (the "Stockholders Agreement") generally
restricts, among other things, the transfer of the Common Stock and Preferred
Stock owned by the parties with the exception of stock sold: (i) in an initial
public offering pursuant to an effective registration statement under the
Securities Act, or (ii) in the public market pursuant to Rule 144 under the
Securities Act. The Stockholders Agreement further provides the stockholders
with rights of first refusal in the case of sales of stock of the Company
initiated by stockholders of the Company that are parties to the Stockholders
Agreement ("Rights of First Refusal").
On June 13, 1995, the Company purchased certain assets and assumed certain
liabilities (the "Quest Purchase") of Quest with the consent of Edward H.
Lavin and J. Thomas Elliott, the majority stockholders of the managing general
partners of Quest.
On June 22, 1995, the Initial Investors, together with Northwood Capital
Partners LLC ("Northwood LLC"), Northwood Ventures (together with Northwood
LLC, the "Northwood Entities") and BT Capital Partners, Inc. ("BT") purchased
from the Company 23,760 shares of Series A-2 Preferred Stock at a price of
$1,000 per share and 123,078 shares of Class A Common Stock at a price of
$1.95 per share for an aggregate purchase price for both classes of
$24,000,003 (including, in the case of the Northwood Entities, the retirement
of certain debt of Quest assumed by the Company). On July 21, 1995,
Enterprises & Transcommunications, L.P. ("Enterprises") purchased 2,475 shares
of Series A-2 Preferred Stock at a price of $1,000 per share and 12,821 shares
of Class A Common Stock at a price of $1.95 per share for an aggregate
purchase price of $2,500,000.95 (the Initial Investors, the Northwood
Entities, BT and Enterprises are collectively referred to as the "Original
Purchasers"). Both equity purchases were made under similar terms as the
Purchase Agreement, including Preemptive Rights and Registration Rights.
Pursuant to the Stockholders Agreement, as amended (including, in such
amendment, the addition of all Original Purchasers as parties thereto), the
Board of Directors of the Company consists of nine persons, including one
outside director, two appointed by Mr. Thomas Brandenburg, one appointed by
each of the Initial Investors, one appointed by BT and one appointed by
Enterprises. The Stockholders Agreement between the Company and the Original
Purchasers terminates on April 20, 2004, unless certain minimum stock
ownership requirements are not satisfied or unless the agreement is otherwise
extended by the parties.
In March 1996, the Company caused a recapitalization pursuant to which the
Company (i) issued an aggregate of an additional 110,157 shares of Common
Stock to the Original Purchasers for no consideration in order to settle a
dispute relating to the price per share of the Common Stock paid by the
Original Purchasers stemming from, in part, the Company's operating
performance following the June 22, 1995 investment by the Initial Investors,
the Northwood Entities and BT as compared with the operating performance
projected by the Company at the time of such investment; (ii) caused the
Series A-2 Preferred Stock to be senior to the Series A Preferred Stock with
respect to redemption, dividends and liquidation in further settlement of the
dispute referred to in (i) above; and (iii) increased the number of directors
of the Company to nine in order to permit the addition of an outside member (a
director who is not an employee of the Company and who is not affiliated with
an Original Purchaser) to the board.
CIBC, Chase and BT, who are Original Purchasers, or their affiliates, were
Initial Purchasers in the Offering.
In January 1995, the Company executed a consulting agreement with Eugene A.
Sekulow, a director of the Company, for the period ending December 31, 1996.
Pursuant to the agreement, Mr. Sekulow is entitled to a
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consulting fee of $48,000, payable in twelve monthly installments and $2,500
per day if Mr. Sekulow devotes more than two days per month to the Company.
The Company paid Mr. Sekulow $58,625 for the period ending December 31, 1995
and as of June 1996 has paid Mr. Sekulow $24,000.
In December 1995, the Company executed a promissory note in favor of Mr. J.
Thomas Elliott, President and Chief Executive Officer of the Company whereby
Mr. Elliott promised to pay to the Company $75,000 payable on or before
January 2, 1997.
On July 18, 1996 the Company agreed with Mr. Stephen C. Schwartz, the
founder and former director and officer of USNCN, to repurchase Mr. Schwartz's
interest in USNCN, among other things, for $1.7 million. Upon the closing of
such agreement, the Company acquired the 439,160 shares of common stock of
USNCN, $.01 par value ("USNCN Common Stock") formerly held by Mr. Schwartz.
In January 1996, the Company executed a consulting agreement with Edward H.
Lavin for the period ending January 1, 1997 pursuant to which Mr. Lavin
received 11,000 Restricted Shares of the Common Stock (now Class A Common
Stock) in exchange for consulting services with respect to all matters
relating to the business and marketing of the Company. The Company, which will
also provide certain cash compensation to Mr. Lavin for such services, may
renew the agreement for three month periods; however the maximum term of the
agreement is two years.
RECAPITALIZATION
In connection with the consummation of the Offering, the Certificate of
Incorporation of the Company was amended to provide for the authorization of
two classes of Common Stock, Class A Common Stock and Class B Common Stock
(collectively, the "Common Stock"). The rights of such classes are identical,
except that Class A Common Stock is entitled to one vote per share, while
Class B Common Stock is not entitled to any voting rights, except as required
by law. In addition, each outstanding share of Common Stock of the Company
existing on the date of the Offering was converted into one share of Class A
Common Stock. See "Description of Capital Stock--Common Stock."
As described above, by requisite vote, the Original Purchasers waived their
Preemptive Rights and Registration Rights with respect to the Offering. The
Original Purchasers also approved, and the Company took all necessary action
to effect prior to the consummation of the Offering, the amendment of the
terms of the Series A Preferred Stock and Series A-2 Preferred Stock to
provide for and effectuate the conversion of the shares of each such series of
Preferred Stock into newly issued shares of Class A Common Stock, which
conversion was consummated on September 30, 1996.
Also in connection with the Offering, the Original Purchasers purchased from
the Company shares of its newly created 9% Cumulative Convertible PIK
Preferred Stock, par value $1.00 per share (the "9% Preferred Stock"), for an
aggregate purchase price of $10 million. For a description of certain of the
terms of the 9% Preferred Stock, see "Description of Capital Stock--Preferred
Stock."
The events described under this heading "--Recapitalization" are
collectively referred to as the "Recapitalization."
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STOCK OWNERSHIP
The following table sets forth as of October 31, 1996, the number of shares
of Class A Common Stock and the percentage of the outstanding shares of such
class that are beneficially owned by (i) each person that is the beneficial
owner of more than 5% of the outstanding shares of Class A Common Stock, (ii)
each of the directors and the Named Executive Officers of the Company and
(iii) all of the current directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK (2)
---------------------
NUMBER OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OWNED OF CLASS
- --------------------------------------- ------------ --------
<S> <C> <C>
BT Capital Partners, Inc. ............................... 129,123 16.28%
130 Liberty Street
New York, New York 10017-2070
Chase Capital Partners................................... 174,308 21.97%
380 Madison Ave., 12th Floor
New York, New York 10017-2070
CIBC Wood Gundy Ventures, Inc. .......................... 174,308 21.97%
425 Lexington Avenue
New York, New York 10017-3903
Hancock Venture Partners IV.............................. 172,084 21.69%
One Financial Center, 44th Floor
New York, New York 10017-3903
Enterprises & Transcommunications, L.P. ................. 42,917 5.41%
600 Congress Suite 3000
One American Center
Austin, Texas 78701
Thomas C. Brandenburg (3)(4)(5).......................... 22,216 2.80%
Richard J. Brekka (3)(5)................................. 174,308 21.97%
J. Thomas Elliott (3).................................... 11,000 1.39%
Ronald W. Gavillet (3)(6)................................ 2,888 *
William P. Glasgow (3)(5)................................ 42,917 5.41%
Donald J. Hofmann, Jr. (3)(5)............................ 174,308 21.97%
William A. Johnston (3)(5)............................... 172,084 21.69%
Paul S. Lattanzio (3)(5)................................. 129,123 16.28%
Eugene A. Sekulow........................................ -- --
All directors and executive officers of the Company as a
group (9 persons)....................................... 728,844 91.87%
</TABLE>
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment
power with respect to the shares.
(2) Excludes shares underlying the Initial Warrants issued in connection with
the Offering.
(3) The address of the beneficial owners is the address of the Company listed
elsewhere in this Prospectus.
(4) Includes 10,000 shares subject to a voting trust for David Montville. Mr.
Brandenburg, as the voting trust agent, disclaims beneficial ownership
with respect to the shares held in trust.
(5) Each director disclaims beneficial ownership of any shares of Common Stock
or Preferred Stock which it does not directly own.
(6) These shares are subject to exercisable options held by Mr. Gavillet.
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DESCRIPTION OF THE NOTES
On September 30, 1996, the Company consummated a private placement of 48,500
Units, pursuant to which the Company issued and sold $48.5 million in aggregate
principal amount at maturity of Senior Notes and $36.0 million in aggregate
principal amount at maturity of Convertible Notes. As described elsewhere in
this Prospectus, in connection with the Offering the Company undertook to
consummate the Exchange Offer, pursuant to which the Holders of Old Notes would
be entitled to exchange such Old Notes for New Notes. The following is a
description of the Old Notes, the New Notes and the Convertible Notes.
GENERAL
The Old Notes were and the New Notes will be issued under the Senior Note
Indenture. The Convertible Notes were issued pursuant to the Convertible Note
Indenture. For purposes of this Description of the Notes, the term "Company"
refers to United USN, Inc. and does not include its subsidiaries except for
purposes of financial data determined on a consolidated basis.
The terms of the Senior Notes include those stated in the Senior Note
Indenture and those made a part of the Senior Note Indenture by reference to
the Trust Indenture Act of 1939 as in effect on the date of the Indenture (the
"Trust Indenture Act"). Similarly, the terms of the Convertible Notes include
those stated in the Convertible Note Indenture and those made a part of the
Convertible Note Indenture by reference to the Trust Indenture Act. The
following summaries of certain provisions of the Indentures do not purport to
be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Indentures. The Notes are subject to all
such terms, and holders of the Notes are referred to the applicable Indenture
and the Trust Indenture Act for a complete statement of such terms. Copies of
the Indentures are available from the Company on request. The statements and
definitions of terms under this caption relating to the Notes and the
Indentures are summaries and do not purport to be complete. Such summaries make
use of certain terms defined in the Indentures and are qualified in their
entirety by express reference to the Indentures. Certain terms used herein are
defined below under "--Certain Definitions."
The Old Notes were and the New Notes will be general unsecured obligations of
the Company limited in aggregate principal amount at Stated Maturity to $137
million and will rank pari passu in right of payment with all existing and
future senior unsecured indebtedness of the Company, and will be senior in
right of payment to all existing and future subordinated indebtedness of the
Company. The Convertible Notes are general unsecured obligations of the Company
limited in aggregate principal amount at Stated Maturity to $46 million, are
subordinated in right of payment to the Senior Notes, and rank pari passu in
right of payment with all other existing and future senior unsecured
indebtedness of the Company. The Notes are effectively subordinated, however,
to secured indebtedness of the Company to the extent of the assets securing
that indebtedness (including up to $30 million of indebtedness under a future
Credit Facility). The Company's Subsidiaries will have no direct obligation to
pay amounts due on the Notes and did not and will not guarantee the Notes on
their respective Issue Dates; however, if a Restricted Subsidiary guarantees
any Indebtedness of the Company, such Restricted Subsidiary will be obligated
to guarantee the Senior Notes on a senior basis and the Convertible Notes on a
senior subordinated basis. See "--Certain Covenants--Limitation on Issuances of
Guarantees by Restricted Subsidiaries." As a result, the Notes effectively will
be subordinated to all existing and future third-party indebtedness and other
liabilities of the Company's Subsidiaries (including trade payables). As of
September 30, 1996, the total outstanding indebtedness and other liabilities
(including trade payables and other non-debt obligations) of the Company that
would rank pari passu in right of payment with the Notes was approximately $5.8
million. As of September 30, 1996, the total outstanding indebtedness and other
liabilities (including trade payables and other non-debt obligations) of the
Company's Subsidiaries on a combined consolidated basis (after the elimination
of loans and advances by the Company) was approximately $5.3 million. Of that
amount, approximately $0.6 million in indebtedness was secured by Liens on the
assets of the borrowing Subsidiaries.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. Any rights (other than claims based upon
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valid pari passu loans and advances made by the Company) of the Company and
its creditors, including the holders of Notes, to participate in the
distribution of the assets of any of the Company's Subsidiaries upon any
liquidation or reorganization of any such Subsidiary will be subject to the
prior claims of that Subsidiary's creditors (including trade creditors).
Accordingly, the Company anticipates that the primary source of cash to pay
the Company's obligations under the Notes will be derived from the operations
of the Restricted Subsidiaries. The Indentures permit under limited
circumstances the creation of, or the designation of existing Restricted
Subsidiaries as, Unrestricted Subsidiaries. Such Unrestricted Subsidiaries
will not generally be subject to the covenants applicable to the Company and
the Restricted Subsidiaries. See "Risk Factors--Substantial Leverage" and "--
Holding Company Structure; Source of Repayment of Notes; Effective
Subordination of Notes to Indebtedness of Subsidiaries."
The Convertible Note Indenture does not contain any restrictions on the
payment of dividends or the making of distributions, investments or certain
other restricted payments or any financial covenants and contains no covenants
or other provisions against a dramatic decline in credit quality of the
Convertible Notes, except as described below in "--Right to Require Repurchase
of Convertible Notes Upon a Termination of Trading."
The Old Notes and the Convertible Notes have been designated for trading in
the PORTAL Market.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes are limited in aggregate principal amount at Stated
Maturity to $137 million and will mature on September 30, 2003. The Old Notes
were issued at a discount to their aggregate principal amount to generate
gross proceeds to the Company of approximately $30 million. In addition to the
Old Notes issued as of September 30, 1996, an additional $72 million aggregate
principal amount at Stated Maturity of Senior Notes may be issued pursuant to
the Senior Note Indenture. The Senior Notes will accrete interest at the rate
of 14% per annum, compounded semiannually, to an aggregate principal amount of
$48.5 million by March 30, 2000. Although for U.S. federal income tax purposes
a significant amount of original issue discount, taxable as ordinary income,
will be recognized by a holder as such discount accrues from the Issue Date of
the Senior Notes, no interest will be payable on the Senior Notes prior to
March 30, 2000. See "Certain Federal Income Tax Considerations--Taxation of
the Notes--Original Issue Discount." From and after March 30, 2000, interest
on the Senior Notes will accrue at the rate of 14% per annum and will be
payable in cash semiannually on March 30 and September 30, commencing
September 30, 2000, to the holders of record of Senior Notes at the close of
business on March 15 and September 15 immediately preceding such interest
payment date. Interest on the Senior Notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from
March 30, 2000. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The Convertible Notes are limited in aggregate principal amount at Stated
Maturity to $46 million and will mature on September 30, 2004. The Convertible
Notes were issued at a discount to their aggregate principal amount to
generate gross proceeds to the Company of approximately $28 million. In
addition to the Convertible Notes issued as of September 30, 1996, an
additional $3.1 million aggregate principal amount at Stated Maturity of
Convertible Notes may be issued pursuant to the Convertible Note Indenture.
The Convertible Notes will accrete interest at the rate of 9% per annum,
compounded semiannually, to an aggregate principal amount of $36.0 million by
September 30, 1999. Although for U.S. federal income tax purposes a
significant amount of original issue discount, taxable as ordinary income,
will be recognized by a holder as such discount accretes from the Issue Date
of the Convertible Notes, no interest will be payable on the Convertible Notes
prior to September 30, 1999. See "Certain Federal Income Tax Considerations--
Taxation of the Notes--Original Issue Discount." From and after September 30,
1999, interest on the Convertible Notes will accrue at the rate of 9% per
annum and will be payable in cash semiannually on March 30 and September 30,
of each year commencing March 30, 2000, to the holders of record of
Convertible Notes at the close of business on March 15 and September 15
immediately preceding such interest payment date. Interest on the Convertible
Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from September 30, 1999. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
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If the Company does not comply with certain deadlines set forth in the
Registration Rights Agreement with respect to the conduct of the Exchange
Offer or the registration of either the Senior Notes or the Convertible Notes
for resale under a shelf registration statement, holders of the Senior Notes
and/or the Convertible Notes will be entitled to Special Interest. See
"Registration Rights."
Principal of, premium, if any, and interest and Special Interest, if any, on
the Old Notes and the Convertible Notes is, and on the New Notes will be,
payable, and the Notes may be presented for registration of transfer or
exchange, at the office or agency of the Company maintained for such purpose,
which office shall be maintained in the Borough of Manhattan, The City of New
York. At the option of the Company, interest and Special Interest may be paid
by check mailed to the registered holders at their registered addresses. The
Old Notes and the Convertible Notes were, and the New Notes will be, issued
without coupons and in fully registered form only, in denominations of $1,000
and integral multiples thereof.
CONVERSION RIGHTS OF CONVERTIBLE NOTES
The Convertible Notes are convertible into the Convertible Note Shares, at
the option of the holders of Convertible Notes, at any time after the 60th day
following the date of original issuance of the Convertible Notes and prior to
redemption or final maturity of the Convertible Notes, initially at a
conversion price of $134.08 per share, subject to adjustment (the "Conversion
Price") as described below and as described in "--Additional Invested Equity."
The right to convert Convertible Notes which have been called for redemption
will terminate at the close of business on the business day preceding the
redemption date. In the event that the Company consummates a sale or sales of
any class of Capital Stock for an amount, individually or in the aggregate, in
excess of $5,000,000 (each, a "Reset Event") and at the time of such sale or
sales, the equity valuation of the Company based upon such sale or sales (as
evidenced by a Board Resolution delivered to the Convertible Note Trustee) is
less than $122,500,000, then on the date of the consummation of any such Reset
Event (the "Reset Date"), the Conversion Price shall be adjusted (the
"Conversion Reset") to equal 115% of the price (the "Conversion Reset Price")
at which such sale or sales were consummated; provided, that if such sale or
sales are consummated more than nine months after a Qualified Public Offering
at a total equity valuation of the Company of at least $122,500,000, then no
Conversion Reset will be required. In the event that the Conversion Price
before such calculation shall be equal to or less than the Conversion Reset
Price, then no additional adjustment to the Conversion Price shall be made.
Subject to certain exceptions, the Conversion Price will be subject to
adjustment on the occurrence of certain events including: (i) the payment by
the Company of dividends (or the making of other distributions) with respect
to any class of Capital Stock payable in Common Stock or other shares of the
Company's Capital Stock, (ii) subdivisions, combinations and reclassifications
of Common Stock, (iii) the issuance to all holders of Common Stock of rights,
options or warrants entitling them to subscribe for Common Stock, or of
securities convertible into or exchangeable for shares of Common Stock, in
either case for consideration per share of Common Stock which is less than the
Current Market Price per share of Common Stock (determined as provided in the
Convertible Note Indenture), (iv) the issuance or sale of shares of Common
Stock, or securities convertible into or exchangeable for shares of Common
Stock, for consideration per share of Common Stock which is less than the
Current Market Price per share of Common Stock (determined as provided in the
Convertible Note Indenture), other than the Warrants, (v) the distribution to
all holders of Common Stock of any of the Company's assets, debt securities or
any rights or warrants to purchase securities (excluding those rights and
warrants referred to in clause (iii) above and excluding cash dividends or
other cash distributions from current or retained earnings) and (vi) certain
other events which could have the effect of depriving holders of the
Convertible Notes of all or any of the conversion rights in respect of any
Convertible Note.
No adjustment in the Conversion Price will be required unless such
adjustment would require an increase or decrease of at least 1.0% in the
Conversion Price; provided, that any adjustment which is not made will be
carried forward and taken into account in any subsequent adjustment.
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In addition to the foregoing adjustments, the Company will be permitted to
reduce the Conversion Price as it considers to be advisable in order that any
event treated for United States federal income tax purposes as a dividend of
stock or stock rights will not be taxable to the holders of the Common Stock
or, if that is not possible, to diminish any income taxes that are otherwise
payable because of such event. In the case of any consolidation or merger of
the Company with any other Person (other than one in which no change is made
in the Common Stock), or any sale or transfer of all or substantially all of
the assets of the Company, the holder of any Convertible Note then outstanding
will have the right thereafter to convert such Convertible Note only into the
kind and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock into which such Convertible Note might have been converted
immediately prior to such consolidation, merger, sale or transfer; and
adjustments will be provided for events subsequent thereto that are as nearly
equivalent as practical to the Conversion Price adjustments described above.
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon the then
Closing Price (determined as provided in the Convertible Note Indenture) at
the close of business on the day of conversion. If any Convertible Notes are
surrendered for conversion during the period from the close of business on any
regular record date through and including the next succeeding interest payment
date (except any such Convertible Notes called for redemption), such
Convertible Notes when surrendered for conversion must be accompanied by
payment in next day funds of an amount equal to the interest thereon which the
registered Holder on such record date is to receive. Except as described in
the preceding sentence, no interest will be payable by the Company on
converted Convertible Notes with respect to any interest payment date
subsequent to the date of conversion. No other payment or adjustment for
interest or dividends is to be made upon conversion.
SUBORDINATION OF CONVERTIBLE NOTES
The payment of the principal of and premium, if any, and interest (including
Special Interest, if any) on the Convertible Notes will, to the extent set
forth in the Convertible Note Indenture, be subordinated in right of payment
to the prior payment in full of the Senior Notes and all other obligations of
the Company and the Guarantors, if any, under the Senior Notes, the Senior
Note Guarantees, if any, and the Senior Note Indenture (the "Senior
Indebtedness"). If there is a payment or distribution of assets to creditors
upon any liquidation, dissolution, winding up, reorganization, assignment for
the benefit of creditors, marshalling of assets or any bankruptcy, insolvency
or similar proceedings of the Company or a Guarantor, as applicable, the
holders of all Senior Indebtedness will be entitled to receive payment in full
of all amounts due or to become due thereon or provision for such payment in
money or money's worth must be made before the holders of the Convertible
Notes will be entitled to receive any payment in respect of the principal of
or premium, if any, or interest (including Special Interest, if any) on the
Convertible Notes. In the event of the acceleration of the Maturity of the
Convertible Notes, the holders of all Senior Indebtedness will first be
entitled to receive payment in full in cash of all amounts due thereon or
provision for such payment in money or money's worth before the holders of the
Convertible Notes will be entitled to receive any payment for the principal of
or premium, if any, or interest (including Special Interest, if any) on the
Convertible Notes. No payments on account of principal of or premium, if any,
or interest (including Special Interest, if any) on the Convertible Notes or
on account of the purchase or acquisition of Convertible Notes may be made if
there has occurred and is continuing a default in any payment with respect to
Senior Indebtedness, any acceleration of the maturity of any Senior
Indebtedness or if any judicial proceeding is pending with respect to any such
default.
ADDITIONAL INVESTED EQUITY
If the Company does not achieve consolidated total revenues (calculated in
accordance with GAAP) of at least $8.5 million for the period from June 1,
1997 through June 30, 1997 and if, by September 30, 1997, the Company has not
either (i) consummated a Qualified Public Offering or (ii) been sold pursuant
to a Qualified Sale of the Company, the Company shall by such date be required
to either (A) obtain $10.0 million of
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Additional Invested Equity or (B) (i) grant to the holders of the Convertible
Notes the right to purchase for $10.0 million additional convertible
securities of the Company convertible into 16 2/3% of the Common Stock on a
fully diluted basis (subject to certain exceptions) after giving effect to the
issuance of such additional convertible securities, (ii) grant to the holders
of the Convertible Notes the right to purchase warrants (the "Additional
Warrants") exercisable for Common Stock representing up to 5% of the Common
Stock of the Company at a purchase price of $.01 per share (subject to certain
adjustments, if required) on a fully diluted basis (subject to certain
exceptions) after giving effect to the issuance of such warrants, and (iii)
adjust the Conversion Price for the Convertible Notes shall be adjusted by
dividing the Conversion Price in effect immediately prior to the issuance of
such convertible securities and warrants by 1.15.
OPTIONAL REDEMPTION
The Old Notes are not and the New Notes will not be redeemable at the option
of the Company prior to September 30, 2001, subject to provisions of the
following paragraph. Thereafter, the Senior Notes will be subject to
redemption at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount at Stated Maturity thereof) set forth below,
plus accrued and unpaid interest (if any) and Special Interest (if any), if
redeemed during the twelve months beginning September 30 of each year
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................... 109.0%
2002........................................................... 104.5%
</TABLE>
Notwithstanding the foregoing, in the event that on or prior to September
30, 1999, the Company consummates one or more Public Equity Offerings of its
Common Stock or issues or sells Qualified Stock of the Company to a Strategic
Investor, in each case in an aggregate amount equal to or exceeding $40
million, up to a maximum of 25% of the aggregate principal amount at Stated
Maturity of the Senior Notes will be redeemable at the option of the Company
out of the net proceeds of such sale or sales to the extent that such proceeds
consist of cash or cash equivalents. Such Senior Notes will be redeemable on
not less than 30 nor more than 60 days' prior notice at a redemption price
equal to 114% of the Accreted Value of the Senior Notes to be redeemed on the
redemption date plus accrued and unpaid interest, if any, and Special
Interest, if any, to the redemption date. Any such redemption shall occur
within 90 days after (but not before) such sale or last such sale in the case
of a series of related transactions; provided, that immediately after giving
effect to such redemption not less than 75% of the aggregate principal amount
at Stated Maturity of the Senior Notes originally issued remain outstanding.
The Convertible Notes are not redeemable prior to September 30, 2000. During
the period from September 30, 2000 to September 30, 2002 the Company may
redeem all but not less than all of the Convertible Notes, upon not less than
30 nor more than 60 days' notice, if the Closing Price (as defined in the
Convertible Note Indenture) of the Common Stock is at least 150% of the
Conversion Price for thirty consecutive days, at a redemption price equal to
100% of the principal amount at Stated Maturity thereof plus accrued and
unpaid interest, if any, and Special Interest, if any; provided, that if the
Common Stock is not traded on a U.S. national securities exchange or approved
for trading on an established automated over-the-counter trading market in the
United States and not quoted on a consolidated transaction reporting tape, the
Convertible Notes will not be redeemable during such period. On or after
September 30, 2002, the Convertible Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 nor more 60
days' notice, at 100% of the principal amount thereof at Stated Maturity, plus
accrued and unpaid interest, if any, and Special Interest, if any.
MANDATORY REDEMPTION
Except as set forth under "--Repurchase at the Option of Holders upon a
Change of Control,"
"--Asset Sales," and "--Right to Require Repurchase of Convertible Notes Upon
a Termination of Trading," the Company is not required to make mandatory
redemption payments or sinking fund payments with respect to the Notes.
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REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes shall have
the right to require the Company to repurchase all or any part (equal to
$1,000 principal amount or an integral multiple thereof) of such holder's
Notes pursuant to an irrevocable and unconditional offer described below (the
"Change of Control Offer") at a purchase price (the "Change of Control
Purchase Price") equal to 101% of the Accreted Value of such Notes (or
portions thereof) on any Change of Control Payment Date (as defined herein)
occurring prior to March 30, 2000, plus accrued and unpaid interest, if any,
and Special Interest, if any, thereon to such Change of Control Payment Date,
or 101% of the principal amount at Stated Maturity of such Notes (or portions
thereof), on any Change of Control Payment Date occurring on or after March
30, 2000 plus accrued and unpaid interest, if any, and Special Interest, if
any, to such Change of Control Payment Date.
Within 30 days following any Change of Control, the Company or the
applicable Trustee (at the expense of the Company) shall mail a notice to each
holder stating, among other things: (1) that a Change of Control Offer is
being made pursuant to the covenant in the applicable Indenture entitled
"Repurchase at the Option of Holders upon a Change of Control" and that all
Notes properly tendered will be accepted for payment; (2) the Change of
Control Purchase Price and the purchase date (the "Change of Control Payment
Date"), which shall be no earlier than 30 days nor later than 60 days from the
date such notice is mailed; (3) that any Notes or portions thereof not
properly tendered will continue to accrete in value or accrue interest, as the
case may be, and accrue Special Interest, if applicable; (4) that, unless the
Company defaults in the payment of the Change of Control Purchase Price, all
Notes or portions thereof accepted for payment pursuant to the Change of
Control Offer shall cease to accrete in value or accrue interest, as the case
may be, and accrue Special Interest, if applicable, from and after the Change
of Control Payment Date; (5) that holders electing to have any Notes or
portions thereof purchased pursuant to a Change of Control Offer will be
required to surrender the Notes, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Notes completed, to a paying agent (the
"Paying Agent") at the address specified in the notice prior to the close of
business on the third Business Day preceding the Change of Control Payment
Date; (6) that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the holder, the
principal amount of Notes delivered for purchase, and a statement that such
holder is withdrawing his election to have such Notes or portions thereof
purchased; (7) that holders whose Notes are being purchased only in part will
be issued new Notes equal in principal amount to the unpurchased portion of
the Note or Notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount at Stated Maturity or an integral multiple thereof;
and (8) the instructions and any other information necessary to enable holders
to accept a Change of Control Offer or effect withdrawal of such acceptance.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of
Notes pursuant to a Change of Control Offer.
On the Change of Control Payment Date, the Company will (1) accept for
payment Notes or portions thereof properly tendered pursuant to the Change of
Control Offer, (2) deposit with the Paying Agent in immediately available
funds an amount equal to the Change of Control Purchase Price in respect of
all Notes or portions thereof so tendered, including accrued and unpaid
interest, if any, and Special Interest, if any, thereon and (3) deliver, or
cause to be delivered, to the applicable Trustee the Notes so accepted
together with an Officers' Certificate listing the Notes or portions thereof
tendered to the Company and accepted for payment. The Paying Agent shall
promptly mail to each holder of Notes so accepted payment in an amount equal
to the Change of Control Purchase Price, including interest and Special
Interest, if applicable, for such Notes and the applicable Trustee shall
promptly authenticate and mail to each holder a new Note equal in principal
amount at Stated Maturity to any unpurchased portion of the Notes surrendered,
if any; provided, that each such new Note shall be in a principal amount at
Stated Maturity of $1,000 or any integral multiple thereof. The Company will
announce publicly the results of a Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
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The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase Notes upon a Change of Control may deter
a third party from acquiring the Company in a transaction that constitutes a
Change of Control. If a Change of Control Offer is made, there can be no
assurance that the Company will have sufficient funds to pay the Change of
Control Purchase Price for all Notes tendered by holders seeking to accept the
Change of Control Offer. In addition, instruments governing other Indebtedness
of the Company may prohibit the Company from purchasing any Notes prior to
their Stated Maturity, including pursuant to a Change of Control Offer. In the
event that a Change of Control Offer occurs at a time when the Company does
not have sufficient available funds to pay the Change of Control Purchase
Price for all Notes tendered pursuant to such offer or at a time when the
Company is prohibited from purchasing the Notes (and the Company is unable
either to obtain the consent of the holders of the relevant Indebtedness or to
repay such Indebtedness), an Event of Default (as defined herein) would occur
under the Indentures. In addition, one of the events that constitutes a Change
of Control under the Indentures is a sale, conveyance, transfer or lease of
all or substantially all of the assets of the Company or of the Company and
its Restricted Subsidiaries taken as a whole. The Indentures will be governed
by New York law, and there is no established quantitative definition under New
York law of "substantially all" of the assets of a corporation. Accordingly,
if the Company and/or its Restricted Subsidiaries were to engage in a
transaction in which it or they disposed of less than all of the assets of the
Company or less than all of the assets of the Company and its Restricted
Subsidiaries taken as a whole, a question of interpretation could arise as to
whether such disposition was of "substantially all" of its or their assets, as
the case may be, and whether the Company was required to make a Change of
Control Offer.
Except as described herein with respect to a Change of Control and, except
with regard to the Convertible Notes, the covenant described below in "--Right
to Require Repurchase of Convertible Notes Upon a Termination of Trading,"
neither Indenture contains any other provisions that permit holders of Notes
to require that the Company repurchase or redeem Notes in the event of a
takeover, recapitalization or similar restructuring. The foregoing provisions
may not necessarily afford the holders of the Notes protection in the event of
a highly leveraged transaction, including a reorganization, restructuring,
merger or other similar transaction involving the Company, that may adversely
affect the holders because (i) such transactions may not involve a shift in
voting power or beneficial ownership or, even if they do, may not involve a
shift of the magnitude required under the definition of Change of Control to
require the Company to make a Change of Control Offer or (ii) such
transactions may include an actual shift in voting power or beneficial
ownership to a Strategic Investor or to a Permitted Holder which is excluded
under the definition of Change of Control from the amount of shares involved
in determining whether or not the transaction involves a shift of the
magnitude required to trigger the provisions.
ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale (as defined herein) unless (i) no Event of Default
under the Indentures shall have occurred and be continuing or shall occur as a
consequence thereof; (ii) the Company or such Restricted Subsidiary, as the
case may be, receives net consideration at the time of such Asset Sale at
least equal to the Fair Market Value (as evidenced by a Board Resolution of
the Company delivered to the applicable Trustee) of the Property or assets
sold or otherwise disposed of; (iii) at least 75% of the consideration
received by the Company or such Restricted Subsidiary for such Property or
assets consists of Cash Proceeds; and (iv) the Company or such Restricted
Subsidiary, as the case may be, uses the Net Cash Proceeds from such Asset
Sale in the manner set forth below.
Within 270 days after any Asset Sale, the Company or such Restricted
Subsidiary, as the case may be, may at its option reinvest an amount equal to
the Net Cash Proceeds (or any portion thereof) from such Asset Sale in
Telecommunications Assets and/or (ii) apply an amount equal to such Net Cash
Proceeds (or remaining Net Cash Proceeds) to the permanent reduction of
Indebtedness of the Company (other than Indebtedness to a Restricted
Subsidiary) that is pari passu in right of payment with the Notes or to the
permanent reduction of Indebtedness of any Restricted Subsidiary that is pari
passu in right of payment with such Restricted Subsidiary's Guarantee, if
applicable (other than Indebtedness to the Company or another Restricted
Subsidiary). Any Net Cash Proceeds
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from any Asset Sale that are not used to reinvest in Telecommunications Assets
and/or reduce pari passu Indebtedness of the Company or Indebtedness of its
Restricted Subsidiaries shall constitute Excess Proceeds.
If at any time the aggregate amount of Excess Proceeds calculated as of such
date exceeds $5 million, the Company shall, on a date (the "Asset Sale Payment
Date") which shall be no earlier than 30 days nor later than 40 days
subsequent to the date on which the Company sends notice to Holders of the
Asset Sale Offer, which shall be within 30 days of the date on which such
Excess Proceeds exceed $5 million, use such Excess Proceeds to make offers (A)
to purchase (each an "Asset Sale Offer") (i) first, on a pro rata basis from
all holders of Senior Notes in an aggregate principal amount equal to the
maximum principal amount that may be purchased out of the then-existing Excess
Proceeds, at a purchase price (the "Asset Sale Purchase Price") in cash equal
to 100% of the Accreted Value of such Senior Notes on any Asset Sale Payment
Date occurring prior to March 30, 2000, plus accrued and unpaid interest, if
any, and Special Interest, if any, to the Asset Sale Payment Date, or 100% of
the principal amount at Stated Maturity of such Senior Notes on any Asset Sale
Payment Date occurring on or after March 30, 2000, plus accrued and unpaid
interest, if any, and Special Interest, if any, to such Asset Sale Payment
Date, and (ii) thereafter, if any Excess Proceeds remain upon completion of
such purchases of the Senior Notes, on a pro rata basis from all holders of
Convertible Notes, in an aggregate principal amount equal to the maximum
principal amount that may be purchased out of Excess Proceeds, at an Asset
Sale Purchase Price in cash equal to 100% of the Accreted Value of such
Convertible Notes on any Asset Sale Payment Date occurring prior to September
30, 1999, plus accrued and unpaid interest, if any, and Special Interest, if
any, to the Asset Sale Payment Date, or 100% of the principal amount at Stated
Maturity of such Convertible Notes on any Asset Sale Payment Date occurring on
or after September 30, 1999, plus accrued and unpaid interest, if any, and
Special Interest, if any, to such Asset Sale Payment Date, in accordance with
the procedures set forth in the applicable Indenture and (B) to the
substantially concurrent repayment or redemption of Pari Passu Indebtedness
(if any) if required by the instruments relating to such Pari Passu
Indebtedness (which repayment or redemption, in the case of a revolving credit
arrangement or multiple advance arrangement, reduces the commitment
thereunder). The Excess Proceeds to be so applied may be applied such that the
portion to be applied to the repayment or redemption of Pari Passu
Indebtedness shall not exceed an amount equal to the product obtained by
multiplying such Excess Proceeds by a fraction, the numerator of which is the
outstanding principal amount of Pari Passu Indebtedness that, pursuant to the
instruments relating thereto, is required to be repaid or redeemed with
proceeds from such Asset Sale or Asset Sales and the denominator of which is
the sum of the (i) aggregate principal amount of the Senior Notes then
outstanding plus (ii) the aggregate principal amount of outstanding Pari Passu
Indebtedness that, pursuant to the instruments relating thereto, is required
to be repaid or redeemed with proceeds from such Asset Sale or Asset Sales.
Upon completion of any Asset Sale Offer (including payment of the Asset Sale
Purchase Price), any surplus Excess Proceeds that were the subject of such
offer shall cease to be Excess Proceeds, and the Company may then use such
amounts for general corporate purposes.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of
Notes pursuant to an Asset Sale Offer.
RIGHT TO REQUIRE REPURCHASE OF CONVERTIBLE NOTES UPON A TERMINATION OF TRADING
In the event of any Termination of Trading occurring after the Issue Date
and on or prior to Maturity, each holder of Convertible Notes will have the
right, at the holder's option, to require the Company to repurchase all or any
part of such holder's Convertible Notes on the date (the "Repurchase Date")
that is 30 days after the date the Company gives notice of the Termination of
Trading as described below at a price (the "Repurchase Price") equal to 100%
of the Accreted Value of such Convertible Notes on any Repurchase Date
occurring prior to September 30, 1999, together with accrued and unpaid
interest, if any, and Special Interest, if any, thereon to the Repurchase
Date, or 100% of the principal amount at Stated Maturity of such Convertible
Notes on any Repurchase Date occurring on or after September 30, 1999,
together with accrued and unpaid interest, if any, and Special Interest, if
any, thereon to the Repurchase Date. On or prior to the Repurchase Date, the
Company shall deposit with the Convertible Note Trustee or a Paying Agent an
amount of money sufficient to pay the Repurchase Price of the Convertible
Notes which are to be repaid on or promptly following the Repurchase Date.
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Failure by the Company to provide timely notice of a Termination of Trading,
as provided for below, or to repurchase the Convertible Notes when required
under the preceding paragraph will result in an Event of Default under the
Convertible Note Indenture whether or not such repurchase is permitted by the
subordination provisions of the Convertible Note Indenture.
On or before the 15th day after the occurrence of a Termination of Trading,
the Company is obligated to mail to all holders of Convertible Notes a notice
of the occurrence of such Termination of Trading, the Repurchase Date, the
date by which the repurchase right must be exercised, the Repurchase Price for
Convertible Notes and the procedures which the holder must follow to exercise
this right. To exercise the repurchase right, the holder of a Convertible Note
must deliver, on or before the close of business on the Repurchase Date,
irrevocable written notice to the Company (or an agent designated by the
Company for such purpose) and to the Convertible Note Trustee of the holder's
exercise of such right, together with the certificates evidencing the
Convertible Notes with respect to which the right is being exercised, duly
endorsed for transfer. Such written notice is irrevocable.
A "Termination of Trading," shall occur if the Common Stock (or other common
stock into which the Convertible Notes are then convertible) had been listed
for trading on a U.S. national securities exchange or approved for trading on
an established automated over-the-counter trading market in the United States
and are thereafter neither so listed nor so approved.
The right to require the Company to repurchase Convertible Notes as a result
of the occurrence of a Termination of Trading could create an Event of Default
under the Senior Note Indenture, as a result of which any repurchase could,
absent a waiver, be blocked by the subordination provisions of the Convertible
Notes. Failure by the Company to repurchase the Convertible Notes when
required will result in an Event of Default under the Convertible Note
Indenture whether or not such repurchase is permitted by the subordination
provisions. The Company's ability to pay cash to the holders of Convertible
Notes upon a repurchase may be limited by certain financial covenants
contained in the other then existing Indebtedness of the Company.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of
Convertible Notes pursuant to an offer to repurchase upon a Termination of
Trading.
The foregoing provisions would not necessarily afford holders of the
Convertible Notes protection in the event of highly leveraged or other
transactions involving the Company or the Restricted Subsidiaries that may
adversely affect such holders. In addition, the foregoing provisions may
discourage open market purchases of the Common Stock or a non-negotiated
tender or exchange offer for such Common Stock and, accordingly, may limit a
stockholder's ability to realize a premium over the market price of the Common
Stock in connection with any such transaction.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Senior Note Indenture
and, where expressly indicated, the Convertible Note Indenture. Certain terms
capitalized below but not defined shall have the meanings ascribed to them
under the caption "Certain Definitions."
Limitation on Indebtedness
The Company will not, and will not permit its Restricted Subsidiaries to,
directly or indirectly, incur any Indebtedness (including Acquired
Indebtedness), and the Company will not issue any Disqualified Stock or permit
any of its Restricted Subsidiaries to issue any Disqualified Stock; provided,
that the Company may incur Indebtedness or issue Disqualified Stock if, after
giving effect to such issuance or incurrence on a pro forma basis, the
Indebtedness to Operating Cash Flow Ratio of the Company does not exceed 5 to
1.0.
The foregoing limitation will not apply to: (a) Indebtedness existing under
the Credit Facility; provided, that the aggregate principal amount of all such
Indebtedness under the Credit Facility, when taken together with
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all Indebtedness of the Company then outstanding which was permitted to have
been incurred under clause (j) below, shall not exceed $45 million at any one
time outstanding, up to $30 million of which may be secured; (b) the Existing
Indebtedness; (c) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness owing to any of its respective
Wholly-Owned Restricted Subsidiaries; provided, that any such Indebtedness is
junior and subordinate to the Notes and Guarantees, if any, and such
Indebtedness is held at all times by the Company or a Wholly-Owned Restricted
Subsidiary of the Company; (d) Indebtedness of any Restricted Subsidiary to
the Company or a Wholly-Owned Restricted Subsidiary of the Company; (e) the
incurrence by the Company or any of its Restricted Subsidiaries of Interest
Hedging Obligations with respect to any floating rate Indebtedness that is
permitted by the covenant described in this paragraph; (f) the incurrence by
the Company or any of its Restricted Subsidiaries of Indebtedness evidenced by
the Senior Notes or Senior Note Guarantees, if any, issued pursuant to the
Senior Note Indenture and by the Convertible Notes or Convertible Note
Guarantees, if any, issued pursuant to the Convertible Note Indenture; (g)
Indebtedness in respect of performance, surety or appeal bonds provided by the
Company in the ordinary course of business; (h) Vendor Financing not to exceed
an aggregate principal amount of $5 million at any one time outstanding; (i)
the incurrence by the Company or any of its Restricted Subsidiaries of
Refinancing Indebtedness issued in exchange for, or the proceeds of which are
used to refinance, repurchase, replace, refund or defease ("Refinance" and
correlatively, "Refinanced" and "Refinancing") Indebtedness permitted pursuant
to clause (b) or (f) of this paragraph; provided, that (i) the amount of such
Refinancing Indebtedness shall not exceed the principal amount of, premium, if
any, and accrued interest (and Special Interest on the Notes) on the
Indebtedness so Refinanced (or if such Indebtedness was issued with original
issue discount, the original issue price plus amortization of the original
issue discount at the time of the repayment of such Indebtedness) plus the
fees, expenses and costs of such Refinancing and reasonable prepayment
premiums, if any, in connection therewith, (ii) such Refinancing Indebtedness
shall have a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being Refinanced, (iii) such Refinancing Indebtedness shall have
an Average Life equal to or greater than the Average Life of the Indebtedness
being Refinanced, (iv) if the Indebtedness being Refinanced is subordinated in
right of payment to the Senior Notes, such Refinancing Indebtedness shall be
subordinate in right of payment to the Senior Notes on terms at least as
favorable to the Holders of Senior Notes as those contained in the
documentation governing the Indebtedness being so Refinanced, and (v) no
Restricted Subsidiary shall incur Refinancing Indebtedness to Refinance
Indebtedness of the Company or another Subsidiary; and (j) Indebtedness of the
Company not otherwise permitted to be incurred pursuant to the covenant
described in this paragraph in an amount which shall not exceed $5 million at
any one time outstanding and which amount shall reduce the amount permitted to
be incurred under clause (a) above.
In the event that the Company or any Restricted Subsidiary has incurred
Indebtedness pursuant to clause (c) of the second paragraph of this covenant
owing to a Restricted Subsidiary and that Restricted Subsidiary thereafter
does not remain a "Restricted Subsidiary" as defined in the Senior Note
Indenture, the aggregate principal amount of such Indebtedness of the Company
or a Restricted Subsidiary, as applicable, owing to such Person at the time of
such a change in Restricted Subsidiary status that was at any time incurred
pursuant to clause (c) of the second paragraph of this covenant, shall be
deemed to be Indebtedness incurred by the Company or a Restricted Subsidiary,
as the case may be, at the time of such change in Restricted Subsidiary
status.
Indebtedness incurred by any Person that is not a Restricted Subsidiary of
the Company, which Indebtedness is outstanding at the time such Person becomes
a Restricted Subsidiary of the Company, or is merged into or consolidated
with, the Company or a Restricted Subsidiary shall be deemed to have been
incurred, at the time such Person becomes a Restricted Subsidiary, or is
merged into or consolidated with the Company or a Restricted Subsidiary. A
guarantee permitted by this covenant to be incurred by the Company or a
Restricted Subsidiary of Indebtedness otherwise permitted to be incurred
pursuant to this covenant is not considered a separate incurrence for purposes
of this covenant.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Indentures provide that the Company may not permit any Restricted
Subsidiary, directly or indirectly, to guarantee any Indebtedness of the
Company ("Guaranteed Indebtedness") unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Senior
Note Indenture providing
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for a Guarantee of payment of the Senior Notes by such Restricted Subsidiary
(a "Senior Note Guarantee") and a supplemental indenture to the Convertible
Note Indenture providing for a Guarantee of payment of the Convertible Notes
by such Restricted Subsidiary (a "Convertible Note Guarantee") and (ii) such
Restricted Subsidiary waives and will not in any manner whatsoever claim or
take the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Guarantee, provided, that any Restricted Subsidiary may guarantee any Credit
Facility so long as such Restricted Subsidiary enters into a Guarantee ranking
pari passu with its guarantee under such Credit Facility. If the Guaranteed
Indebtedness is pari passu with the Notes, then the guarantee of such
Guaranteed Indebtedness shall be pari passu with or subordinated to the
Guarantee; and if the Guaranteed Indebtedness is subordinated to the Notes,
then the guarantee of such Guaranteed Indebtedness shall be subordinated to
the Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes. In addition, each Convertible Note Guarantee of a
Restricted Subsidiary will be subordinated to the Senior Note Guarantee of
such Restricted Subsidiary.
Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary
shall provide by its terms that it shall be automatically and unconditionally
released and discharged upon the release or discharge of the guarantee which
resulted in the creation of such Restricted Subsidiary's Guarantee, except a
discharge or release by, or as a result of, payment under such guarantee.
Limitation on Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, create, incur, assume or suffer to
exist any Liens of any kind, other than Permitted Liens, on or with respect to
any of its Property or assets now owned or hereafter acquired, or any interest
therein or any income or profits therefrom, without effectively providing that
the Notes shall be secured equally and ratably with or prior to (and provided
that the Senior Notes shall be secured prior to any secured obligation that is
subordinated in right of payment to the Senior Notes) the obligations so
secured for so long as such obligations are so secured.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, assume, guarantee or otherwise become
liable with respect to any Sale and Leaseback Transaction, unless (i) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale and Leaseback Transaction at least
equal to the Fair Market Value (as evidenced by a Board Resolution delivered
to the Trustee) of the Property or assets subject to such transaction; (ii)
the Attributable Indebtedness of the Company or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted to be
incurred by the covenant described under "--Limitation on Indebtedness" and
any Liens granted thereby would be permitted by the covenant described under
"--Limitation on Liens;" and (iii) the Net Cash Proceeds from such transaction
are applied in accordance with the provisions described under "--Asset Sales"
as if such proceeds resulted from an Asset Sale.
Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, make any Restricted Payment unless, at the time of
and after giving effect to such proposed Restricted Payment (i) no Default or
Event of Default under the Senior Note Indenture shall have occurred and be
continuing or shall occur as a consequence thereof; (ii) after giving effect,
on a pro forma basis, to such Restricted Payment and the incurrence of any
Indebtedness the net proceeds of which are used to finance such Restricted
Payment, the Company could incur at least $1.00 of additional Indebtedness
pursuant to the first paragraph of "--Limitation on Indebtedness;" and (iii)
after giving effect to such Restricted Payment on a pro forma basis, the
aggregate amount expended or declared for all Restricted Payments after the
Issue Date does not exceed the sum of (A) 50% of the Consolidated Net Income
of the Company (or, if Consolidated Net Income shall be a deficit, minus 100%
of such deficit) for the period (taken as one accounting period) beginning on
the last day of the fiscal
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quarter immediately preceding the Issue Date and ending on the last day of the
fiscal quarter immediately preceding the date of such Restricted Payment, plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company subsequent
to the Issue Date from the issuance or sale (other than to a Subsidiary) of
shares of its Qualified Stock, including Qualified Stock issued upon the
conversion of convertible debt (other than any conversion of the Convertible
Notes) or the exercise of options, warrants or rights to purchase Qualified
Stock, plus (C) 100% of the amount of any Indebtedness of the Company or any
of its Restricted Subsidiaries (as expressed on the face of a balance sheet in
accordance with GAAP), or the carrying value of any Disqualified Stock, which
has been converted into, exchanged for or satisfied by the issuance of shares
of Qualified Stock of the Company subsequent to the Issue Date, less the
amount of any cash or the value of any other Property distributed by the
Company or its Restricted Subsidiaries upon such conversion, exchange or
satisfaction, plus (D) 100% of the net reduction in Investments, subsequent to
the Issue Date, in any Person, resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers
of Property (but only to the extent such interest, dividends, repayments or
other transfers of Property are not included in the calculation of
Consolidated Net Income), in each case to the Company or any Restricted
Subsidiary from any Person (including, without limitation, from Unrestricted
Subsidiaries) or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed in the case of any Person the amount of
Investments previously made by the Company or any Restricted Subsidiary in
such Person and in each such case which was treated as a Restricted Payment,
minus (E) 100% of the amount of Investments made pursuant to clauses (v),
(vi), (vii) and (viii) of the following paragraph subsequent to the Issue
Date.
The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the Senior Note Indenture; (ii) retiring (A) any Capital
Stock of the Company or any Restricted Subsidiary of the Company or (B)
Indebtedness of the Company that is subordinated in right of payment to the
Notes or (C) Indebtedness of a Restricted Subsidiary of the Company, in
exchange for, or out of the proceeds of the substantially concurrent sale of
Qualified Stock of the Company; (iii) so long as no Default or Event of
Default under the Senior Note Indenture shall have occurred and be continuing
or shall occur as a consequence thereof, retiring any Indebtedness of the
Company subordinated in right of payment to the Notes in exchange for, or out
of the proceeds of, the substantially concurrent incurrence of Indebtedness of
the Company (other than Indebtedness to a Subsidiary of the Company);
provided, that such new Indebtedness (A) is subordinated in right of payment
to the Notes at least to the same extent as, (B) has an Average Life at least
as long as, and (C) has no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal under the Indebtedness so
retired; (iv) so long as no Default or Event of Default under the Senior Note
Indenture shall have occurred and be continuing or shall occur as a
consequence thereof, retiring any Indebtedness of a Restricted Subsidiary of
the Company in exchange for, or out of the proceeds of, the substantially
concurrent incurrence of Indebtedness of the Company or any Restricted
Subsidiary that is permitted under the covenant described under "--Limitation
on Indebtedness" and that (A) is not secured by any assets of the Company or
any Restricted Subsidiary to a greater extent than the retired Indebtedness
was so secured, (B) has an Average Life at least as long as the retired,
purchased, redeemed or acquired Indebtedness and (C) is subordinated in right
of payment to the Notes or the Guarantees, as applicable, at least to the same
extent as the retired Indebtedness; (v) so long as no Default or Event of
Default under the Senior Note Indenture shall have occurred and be continuing
or shall result as a consequence thereof, purchasing, redeeming, retiring or
acquiring any Capital Stock of the Company or any Restricted Subsidiary of the
Company held by any member or former member of the Company's (or any of its
Subsidiaries') management pursuant to any management agreement or stock option
plan if in effect on the Issue Date or upon the death, disability, retirement
or termination of employment of such members; provided, that the aggregate
price paid for all such retired Common Stock shall not exceed, in the
aggregate, the sum of $1 million plus the aggregate Cash Proceeds received by
the Company from any reissuance of such Common Stock by the Company to members
of management of the Company and its Subsidiaries; (vi) so long as no Default
or Event of Default under the Senior Note Indenture shall have occurred and be
continuing or shall occur as a consequence thereof, making loans to
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members of management of the Company as required pursuant to employment
agreements with such members, in an aggregate principal amount not to exceed
$1 million; provided, that any repayment of such loans (but only to the extent
such payments are not included in the calculation of Consolidated Net Income
of the Company) shall reduce the amount of such Investments; (vii) so long as
no Default or Event of Default under the Senior Note Indenture shall have
occurred and be continuing or shall occur as a consequence thereof, making
Investments in Joint Ventures in an aggregate amount not to exceed $10
million; provided, that any repayment of loans or advances, return of capital
or other transfer of Property (but only to the extent such distributions are
not included in the calculation of Consolidated Net Income of the Company)
shall reduce the amount of such Investments; and (viii) so long as no Default
or Event of Default under the Senior Note Indenture shall have occurred and be
continuing, the Company may redeem Convertible Notes pursuant to the terms of
the Convertible Note Indenture or repurchase Convertible Notes pursuant to a
Change of Control Offer, an Asset Sale Offer or a repurchase offer upon a
Termination of Trading of the Common Stock pursuant to the terms of the
Convertible Note Indenture.
Not later than the date of making of any Restricted Payment or any
Investment made pursuant to clause (vii) of the previous paragraph, the
Company shall deliver to the Senior Note Trustee an Officers' Certificate
stating that such Restricted Payment or Investment is permitted and setting
forth the basis upon which the required calculations were computed, which
calculations may be based upon the Company's latest available financial
statements.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective or enter
into an encumbrance or restriction (other than pursuant to law or regulation)
on the ability of any Restricted Subsidiary (i) to pay dividends or make any
other distributions in respect of its Capital Stock or pay any Indebtedness or
other obligation owed to the Company or any Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any Restricted
Subsidiary of the Company; or (iii) to transfer any of its Property or assets
to the Company or any other Restricted Subsidiary of the Company, except: (a)
any encumbrance or restriction existing as of the Issue Date pursuant to the
Senior Note Indenture or the Convertible Note Indenture or the Existing
Indebtedness; (b) any encumbrance or restriction pursuant to an agreement
relating to an acquisition of assets or Property, so long as the encumbrances
or restrictions in any such agreement relate solely to the assets or Property
so acquired (and are not or were not created in anticipation of or in
connection with the acquisition thereof); (c) any encumbrance or restriction
relating to any Indebtedness of any Restricted Subsidiary existing on the date
on which such Restricted Subsidiary is acquired by the Company or any
Restricted Subsidiary (other than Indebtedness incurred by such Restricted
Subsidiary in connection with or in anticipation of its acquisition); (d)
customary provisions restricting subletting or assignment of any lease
governing a leasehold interest of the Company or any Restricted Subsidiary or
customary provisions in any telecommunications resale agreements (including,
without limitation, the existing Ameritech Resale Agreements, the NYNEX Resale
Agreement and the long distance agreements of the Company), license agreements
or similar agreements that restrict the assignment of such agreement or any
rights thereunder; (e) any temporary encumbrance or restriction with respect
to a Restricted Subsidiary pursuant to an agreement that has been entered into
for the sale or disposition of all or substantially all of the Capital Stock
of, or Property and assets of, such Restricted Subsidiary; (f) any restriction
on the sale or other disposition of assets or Property securing Indebtedness
as a result of a Permitted Lien on such assets or Property permitted by the
covenant described under "--Limitation on Liens;" and (g) any encumbrance or
restriction that amends, extends, refinances, refunds, renews or replaces any
agreement described in clauses (a) through (c) whether or not among the same
parties, provided, that the terms and conditions of any such encumbrance or
restriction are no less favorable to the holders of the Senior Notes than
those under or pursuant to the agreement amended, extended, refinanced,
refunded, renewed or replaced.
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Company (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Restricted Subsidiary and (ii)
shall not permit any Person other than the Company or a Restricted Subsidiary
to own any Capital Stock of any Restricted Subsidiary other than directors
qualifying shares, except
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for (a) a sale of 100% of the Capital Stock of a Restricted Subsidiary sold in
a transaction not prohibited by the covenant described under "--Asset Sales";
(b) Capital Stock of a Restricted Subsidiary issued and outstanding on the
Issue Date and held by Persons other than the Company or any Restricted
Subsidiary; (c) Capital Stock of a Restricted Subsidiary issued and
outstanding prior to the time that such Person becomes a Restricted Subsidiary
so long as such Capital Stock was not issued in contemplation of such Person's
becoming a Restricted Subsidiary or otherwise being acquired by the Company;
(d) not more than ten percent of the Common Stock of USN Solutions, Inc. on a
fully diluted basis issued pursuant to the exercise of the option (the "USN
Solutions Option") contemplated by that certain Memorandum of Understanding,
dated July 3, 1996, by and between USN Solutions, Inc. and Genesys SA; and (e)
any Disqualified Stock permitted to be issued under the covenant described
under "--Limitation on Indebtedness."
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, sell, lease, transfer, or otherwise dispose of,
any of its Property or assets to, or purchase any Property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that would have been obtained in a comparable arm's-length transaction
by the Company or such Restricted Subsidiary with a Person that is not an
Affiliate and (b) the Company delivers to the Senior Note Trustee (i) with
respect to any Affiliate Transaction involving aggregate payments in excess of
$1 million, a Board Resolution certifying that such Affiliate Transaction
complies with clause (a) above and that such Affiliate Transaction has been
approved by a majority of the disinterested directors who have determined that
such Affiliate Transaction is in the best interests of the Company or such
Restricted Subsidiary and (ii) with respect to any Affiliate Transaction
involving aggregate payments in excess of $5 million, an opinion as to the
fairness from a financial point of view to the Company or such Restricted
Subsidiary issued by an investment banking firm of national standing, or in
the case of a transaction involving a sale or transfer of assets subject to
valuation such as real estate, an appraisal issued by a nationally recognized
appraisal firm, together with an Officers' Certificate to the effect that such
opinion complies with this clause (ii); provided, that the following shall not
be deemed Affiliate Transactions: (i) any employment agreement or consulting
agreement (including stock options) entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
industry practice; (ii) any agreement or arrangement with respect to the
compensation of a director of the Company or any Restricted Subsidiary
approved by the Board of Directors and consistent with industry practice;
(iii) transactions between or among the Company, its Wholly-Owned Restricted
Subsidiaries or a majority-owned Restricted Subsidiary (so long as no minority
interest is owned by a Person which is otherwise an Affiliate); (iv)
transactions constituting Restricted Payments permitted by the covenant
described under "--Restricted Payments"; (v) transactions pursuant to
contracts existing on the Issue Date and disclosed in a schedule attached to
the Senior Note Indenture; (vi) making loans or advances to officers,
employees or consultants of the Company and its Subsidiaries (including travel
and moving expenses) in the ordinary course of business not to exceed $1
million; and (vii) the issuance of stock options for Common Stock of the
Company pursuant to any plan approved by the Board of Directors.
Restricted and Unrestricted Subsidiaries
The Indentures provide that the Company may designate a Subsidiary
(including a newly formed or newly acquired Subsidiary) of the Company or any
of its Restricted Subsidiaries as an Unrestricted Subsidiary; provided, that
so long as the Senior Notes remain outstanding and the Senior Note Indenture
has not been satisfied or discharged, (i) immediately after giving effect to
the transaction, the Company could incur $1.00 of additional Indebtedness
pursuant to the first paragraph of "--Limitation on Indebtedness" and (ii)
such designation is at the time permitted under "--Restricted Payments."
Notwithstanding any provisions of this covenant all Subsidiaries of an
Unrestricted Subsidiary will be Unrestricted Subsidiaries.
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The Senior Note Indenture further provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, take any action or
enter into any transaction or series of transactions that would result in a
Person (other than a newly formed Subsidiary having no outstanding
Indebtedness (other than Indebtedness to the Company or a Restricted
Subsidiary) at the date of determination) becoming a Restricted Subsidiary
(whether through an acquisition, the redesignation of an Unrestricted
Subsidiary or otherwise) unless, after giving effect to such action,
transaction or series of transactions on a pro forma basis, (i) the Company
could incur at least $1.00 of additional Indebtedness pursuant to the first
paragraph of "--Limitation on Indebtedness" and (ii) no Default or Event of
Default would occur or be continuing.
Subject to the preceding paragraph, an Unrestricted Subsidiary may be
redesignated as a Restricted Subsidiary. The designation of a Subsidiary as an
Unrestricted Subsidiary or the designation of an Unrestricted Subsidiary as a
Restricted Subsidiary in compliance with the preceding paragraph shall be made
by the Board of Directors pursuant to a Board Resolution delivered to the
Trustees and shall be effective as of the date specified in such Board
Resolution, which shall not be prior to the date such Board Resolution is
delivered to the Trustees.
Limitations on Line of Business
The Senior Note Indenture provides that neither the Company nor any of its
Restricted Subsidiaries will directly or indirectly engage to any substantial
extent in any line or lines of business activity other than the
Telecommunications Business.
Issuance of Contingent Warrants
The Senior Note Indenture provides that the Company will be obligated to
issue to holders of the Senior Notes Senior Note Contingent Warrants,
exercisable for Class A Common Stock representing up to 3% of the Common Stock
on a fully diluted basis as of the date of such issuance (without including
(i) Common Stock issued for fair market value subsequent to the Closing Date
(as determined in the Warrant Agreement), (ii) Common Stock issuable pursuant
to any options, or shares of Common Stock granted to or purchased by
management of the Company, pursuant to agreements or stock plans existing on
the date of the Senior Note Indenture and either disclosed in a schedule
attached thereto or described herein, or (iii) certain additional shares of
Common Stock issuable pursuant to options, or shares of Common Stock issuable
pursuant to agreements or stock plans, as disclosed in a schedule attached to
the Senior Note Indenture) after giving effect to the issuance of such Senior
Note Contingent Warrants, in the event that, on or prior to March 30, 1998,
the Company does not effect a Qualified Public Offering or has not been sold
pursuant to a Qualified Sale of the Company. The Convertible Note Indenture
provides that, in the event that the Company has not, on or prior to September
30, 1999, (i) consummated a Qualified Public Offering or (ii) been sold
pursuant to a Qualified Sale of the Company, the Company will be obligated to
issue to the holders of the Convertible Notes Convertible Note Contingent
Warrants exercisable for Class A Common Stock representing up to 2.5% of the
Common Stock of the Company on a fully diluted basis (subject to the
exceptions set forth in clauses (i), (ii) and (iii) of the immediately
preceding sentence) after giving effect to the issuance of such Convertible
Note Contingent Warrants. All Contingent Warrants will be issued pursuant to
the Warrant Agreement with the same rights thereunder as the Initial Warrants,
and holders will have the benefit of the Registration Rights Agreement.
Waiver of Certain Covenants
The Company may omit in respect of any Senior Notes, in any particular
instance, to comply with the provisions of any covenant or condition described
under "Description of the Notes--Certain Covenants," if before or after the
time for such compliance the holders of at least a majority in principal
amount at Stated Maturity of the outstanding Senior Notes (75% in principal
amount at Stated Maturity for the covenant described under "--Issuance of
Contingent Warrants") either waive such compliance in such instance or
generally waive compliance with such covenant or condition, but no such waiver
shall extend to or affect such covenant or condition except to the extent so
expressly waived and, until such waiver shall become effective, the
obligations of the Company and the duties of the Senior Note Trustee in
respect of any such covenant or condition shall remain in full force and
effect.
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Reports
The Senior Note Indenture and the Convertible Note Indenture each provide
that, whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the Commission the annual reports, quarterly reports and other documents which
the Company would have been required to file with the Commission pursuant to
such Section 13(a) or 15(d) or any successor provision thereto if the Company
were subject thereto, such documents to be filed with the Commission on or
prior to the respective dates (the "Required Filing Dates") by which the
Company would have been required to file them. The Company shall also (whether
or not it is required to file reports with the Commission), within 30 days of
each Required Filing Date, (i) transmit by mail to all holders of Notes, as
their names and addresses appear in the applicable Security Register, without
cost to such holders or Persons, and (ii) file with the Trustees, copies of
the annual reports, quarterly reports and other documents (without exhibits)
which the Company has filed or would have filed with the Commission pursuant
to Section 13(a) or 15(d) of the Exchange Act, any successor provisions
thereto or this covenant. The Company shall not be required to file any report
with the Commission if the Commission does not permit such filing.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Senior Note Indenture and the Convertible Note Indenture each provide
that the Company will not, in any transaction or series of transactions,
consolidate with, or merge with or into, any other Person or permit any other
Person to merge with or into the Company (other than a merger of a Restricted
Subsidiary into the Company in which the Company is the continuing
corporation), or sell, convey, assign, transfer, lease or otherwise dispose of
all or substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) the Company shall be the continuing corporation or (b) the
corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole (such corporation or Person, the
"Surviving Entity"), shall be a corporation organized and validly existing
under the laws of the United States of America, any political subdivision
thereof, any state thereof or the District of Columbia, and shall expressly
assume, by a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest and Special Interest, if
any, on all the related Notes and the performance of the Company's
covenants and obligations under the applicable Indenture;
(ii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Default or
Event of Default under the Senior Note Indenture or the Convertible Note
Indenture, as applicable, shall have occurred and be continuing or would
result therefrom;
(iii) in the case of the Senior Note Indenture only, immediately after
giving effect to such transaction or series of transactions on a pro forma
basis (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such
transaction or series of transactions) the Company (or the Surviving
Entity, if the Company is not continuing) would be permitted to incur $1.00
of additional Indebtedness pursuant to the first paragraph of "--Limitation
on Indebtedness"; and
(iv) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, the Company (or the Surviving Entity, if
the Company is not continuing) shall have a Consolidated Net Worth equal to
or greater than the Consolidated Net Worth of the Company immediately prior
to such transaction.
The provision of clause (iii) shall not apply to any merger or consolidation
into or with, or any such transfer of all of the Property and assets of the
Company and the Restricted Subsidiaries into, the Company.
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In connection with any consolidation, merger, transfer of assets or other
transactions contemplated by this provision, the Company shall deliver, or
cause to be delivered, to the applicable Trustee, in form and substance
reasonably satisfactory to such Trustee, an Officers' Certificate and an
opinion of counsel, each stating that such consolidation, merger, sale,
assignment, conveyance or transfer and the supplemental indenture in respect
thereto comply with the provisions of the applicable Indenture and that all
conditions precedent in the applicable Indenture relating to such transactions
have been complied with.
Upon any transaction or series of transactions that are of the type
described in, and are effected in accordance with, the foregoing paragraphs,
the Surviving Entity shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under the applicable Indenture
and the related Notes with the same effect as if such Surviving Entity had
been named as the Company in the applicable Indenture; and when a Surviving
Person duly assumes all of the obligations and covenants of the Company
pursuant to the applicable Indenture and the related Notes, except in the case
of a lease, the predecessor Person shall be relieved of all such obligations.
EVENTS OF DEFAULT
Each of the following is an "Event of Default" under the Indentures (except
where otherwise expressly indicated):
(a) default in the payment of interest (or Special Interest, if any) on
any Note issued pursuant to such Indenture when the same becomes due and
payable, and the continuance of such default for a period of 30 days;
(b) default in the payment of the principal of (or premium, if any, on)
any Note issued pursuant to such Indenture at its maturity, upon optional
redemption, required repurchase (including pursuant to a Change of Control
Offer, an Asset Sale Offer, or, in the case of the Convertible Note
Indenture, a repurchase offer upon a Termination of Trading of the Common
Stock) or otherwise or the failure to make an offer to purchase any such
Note as required;
(c) in the case of the Senior Note Indenture, the Company fails to comply
with any of its covenants or agreements contained in "--Limitation on
Indebtedness," "--Limitation on Sale and Leaseback Transactions" or "--
Restricted Payments," in the case of both Indentures, fails to perform or
comply with the provisions described under "--Repurchase at the Option of
the Holders upon a Change of Control," "--Asset Sales," "--Issuances of
Contingent Warrants" or "--Consolidation, Merger, Conveyance, Lease or
Transfer" or in the case of the Convertible Note Indenture, fails to
perform or comply with the provisions described under "--Right to Require
Repurchase of Convertible Notes upon a Termination of Trading" or "--
Additional Invested Equity;"
(d) default in the performance, or breach, of any covenant or warranty of
the Company in such Indenture (other than a covenant or warranty addressed
in (a), (b) or (c) above) and continuance of such Default or breach for a
period of 45 days after written notice thereof has been given to the
Company by the applicable Trustee or to the Company and the applicable
Trustee by holders of at least 25% of the aggregate principal amount at
Stated Maturity of the outstanding applicable Notes;
(e) Indebtedness of the Company or any Restricted Subsidiary is not paid
when due within the applicable grace period, if any, or is accelerated by
the holders thereof and, in either case, the principal amount of such
unpaid or accelerated Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more final
nonappealable judgments against the Company or any Restricted Subsidiary in
an uninsured or unindemnified aggregate amount in excess of $10 million
which is not discharged, waived, appealed, stayed, bonded or satisfied for
a period of 60 consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency, or other similar law or
(ii) a decree or order adjudging the Company or any
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Significant Restricted Subsidiary a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment
or composition of or in respect of the Company or any Significant
Restricted Subsidiary under U.S. bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state or foreign bankruptcy,
insolvency, or similar law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of
the Company or any Significant Restricted Subsidiary or of any substantial
part of the Property or assets of the Company or any Significant Restricted
Subsidiary, or ordering the winding up or liquidation of the affairs of the
Company or any Significant Restricted Subsidiary, and the continuance of
any such decree or order for relief or any such other decree or order
unstayed and in effect for a period of 60 consecutive days;
(h) (i) the commencement by the Company or any Significant Restricted
Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent
by the Company or any Significant Restricted Subsidiary to the entry of a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency or other similar law or
to the commencement of any bankruptcy or insolvency case or proceeding
against the Company or any Significant Restricted Subsidiary; or (iii) the
filing by the Company or any Significant Restricted Subsidiary of a
petition or answer or consent seeking reorganization or relief under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law; or
(iv) the consent by the Company or any Significant Restricted Subsidiary to
the filing of such petition or to the appointment of or taking possession
by a custodian, receiver, liquidator, assignee, trustee, sequestrator or
similar official of the Company or any Significant Restricted Subsidiary or
of any substantial part of the Property or assets of the Company or any
Significant Restricted Subsidiary, or the making by the Company or any
Significant Restricted Subsidiary of an assignment for the benefit of
creditors; or (v) the admission by the Company or any Significant
Restricted Subsidiary in writing of its inability to pay its debts
generally as they become due; or (vi) the taking of corporate action by the
Company or any Significant Restricted Subsidiary in furtherance of any such
action; or
(i) in the case of the Convertible Note Indenture, the occurrence and
continuation of an Event of Default under the Senior Note Indenture for a
period of 30 consecutive days after written notice of the occurrence of
such Event of Default has been given to the Company by the Convertible Note
Trustee or a holder or holders of Convertible Notes, which notice states
that such an event constitutes a Default under the Convertible Note
Indenture.
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
applicable Trustee or the holders of not less than 25% of the outstanding
aggregate principal amount at Stated Maturity of the Senior Notes or the
Convertible Notes, as the case may be, may declare the Default Amount,
premium, if any, and any accrued and unpaid interest (and Special Interest, if
any) on all such Notes then outstanding to be immediately due and payable by a
notice in writing to the Company (and to the applicable Trustee if given by
holders of such Notes), and upon any such declaration all amounts payable in
respect of the Senior Notes and the Convertible Notes, as the case may be,
will become and be immediately due and payable. If any Event of Default
specified in clause (g) or (h) above occurs, the Default Amount, premium, if
any, and any accrued and unpaid interest (and Special Interest, if any) on the
Senior Notes or the Convertible Notes, as the case may be, then outstanding
shall become immediately due and payable without any declaration or other act
on the part of the applicable Trustee or any holder of such Notes. In the
event of a declaration of acceleration because an Event of Default set forth
in clause (e) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied, or cured or waived by the holders of the relevant Indebtedness
within 60 days after such event of default; provided, that no judgment or
decree for the payment of the money due on the Notes has been obtained by the
applicable Trustee as provided in the applicable Indenture. In the event of a
declaration of acceleration because an Event of Default set forth in
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clause (i) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled (A) if the Senior
Notes have been repaid, (B) if the Event of Default under the Senior Note
Indenture triggering such Event of Default pursuant to clause (i) above shall
be remedied or cured, or waived by the holders of the Senior Notes, or (C) if
the Senior Notes have been accelerated, then the acceleration of the Senior
Notes shall have been rescinded within 60 days of the occurrence of such Event
of Default under the Senior Note Indenture, and, in the case of clauses (A),
(B) or (C) above, the Senior Note Trustee so certifies to the Convertible Note
Trustee, provided that any such event described in clause (A), (B) or (C)
above must occur prior to the commencement of enforcement proceedings with
respect to the Convertible Note Indenture. Until September 30, 1999, the
"Default Amount" shall equal the Accreted Value of the Senior Notes and the
Accreted Value of the Convertible Notes, as applicable. From September 30,
1999 to March 30, 2000 the Default Amount shall equal the Accreted Value of
the Senior Notes and 100% of principal amount at Stated Maturity of the
Convertible Notes, as applicable. Thereafter, the Default Amount shall equal
100% of the principal amount at Stated Maturity of the Senior Notes and the
Convertible Notes, as applicable. Under certain circumstances, the holders of
a majority in principal amount at Stated Maturity of the outstanding Senior
Notes or the Convertible Notes, as applicable, by notice to the Company and
the applicable Trustee may rescind an acceleration and its consequences.
Subject to all provisions of the applicable Indenture and applicable law, the
holders of a majority in aggregate principal amount at Stated Maturity of the
Senior Notes or the Convertible Notes, as the case may be, at the time
outstanding have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the applicable Trustee, or
exercising any trust or power conferred on such Trustee.
The holders of a majority in aggregate principal amount at Stated Maturity
of the Senior Notes or the Convertible Notes, as the case may be, then
outstanding by notice to the applicable Trustee may on behalf of the holders
of all such Notes waive any existing Default or Event of Default and its
consequences under the applicable Indenture except a continuing Default or
Event of Default in the payment of interest (and Special Interest, if any) on,
premium, if any on or the principal of, such Notes. Subject to the provisions
of the applicable Indentures relating to the duties of the applicable Trustee,
the applicable Trustee is under no obligation to exercise any of its rights or
powers under the applicable Indenture at the request, order or direction of
any of the holders, unless such holders have offered to such Trustee
reasonable security or indemnity. Subject to the provisions of the Senior Note
Indenture or the Convertible Note Indenture, as the case may be, and
applicable law, the holders of a majority in aggregate principal amount at
Stated Maturity of the Senior Notes or the Convertible Notes, as applicable,
at the time outstanding have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the applicable Trustee,
or exercising any trust or power conferred upon such Trustee.
The Company is required to deliver to each Trustee annually a statement
regarding compliance with the applicable Indenture, and the Company is
required within five Business Days after becoming aware of any Default or
Event of Default, to deliver to the applicable Trustee a statement describing
such Default or Event of Default, its status and what action the Company is
taking or proposes to take with respect thereto.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Senior Note Trustee or the Convertible Note Trustee, as
applicable, may, at any time and from time to time, without notice to or
consent of any holder of Senior Notes or any holder of Convertible Notes, as
applicable, enter into one or more indentures supplemental to the Senior Note
Indenture or the Convertible Note Indenture, as the case may be, (i) to
evidence the succession of another Person to the Company and the assumption by
such successor of the covenants and obligations of the Company in such
Indenture and such Notes; (ii) to add to the covenants of the Company, for the
benefit of the holders, or to surrender any right or power conferred upon the
Company by such Indenture; (iii) to add any additional Events of Default; (iv)
to provide for uncertificated Notes in addition to or in place of certificated
Notes; (v) to evidence and provide for the acceptance of appointment under
such Indenture of a successor Trustee; (vi) to cure any ambiguity in such
Indenture, to correct or supplement any provision in such Indenture which may
be inconsistent with any other provision therein or to add any other
provisions with respect to matters or questions arising under such Indenture;
provided, that such actions shall not adversely affect the interests of the
holders in any material respect; (vii) to
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secure such Notes; (viii) to provide for Guarantees as required under the
applicable Indenture; (ix) to make provision with respect to the conversion
rights of the holders of Convertible Notes in the event of a consolidation,
merger or sale of assets involving the Company as required by the Convertible
Note Indenture; or (x) to comply with the requirements of the Commission in
order to effect or maintain the qualification of such Indenture under the
Trust Indenture Act.
With the consent of the holders of not less than a majority in aggregate
principal amount at Stated Maturity of the outstanding Senior Notes or
Convertible Notes, as the case may be, the Company and the Senior Note Trustee
or the Convertible Note Trustee, as applicable, may enter into one or more
indentures supplemental to the Senior Note Indenture or the Convertible Note
Indenture for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of such Indenture or modifying in
any manner the rights of the holders; provided, that no such supplemental
indenture shall, without the consent of the holder of each outstanding Senior
Note or Convertible Note: (i) change the Stated Maturity of the principal of,
or any installment of interest (including Special Interest, if any) on, any
Senior Note or Convertible Note, or reduce the Accreted Value or principal
amount thereof at Stated Maturity (or premium, if any), or the interest
thereon that would be due and payable upon Stated Maturity thereof, or reduce
the Default Amount that would be due and payable upon Stated Maturity thereof,
or change the place of payment where, or the coin or currency in which, any
Senior Note or Convertible Note, as the case may be, or any premium or
interest (including Special Interest, if any) thereon is payable, or impair
the right to institute suit for the enforcement of any such payment on or
after the Stated Maturity thereof; (ii) reduce the percentage in principal
amount of the outstanding Senior Notes or Convertible Notes, as the case may
be, the consent of whose holders is necessary for any such supplemental
indenture or required for any waiver of compliance with certain provisions of
the Senior Note Indenture or any Senior Note Guarantees or the Convertible
Note Indenture or any Convertible Note Guarantees or certain Defaults
thereunder; (iii) subordinate in right of payment, or otherwise subordinate,
the Senior Notes or any Senior Note Guarantees to any other Indebtedness; (iv)
make any changes in the subordination provisions of the Convertible Notes or
any Convertible Note Guarantees that would adversely affect the holders of the
Convertible Notes; (v) modify the obligations of the Company to make offers to
purchase Notes upon a Change of Control or from the proceeds of Asset Sales
or, in the case of a Termination of Trading of the Common Stock, the
obligation of the Company pursuant to the Convertible Note Indenture to
repurchase the Convertible Notes; or (vi) modify any provision of this
paragraph (except to increase any percentage set forth herein).
The holders of not less than a majority in aggregate principal amount at
Stated Maturity of the outstanding Senior Notes or Convertible Notes, as the
case may be, may, on behalf of the holders of all such Notes, waive any past
Default under the applicable Indenture and its consequences, except Default in
the payment of the principal of (or premium, if any) or interest on any Note,
or in respect of a covenant or provision hereof which under the proviso to the
prior paragraph cannot be modified or amended without the consent of the
holder of each outstanding Senior Note or Convertible Note affected.
The holders of not less than 75% in aggregate principal amount at Stated
Maturity of the outstanding Senior Notes may, on behalf of the holders of all
such Senior Notes, waive any right to require the Company to issue to the
holders of the Senior Notes Senior Note Contingent Warrants. The holders of
not less than 75% in aggregate principal amount at Stated Maturity of the
outstanding Convertible Notes may, on behalf of the holders of all such
Convertible Notes, waive any right to require the Company to issue to the
holders of the Convertible Notes either Convertible Note Contingent Warrants
or Additional Warrants.
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
The Company may terminate its obligations under the Senior Notes and the
Senior Note Indenture when (i) either (A) all outstanding Senior Notes have
been delivered to the Senior Note Trustee for cancellation or (B) all such
Senior Notes not theretofore delivered to the Senior Note Trustee for
cancellation have become due and payable, will become due and payable within
one year or are to be called for redemption within one year under irrevocable
arrangements satisfactory to the Senior Note Trustee for the giving of notice
of redemption by the Senior Note Trustee in the name and at the expense of the
Company, and the Company has irrevocably deposited or caused to be deposited
with the Senior Note Trustee funds or U.S. Government Obligations in an amount
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sufficient to pay and discharge the entire indebtedness on the Senior Notes
not theretofore delivered to the Senior Note Trustee for cancellation, for
principal of (premium, if any, on) and interest (including Special Interest,
if any) to the date of deposit or maturity or date of redemption; (ii) the
Company has paid or caused to be paid all sums then due and payable by the
Company under the Senior Note Indenture; and (iii) the Company has delivered
an Officers' Certificate and an Opinion of Counsel relating to compliance with
the conditions set forth in the Senior Note Indenture. The Company may also
terminate its obligations under the Convertible Notes and the Convertible Note
Indenture when (i) either (A) all outstanding Convertible Notes have been
delivered to the Convertible Note Trustee for cancellation or (B) all such
Convertible Notes not theretofore delivered to the Convertible Note Trustee
for cancellation have become due and payable within one year or are to be
called for redemption within one year under irrevocable arrangements
satisfactory to the Convertible Note Trustee for the giving of notice of
redemption by the Convertible Note Trustee in the name and at the expense of
the Company, and the Company has irrevocably deposited or caused to be
deposited with the Convertible Note Trustee funds or U.S. Government
Obligations in an amount sufficient to pay and discharge the entire
indebtedness on the Convertible Notes not theretofore delivered to the
Convertible Note Trustee for cancellation, for principal of (premium, if any,
on) and interest (including Special Interest, if any) to the date of deposit
or maturity or date of redemption; (ii) the Company has paid or caused to be
paid all sums then due and payable by the Company under the Convertible Note
Indenture; and (iii) the Company has delivered an Officers' Certificate and an
Opinion of Counsel relating to compliance with the conditions set forth in the
Convertible Note Indenture; provided, that notwithstanding the provisions
above, the holders of Convertible Notes will retain their conversion rights
until the applicable redemption date.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Senior Notes or the Convertible Notes, as the case
may be, and the respective Indentures shall cease to be of further effect as
to all outstanding Senior Notes or all outstanding Convertible Notes, as the
case may be (except as to (i) rights of registration of transfer, substitution
and exchange of Senior Notes or the Convertible Notes, as the case may be, and
the Company's right of optional redemption, (ii) rights of holders to receive
payments of principal of, premium, if any, and interest (including Special
Interest, if applicable) on the Senior Notes or the Convertible Notes, as the
case may be, (but not the Change of Control Purchase Price or the Asset Sale
Purchase Price) and any rights of the holders with respect to such amounts,
(iii) the rights, obligations and immunities of the applicable Trustee under
the applicable Indenture, (iv) conversion rights under the Convertible Note
Indenture, and (v) certain other specified provisions in the applicable
Indenture) or (b) cease to be under any obligation to comply with certain
restrictive covenants including those described under "--Certain Covenants,"
after the irrevocable deposit by the Company with the applicable Trustee, in
trust for the benefit of the holders, at any time prior to the Stated Maturity
of the Senior Notes or the Convertible Notes, as the case may be, of (A) money
in an amount, (B) U.S. Government Obligations which through the payment of
interest and principal will provide, not later than one day before the due
date of payment in respect of such Notes, money in an amount, or (C) a
combination thereof sufficient to pay and discharge the principal of, and
interest (including Special Interest, if applicable) on, such Notes then
outstanding on the dates on which any such payments are due in accordance with
the terms of the applicable Indenture and of such Notes. Such defeasance or
covenant defeasance shall be deemed to occur only if certain conditions are
satisfied, including, among other things, delivery by the Company to the
applicable Trustee of an opinion of outside counsel acceptable to such Trustee
to the effect that (i) such deposit, defeasance and discharge will not be
deemed, or result in, a taxable event for federal income tax purposes with
respect to the holders; and (ii) the Company's deposit will not result in such
trust or such Trustee being subject to regulation under the Investment Company
Act of 1940.
THE TRUSTEE
Harris Trust and Savings Bank is the Trustee under each Indenture and its
current address is 111 West Monroe, Chicago, Illinois 60603.
The holders of not less than a majority in aggregate principal amount at
Stated Maturity of the outstanding Senior Notes or Convertible Notes, as the
case may be, have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the applicable Trustee,
subject to certain
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exceptions. Except during the continuance of an Event of Default under the
Indentures, the Trustees will perform only such duties as are specifically set
forth in the Indentures. Each Indenture provides that in case an Event of
Default shall occur (which shall not be cured or waived), the applicable
Trustee will be required, in the exercise of its rights and powers under such
Indenture, to use the degree of care of a prudent person in the conduct of
such person's own affairs. Subject to such provisions, each Trustee will be
under no obligation to exercise any of its rights or powers under the
applicable Indenture at the request of any of the holders of the Senior Notes
or Convertible Notes, as the case may be, unless such holders shall have
offered to the applicable Trustee indemnity satisfactory to it against any
loss, liability or expense.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indentures or for any claim based on, in respect of, or by reason
of, such obligations or their creation, solely by reason of its status as a
director, officer, employee, incorporator or stockholder of the Company. By
accepting a Note each holder waives and releases all such liability (but only
such liability). The waiver and release are part of the consideration for
issuance of the Notes. Nonetheless, such waiver may not be effective to waive
liabilities under the federal securities laws and it has been the view of the
Commission that such a waiver is against public policy.
GOVERNING LAW
The Senior Note Indenture and the Convertible Note Indenture and the Senior
Notes and the Convertible Notes are governed by the laws of the State of New
York, without regard to principles of conflicts of law.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the applicable
Indenture. The Company, the Registrars and the Trustees may require a holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a holder to pay any taxes and fees required by law
or permitted by the applicable Indenture.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indentures. Reference is made to the Indentures for the full definition of all
such terms, as well as any capitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such other Person merging with or into or becoming a
Subsidiary of such specified Person.
"Accreted Value" means, (A) with respect to the Senior Notes, for any
Specified Date, the amount provided below for each $1,000 principal amount at
Stated Maturity of the Senior Notes:
(a) If the Specified Date occurs on one of the following dates (each a
"Senior Note Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Senior Note Semi-Annual Accrual Date:
SEMI-
ANNUAL
ACCRUAL ACCRETED
DATE VALUE
------- --------
March 30,
1997..... $ 666.34
September
30, 1997. 712.99
March 30,
1998..... 762.90
September
30, 1998. 816.30
March 30,
1999..... 873.44
September
30, 1999. 934.58
March 30,
2000..... 1,000.00
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(b) if the Specified Date occurs before the first Senior Note Semi-Annual
Accrual Date, the Accreted Value will equal the sum of (i) $622.75 and (ii)
an amount equal to the product of (y) the Accreted Value of the first
Senior Note Semi-Annual Accrual Date less the original issue price
multiplied by (z) a fraction, the numerator of which is the number of days
from the Issue Date to the Specified Date, using a 360-day year of twelve
30-day months, and the denominator of which is the number of days elapsed
from the Issue Date to the first Senior Note Semi-Annual Accrual Date,
using a 360-day year of twelve 30-day months;
(c) if the Specified Date occurs between two Senior Note Semi-Annual
Accrual Dates, the Accreted Value will equal the sum of (i) the Accreted
Value for the Senior Note Semi-Annual Accrual Date immediately preceding
such Specified Date and (ii) an amount equal to the product of (y) the
Accreted Value for the immediately following Senior Note Semi-Annual
Accrual Date less the Accreted Value for the immediately preceding Senior
Note Semi-Annual Accrual Date multiplied by (z) a fraction, the numerator
of which is the number of days from the immediately preceding Senior Note
Semi-Annual Accrual Date to the Specified Date, using a 360-day year of
twelve 30-day months, and the denominator of which is 180; or
(d) if the Specified Date occurs after the last Senior Note Semi-Annual
Accrual Date, the Accreted Value will equal $1,000.
(B) with respect to the Convertible Notes, for any Specified Date, the
amount provided below for each $1,000 principal amount at Stated Maturity of
the Convertible Notes:
(a) If the Specified Date occurs on one of the following dates (each a
"Convertible Note Semi-Annual Accrual Date"), the Accreted Value will equal
the amount set forth below for such Convertible Note Semi-Annual Accrual
Date:
SEMI-
ANNUAL
ACCRUAL ACCRETED
DATE VALUE
------- ---------
March 30,
1997..... $ 802.45
September
30, 1997. 838.56
March 30,
1998..... 876.30
September
30, 1998. 915.73
March 30,
1999..... 956.94
September
30, 1999. 1,000.00
(b) if the Specified Date occurs before the first Convertible Note Semi-
Annual Accrual Date, the Accreted Value will equal the sum of (i) $767.90
and (ii) an amount equal to the product of (y) the Accreted Value of the
first Convertible Note Semi-Annual Accrual Date less the original issue
price multiplied by (z) a fraction, the numerator of which is the number of
days from the Issue Date to the Specified Date, using a 360-day year of
twelve 30-day months, and the denominator of which is the number of days
elapsed from the Issue Date to the first Convertible Note Semi-Annual
Accrual Date, using a 360-day year of twelve 30-day months;
(c) if the Specified Date occurs between two Convertible Note Semi-Annual
Accrual Dates, the Accreted Value will equal the sum of (i) the Accreted
Value for the Convertible Note Semi-Annual Accrual Date immediately
preceding such Specified Date and (ii) an amount equal to the product of
(y) the Accreted Value for the immediately following Convertible Note Semi-
Annual Accrual Date less the Accreted Value for the immediately preceding
Convertible Note Semi-Annual Accrual Date multiplied by (z) a fraction, the
numerator of which is the number of days from the immediately preceding
Convertible Note Semi-Annual Accrual Date to the Specified Date, using a
360-day year of twelve 30-day months, and the denominator of which is 180;
or
(d) if the Specified Date occurs after the last Convertible Note Semi-
Annual Accrual Date, the Accreted Value will equal $1,000.
"Additional Invested Equity" means the net cash proceeds from the sale to
Persons, other than holders of the Convertible Notes, of Capital Stock not
maturing and not redeemable prior to September 30, 2004; provided, that the
terms of any such Capital Stock do not provide for any redemption or
repurchase, whether pursuant to a sinking fund or otherwise, or permit any
cash dividend prior to the Stated Maturity of the Convertible Notes.
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"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by,
such Person; provided that each Unrestricted Subsidiary shall be deemed to be
an Affiliate of the Company and of each other Subsidiary of the Company;
provided that any lender under a Credit Facility shall not be deemed to be an
Affiliate solely as the result of the Credit Facility; and provided, further,
that neither the Company nor any of its Wholly-Owned Restricted Subsidiaries
shall be deemed to be Affiliates of each other. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "under common control with" and "controlled by"), and as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of Voting Stock, by agreement or
otherwise; provided, that beneficial ownership of 10% or more of the Voting
Stock of a Person (on a fully diluted basis) shall be deemed to be control.
"Asset Sale" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, dispositions
pursuant to any consolidation or merger) by such Person or any of its
Restricted Subsidiaries to any Person other than to such Person or a
Restricted Subsidiary of such Person, in one transaction or a series of
related transactions (each hereinafter referred to as a "Disposition"), of (a)
Capital Stock of or other equity interests in any Restricted Subsidiary (other
than director's qualifying shares) except as provided in clause (iv) of this
definition, (b) all or substantially all of the assets of any division or line
of business of such Person or of any of the Restricted Subsidiaries or (c)
Property or assets of such Person or any of its Restricted Subsidiaries, the
Fair Market Value of which exceeds $500,000, other than (i) a Disposition of
Property in the ordinary course of business and consistent with industry
practice, (ii) a Disposition of Eligible Cash Equivalents, (iii) a Disposition
of an Investment that constitutes a Restricted Payment under the Senior Note
Indenture permitted under the first paragraph of the covenant described in "--
Restricted Payments," (iv) a Disposition of no more than ten percent of the
Common Stock of USN Solutions, Inc. on a fully diluted basis pursuant to the
exercise of the USN Solutions Option, (v) a Disposition by the Company in
connection with a transaction permitted under "--Consolidation, Merger,
Conveyance, Lease or Transfer" and (vi) contribution of assets to any
Unrestricted Subsidiary constituting an Investment permitted by the Indenture.
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present
value (discounted at a rate consistent with accounting guidelines, as
determined in good faith by such Person) of the payments during the remaining
term of the lease (including any period for which such lease has been extended
or may, at the option of the lessor, be extended) or until the earliest date
on which the lessee may terminate such lease without penalty or upon payment
of a penalty (in which case the rental payments shall include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund
or mandatory redemption payment requirements) of such debt security or
Disqualified Stock multiplied in each case by (y) the amount of such principal
or redemption payment, by (ii) the sum of all such principal or redemption
payments.
"Board of Directors" means, with respect to any Person, the Board of
Directors (or similar governing body) of such Person or any committee of the
Board of Directors (or similar governing body) duly authorized to act on
behalf of such Board (or similar governing body).
"Board Resolution" means a duly adopted resolution of the Board of Directors
in full force and effect at the time of determination and certified as such.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability
on the face of a balance sheet of such Person in accordance with GAAP and the
stated maturity thereof shall be the date of the last payment of rent or any
amount due under such lease prior to the first date upon which such lease may
be terminated by the lessee without payment of a penalty.
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"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however
designated) in such Person and any rights (other than Indebtedness convertible
into an equity interest), warrants or options to acquire an equity interest in
such Person.
"Cash Proceeds" means, with respect to any Asset Sale or issuance or sale of
Capital Stock by any Person, the aggregate consideration received in respect
of such sale or issuance by such Person in the form of cash or Eligible Cash
Equivalents; provided that with regard to an Asset Sale, any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance
sheet or in the notes thereto) of the Company or any Restricted Subsidiary
(other than liabilities that are by their terms subordinated to the Notes or
Guarantees, if any) which are assumed by the transferee of any such assets and
from which the Company and such Restricted Subsidiary are completely released
shall be deemed Cash Proceeds.
"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer, or lease (other than to the Company or any Wholly-Owned Restricted
Subsidiary of the Company), whether direct or indirect, of all or
substantially all of the assets of the Company or of the Company and its
Restricted Subsidiaries taken as a whole to any "person" or "group" (within
the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any
successor provision to either of the foregoing, including any group acting for
the purpose of acquiring, holding or disposing of securities within the
meaning of Rule 13d-5(b)(i) under the Exchange Act) shall have occurred; (ii)
any "person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2)
of the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing
of securities within the meaning of Rule 13d-5(b)(i) under the Exchange Act),
other than any Permitted Holder or Permitted Holders, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of
the total voting power of all classes of the Voting Stock of the Company
(including any warrants or options or rights to acquire such Voting Stock),
calculated on a fully diluted basis, and such voting power percentage is
greater than or equal to the total voting power percentage then beneficially
owned by the Permitted Holders in the aggregate; or (iii) during any period of
two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election or appointment by such board or whose nomination for
election by the stockholders of the Company was approved by a vote of a
majority of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office.
"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to vote in the election of directors of such Person and any
rights (other than Indebtedness convertible into such Capital Stock), warrants
or options to acquire such Capital Stock of such Person.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication (A) the sum of (i) the aggregate amount of cash
and non-cash interest expense (including capitalized interest) of such Person
and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP in respect of Indebtedness
(including, without limitation, (v) any amortization of debt discount, (w) net
costs associated with Interest Hedging Obligations (including any amortization
of discounts), (x) the interest portion of any deferred payment obligation
calculated in accordance with the effective interest method, (y) all accrued
interest and (z) all commissions, discounts and other fees and charges owed
with respect to letters of credit, bankers' acceptances or similar facilities)
paid or accrued, or scheduled to be paid or accrued, during such period; (ii)
dividends or distributions with respect to Preferred Stock or Disqualified
Stock of such Person (and of its Restricted Subsidiaries if paid to a Person
other than such Person or its Restricted Subsidiaries) declared and payable in
cash; (iii) the portion of any rental obligation of such Person or its
Restricted Subsidiaries in respect of any Capital Lease Obligation allocable
to interest expense in accordance with GAAP; (iv) the portion of any rental
obligation of such Person or its Restricted Subsidiaries in respect of any
Sale and Leaseback Transaction allocable to interest expense (determined as if
such were treated as a Capital Lease Obligation); and (v) to the extent any
Indebtedness of any other Person is guaranteed by such Person or any of its
Restricted Subsidiaries, the aggregate amount of interest paid or accrued, or
scheduled to be paid or accrued, by such other Person during such period
attributable to any such Indebtedness, less (B) to the extent included in (A)
above,
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amortization or write-off of deferred financing costs of such Person and its
Restricted Subsidiaries during such period and any charge related to any
premium or penalty paid in connection with redeeming or retiring any
Indebtedness of such Person and its Restricted Subsidiaries prior to its
Stated Maturity; in the case of both (A) and (B) above, after elimination of
intercompany accounts among such Person and its Restricted Subsidiaries and as
determined in accordance with GAAP. For purposes of clause (ii) above,
dividend requirements attributable to any Preferred Stock or Disqualified
Stock shall be deemed to be an amount equal to the amount of dividend
requirements on such Preferred Stock or Disqualified Stock times a fraction,
the numerator of which is the amount of such dividend requirements, and the
denominator of which is one minus the applicable combined federal, state,
local and foreign income tax rate of the Company and its Restricted
Subsidiaries (expressed as a decimal), on a consolidated basis, for the fiscal
year immediately preceding the date of the transaction giving rise to the need
to calculate Consolidated Interest Expense.
"Consolidated Net Income" of any Person means, for any period, the aggregate
net income (or net loss) of such Person and its Restricted Subsidiaries for
such period on a consolidated basis determined in accordance with GAAP;
provided that there shall be excluded therefrom, without duplication, (i) all
items classified as extraordinary, unusual or nonrecurring, (ii) the net
income of any Person that is not a Restricted Subsidiary or that is accounted
for by the equity method of accounting which shall be included only to the
extent of the amount of dividends or distributions paid to such Person or its
Restricted Subsidiaries, (iii) the net income of any Person acquired by such
Person or any of its Restricted Subsidiaries in a pooling-of-interests
transaction for any period prior to the date of the related acquisition, (iv)
any gain or loss, net of taxes, realized on the termination of any employee
pension benefit plan, (v) net gains (but not net losses) in respect of Asset
Sales by such Person or its Restricted Subsidiaries, (vi) the net income (but
not net loss) of any Restricted Subsidiary of such Person to the extent that
the payment of dividends or other distributions to such Person is restricted
by the terms of its charter or any agreement, instrument, contract, judgment,
order, decree, statute, rule, governmental regulation or otherwise, except for
any dividends or distributions actually paid by such Restricted Subsidiary to
such Person, and (vii) with regard to a non-Wholly-Owned Restricted
Subsidiary, any aggregate net income (or loss) in excess of such Person's or
such Restricted Subsidiary's pro rata share of such non-Wholly-Owned
Restricted Subsidiary's net income (or loss).
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person and its Restricted Subsidiaries, as determined on a
consolidated basis in accordance with GAAP, less amounts attributable to
Disqualified Stock of such Person.
"Credit Facility" means one or more credit agreements, loan agreements or
similar agreements providing for working capital advances, term loans, letter
of credit facilities or similar advances, loans or facilities to the Company,
which may, pursuant to the terms of the Senior Note Indenture, be guaranteed
by the Restricted Subsidiaries, with a bank or syndicate of banks or other
financial institutions, as such may be amended, renewed, extended,
supplemented, refinanced and replaced or refunded from time to time; provided,
that for purposes of the Senior Note Indenture, the aggregate principal amount
of Indebtedness under the Credit Facility shall not exceed $45 million at any
one time outstanding less the amount of any mandatory or permitted principal
payments or payments from the proceeds of Asset Sales made under the Credit
Facility that, in each case, permanently reduce the borrowing capacity of the
Company thereunder.
"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the date on
which the Convertible Notes mature.
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"EBITDA" means, with respect to any Person for any period, the sum for such
Person for such period of Consolidated Net Income plus, to the extent
reflected in the income statement of such Person for such period from which
Consolidated Net Income is determined, without duplication, (i) Consolidated
Interest Expense, (ii) income tax expense of such Person and its consolidated
Subsidiaries, (iii) depreciation expense, (iv) amortization expense, (v) any
non-cash expense related to the issuance to employees of such Person of
options to purchase Capital Stock of such Person and (vi) any charge related
to any premium or penalty paid in connection with redeeming or retiring any
Indebtedness prior to its Stated Maturity and minus, to the extent reflected
in such income statement, any noncash credits that had the effect of
increasing Consolidated Net Income of such Person for such period. This
definition of EBITDA is used only for the purpose of this Description of the
Notes and the Senior Note Indenture.
"Eligible Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits,
certificates of deposit or Eurodollar deposits of any commercial bank
organized in the United States having capital and surplus in excess of $500
million with a maturity date not more than one year from the date of
acquisition, (iii) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause (ii)
above, (iv) direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing, or subject to tender at the option of the
holder thereof within ninety days after the date of acquisition thereof and,
at the time of acquisition, having a rating of A or better from Standard &
Poor's or A-2 or better from Moody's, (v) commercial paper issued by the
parent corporation of any commercial bank organized in the United States
having capital and surplus in excess of $500 million and commercial paper
issued by others having one of the two highest ratings obtainable from either
of Standard & Poor's or Moody's and in each case maturing within 270 days
after the date of acquisition, (vi) overnight bank deposits and bankers'
acceptances at any commercial bank organized in the United States having
capital and surplus in excess of $500 million, (vii) deposits available for
withdrawal on demand with a commercial bank organized in the United States
having capital and surplus in excess of $500 million and (viii) investments in
money market funds substantially all of whose assets comprise securities of
the types described in clauses (i) through (vi).
"Exchange Rate Obligation" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Existing Indebtedness" means Indebtedness outstanding on the date of the
Senior Note Indenture and disclosed in a schedule attached to the Senior Note
Indenture.
"Fair Market Value" means, with respect to any asset or Property, the sale
value that could be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy, as determined in good faith by the
Board of Directors of the Company or a Restricted Subsidiary, as applicable.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the Indentures shall utilize GAAP as in effect on the Issue
Date.
"guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"guaranteed," "guaranteeing" and "guarantor" shall have meanings correlative
to the foregoing).
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"Guarantee" means a guarantee of the payment of the Senior Notes and/or the
Convertible Notes, as applicable, executed and delivered by a Restricted
Subsidiary as required by the covenant described under "--Limitation on
Issuances of Guarantees by Restricted Subsidiaries" and "Guarantees" means,
collectively, the Senior Note Guarantees and the Convertible Note Guarantees,
if any.
"Guarantor" means a Restricted Subsidiary that executes and delivers a
Guarantee.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, guarantee or otherwise become liable in respect of such Indebtedness
or other obligation or the recording, as required pursuant to GAAP or
otherwise, of any such Indebtedness or obligation on the balance sheet of such
Person (and "incurrence," "incurred," "incurrable" and "incurring" shall have
meanings correlative to the foregoing); provided that a change in GAAP that
results in an obligation of such Person that exists at such time becoming
Indebtedness shall not be deemed an incurrence of such Indebtedness.
Indebtedness otherwise incurred by a Person before it becomes a Restricted
Subsidiary of the Company shall be deemed to have been incurred at the time at
which it becomes a Restricted Subsidiary.
"Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with acquisition of Property,
assets or businesses, excluding trade accounts payable made in the ordinary
course of business which are not more than 90 days overdue or which are being
contested in good faith and by appropriate proceedings, (iii) any
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (iv) any obligation of such Person issued or assumed as the deferred
purchase price of Property, assets or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business,
which in either case are not more than 90 days overdue or which are being
contested in good faith and by appropriate proceedings, and for which adequate
reserves are being maintained on the books of the Company in accordance with
GAAP), (v) any Capital Lease Obligation of such Person, (vi) the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person and, to
the extent held by other Persons, the maximum fixed redemption or repurchase
price of Disqualified Stock of such Person's Restricted Subsidiaries, at the
time of determination, (vii) the notional amount of any Interest Hedging
Obligations or Exchange Rate Obligations of such Person at the time of
determination, (viii) any Attributable Indebtedness with respect to any Sale
and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has guaranteed or is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise. For purposes of the preceding sentence, the maximum fixed
repurchase price of any Disqualified Stock that does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were repurchased on any date
on which Indebtedness shall be required to be determined pursuant to the
Senior Note Indenture; provided that if such Disqualified Stock is not then
permitted to be repurchased, the repurchase price shall be the book value of
such Disqualified Stock. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and the maximum liability of any guarantees at such date;
provided, that for purposes of calculating the amount of Notes outstanding at
any date, the amount of such Notes shall be the Accreted Value thereof as of
such date, unless cash interest has commenced to accrue pursuant to the
applicable Indenture, in which case the amount of such Notes outstanding will
be the aggregate principal amount thereof at Stated Maturity; and provided,
further, that for purposes of calculating the amount of any non-interest
bearing or other discount security (other than the Notes), such Indebtedness
shall be deemed to be the principal amount thereof that would be shown on the
balance sheet of the issuer dated such date prepared in accordance with GAAP
but that such security shall be deemed to have been incurred only on the date
of the original issuance thereof.
"Indebtedness to Operating Cash Flow Ratio" means, as at any date of
determination, the ratio of (i) the aggregate amount of Indebtedness of the
Company and its Restricted Subsidiaries on a consolidated basis as of
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the date of determination to (ii) the aggregate amount of EBITDA of the
Company and its Restricted Subsidiaries for the four preceding fiscal quarters
for which financial information is available immediately prior to the date of
determination; provided that any Indebtedness incurred or retired by the
Company or any of its Restricted Subsidiaries during the fiscal quarter in
which the date of determination occurs shall be calculated as if such
Indebtedness was so incurred or retired on the first day of the fiscal quarter
in which the date of determination occurs; and provided, further, that (x) if
the transaction giving rise to the need to calculate the Indebtedness to
Operating Cash Flow Ratio would have the effect of increasing or decreasing
Indebtedness or EBITDA in the future, Indebtedness or EBITDA shall be
calculated on a pro forma basis as if such transaction had occurred on the
first day of such four fiscal quarter period preceding the date of
determination, and (y) if during such four fiscal quarter period, the Company
or any of its Restricted Subsidiaries shall have engaged in any Asset Sale,
EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive), or increased by an amount equal to the EBITDA (if negative),
directly attributable to the assets which are the subject of such Asset Sale
and any related retirement of Indebtedness as if such Asset Sale and related
retirement of Indebtedness had occurred on the first day of such four fiscal
quarter period or (z) if during such four fiscal quarter period the Company or
any of its Restricted Subsidiaries shall have acquired any material assets
outside the ordinary course of business, EBITDA shall be calculated on a pro
forma basis as if such asset acquisition and related financing had occurred on
the first day of such four fiscal quarter period.
"Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement,
interest rate cap, collar or floor agreement or other similar agreement or
arrangement designed to protect against or manage such Person's or any of its
Restricted Subsidiaries' exposure to fluctuations in interest rates.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) acquisition of any shares of Capital
Stock, bonds, notes, debentures or other securities of such Person, or (iii)
acquisition, by purchase or otherwise, of all or substantially all of the
business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude accounts receivable and other
extensions of trade credit on commercially reasonable terms in accordance with
normal trade practices. The amount of an Investment shall be the original cost
of such Investment, plus the cost of all additions thereto and minus the
amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property or assets other
than cash, such Property or assets shall be valued at its Fair Market Value at
the time of such transfer. The Company shall be deemed to make an "Investment"
in the amount of the Fair Market Value of the assets of a Subsidiary at the
time that such Subsidiary is designated as an Unrestricted Subsidiary.
"Issue Date" means the date on which the Old Notes or the Convertible Notes
were, or the New Notes are, first authenticated and delivered under the Senior
Note Indenture or Convertible Note Indenture.
"Joint Venture" means a Telecommunications Company of which less than 50
percent of the Voting Stock is held by the Company; provided that the
management and operations of such Person are controlled by a Strategic
Investor or by the Company pursuant to (i) the charter documents of such
Person, or (ii) an agreement among the holders of the Voting Stock of such
Person, or (iii) a management agreement between the Company and such Person.
"Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement,
security interest, lien (statutory or other), charge, easement, encumbrance,
preference, priority or other security or similar agreement or preferential
arrangement of any nature whatsoever on or with respect to such Property or
other asset (including, without limitation, any conditional sale or title
retention agreement having substantially the same economic effect as any of
the foregoing).
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"Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
applicable Indenture, whether at Stated Maturity, on the Change of Control
Payment Date or purchase date established pursuant to the terms of the
applicable Indenture with regard to a Change of Control Offer, an Asset Sale
Offer or an offer to repurchase upon a Termination of Trading of the Common
Stock of the Company, as applicable, or by declaration of acceleration, call
for redemption or otherwise.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or
such Restricted Subsidiary incurred in connection with such sale, including,
without limitation, all legal, title and recording tax expenses, commissions
and other fees and expenses incurred (but excluding any finder's fee or
broker's fee payable to any Affiliate of such Person) and all federal, state,
foreign and local taxes arising in connection with such sale that are paid or
required to be accrued as liability under GAAP by such Person or its
Restricted Subsidiaries, (ii) all payments made or required to be made by such
Person or its Restricted Subsidiaries on any Indebtedness which is secured by
such Properties or other assets in accordance with the terms of any Lien upon
or with respect to such Properties or other assets or which must, by the terms
of such Lien, or in order to obtain a necessary consent to such transaction or
by applicable law, be repaid in connection with such sale and (iii) all
contractually required distributions and other payments made to minority
interest holders (but excluding distributions and payments to Affiliates of
such Person) in Restricted Subsidiaries of such Person as a result of such
transaction; provided that, in the event that any consideration for a
transaction (which would otherwise constitute Net Cash Proceeds) is required
to be held in escrow pending determination of whether a purchase price
adjustment will be made, such consideration (or any portion thereof) shall
become Net Cash Proceeds only at such time as it is released to such Person or
its Restricted Subsidiaries from escrow; provided, further, that any non-cash
consideration received in connection with any transaction, which is
subsequently converted to cash, shall be deemed to be Net Cash Proceeds at
such time, and shall thereafter be applied in accordance with the Indentures.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President, the Chief Executive
Officer, the Chief Operating Officer or a Vice President, and by the Chief
Financial Officer, the Chief Accounting Officer, the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary of the Company or a
Restricted Subsidiary and delivered to the Trustee, which shall comply with
the applicable Indenture.
"Pari Passu Indebtedness" means any Indebtedness (secured or unsecured) of
the Company or any Guarantor that ranks pari passu in right of payment with
the Senior Notes or the Senior Note Guarantees, as applicable.
"Permitted Holders" means Thomas C. Brandenburg, J. Thomas Elliott and
Ronald W. Gavillet and Chase, CIBC, Hancock, BT, the Northwood Entities,
Enterprise and Merrill Lynch Global Allocation Fund, Inc., and any of their
respective Subsidiaries (or a wholly-owned Subsidiary of the sole stockholder
of any of the foregoing Persons).
"Permitted Investments" means (i) Eligible Cash Equivalents; (ii)
Investments in Property used in the ordinary course of business; (iii)
Investments in the Company or in any Restricted Subsidiary or any Person as a
result of which such Person becomes a Restricted Subsidiary in compliance with
the Senior Note Indenture; (iv) Investments pursuant to certain agreements or
obligations of the Company or a Restricted Subsidiary, in effect on the Issue
Date, to make such Investments, and disclosed in a schedule attached to the
Senior Note Indenture; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and workers' compensation,
performance and other similar deposits; (vi) Interest Hedging Obligations with
respect to any floating rate Indebtedness that is permitted by the terms of
the Senior Note Indenture to be outstanding; (vii) bonds, notes, debentures or
other debt securities received as a result of Asset Sales permitted under the
covenant described under "--Asset Sales;" (viii) Investments in existence on
the Issue Date; and (ix) Investments in securities of trade creditors,
wholesalers or customers received pursuant to any plan of reorganization or
similar arrangements.
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"Permitted Liens" means (i) Liens created by the Senior Note Indenture or
that otherwise secure the payment of the Senior Notes or the Senior Note
Guarantees, if any, and Liens created by the Convertible Note Indenture or
which otherwise secure the payment of the Convertible Notes or the Convertible
Note Guarantees, if any; (ii) Liens on Property or assets of a Person existing
at the time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary of the Company or becomes a Restricted Subsidiary of the
Company, provided that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not secure any Property or assets of
the Company or any of its Restricted Subsidiaries other than the Property or
assets subject to the Liens prior to such merger or consolidation; (iii) Liens
on Property or assets existing at the time of acquisition thereof by the
Company or any Restricted Subsidiary, provided that such Liens were not given
in contemplation of such acquisition; (iv) Liens to secure the payment of all
or a part of the purchase price or construction cost of Property or assets
acquired or constructed in the ordinary course of business after the Issue
Date, provided that the Indebtedness secured by such Liens shall not exceed
the lesser of 100% of the cost or the Fair Market Value of the Property or
assets acquired or constructed and such Liens shall not extend to any other
Property or assets; (v) Liens incurred or deposits made to secure the
performance of tenders, bids, leases not constituting Capitalized Lease
Obligations, statutory or regulatory obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the
ordinary course of business consistent with industry practice; (vi) Liens
existing as of the Issue Date and disclosed in a schedule attached to the
Senior Note Indenture; (vii) any Lien on Property of the Company in favor of
the United States of America or any state thereof, or any instrumentality of
either, to secure certain payments pursuant to any contract or statute; (viii)
any Lien for taxes or assessments or other governmental charges or levies not
then due and payable (or which, if due and payable, are being contested in
good faith and for which adequate reserves are being maintained, to the extent
required by GAAP); (ix) easements, rights-of-way, licenses and other similar
restrictions on the use of Properties or minor imperfections of title that, in
the aggregate, are not material in amount and do not in any case materially
detract from the Properties subject thereto or interfere with the ordinary
conduct of the business of the Company or its Restricted Subsidiaries; (x) any
Lien to secure obligations under workers' compensation laws or similar
legislation, including any Lien with respect to judgments which are not
currently dischargeable; (xi) any statutory warehousemen's, materialmen's or
other similar Liens for sums not then due and payable (or which, if due and
payable, are being contested in good faith and with respect to which adequate
reserves are being maintained, to the extent required by GAAP); (xii) Liens in
favor of the Company; (xiii) Liens on Property or assets of the Company
securing not more than $30 million aggregate principal amount at any one time
outstanding of Indebtedness incurred under clause (a) of the second paragraph
of the covenant described under "--Limitation on Indebtedness"; (xiv) Liens
securing any Vendor Financing, provided that such Liens do not extend to any
Property or assets other than the Property or assets the acquisition of which
was financed by such Indebtedness; (xv) Liens securing reimbursement
obligations with respect to letters of credit that encumber documents and
other Property relating to such letters of credit and the products and
proceeds thereof; and (xvi) Liens to secure any permitted extension, renewal,
refinancing or refunding (or successive extensions, renewals, refinancings or
refundings), in whole or in part, of any Indebtedness secured by Liens
referred to in the foregoing clauses (ii), (iii) and (xiv), provided that such
Liens do not extend to any other Property or assets and the principal amount
of the Indebtedness secured by such Liens is not increased.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, trust, unincorporated organization or government or
any agency or political subdivision thereof or other entity.
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, excluding Capital Stock in any other Person.
"Public Equity Offering" means an underwritten public offering of Capital
Stock (other than Disqualified Stock) of the Company pursuant to an effective
registration statement filed under the Securities Act.
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"Qualified Public Offering" means a Public Equity Offering resulting in net
proceeds to the Company of at least $35 million.
"Qualified Sale of the Company" means a sale of the Capital Stock or a
merger or consolidation involving the Company, pursuant to which the holders
of Capital Stock of the Company receive cash proceeds and/or publicly traded
securities having a fair market value in each case of at least $122,500,000 in
the aggregate, or a sale of assets of the Company pursuant to which the
Company receives net cash proceeds and/or publicly traded securities having a
fair market value of at least $122,500,000 in the aggregate.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Refinancing Indebtedness" means any Indebtedness incurred in connection
with the Refinancing of other Indebtedness.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than to the
Company or any Restricted Subsidiary of the Company on the Capital Stock of
any Restricted Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or
such Restricted Subsidiary (and other than pro rata dividends, distributions
or payments declared or paid on the Common Stock of USN Solutions, Inc. to any
Person not otherwise an Affiliate of the Company holding such Common Stock as
a result of the exercise of the USN Solutions Option; provided, that the
Company shall receive pro rata dividends, distributions or payments at the
same time and in the same form and composition of consideration as the
dividends, distributions or payments paid to such minority stockholders), (ii)
a payment made by the Company or any of its Restricted Subsidiaries (other
than to the Company or any Restricted Subsidiary of the Company) to purchase,
redeem, acquire or retire any Capital Stock of the Company or of a Restricted
Subsidiary of the Company, (iii) a payment made by the Company or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock
of the Company) to redeem, repurchase, defease (including an in-substance or
legal defeasance) or otherwise acquire or retire for value (including pursuant
to mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of the Company or
such Restricted Subsidiary which is subordinate (whether pursuant to its terms
or by operation of law) in right of payment to the Notes, or any Guarantees,
as applicable, or (iv) an Investment in any Person, including an Unrestricted
Subsidiary or the designation of a Subsidiary as an Unrestricted Subsidiary,
other than a Permitted Investment.
"Restricted Subsidiary" means (i) with respect to any Person other than the
Company and its Subsidiaries, a Subsidiary of such Person and (ii) with
respect to the Company and its Subsidiaries, any Subsidiary of the Company
that has not been classified as an "Unrestricted Subsidiary."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or
transferred by such Person or a Restricted Subsidiary of such Person and is
thereafter leased back from the purchaser or transferee thereof by such Person
or one of its Restricted Subsidiaries.
"Significant Restricted Subsidiary" means a Restricted Subsidiary that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act and the Exchange Act.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred), and, when used with respect
to any installment of interest on such security, the fixed date on which such
installment of interest is due and payable.
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"Strategic Investor" means, with respect to any relevant transaction, a
Telecommunications Company which, both as of the Business Day immediately
before the day of the closing of such transaction and the Business Day
immediately after the day of closing of such transaction, has, or whose parent
has, an equity market capitalization, a net asset value or annual revenues of
at least $2 billion on a consolidated basis. For purposes of this definition,
the term "parent" means any Person of which the relevant Strategic Investor is
a Subsidiary.
"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50%
of the outstanding partnership or similar interests of which are owned,
directly or indirectly, by such Person, or by one or more other Subsidiaries
of such Person, or by such Person and one or more other Subsidiaries of such
Person and (iii) any limited partnership of which such Person or any
Subsidiary of such Person is a general partner.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses to use
copyrighted material) that are utilized by such Person, directly or
indirectly, for the design, development, construction, installation,
integration, operation, management or provision of telecommunications systems
and/or services, including without limitation, any businesses or services in
which the Company is currently engaged and including any computer systems used
in a Telecommunications Business. Telecommunications Assets shall also include
stock, joint venture or partnership interests in another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided, further, that if such stock, joint
venture or partnership interests are held by the Company or a Restricted
Subsidiary, such other Person either is, or immediately following the relevant
transaction shall become, a Restricted Subsidiary of the Company pursuant to
the applicable Indenture unless such Person is a Joint Venture. The
determination of what constitutes Telecommunication Assets shall be made by
the Board of Directors and evidenced by a Board Resolution delivered to the
applicable Trustee.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) creating, developing or
marketing communications related network equipment, software and other devices
for use in (i) above or (iii) evaluating, participating or pursuing any other
activity or opportunity that is related to those specified in (i) or (ii)
above and includes, without limitation, any business in which the Company and
its Restricted Subsidiaries are currently engaged.
"Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.
"U.S. Government Obligations" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii)
obligations of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S.
Government Obligation which is so specified and held, provided that (except as
required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or the
specific payment of principal or interest of the U.S. Government Obligation
evidenced by such depository receipt.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the
Indentures.
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"Vendor Financing" means, with respect to any Person, an obligation owed by
such Person to a vendor of Telecommunications Assets solely in respect of the
purchase price of such assets, provided that the amount of such Indebtedness
does not exceed the Fair Market Value of such assets, and provided, further,
that such Indebtedness is incurred within 90 days of the acquisition of such
assets.
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or at the times that such class of Capital Stock has voting power
by reason of the happening of any contingency) to vote in the election of
members of the Board of Directors or comparable body of such Person.
"Wholly-Owned Restricted Subsidiary" means any Restricted Subsidiary, all of
the outstanding Capital Stock (other than directors' qualifying shares) of
which is owned, directly or indirectly, by the Company; provided, that for
purposes of the Senior Note Indenture, other than for purposes of the
definition of "Consolidated Net Income," USN Solutions, Inc. shall not cease
to be a Wholly-Owned Restricted Subsidiary merely as a result of the exercise
of the USN Solutions Option.
DESCRIPTION OF THE WARRANTS
In connection with a private placement of the Units on September 30, 1996,
the Company issued Initial Warrants to purchase 61,550 shares of Class A
Common Stock and undertook to issue, under certain circumstances, to holders
of the Old Notes and holders of the New Notes Senior Note Contingent Warrants
and to holders of the Convertible Notes Convertible Note Contingent Warrants
and Additional Warrants. The following is a description of all such Warrants.
GENERAL
On September 30, 1996, the Company issued Initial Warrants to purchase
61,550 shares of Class A Common Stock to the purchasers of the Units. The
Initial Warrants were and the Contingent Warrants will be issued pursuant to a
Warrant Agreement, dated as of September 30, 1996 (the "Warrant Agreement"),
between the Company and Harris Trust and Savings Bank, as Warrant Agent (the
"Warrant Agent"). The Initial Warrants are and the Contingent Warrants will be
subject to all terms in the Warrant Agreement and holders of Warrants are
referred to the Warrant Agreement, a copy of which is available from the
Company on request, for a complete statement of such terms. The statements and
definitions of terms under this caption relating to the Warrants are summaries
and do not purport to be complete. Such summaries make use of certain terms
defined in the Warrant Agreement and are qualified in their entirety by
express reference to the Warrant Agreement.
Each Initial Warrant is evidenced by a Warrant Certificate and entitles the
holder thereof to purchase 1.27 shares of Class A Common Stock (each a
"Warrant Share") from the Company at a price (the "Exercise Price") of $.01
per share, subject to adjustment as described below. Subject to certain
limitations, the Initial Warrants may be exercised at any time beginning 180
days from the date of original issuance thereof and on or prior to the close
of business on a date eight years following the Issue Date (the "Expiration
Date"). Initial Warrants that are not exercised by the Expiration Date will
expire. The Company will give notice of expiration not less than 90 nor more
than 120 days prior to the Expiration Date to registered holders of the then
outstanding Initial Warrants.
The aggregate number of Warrant Shares issuable upon exercise of the Initial
Warrants is equal to approximately 12% of the outstanding shares of Common
Stock, on a fully diluted basis as of the date of the issuance of the Units.
In addition, the Company will be obligated pursuant to the Senior Note
Indenture to issue to holders of the Senior Notes Senior Note Contingent
Warrants, exercisable for Class A Common Stock representing up to 3% of the
Common Stock on a fully diluted basis as of the date of such issuance (subject
to certain exceptions) after
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giving effect to the issuance of such Contingent Warrants, in the event that
on, or prior to March 30, 1998, the Company does not effect a Qualified Public
Offering or has not been sold pursuant to a Qualified Sale of the Company. In
addition, in the event that the Company has not, on or prior to September 30,
1999, (i) consummated a Qualified Public Offering or (ii) been sold pursuant
to a Qualified Sale of the Company, the Company will be obligated pursuant to
the Convertible Note Indenture to issue to the holders of the Convertible
Notes Convertible Note Contingent Warrants exercisable for Class A Common
Stock representing up to 2.5% of the Common Stock of the Company on a fully
diluted basis (subject to certain exceptions) after giving effect to the
issuance of such Contingent Warrants. All Contingent Warrants will be issued
pursuant to the Warrant Agreement with the same rights thereunder as the
Initial Warrants, and holders will have the benefit of the Registration Rights
Agreement. See "Description of the Notes--Certain Covenants--Issuance of
Contingent Warrants."
Under certain conditions, if the Company has not consummated a Qualified
Public Offering or a Qualified Sale of the Company has not occurred by
September 30, 1997, the Company will be required to offer to holders of
Convertible Notes the right to acquire additional convertible securities and
warrants. See "Description of the Notes--Additional Invested Equity."
CERTAIN TERMS
Exercise
In order to exercise all or any of the Warrants represented by a Warrant
Certificate, the holder thereof is required to surrender to the Warrant Agent
the Warrant Certificate, a duly executed copy of the subscription form set
forth in the Warrant Certificate and payment in full of the Exercise Price for
each Warrant Share or other security as to which a Warrant is being exercised.
Payment for securities upon exercise of a Warrant may be made in cash or by
certified check, official bank check or bank cashier's check payable to the
order of the Company. Upon the exercise of any Warrant in accordance with the
Warrant Agreement, the Warrant Agent shall instruct the Company to transfer
promptly to, or upon the written order of, the holder of such Warrant
appropriate evidence of ownership of any Warrant Share or other securities or
property to which such holder is entitled, registered or otherwise placed in
such name or names as such holder may direct in writing, and the Company shall
deliver such evidence of ownership to the person or persons entitled to
receive the same, including, without limitation, any cash payable to adjust
for fractional interests in Warrant Shares issuable upon such exercise. If
less than all of the Warrants evidenced by a Warrant Certificate are to be
exercised, a new Warrant Certificate will be issued for the remaining number
of Warrants. All Warrant Shares or other securities issuable by the Company
upon the exercise of the Warrants shall be validly issued, fully paid and
nonassessable.
No fractional Warrant Shares will be issued upon exercise of the Warrants.
If any fraction of a Warrant Share would, except for the foregoing provision,
be issuable upon the exercise of any Warrants (or specified portion thereof),
the Company will pay an amount in cash equal to the Current Market Price (as
defined in the Warrant Agreement) per share of Class A Common Stock, as
determined on the trading day immediately preceding the date the Warrant is
presented for exercise, multiplied by such fraction, computed to the nearest
whole cent.
Certificates for Warrants will be issued in global form or registered form
as definitive warrant certificates and no service charge will be made for
registration of transfer or exchange upon surrender of any Warrant Certificate
at the office of the Warrant Agent maintained for that purpose. The Company
may require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any registration or transfer or
exchange of Warrant Certificates.
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares is then effective under,
or the exercise of such Warrants is exempt from the registration requirements
of, the Securities Act. See "Registration Rights."
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Adjustments
Subject to certain exceptions, including the issuance of the Initial
Warrants, the Contingent Warrants and Additional Warrants and conversion of
the Convertible Notes, the Exercise Price and the number of Warrant Shares
issuable upon exercise of the Warrants will be subject to adjustment on the
occurrence of certain events including: (i) the payment by the Company of
dividends (or the making of other distributions) with respect to Common Stock
payable in Common Stock or other shares of the Company's capital stock, (ii)
subdivisions, combinations and reclassifications of Common Stock, (iii) the
issuance to all holders of Common Stock of rights, options or warrants
entitling them to subscribe for Common Stock, or of securities convertible
into or exchangeable for shares of Common Stock, in either case for
consideration per share of Common Stock which is less than the Current Market
Price per share of Common Stock, (iv) the issuance or sale of shares of Common
Stock for consideration per share of Common Stock which is less than the
Current Market Price per share of Common Stock and (v) the distribution to all
holders of Common Stock of any of the Company's assets, debt securities or any
rights or warrants to purchase securities (excluding those rights and warrants
referred to in clause (iii) above and excluding cash dividends or other cash
distributions from current or retained earnings).
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least 1.0% in the Exercise Price;
provided, that any adjustment which is not made will be carried forward and
taken into account in any subsequent adjustment.
Mergers, Consolidations and Certain Other Transactions
Except as otherwise provided herein, in the event the Company consolidates
with, merges with or into, or sells all or substantially all of its property
and assets to another Person, each Warrant thereafter shall entitle the holder
thereof to receive upon exercise thereof the number of shares of capital stock
or other securities or property which the holder of a share of Common Stock is
entitled to receive upon completion of such consolidation, merger or sale of
assets. If the Company merges or consolidates with, or sells all or
substantially all of its property and assets to, another Person and, in
connection therewith, consideration to the holders of Common Stock in exchange
for their shares is payable solely in cash, or in the event of the
dissolution, liquidation or winding-up of the Company, then the holders of the
Warrants will be entitled to receive distributions on an equal basis with the
holders of Common Stock or other securities issuable upon exercise of the
Warrants, as if the Warrants had been exercised immediately prior to such
event, less the Exercise Price. Upon receipt of such payment, if any, the
Warrants will expire and the rights of the holders thereof will cease.
In case of any such merger, consolidation or sale of assets, the surviving
or acquiring Person and, in the event of any dissolution, liquidation or
winding-up of the Company, the Company, shall deposit promptly with the
Warrant Agent the funds or other consideration, if any, necessary to pay the
holders of the Warrants. After such funds and the surrendered Warrant
Certificate are received, the Warrant Agent shall make payment by delivering a
check in such amount as is appropriate (or, in the case of consideration other
than cash, shall transfer such other consideration as is appropriate) to such
Person or Persons as it may be directed in writing by the holders surrendering
such Warrants.
No Rights as Stockholders
The holders of unexercised Warrants are not entitled, as such, to receive
dividends or other distributions with respect to the Common Stock, receive
notice of any meeting of the stockholders of the Company, consent to any
action of the stockholders of the Company, receive notice of any other
stockholder meetings, or to any other rights as stockholders of the Company.
RESERVATION OF SHARES
The Company has authorized and reserved for issuance such number of shares
of Common Stock as shall be issuable upon the exercise of all outstanding
Warrants. Such shares of Class A Common Stock, when paid for and issued, will
be duly and validly issued, fully paid and non-assessable, free of preemptive
rights and free from all taxes, liens, charges and security interests with
respect to the issue thereof.
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AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including, without limitation, curing defects or
inconsistencies or making any change that does not materially adversely affect
the rights of any holder. Any amendment or supplement to the Warrant Agreement
that has a material adverse effect on the interests of the holders of the
Warrants shall require the written consent of the holders of a majority of the
then outstanding Warrants. The consent of each holder of the Warrants affected
shall be required for any amendment pursuant to which the Exercise Price would
be increased or the number of Warrant Shares purchasable upon exercise of
Warrants would be decreased (other than pursuant to adjustments provided in
the Warrant Agreement).
REGISTRATION RIGHTS
With respect to the Notes, the Warrants, the Warrant Shares and the
Convertible Note Shares, the Company has entered into a registration rights
agreement with the Initial Purchasers, dated as of September 30, 1996 (the
"Registration Rights Agreement"), for the benefit of the holders of the Notes
and the Warrants. The summary herein of certain provisions of the Registration
Rights Agreement relating to the Convertible Notes and the Warrants does not
purport to be complete and is subject to all the provisions of the
Registration Rights Agreement, which is available upon request from the
Company.
CONVERTIBLE NOTES
Registration of the Convertible Notes. The Company is required, under the
terms of the Registration Rights Agreement, to (i) file a shelf registration
statement with respect to resale of the Convertible Notes by the holders
thereof (the "Convertible Note Shelf Registration Statement") with the
Commission within 60 days after the date of original issuance of the
Convertible Notes; (ii) cause the Convertible Note Shelf Registration
Statement to be declared effective under the Securities Act within 120 days
after the date of original issuance of the Convertible Notes; and (iii)
maintain the effectiveness of the Convertible Note Shelf Registration
Statement until the earlier of (a) such time as all Convertible Notes have
been sold thereunder or otherwise or exercised and (b) three years after its
effective date. The Company will provide to each holder of Convertible Notes
covered by the Convertible Note Shelf Registration Statement copies of the
prospectus which is a part of the Convertible Note Shelf Registration
Statement, notify each such holder when the Convertible Note Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Convertible Notes. A holder
of Convertible Notes that sells such Convertible Notes pursuant to the
Convertible Note Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to the purchaser, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations).
If either (i) the Convertible Note Shelf Registration Statement has not been
declared effective by the Commission on or prior to the date specified for
such effectiveness in the Registration Rights Agreement, or (ii) any
Convertible Note Shelf Registration Statement required by the Registration
Rights Agreement is filed and declared effective but shall thereafter cease to
be effective or fail to be usable for its intended purpose without being
succeeded immediately by a post-effective amendment to such Convertible Note
Shelf Registration Statement that cures such failure and that is itself
declared effective for a period of more than 30 consecutive business days
(each such event referred to in clauses (i) and (ii), a "Convertible Note
Registration Default"), then commencing on the day following the date on which
such Convertible Note Registration Default occurs, the Company agrees to pay
to each holder of the Convertible Notes during the first 90-day period
immediately following the occurrence of such Convertible Note Registration
Default Special Interest. The amount of Special Interest payable to each
holder shall increase by an additional 0.5% per annum for each subsequent 90-
day period up to a maximum rate of 1.5% per annum. A Convertible Note
Registration Default shall cease, and Special
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Interest shall cease to be payable with respect to such Convertible Note
Registration Default, (1) upon the effectiveness of the Convertible Note Shelf
Registration Statement in the case of clause (i) above, or (2) when the
Convertible Note Shelf Registration Statement becomes effective or usable in
the case of clause (ii) above. Notwithstanding the foregoing, (i) the amount
of Special Interest payable shall not increase because more than one
Convertible Note Registration Default has occurred and is pending and (ii) a
holder of Convertible Notes who is not entitled to the benefits of the
Convertible Note Shelf Registration Statement (i.e., such holder has not
elected to include information) shall not be entitled to Special Interest with
respect to a Convertible Note Registration Default that pertains to the
Convertible Note Shelf Registration Statement.
All accrued Special Interest shall be paid to record holders in the same
manner in which payments of interest are made pursuant to the Convertible Note
Indenture. See "Description of the Notes--Principal, Maturity and Interest."
Payment of Special Interest is the sole remedy available to holders of
Convertible Notes in the event the Company does not comply with the deadlines
set forth in the Registration Rights Agreement with respect to the
registration of the Convertible Notes for resale under a shelf registration
statement.
Holders of Convertible Notes will be able to convert their Convertible Notes
only if a registration statement relating to the Convertible Note Shares is
then effective under, or the conversion of the Convertible Notes is exempt
from the registration requirements of, the Securities Act.
Registration of Convertible Note Shares. The Company is required, under the
terms of the Registration Rights Agreement, to (i) file a shelf registration
statement with respect to the Company's issuance of the Convertible Note
Shares to holders upon exercise of the Convertible Notes (the "Convertible
Note Shares Shelf Registration Statement") with the Commission within 60 days
after the date of original issuance of the Convertible Notes, (ii) cause the
Convertible Note Shares Shelf Registration Statement to be declared effective
under the Securities Act within 120 days after the date of original issuance
of the Convertible Notes and (iii) keep effective the Convertible Note Shares
Shelf Registration Statement (or a successor registration statement thereto)
until eight years after the Issue Date of the Convertible Notes or such
shorter period that will terminate when all the Convertible Note Shares
covered by such Convertible Note Shares Shelf Registration Statement have been
sold pursuant to such Convertible Note Shares Shelf Registration Statement or
otherwise.
The Company will provide to each holder of Convertible Note Shares copies of
the prospectus which is a part of the Convertible Note Shares Shelf
Registration Statement, notify each such holder when the Convertible Note
Shares Shelf Registration Statement has become effective and take certain
other actions, subject to compliance by such holder with certain conditions in
the Registration Rights Agreement, as are required to permit unrestricted
resales of the Convertible Note Shares.
Each holder of Convertible Note Shares that sells such Convertible Note
Shares pursuant to the Convertible Note Shares Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to the purchaser, will be
subject to certain of the civil liability provisions under the Securities Act
in connection with such shares and will be bound by certain provisions of the
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations).
WARRANTS
Registration of the Warrants. The Company is required, under the terms of
the Registration Rights Agreement, to (i) file a shelf registration statement
with respect to resale of the Warrants by the holders thereof (the "Warrant
Shelf Registration Statement") with the Commission within 60 days after the
date of original issuance of the Initial Warrants; (ii) cause the Warrant
Shelf Registration Statement to be declared effective under
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the Securities Act within 120 days after the date of original issuance of the
Initial Warrants; and (iii) keep effective the Warrant Shelf Registration
Statement until the earlier of (A) such time as all Initial Warrants have been
sold thereunder or otherwise or exercised and (B) three years after its
effective date; provided, however, that in the event the Company is required
to issue Contingent Warrants or Additional Warrants, the Company shall amend
the Warrant Shelf Registration Statement to include the Contingent Warrants
and the time period shall be three years after the issuance of the Contingent
Warrants or Additional Warrants, as the case may be.
The Company will provide to each holder of Warrants copies of the prospectus
which is a part of the Warrant Shelf Registration Statement, notify each such
holder when the Warrant Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of
the Warrants.
Each holder of Warrants that sells such Warrants pursuant to the Warrant
Shelf Registration Statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus
to the purchaser, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by
certain provisions of the Registration Rights Agreement which are applicable
to such holder (including certain indemnification obligations).
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares is then effective under,
or the exercise of such Warrants is exempt from the registration requirement
of, the Securities Act.
Registration of the Warrant Shares. The Company also is required, under the
terms of the Registration Agreement, to (i) file a shelf registration
statement with respect to the Company's issuance of the Warrant Shares to
holders upon exercise of the Warrants (the "Warrant Shares Shelf Registration
Statement") with the Commission within 270 days after the date of original
issuance of the Initial Warrants, (ii) cause the Warrant Shares Shelf
Registration Statement to be declared effective under the Securities Act
within 360 days after the date of original issuance of the Initial Warrants
and (iii) keep effective the Warrant Shares Shelf Registration Statement (or a
successor registration statement thereto) until eight years after the Issue
Date of the Convertible Notes or such shorter period that will terminate when
all the Warrant Shares covered by such Warrant Shares Shelf Registration
Statement have been sold pursuant to such Warrant Shares Shelf Registration
Statement or otherwise.
The Company will, upon the filing of the Warrant Shares Shelf Registration
Statement, provide to each holder of Warrant Shares copies of the prospectus
which is a part of the Warrant Shares Shelf Registration Statement, notify
each such holder when the Warrant Shares Shelf Registration Statement has
become effective and take certain other actions, subject to compliance by such
holder with certain conditions in the Registration Rights Agreement, as are
required to permit unrestricted resales of the Warrant Shares.
Each holder of Warrant Shares that sells such Warrant Shares pursuant to the
Warrant Shares Shelf Registration Statement generally will be required to be
named as a selling securityholder in the related prospectus and to deliver a
prospectus to the purchaser, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such shares and will be
bound by certain provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations). In
addition, each holder of Warrant Shares will be required to deliver
information to be used in connection with the Warrant Shares Shelf
Registration Statement in order to have its Warrant Shares included in the
Warrant Shares Shelf Registration Statement.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 2,650,000 shares of
capital stock, consisting of 2,550,000 shares of Common Stock, par value $.01
per share, of which 2,500,000 shares are designated as Class A Common Stock
and 50,000 shares are designated as Class B Common Stock, and 100,000 shares
are designated as Preferred Stock, par value $1.00 per share.
COMMON STOCK
The holders of Common Stock are entitled to receive dividends when and as
dividends are declared by the Board of Directors of the Company out of funds
legally available therefor, provided that if any shares of Preferred Stock are
at the time outstanding, the payment of dividends on the Common Stock or other
distributions may be subject to the declaration and payment of full cumulative
dividends on outstanding shares of Preferred Stock. If stock dividends are
declared, holders of Class A Common Stock will receive shares of Class A
Common Stock and holders of Class B Common Stock will receive shares of Class
B Common Stock.
Except for matters where applicable law requires the approval of one or both
classes of Common Stock voting as separate classes, holders of Class A Common
Stock are entitled to one vote per share on all matters submitted to a vote of
the stockholders, including the election of directors. Unless required by law,
holders of Class B Common Stock are not entitled to voting rights.
Shares of Class A Common Stock are convertible into Class B Common Stock on
a one-to-one basis at any time at the option of the holders thereof.
Upon any liquidation, dissolution or winding up of the affairs of the
Company, whether voluntary or involuntary, any assets remaining after the
satisfaction in full of the prior rights of creditors and the aggregate
liquidation preference of any Preferred Stock then outstanding will be
distributed to the holders of Class A Common Stock and Class B Common Stock,
ratably as a single class in proportion to the number of shares held by them.
In the event of a reorganization, consolidation or merger of the Company,
each holder of a share of Class A Common Stock shall be entitled to receive
the same kind and amount of property receivable by a holder of a share of
Class B Common Stock and each holder of a share of Class B Common Stock shall
be entitled to receive the same kind and amount of property receivable by a
holder of Class A Common Stock.
TRANSFER AGENT AND REGISTRAR OF CLASS A COMMON STOCK
The transfer agent and registrar for the Class A Common Stock is Harris
Trust and Savings Bank.
PREFERRED STOCK
The authorized but unissued Preferred Stock may be issued by the Board of
Directors of the Company from time to time in one or more series with such
preferences, terms and rights as the Board of Directors may determine without
further action by the stockholders of the Company. Accordingly, the Board of
Directors has the power to fix the dividend rate and to establish the
provisions, if any, relating to dividends, voting rights, redemption rates,
sinking funds, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future. Currently, the Company has 30,000 shares
of Preferred Stock authorized for issuance, all of which has been designated
as 9% Cumulative Convertible PIK Preferred Stock (the "9% Preferred Stock").
In connection with the Offering, the Company issued 10,000 shares of its 9%
Preferred Stock. The 9% Preferred Stock has a liquidation preference and
stated value of $1,000 per share. Dividends will accrue semiannually at a rate
of 9% per annum and be fully cumulative. Dividends are payable in additional
shares of 9% Preferred Stock. In the event of any liquidation, dissolution or
winding up of the Company, holders of the
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9% Preferred Stock will be entitled to receive their full liquidation
preference per share, together with accrued and unpaid dividends, prior to the
distribution of any assets of the Company to holders of Common Stock.
Shares of 9% Preferred Stock are not redeemable at the option of the
Company, but are subject to mandatory redemption in 2006 at the stated value,
together with all accrued and unpaid dividends to the redemption date.
The shares of 9% Preferred Stock are convertible into shares of Class A
Common Stock, at any time, in whole or from time to time in part, at the
option of the holders thereof.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Company's
management. The issuance of shares of the Preferred Stock pursuant to the
Board of Directors' authority described above may adversely affect the rights
of the holders of Common Stock. For example, Preferred Stock issued by the
Company may rank prior to the Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
LIMITATION OF LIABILITY OF DIRECTORS
The Certificate of Incorporation provides that a director of the Company
will not be personally liable for monetary damages to the Company or its
stockholders for breach of fiduciary duty as a director, except for liability,
(i) for any breach of the director's duty of loyalty to such corporation or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemption as
provided in Section 194 of the Delaware General Corporation Law (the "DGCL")
or (iv) for any transaction from which the director derived an improper
personal benefit.
This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of
care by a director. As a result of the inclusion of such a provision,
stockholders may be unable to recover monetary damages against directors for
actions taken by them that constitute negligence or gross negligence or that
are otherwise in violation of their fiduciary duty of care, although it may be
possible to obtain injunctive or other equitable relief with respect to such
actions. If equitable remedies are found not to be available to stockholders
in any particular situation, stockholders may not have an effective remedy
against a director in connection with such conduct.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws provide that directors and officers of the Company shall be
indemnified against liabilities arising from their service as directors and
officers. Additionally, the Company has entered into indemnification
agreements with each of its executive officers and directors to reimburse them
for certain liabilities incurred in connection with the performance of their
fiduciary duties. Section 145 of the DGCL ("Section 145") empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that he is or was a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
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Section 145 also empowers a corporation to 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 acted in any of
the capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may 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 was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
Section 145 further provides that to the extent that a director or officer
of a corporation has been successful in the defense of any action, suit or
proceeding referred to above or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 145 shall not be deemed exclusive of
any other rights to which the indemnified party may be entitled; and that the
corporation is empowered to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him in any such capacity, or arising out of his status as such, whether or not
the corporation would have the power to indemnify him against such liabilities
under Section 145.
There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of
the Company which could give rise to an indemnification obligation on the part
of the Company. In addition, except as described herein, the Board of
Directors is not aware of any threatened litigation or proceeding which may
result in a claim for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain United States federal income tax
consequences of an exchange of Old Notes for New Notes and the ownership of
New Notes, as well as certain potential federal income tax consequences to the
Company with respect to the Notes. Except where noted, it deals only with Old
Notes and New Notes held as capital assets by initial purchasers of Old Notes
that are United States holders and does not deal with special situations, such
as those of foreign persons, dealers in securities, financial institutions,
life insurance companies, holders whose "functional currency" is not the U.S.
dollar, or special rules with respect to integrated transactions of which the
ownership of common stock is a part (such as certain hedging transactions), or
certain "straddle" transactions. Furthermore, the discussion below is based
upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and regulations, rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified so as
to result in federal income tax consequences different from those discussed
below. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE FEDERAL
INCOME TAX CONSIDERATIONS THAT MAY BE SPECIFIC TO THEM OF THE EXCHANGE OF OLD
NOTES FOR NEW NOTES AND THE OWNERSHIP OF THE NEW NOTES, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
EXCHANGE OF SENIOR NOTES
There should be no federal income tax consequences to holders exchanging Old
Notes for New Notes pursuant to the Exchange Offer since the Exchange Offer
will be by operation of the original terms of the Old Notes, pursuant to a
unilateral act by the Company and will not result in any material alteration
in the terms of the Old Notes. Each exchanging holder will have the same
adjusted tax basis and holding period in the New Notes as it had in the Old
Notes immediately before the exchange.
TAXATION OF THE SENIOR NOTES
Original Issue Discount. Because the Old Notes were issued with original
issue discount ("OID"), the New Notes will also bear OID that holders
generally will be required to include in income as it accrues on a yield-to-
maturity basis over the term of the New Notes in advance of cash payments
attributable to such income (regardless of whether the holder is a cash or
accrual basis taxpayer). The amount of OID with respect to a New Note will be
the excess of the stated redemption price at maturity of such New Note over
its issue price. The stated redemption price at maturity will include all
payments required to be made on the New Notes whether denominated as principal
or interest (other than payments subject to remote or incidental
contingencies). The Company intends to treat the payment of Special Interest
and the issuance of Contingent Warrants as subject to such contingencies,
which treatment is binding on holders unless a holder explicitly discloses on
its tax return for the taxable year that includes the acquisition date of Old
Notes that its treatment is different. The Company's treatment is not,
however, binding on the Internal Revenue Service (the "IRS").
The issue price of the New Notes is equal to the issue price of the Old
Notes. The issue price of the Old Notes, which is the same as the issue price
of the New Notes, was determined by allocating the issue price of the Units
between the Old Notes and the Warrants based on their relative fair market
values. For this purpose, the issue price of a Unit was the initial price at
which a substantial portion of the Units were sold (not including sales to
bond houses, brokers or similar persons or organizations acting in the
capacity of underwriters or wholesalers). With respect to the $ million
in aggregate proceeds received from the offering of the Units, the Company
allocated approximately $ million to the Old Notes and $ million to the
Initial Warrants. This allocation reflected the Company's judgment as to the
relative values of those instruments at the time of issuance. The allocation
is binding on a holder unless such holder explicitly discloses on its tax
return for the taxable year that includes the acquisition date of the Unit
that its allocation is different from that of the Company. The allocation is
not, however, binding on the IRS.
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A holder of a debt instrument that bears OID is required to include in gross
income an amount equal to the sum of the daily portions of OID for each day
during the taxable year in which the debt instrument is held. The daily
portions of OID are determined by allocating to each day in an accrual period
the pro rata portion of the OID that is allocable to the accrual period. The
amount of OID that is allocable to an accrual period with respect to the New
Notes is generally equal to the product of the adjusted issue price of the New
Notes at the beginning of the accrual period (the issue price of the New Notes
determined as described above, generally increased by all prior accruals of
OID with respect to the Old Notes and the New Notes) and the New Notes' yield-
to-maturity (the discount rate, which, when applied to all payments under the
Old Notes and the New Notes, results in a present value equal to the issue
price of the New Notes). In the case of the final accrual period, the
allocable OID generally is the difference between the amount payable at
maturity and the adjusted issue price at the beginning of the accrual period.
The Company will furnish annually to the IRS and to holders (other than with
respect to certain exempt holders, including, in particular, corporations)
information with respect to the OID accruing while the Senior Notes were held
by the holders.
Premium. If a holder purchased an Old Note for an amount that is greater
than such Note's stated redemption price at maturity, such holder will be
considered to have purchased such Note with "amortizable bond premium" equal
in amount to such excess, and generally will not be required to include OID in
income. A holder may elect to amortize such premium, using a constant yield
method, over the remaining term of such Note with reference to either the
amount payable on maturity or, if it results in a smaller premium attributable
to the period through the earlier call date, with reference to the amount
payable on the earlier call date. An election to amortize bond premium applies
to all taxable debt obligations then owned and thereafter acquired by the
holder and may be revoked only with the consent of the IRS.
If a holder of a New Note (including an original purchaser of an Old Note)
purchased the Old Note exchanged therefor for an amount greater than the Old
Note's adjusted issue price but less than such Note's stated redemption price
at maturity, then the holder will be required to include annual accruals of
OID in gross income in accordance with the rules described above; however, the
amount of OID includable in income will be reduced to reflect such acquisition
premium. The includable OID (as otherwise determined) will be reduced by an
amount equal to the OID multiplied by a fraction, the numerator of which is
such excess and the denominator of which is the OID for the period from the
date of acquisition until the maturity date.
Registration of the Notes. If, within the applicable period after the
original issuance of the Old Notes, this Exchange Offer Registration Statement
has not become effective or the Exchange Offer is not consummated, or certain
other events constituting a Senior Note Registration Default occur, Special
Interest shall become payable in cash with respect to the Old Notes. See "The
Exchange Offer--Purpose and Effect of the Exchange Offer." This rate increase
should not result in a deemed reissuance or taxable exchange of the Old Notes.
Similarly, in the event that the Company does not effect a Qualified Public
Offering within 18 months following the date of the original issuance of the
Old Notes, the Senior Note Indenture will require the Company to issue Senior
Note Contingent Warrants to the holders of the Senior Notes. The issuance of
the Contingent Warrants should not result in a deemed taxable exchange of the
Senior Notes for federal income tax purposes. The Company intends to treat the
issuance of Contingent Warrants, if any, as interest for federal income tax
purposes in an amount equal to their fair market value on the date of
issuance.
Disposition of New Notes. A holder will generally recognize gain or loss
upon the sale, exchange, retirement or other disposition of New Notes equal to
the difference between the amount realized on the disposition and the holder's
adjusted tax basis in the New Notes. A holder's adjusted tax basis in a New
Note will generally be the cost of the Old Note, increased by any OID
previously included in income by such holder and decreased by the amount of
any deductions for amortizable bond premium. Such gain or loss generally would
be capital gain or loss and would be long-term if the holding period for the
New Notes (which includes the holding period of the Old Notes) is more than
one year.
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Backup Withholding. Under certain circumstances, a holder may be subject to
backup withholding at a 31% rate on payments received with respect to the New
Notes. This withholding generally applies only if the holder (i) fails to
furnish his or her social security or other taxpayer identification number
("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he
or she has failed to report payment of interest and dividends properly and the
IRS has notified the Company that he or she is subject to backup withholding
or (iv) fails, under certain circumstances, to provide a certified statement,
signed under penalty of perjury, that the TIN provided is his or her correct
number and that he or she is not subject to backup withholding. Any amount
withheld from a payment to a holder under the backup withholding rules is
allowable as a credit against such holder's federal income tax liability,
provided that the required information is furnished to the IRS. Certain
holders (including, among others, corporations and foreign individuals who
comply with certain certification requirements) are not subject to backup
withholding. Holders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
CERTAIN POTENTIAL FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND TO
CORPORATE HOLDERS.
The Senior Notes will constitute applicable high yield discount obligations
("AHYDOs") if their yield-to-maturity is greater than the sum of the relevant
applicable Federal rate (the "AFR") plus five percentage points and the Senior
Notes were issued with significant OID. In such event, the Company will not be
entitled to deduct OID that accrues with respect to such Notes until amounts
attributable to such OID are paid. In addition, if the Senior Notes are AHYDOs
and the yield-to-maturity of the Senior Notes exceeds the sum of the relevant
AFR plus six percentage points (the "Excess Yield"), the Company's deduction
for the "disqualified portion" of the OID accruing on the Senior Notes will be
disallowed. In general, the "disqualified portion" of the OID for any accrual
period will be equal to the product of (i) the Excess Yield divided by the
yield-to-maturity on the Senior Notes, and (ii) the OID for the accrual
period. Subject to otherwise applicable limitations, holders that are U.S.
corporations will be entitled to a dividends-received deduction (generally at
a current rate of 70%) with respect to any disqualified portion of the accrued
OID to the extent that the Company has sufficient current or accumulated
earnings and profits. If the disqualified portion exceeds the Company's
current and accumulated earnings and profits, the excess will continue to be
taxed as ordinary OID income in accordance with the rules described above in
"Original Issue Discount."
It is also possible that some or all of the Notes may constitute "corporate
acquisition indebtedness" if, among other things, the proceeds of the Notes
are used to pay for the purchase of stock or at least two-thirds of the
operating assets of another corporation. To the extent the Notes constitute
corporate acquisition indebtedness, under Section 279 of the Code the maximum
amount of interest or original issue discount the Company can deduct with
respect thereto in any taxable year is $5 million, reduced by any interest
incurred on indebtedness to acquire stock or operating assets but which does
not qualify as corporate acquisition indebtedness.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any Holder thereof
(other than any such Holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
Holder's business and such Holder has no arrangement with any person to
participate in the distribution of such New Notes. Accordingly, any Holder
using the Exchange Offer to participate in a distribution of the New Notes
will not be able to rely on such no-action letters. Notwithstanding the
foregoing, each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with any resale of New Notes received in exchange
for Old Notes where such Old Notes were
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acquired as a result of market-making activities or other trading activities.
The Company has agreed that for a period of 180 days from the Expiration Date,
it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In addition, until
March , 1997 (90 days from the date of this Prospectus), all dealers
effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver, and by delivering, a prospectus as required, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days from the Expiration Date, the Company will send a
reasonable number of additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company will pay all the expenses
incident to the Exchange Offer (which shall not include the expenses of any
Holder in connection with resales of the New Notes). The Company has agreed to
indemnify the Initial Purchasers and any broker-dealers participating in the
Exchange Offer against certain liabilities, including liabilities under the
Securities Act.
This Prospectus has been prepared for use by the Initial Purchasers in
connection with offers and sales of the Notes, the Warrants and the Class A
Common Stock underlying the Warrants and the Convertible Notes, in market-
making transactions at negotiated prices related to prevailing market prices
at the time of sale. The Initial Purchasers may act as principal or agent in
such transactions. The Initial Purchasers have advised the Company that they
currently intend to make a market in the Notes, the Warrants and the Class A
Common Stock but they are not obligated to do so and may discontinue any such
market-making at any time without notice. Accordingly, no assurance can be
given that an active trading market will develop for or as to the liquidity of
the Notes, the Warrants or the Class A Common Stock.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Skadden, Arps, Slate, Meagher & Flom (Illinois).
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1994 and for the fiscal years then ended included in this Prospectus and
the related financial statement schedules included elsewhere in this
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and elsewhere in this
Registration Statement, and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
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GLOSSARY
ACCESS CHARGES--The fees paid by IXCs to LECs for originating and
terminating long distance calls on their local networks.
CAP (Competitive Access Provider)--A company that provides its subscribers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs) and metropolitan
area network providers (MANs) and were formerly referred to as alternative
access vendors (AAVs).
CENTRAL OFFICES--The switching centers or central switching facilities of
the LECs.
CENTREX--Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the
carrier's premises and not at the premises of the subscriber. These features
include direct dialing within a given phone system, direct dialing of incoming
calls, and automatic identification of outbound calls. This is a value added
service that carriers can provide to a wide range of subscribers who do not
have the size or the funds to support their own on-site PBX.
CHURN--The effect of a subscriber electing an alternative telecommunications
provider after having been provided with the telecommunications services of
the Company.
CO-CARRIER STATUS--A relationship between competitive local exchange
carriers ("CLECs") that affords the same access to and rights on each other's
networks, and that provides access and services on an equal basis.
COLLOCATION--The ability of a CLEC such as the Company to connect its
network to the LEC's central offices. Physical collocation occurs when a CLEC
places its network connection equipment inside the LEC's central offices.
Virtual collocation is an alternative to physical collocation pursuant to
which the LEC permits a CLEC to connect its network to the LEC's central
offices at competitive prices, even though the CLEC's network connection
equipment is not physically located inside the central offices.
DEDICATED LINES--Telecommunications lines dedicated or reserved for use
exclusively by particular subscribers along predetermined routes (in contrast
to telecommunications lines within the LEC's public switched network).
DEDICATED SERVICES--Special access, switched transport and private line
services generally offered by CLECs, including the Company.
DIVESTITURE--In 1982, the Department of Justice and AT&T entered into the
Modified Final Judgment (the "MFJ") which resulted in the break-up of AT&T's
monopoly over local and long distance services. This judgment established
seven separate regionally based local switched bell operating companies and
essentially laid the ground work for intense competition in the newly defined
long distance segment of the telecommunications market.
FCC--Federal Communications Commission.
FIBER OPTICS--Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. A strand of
fiber optic cable is as thick as a human hair yet is said to have more
bandwidth capacity than copper cable the size of a telephone pole.
FRAME RELAY--Frame Relay is a high-speed data packet switching service used
to transmit data between computers. Frame Relay supports data units of
variable lengths at access speeds ranging from 56kbs to 1.5 mbs. This service
is ideal for connecting LANS, but is not appropriate for voice and video
applications due to the variable delays that can occur. Frame Relay was
designed to operate at higher speeds on modern fiber optic networks.
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INTERCONNECTION DECISIONS--Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC central offices to any CLEC, long distance carrier or
end user seeking such interconnection for the provision of interstate special
access and switched access transport services.
INTEREXCHANGE CARRIERS OR IXCS--See Long Distance Carrier.
LANS (Local Area Networks)--The interconnection of computers for the purpose
of sharing files, programs and various devices such as work stations, printers
and high-speed modems. LANs may include dedicated computers or file servers
that provide a centralized source of shared files and programs.
LATAS (Local Access and Transport Areas)--The geographically defined areas
in which LECs are authorized by the MFJ to provide local switched services.
LECS (Local Exchange Carriers)--Companies providing local telephone
services.
LOCAL EXCHANGE AREAS--A geographic area determined by the appropriate state
regulatory authority in which local calls generally are transmitted without
toll charges to the calling or called party.
LONG DISTANCE CARRIERS OR INTEREXCHANGE CARRIERS--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis.
A long distance carrier may offer services over its own or another carrier's
facilities. Long distance carriers include, among others, AT&T, MCI, Sprint
and WorldCom, as well as resellers of long distance capacity.
POPS (Point of Presence)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PRIVATE LINE--A private, dedicated telecommunications line connecting
different locations (excluding long distance carrier POPs).
PROVISIONING--The process of initiating a carrier's service to a subscriber.
RBOCS (Regional Bell Operating Companies)--The seven local telephone compa-
nies established by the MFJ. These RBOCs are prohibited from providing inter-
LATA services and from manufacturing telecommunications equipment.
RESELLER--A company which does not own its own transmission facilities and
contracts with facilities-based carriers for the transmission of its
subscribers' long distance calls. In essence, a reseller buys excess capacity
(in minutes) from large facilities-based carriers at volume discounts and
sells services (minutes) to subscribers at reduced cost.
SPECIAL ACCESS SERVICES--The lease of private, dedicated telecommunications
lines or "circuits" along the network of a LEC or a CLEC (such as the
Company), which lines or circuits run to or from the long distance carrier
POPs. Examples of special access services are telecommunications lines running
between POPs of a single long distance carrier, from one long distance carrier
POP to the POP of another long distance carrier or from a subscriber to its
long distance carrier POP. Special access services do not require the use of
switches.
SWITCH--A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits
or selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
SWITCHED ACCESS SERVICES--The origination or termination of long distance
traffic between a customer premise and an IXC POP via shared local trunks
using a local switch.
SWITCHED TRANSPORT SERVICES--Transportation of switched traffic along
dedicated lines between the LEC central offices and interexchange POPs.
SWITCHED TRAFFIC--Telecommunications traffic along a switched network.
TELECOMMUNICATIONS ACT--The Telecommunications Act of 1996.
111
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED USN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Consolidated Financial Statements for the periods ended December
31, 1994 and 1995:
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Redeemable Preferred Stock and Common
Stockholders' Equity.................................................. F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
Unaudited Condensed Consolidated Financial Statements for the nine months
ended
September 30, 1995 and 1996:
Condensed Consolidated Balance Sheets.................................. F-15
Condensed Consolidated Statements of Operations........................ F-16
Condensed Consolidated Statements of Cash Flows........................ F-17
Notes to Condensed Consolidated Financial Statements................... F-18
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
United USN, Inc.
Chicago, Illinois
We have audited the accompanying consolidated financial statements of United
USN, Inc. and subsidiaries (the "Company") as of December 31, 1995 and 1994,
and for the year ended December 31, 1995 and the period from April 20, 1994
(inception) to December 31, 1994, listed in the table of contents. These
consolidated 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 audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 1995 and 1994, and the results of their operations
and their cash flows for the year ended December 31, 1995 and the period from
April 20, 1994 (inception) to December 31, 1994, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 15, 1996
F-2
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------ ------------ -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $ 13,705,025 $ 5,979,222
Accounts receivable (net of allowance for doubtful
accounts:
1995--$192,652; 1994--$81,330)..................... 1,184,453 862,208
Prepaid expenses.................................... 171,111 125,543
Note receivable..................................... 76,204
Interest receivable................................. 61,015
Net assets held for sale............................ 1,453,699
------------ -----------
Total current assets.............................. 16,575,303 7,043,177
Property and Equipment--net........................... 1,214,647 4,749,728
Other Assets.......................................... 2,681,255 954,368
------------ -----------
Total assets...................................... $ 20,471,205 $12,747,273
============ ===========
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON
STOCKHOLDERS' EQUITY
--------------------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 2,734,122 $ 1,155,365
Accrued expenses and other liabilities.............. 1,106,010 782,802
Current maturities on notes payable................. 409,348 63,670
Capital lease obligations--current.................. 75,192 93,958
------------ -----------
Total current liabilities......................... 4,324,672 2,095,795
Capital Lease Obligations--Noncurrent................. 81,391 3,026,430
Notes Payable......................................... 436,825 149,708
------------ -----------
Total liabilities................................. 4,842,888 5,271,933
Redeemable Preferred Stock:
Series A 10% Senior Cumulative preferred stock: par
value $1;
1995: 20,000 shares authorized; 16,200 shares
outstanding;
1994: 50,000 shares authorized; 16,200 shares
outstanding; liquidation value $1,000 per share.... 16,200 16,200
Series A-2 10% Senior Cumulative preferred stock:
par value $1; 1995:
30,000 shares authorized; 26,235 shares
outstanding; liquidation value $1,000 per share.... 26,235
Accumulated unpaid dividends........................ 3,810,000 707,000
Additional paid-in capital.......................... 40,543,605 14,582,350
------------ -----------
Total redeemable preferred stock.................. 44,396,040 15,305,550
Common Stockholders' Equity:
Common stock: par value $.01:
1995--500,000 shares authorized; 313,739 shares
outstanding;
1994--200,000 shares authorized; 177,840 shares
outstanding........................................ 3,137 1,778
Additional paid-in capital.......................... 282,955 21,801
Accumulated deficit................................. (29,053,815) (7,853,789)
------------ -----------
Total common stockholders' equity................. (28,767,723) (7,830,210)
------------ -----------
Total Liabilities, Redeemable Preferred Stock and
Common Stockholders' Equity...................... $ 20,471,205 $12,747,273
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Net service revenue................................. $ 7,883,890 $ 1,737,461
Cost of services.................................... 9,075,749 1,454,882
------------ -----------
Gross margin.................................... (1,191,859) 282,579
------------ -----------
Expenses:
Sales and marketing............................... 5,867,200 2,869,463
General and administrative........................ 10,131,390 4,685,894
Amortization of intangibles....................... 969,271
------------ -----------
Operating loss...................................... (18,159,720) (7,272,778)
------------ -----------
Other income (Expense):
Interest income................................... 586,946 152,099
Interest expense.................................. (733,566) (26,110)
Other income...................................... 59,314
------------ -----------
Other income--net............................... (87,306) 125,989
------------ -----------
Net loss before minority interest................... (18,247,026) (7,146,789)
Minority interest share in loss of USNCN............ 150,000
------------ -----------
Net loss............................................ $(18,097,026) $(7,146,789)
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK COMMON STOCKHOLDERS' EQUITY
------------------------------------------- ----------------------------------
SERIES
SERIES A A-2 ACCUMULATED ADDITIONAL ADDITIONAL
PREFERRED PREFERRED UNPAID PAID-IN- PAID-IN ACCUMULATED
STOCK STOCK DIVIDENDS CAPITAL PAR VALUE CAPITAL DEFICIT
--------- --------- ----------- ----------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 20, 1994.
Issuance of 16,200
shares of Series A
10% Senior Cumulative
preferred stock...... $16,200 $15,212,824
Issuance of 177,840
shares of common
stock................ $1,778 $ 236,661
Costs incurred related
to issuance of stock. (630,474) (214,860)
Accumulated unpaid
preferred dividends.. $ 707,000 $ (707,000)
Net loss.............. (7,146,789)
------- ---------- ----------- ------ --------- ------------
Balance, December 31,
1994................... 16,200 707,000 14,582,350 1,778 21,801 (7,853,789)
Issuance of 26,235
shares of Series A-2
10% Senior Cumulative
preferred stock...... $26,235 26,208,765
Issuance of 135,899
shares of common
stock................ 1,359 263,644
Costs incurred related
to issuance of stock. (247,510) (2,490)
Accumulated unpaid
preferred dividends.. 3,103,000 (3,103,000)
Net loss.............. (18,097,026)
------- ------- ---------- ----------- ------ --------- ------------
Balance, December 31,
1995................... $16,200 $26,235 $3,810,000 $40,543,605 $3,137 $ 282,955 $(29,053,815)
======= ======= ========== =========== ====== ========= ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(18,097,026) $(7,146,789)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization................... 1,288,991 159,685
Amortization of organization costs and
intangibles.................................... 969,271 26,376
Allowance for doubtful accounts................. 111,322 81,330
Loss on disposal of assets...................... (16,274)
Changes in:
Accounts receivable........................... (433,567) (943,538)
Prepaid expenses.............................. 13,082 (37,624)
Interest receivable........................... (61,015)
Account payable............................... 1,578,757 953,465
Accrued expenses and other liabilities........ 338,412 766,532
------------ -----------
Net cash flows from operating activities.... (14,308,047) (6,140,563)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment................ (1,739,542) (1,728,327)
Purchase of subsidiary............................ (892,287)
Organization costs................................ (161,702)
Cash acquired from purchase of subsidiaries....... 331,975
Issuance of noncurrent notes receivable........... (150,000)
Proceeds from note receivable..................... 76,204
------------ -----------
Net cash flows from investing activities.... (2,555,625) (1,708,054)
------------ -----------
Cash flows from financing activities:
Issuance of preferred stock....................... 26,235,000 14,850,000
Issuance of common stock.......................... 265,003 150,000
Costs incurred related to issuance of stock....... (250,000) (845,334)
Deposits.......................................... (20,855) (555,270)
Proceeds from borrowings.......................... 180,000
Payments on assumed Quest indebtedness............ (1,459,458)
Proceeds from notes payable....................... 46,645 73,504
Repayment of notes payable........................ (71,588) (8,330)
Repayment of capital lease obligation............. (155,272) (16,731)
------------ -----------
Net cash flows from financing activities.... 24,589,475 13,827,839
------------ -----------
Net increase in cash................................ 7,725,803 5,979,222
Cash and cash equivalents--Beginning of period...... 5,979,222
------------ -----------
Cash and cash equivalents--End of period............ $ 13,705,025 $ 5,979,222
============ ===========
Supplemental cash flow information--See Note 3
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
1. ORGANIZATION AND ACQUISITIONS
United USN, Inc. ("United") was incorporated under the laws of the State of
Delaware on April 20, 1994 and was initially funded in 1994 through capital
contributions totaling $15 million in cash, before financing costs. In June
1995, United received additional capital contributions of approximately $26
million. United holds controlling investments in two companies: US Network
Corporation and United Telemanagement Services, Inc.
On April 20, 1994, United purchased US Network Corporation ("US Network")
and its 100% subsidiary, FoneNet/Ohio, Inc. ("FoneNet"), in exchange for 1,350
shares of United's preferred stock and 31,500 shares of its common stock. This
transaction was accounted for as a purchase and was valued at US Network's net
book value of approximately $467,000. US Network provides a broad range of
telecommunication services in the central business districts of major cities
in Ohio. The 1994 consolidated statement of income includes the results of
operations of US Network since April 20, 1994.
In July 1994, United purchased a 50.1% ownership interest in USN
Communications Northeast, Inc. ("USNCN") for approximately $2 million. Based
in New York City, USNCN provides a broad range of telecommunications services
to business customers primarily in Manhattan. United has had substantive
control of USNCN since its inception. Therefore, the consolidated financial
statements include the results of operations for USNCN since its commencement
of operations in 1994 and no goodwill has been recorded. In December 1995,
United's ownership in USNCN increased to 83.9% as a result of additional
investments approximating $9.4 million.
In June 1995, USNCN (through a newly formed subsidiary, Quest United, Inc.)
purchased specific assets and assumed certain liabilities of an independent
telephone services company Quest America Management L.P. ("Quest"), for cash
of $950,000 and notes payable to investors of Quest of $842,985 (the
"Acquisition"). The Acquisition has been accounted for as a purchase, and such
assets and liabilities were recorded at their then fair values (which
approximated their historical cost bases) as of the Acquisition date. The
excess of the cost of the Acquisition over the net assets acquired has been
ascribed to various intangible assets (principally customer lists, employment
contracts and work force in place). Although, the consummation of the
Acquisition was subject to regulatory approval, USNCN had assumed substantive
control of Quest's operations as of the date of the Acquisition through the
infusion of equity and debt financing to Quest. Accordingly, the consolidated
statement of operations for the year ended December 31, 1995 include Quest's
revenues and expenses from the Acquisition date forward.
2. SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows:
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of United USN, Inc. and its subsidiaries (the
"Company"). Significant intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition--The Company recognizes revenues in the period in which
telephone services are provided. Revenues for Quest are recorded at the net
commissions earned. If Quest's revenues had been recorded
F-7
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
assuming a resale business, where revenues are recorded at the resale value
and gross margins are equal to the net commissions earned, the following would
have been recorded in 1995:
<TABLE>
<CAPTION>
CONSOLIDATED PROFORMA
AS STATED ADJUSTMENTS CONSOLIDATED
------------ ----------- ------------
<S> <C> <C> <C>
Net service revenue................ $ 7,883,890 $3,374,075 $11,257,965
Cost of services................... 9,075,749 3,374,075 12,449,824
----------- ---------- -----------
Gross margin................... $(1,191,859) $ -- $(1,191,859)
=========== ========== ===========
</TABLE>
Recourse Provisions--USNCN utilizes a third-party billing and collection
agency (the "Agency") to process and factor its accounts receivable, yet
retains the risk of loss on amounts that are deemed to be uncollectible in the
normal course of business. The Agency charges USNCN an allowance for estimated
bad debts on factored accounts receivable, subject to the recourse provisions,
using prior collection experience and industry statistics. Adjustments are
made between actual loss experience and estimated bad debt expenses on a
periodic basis by the Agency. At December 31, 1995, factored receivables of
approximately $828,000 are subject to such adjustment.
Cash and Cash Equivalents--Cash and cash equivalents are defined as cash in
banks, time deposits and highly liquid short-term investments with initial
maturities of three months or less.
Property and Equipment--Purchases of property and equipment are carried at
cost. Depreciation is provided on the straight-line basis. Furniture and
fixtures are depreciated over five years. Leasehold improvements and assets
leased under capital leases are amortized over the shorter of the related
lease term or the estimated useful life of the asset.
Intangible Assets--Costs incurred in the formation of the Company are being
amortized over five years. The intangible assets associated with the
acquisition of Quest are being amortized on a straight-line basis over two
years.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Capital lease obligations incurred (Notes 9 and
17).............................................. $3,398,105 $3,137,119
========== ==========
Fair value of US Network's noncash assets
acquired......................................... $ 623,659
Common and preferred stock issued in connection
with acquisition (Note 1)........................ 467,463
----------
Liabilities assumed........................... $ 156,196
==========
Fair value of Quest America Management L.P.
noncash assets acquired in 1995.................. $ 414,726
Consideration incurred in connection with the
Acquisition (including $950,000 in cash advances)
(Note 3)......................................... 3,104,588
----------
Liabilities assumed........................... $2,689,862
==========
Note payable to USNCN minority shareholder (Note
4)............................................... $ 149,708
Proceeds received upon issuance of note payable... (73,504)
----------
Note receivable from USNCN minority
shareholder (Note 4)......................... $ 76,204
==========
Note payable incurred to finance insurance
policies (Note 8)............................ $ 58,650 $ 72,000
========== ==========
</TABLE>
F-8
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash paid for interest in 1995 was approximately $613,000. No cash was paid
in 1994 for interest and in 1995 and 1994 for income taxes.
4. RELATED PARTY TRANSACTIONS
Note receivable of $76,204 at December 31, 1994 represents amounts due to
United from a minority stockholder of USNCN, at an interest rate of 9%, which
was paid during the first quarter of 1995.
Note payable of $149,708 at December 31, 1994 represents amounts due from a
minority stockholder of USNCN at an interest rate of 10%, which was exchanged
for an increased equity interest in USNCN in December 1995.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Furniture and equipment......................... $1,364,479 $ 629,865
Leasehold improvements.......................... 117,902 1,296,148
Switching equipment............................. 2,984,045
---------- ----------
1,482,381 4,910,058
Less accumulated depreciation................... (267,734) (160,330)
---------- ----------
Total....................................... $1,214,647 $4,749,728
========== ==========
</TABLE>
6. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Intangibles (net of accumulated amortization
of $923,850)................................. $2,001,985 $ --
Deposits...................................... 426,902 605,270
Organization costs (net of accumulated
amortization:
1995--$73,432; 1994--$28,011)................ 153,677 199,098
Notes receivable.............................. 150,000
Other......................................... 98,691
---------- --------
Total..................................... $2,681,255 $954,368
========== ========
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Payroll and benefits............................ $ 548,775 $427,312
Professional services........................... 163,540 244,636
Excise taxes.................................... 117,812 57,462
Interest payable................................ 21,764
Rent............................................ 4,380 29,819
Other........................................... 249,739 23,573
---------- --------
Total....................................... $1,106,010 $782,802
========== ========
</TABLE>
F-9
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. NOTES PAYABLE
The Company issued notes payable of $58,650 and $72,000, in 1995 and 1994,
respectively, to finance insurance policies. The notes are payable in nine
monthly installments through August 1996 and 1995, respectively. Interest is
payable at 8.15% and 6.45%, respectively. The outstanding principal balance at
December 31, 1995 and 1994 was $52,308 and $63,670, respectively.
In 1995, the Company issued a note payable of $46,353 to finance
improvements to an office space. The note requires monthly principal payments
of $831 through July 2001. Interest is payable at 8%. At December 31, 1995,
the outstanding principal balance was $44,777.
In connection with the acquisition of Quest, USNCN assumed notes payable to
investors of Quest. The notes bear interest at 8% and the balances outstanding
at December 31, 1995 total $749,088. The notes require quarterly principal and
interest payments in 1996 and 1997 and in the first quarter of 1998.
Maturities on long-term debt are as follows:
<TABLE>
<S> <C>
1996............................ $409,348
1997............................ 386,474
1998............................ 27,152
1999............................ 8,418
2000............................ 9,117
Thereafter...................... 5,664
--------
Total....................... $846,173
========
</TABLE>
9. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under capital leases, at December 31,
1995 and 1994, as follows:
<TABLE>
<CAPTION>
1995 1994
-------- ----------
<S> <C> <C>
Switching equipment................................. $ -- $2,984,045
Computer equipment.................................. 221,855 153,074
-------- ----------
221,855 3,137,119
Less accumulated amortization....................... (73,003) (68,635)
-------- ----------
Total........................................... $148,852 $3,068,484
======== ==========
</TABLE>
Future minimum lease payments at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................ $ 91,445
1997............................ 64,916
1998............................ 21,151
1999............................ 3,339
--------
Total minimum lease
payments................... 180,851
Less imputed interest........... 24,268
--------
Present value of minimum
lease payments............. $156,583
========
</TABLE>
F-10
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Future minimum lease commitments under noncancelable operating leases
as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.......................... $1,014,766
1997.......................... 1,080,878
1998.......................... 810,608
1999.......................... 424,991
2000.......................... 329,180
Thereafter.................... 193,599
----------
Total..................... $3,854,022
==========
</TABLE>
Rent expense for the year ended December 31, 1995 and the period from April
20, 1994 to December 31, 1994 was approximately $867,000 and $214,000,
respectively.
11. COMMITMENTS
USNCN has executed an exclusive agreement with an independent
telecommunications company ("TelCo One"), whereby TelCo One will allow USNCN
to establish a local private network on its infrastructure in which to provide
service to customers. All of USNCN's local service customers are provided
access to this network and, accordingly, a substantial portion of USNCN's
revenue is earned through the use of these access rights. Under this
agreement, TelCo One provides network maintenance, access to telephone
switches, and billing and collection services. The initial term of the
agreement expires in 2004. USNCN is entitled to renew such agreement for up to
ten years following its initial expiration.
On October 31, 1995, US Network entered into an agreement with an
independent telecommunications company ("TelCo Two") to allow US Network to
resell TelCo Two's local telephone service. The agreement is for a term of ten
years and contains a minimum purchase commitment of 150,000 business access
lines, which is measured by the number of lines in place on the last day of
each 12-month period. The agreement allows for an 18-month period before any
commitment levels are required to be met. At the end of the 18-month period,
US Network must pay, on an annual basis, for any cumulative shortfall of the
commitment amount (net of any cumulative excess over the commitment amount)
which exceeds 300,000 lines ("Shortfall Amount"). The amount to be paid is
calculated as the Shortfall Amount multiplied by $168. Even if no lines were
sold by US Network, the earliest required payment for the shortfall amount is
in 1999. So long as US Network maintains a cumulative net shortfall lower than
300,000 lines, no payments will be due to TelCo Two other than for normal
usage. At the end of the term, US Network will be required to pay for any
remaining cumulative net shortfall at an annual rate of $168 per line. If
there is no cumulative net shortfall at the end of the term, no additional
amount will be required to be paid by US Network. US Network can extend the
term for up to an additional three years to reduce the cumulative net
shortfall to zero before a payment would be required.
12. INCOME TAXES
The Company incurred net losses of $18,097,026 and $7,146,789 in 1995 and
1994, respectively. Accordingly, no provision for current Federal or state
income taxes has been made to the financial statements.
At December 31, 1995 and 1994, the Company had net operating loss carry-
forwards for income tax purposes of approximately $24,129,000 and $6,875,000,
respectively. The expiration periods for utilizing these operating losses
begin in 2009 for Federal tax purposes. Of the net operating loss carry-
forwards remaining at December 31, 1995, $12,286,000 can be applied only
against future taxable income of USNCN.
F-11
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's deferred tax asset components at December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net operating loss carry-forwards.............. $(9,121,000) $(2,555,000)
Accrued liabilities and asset valuation
reserves...................................... (195,000) (106,000)
Amortization of intangibles.................... (309,000)
----------- -----------
Subtotal................................... (9,625,000) (2,661,000)
Valuation allowance............................ 9,625,000 2,661,000
----------- -----------
Total...................................... $ -- $ --
=========== ===========
</TABLE>
As of December 31, 1995 and 1994, the Company had not recognized deferred
income tax assets related to deductible temporary differences and cumulative
net operating losses. The ability of the Company to fully realize deferred tax
assets in future years is contingent upon its success in generating sufficient
levels of taxable income before the statutory expiration periods for utilizing
such net operating losses lapses. After an assessment of all available
evidence, including historical and projected operating trends, the Company was
unable to conclude that realization of such deferred tax assets in the near
future was more likely than not. Accordingly, a valuation allowance was
recorded to offset the full amount of such assets.
13. MINORITY INTEREST IN USNCN
At December 31, 1995 and 1994, no minority interest in USNCN has been
recorded on the balance sheet, as cumulative losses applicable to the minority
interest in USNCN exceed the minority interest in the equity capital of USNCN,
and there is no obligation of the minority interest to make good such losses.
As future earnings materialize, the minority interest will recognize the
benefit of those earnings only to the extent they exceed USNCN's accumulated
losses.
14. CAPITAL STOCK
Redeemable Preferred Stock
In 1995, the Board of Directors approved the designation of 20,000 shares of
the authorized preferred stock as Series A 10% senior cumulative preferred
stock ("Series A") and the remaining 30,000 shares as Series A-2 10% senior
cumulative preferred stock ("Series A-2"). The Company's stockholders of
Series A-2 and Series A are entitled to the following rights and privileges:
Dividends--All preferred stockholders are entitled to cumulative
dividends of 10% per annum on the sum of $1,000 per share plus all
accumulated and unpaid dividends. No dividends have been declared or paid
on the preferred stock. Dividends in arrears on preferred stock were
approximately $2,462,000 for Series A and $1,348,000 for Series A-2 at
December 31, 1995. No cash dividends may be paid on Series A so long as any
Series A-2 shares are still outstanding, other than as provided under the
liquidation and redemption preferences. No cash dividends may be paid on
common stock so long as any preferred stock remains outstanding.
Liquidation--Upon any liquidation of the Company, the holders of Series
A-2 shall be entitled to be paid up to $26.2 million, to redeem the
outstanding shares of Series A-2 before any distribution is made to any
other stockholders. After the full $26.2 million has been paid to Series A-
2 holders, the Series A-2 and Series A holders shall be entitled to be
paid, before any distribution is made to the common stockholders, $1,000
per share plus all accumulated and unpaid dividends.
F-12
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Redemption--Redemption rights can be exercised at $1,000 per share plus
all accrued and unpaid dividends for the holders of 33% or more of Series
A-2 and Series A stock outstanding after five years have elapsed from the
date of issuance of those shares. Special redemption rights are also
available to holders in the event of a change in ownership of the Company,
as defined in the Certificate of Designation. The Company cannot redeem any
shares of Series A so long as the Company has not redeemed any shares of
Series A-2 which the holder has requested to be redeemed. The Company
cannot redeem, purchase or acquire common stock so long as any preferred
stock remains outstanding, other than stock issued upon the exercise of
stock options.
In the event the Company fails to comply with the covenants in the agreement
with the preferred stockholders, the Company is required to increase the
dividend rate by 5%, with an additional increase of 2.5% for each succeeding
90-day period in which the Company remains in noncompliance. Additionally, the
preferred stockholders may demand immediate redemption of all or any portion
of their preferred stock at the aforementioned liquidation values. At December
31, 1995, the Company was in compliance with all covenants.
Common Stock
In October 1995, the Board of Directors approved the repricing of the common
stock issued in 1995 whereby the number of shares issued in 1995 would
increase from 135,899 to 246,056 and the purchase price would decrease from
$1.95 per share to $1.077. The result of this transaction will not change the
amount of total stockholders' equity at December 31, 1995. This transaction is
not reflected in the current financial statements as it had not been finalized
as of December 31, 1995.
15. STOCK OPTION PLAN
The Company has granted options to acquire shares of common stock to certain
officers and other employees. These options become exercisable at a rate of
25% every six months over a period of two years. The options are exercisable
at $1.10 per share, which was no less than the fair market value at the date
of grant, and expire in 2004. The Company has reserved 54,551 shares of common
stock for issuance upon exercise of stock options.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Outstanding at January 1................................... 21,300 --
Granted.................................................... 21,300
Cancelled.................................................. (2,250) --
------ ------
Outstanding at December 31................................. 19,050 21,300
------ ------
Options exercisable at December 31......................... 10,024 --
====== ======
</TABLE>
16. EMPLOYEE BENEFIT PLAN
On January 1, 1995, the Company adopted a qualified 401(k) plan covering all
eligible employees in which the Company contributions are discretionary.
Employees are permitted to make annual contributions through salary deductions
up to 15% of their annual salary. The plan can be amended or terminated at any
time by the Board of Directors. The Company made no contributions to the plan
in 1995.
F-13
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. NET ASSETS HELD FOR SALE
On December 29, 1995, the Company entered into an agreement to sell its
switch-based facilities in Ohio for $9.5 million in cash plus the assumption
of capital and operating leases. The net assets held at December 31, 1995 in
conjunction with this sale are as follows:
<TABLE>
<S> <C>
Switching equipment........................................... $6,233,557
Leasehold improvements........................................ 1,781,260
Outside plant and equipment................................... 423,424
Furniture and equipment....................................... 318,355
----------
8,756,596
Less accumulated depreciation................................. (1,181,587)
----------
Net property and equipment................................ 7,575,009
Deposits...................................................... 100,532
----------
Total assets.............................................. 7,675,541
----------
Less liabilities assumed:
Accrued liabilities......................................... 15,204
Capital lease obligations................................... 6,206,638
----------
Net assets held for sale.................................. $1,453,699
==========
</TABLE>
Additionally, approximately $2.0 million in operating leases will be assumed
by the buyer. The Company will remain contingently liable on capital and
operating leases assumed by the buyer.
The transaction closed on February 29, 1996 and a gain of approximately $8
million was realized. The transaction and the related gain will be recorded in
the 1996 results of the Company. The Company will continue to serve its
customer base as a reseller of telecommunication services.
18. CONTINGENCIES
Loss Contingencies--In 1994, USNCN was named as a defendant in a legal
matter which alleged that USNCN breached an implied contract in the use of a
concept, developed by the plaintiff, in establishing its business and
resulting operations. During 1995, this matter was dismissed in USNCN's favor.
USNCN is contractually required, through its customers, to provide a minimum
level of service volume to an independent carrier. As of December 31, 1995,
USNCN has not complied with prescribed volume requirements but believes that
assertion of a claim by the carrier is unlikely, given contractual
interpretations, past practices, ongoing business relationships, and the
mutual dependency of the parties. Based on an assessment of all such factors,
no amount has been recorded in USNCN's financial statements for settlement of
this exposure as management is unable to reasonably estimate the claim, if
any. However, it is possible that the ultimate resolution of this matter may
have an adverse effect on its financial position, results of operations and
cash flow in future periods.
Gain Contingency--USNCN has submitted a claim of approximately $1.4 million
with TelCo One requesting that certain revenues, purportedly not billed by
TelCo One to its customers, be paid to USNCN. TelCo One is in the process of
reviewing USNCN's claim and has not formally concluded on the amount or terms
of a settlement. While USNCN believes its claim has merit, it is unable to
predict, at this time, whether they will be successful in fully resolving this
matter favorably.
* * * * *
F-14
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $71,390,481 $19,238,964
Accounts receivable (net of allowance for doubtful
accounts:
1996--$220,549; 1995--$89,500)....................... 2,653,580 1,902,172
Prepaid expenses..................................... 61,677 91,512
Interest receivable.................................. 86,859 67,621
Other receivables.................................... 229,940 --
----------- -----------
Total current assets............................... 74,422,537 21,300,269
Property and equipment--net............................ 1,782,850 9,714,373
Other assets........................................... 11,877,699 4,025,485
----------- -----------
Total assets....................................... $88,083,086 $35,040,127
=========== ===========
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON
STOCKHOLDERS' EQUITY
--------------------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable..................................... $ 4,174,694 $ 4,461,273
Accrued expenses and other liabilities............... 1,064,605 1,232,874
Capital lease obligations--current................... 260,444 1,111,007
Current maturities on notes payable.................. 355,860 1,446,511
----------- -----------
Total current liabilities.......................... 5,855,603 8,251,665
Capital lease obligations--noncurrent.................. 349,843 6,249,793
Notes payable.......................................... 154,871 510,731
14% Senior Discount Notes.............................. 48,500,000 --
Original Issue Discount--Senior Notes.................. (18,296,625) --
9% Convertible Subordinated Notes...................... 36,000,000 --
Original Issue Discount--Convertible Notes............. (8,355,600) --
----------- -----------
Total liabilities.................................. 64,208,092 15,012,189
Redeemable Preferred Stock:
Series A 10% Senior Cumulative preferred stock; par
value $1;
1995: 20,000 shares authorized; 16,200 shares
outstanding;
liquidation value $1,000 per share.................. -- 16,200
Series A-2 10% Senior Cumulative preferred stock; par
value $1;
1995: 30,000 shares authorized; 25,344 shares
outstanding;
liquidation value $1,000 per share.................. -- 25,344
Accumulated unpaid dividends......................... -- 2,679,467
9% Cumulative Convertible Pay-In-Kind Preferred
Stock; par value $1;
1996: 30,000 shares authorized; 10,000 shares
outstanding......................................... 10,000 --
Additional paid-in capital........................... 9,842,601 39,405,986
----------- -----------
Total Redeemable Preferred Stock................... 9,852,601 42,126,997
Common Stockholders' Equity:
Common stock: par value $.01;
1996: 2,500,000 shares authorized; 716,525 shares
outstanding;
1995: 500,000 shares authorized; 309,123 shares
outstanding......................................... 7,165 3,091
Additional paid-in capital........................... 54,177,244 271,508
Accumulated deficit.................................. (40,160,939) (22,373,658)
Common stock held in Treasury: 1996--1,000 shares.... (1,077) --
----------- -----------
Total common stockholders' equity.................. 14,022,393 (22,099,059)
----------- -----------
Total liabilities, redeemable preferred stock and
common stockholders' equity....................... $88,083,086 $35,040,127
=========== ===========
</TABLE>
See notes to the unaudited condensed consolidated financial statements
F-15
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net service revenue................................. $ 7,598,705 $ 5,825,785
Cost of services.................................... 6,587,126 6,686,199
----------- ------------
Gross margin.................................... 1,011,579 (860,414)
Expenses:
Sales and marketing............................... 5,837,437 4,243,768
General and administrative........................ 10,919,589 7,366,464
----------- ------------
Operating loss...................................... (15,745,447) (12,470,646)
Other income (expense):
Interest income................................... 472,667 422,901
Interest expense.................................. (45,957) (499,657)
Other income...................................... 8,099,593 --
----------- ------------
Other income--net............................... 8,526,303 (76,756)
----------- ------------
Net income (loss)................................... $(7,219,144) $(12,547,402)
=========== ============
</TABLE>
See notes to the unaudited condensed consolidated financial statements
F-16
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(7,219,144) $(12,547,402)
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization................... 254,049 995,223
Amortization of organization costs and
intangibles.................................... 1,105,748 257,317
Gain on disposal of assets...................... (8,078,901)
Changes in:
Accounts receivable........................... (1,469,127) (1,039,964)
Prepaid expenses.............................. 109,434 34,031
Other receivables............................. (229,940) 58,688
Interest receivable........................... (25,844) (67,621)
Other assets.................................. (18,205) --
Accounts payable.............................. 1,440,563 3,305,908
Accrued expenses and other liabilities........ (19,641) 450,072
----------- ------------
Net cash flows from operating activities.... (14,151,008) (8,553,748)
Cash flows from investing activities:
Purchase of property and equipment................ (232,291) (1,606,399)
Proceeds from sale of assets...................... 9,532,600 --
Purchase of Subsidiary............................ -- (892,287)
Purchase of Minority Interest..................... (1,601,207) --
----------- ------------
Net cash flows from investing activities.... 7,699,102 (2,498,686)
Cash flows from financing activities:
Issuance of common stock.......................... 36,300 256,000
Issuance of preferred stock....................... 10,000,000 25,344,000
Financing costs................................... (147,389) (500,000)
Repurchase of common stock........................ (1,077) --
Proceeds from Senior Notes........................ 30,203,375 --
Proceeds from Convertible Notes................... 27,644,400 --
Debt Acquisition Costs............................ (2,732,664) --
Deposits.......................................... (393,884) (112,154)
Payments on assumed Quest indebtedness............ -- (519,746)
Repayment of notes payable........................ (335,442) (42,099)
Repayment of capital lease obligations............ (136,257) (113,825)
----------- ------------
Net cash flows from financing activities.... 64,137,362 24,312,176
----------- ------------
Net (decrease) increase in cash..................... 57,685,456 13,259,742
Cash and cash equivalents--Beginning of period...... 13,705,025 5,979,222
----------- ------------
Cash and cash equivalents--End of period............ $71,390,481 $ 19,238,964
=========== ============
Supplemental cash flow information:
Capital lease obligations incurred................ $ 589,961 $ 4,004,664
=========== ============
</TABLE>
See notes to the unaudited condensed consolidated financial statements.
F-17
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of September 30, 1996 and
September 30, 1995 and the related condensed consolidated statements of
operations and condensed consolidated statements of cash flows for the nine
months then ended are unaudited. The interim financial statements reflect all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods presented. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the United USN, Inc. 1995 Annual Report to the Board
of Directors and Stockholders. The results of operations for the interim
periods should not be considered indicative of results to be expected for the
full year.
2. RESALE AGREEMENTS
In October 1995, the Company entered into an agreement with a local
telecommunications company ("TelCo One") to allow US Network to resell TelCo
One's local telephone service in the Chicago area. The agreement term is ten
years and contains certain minimum purchase commitments.
In 1996, the Company signed similar agreements with TelCo One and with
another local telecommunications company ("TelCo Two") to resell their local
telephone service in Michigan and Ohio and New York, respectively, to both
business and residential customers. These agreements are also for ten years
and contain certain minimum purchase commitments.
3. SALE OF ASSETS
On December 29, 1995, the Company entered into an agreement to sell its
switch-based facilities in Ohio for $9.5 million in cash plus the assumption
of capital and operating leases. The net assets sold under this agreement are
summarized as follows:
<TABLE>
<S> <C>
Net property and equipment.................................... $7,575,009
Deposits...................................................... 100,532
----------
Total assets.............................................. 7,675,541
Less liabilities assumed:
Accrued liabilities......................................... 15,204
Capital lease obligations................................... 6,206,638
----------
Net assets................................................ $1,453,699
==========
</TABLE>
Additionally, approximately $2.0 million in operating leases was assumed by
the buyer. The Company will remain contingently liable on capital and
operating leases assumed by the buyer. The transaction closed on February 29,
1996 and a gain of approximately $8.1 million was realized. The Company will
continue to serve its customer base as a reseller.
F-18
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
SEPTEMBER 30, 1996
4. PRIVATE PLACEMENT OFFERING
On September 30, 1996, the Company received approximately $55 million in
cash, net of commissions paid, in exchange for 48,500 Units consisting of
$48.5 million aggregate principal amount at maturity of 14% Senior Discount
Notes due 2003 ("Senior Notes") and warrants (the "Initial Warrants") to
purchase 61,550 shares of Class A Common Stock, and 36,000 units of 9%
Convertible Subordinated Notes due 2004 ("Convertible Notes").
The Senior Notes were sold at a unit price, before commissions, of $622.75.
These notes will accrete interest at an annual rate of 14% from September 30,
1996 to March 31, 2000. Thereafter, the notes will bear interest at an annual
rate of 14%, and will be paid semiannually in arrears, on the aggregate
principal amount at maturity of $48.5 million.
The Convertible Notes were sold at a unit price, before commissions, of
$767.90. These notes will accrete interest at an annual rate of 9% from
September 30, 1996 to September 30, 1999. Thereafter, the notes will bear
interest at an annual rate of 9%, and will be paid semiannually in arrears, on
the aggregate principal amount at maturity of $36 million.
5. CHANGES IN EQUITY
In September 1996, the Board of Directors and the existing shareholders
approved the conversion of all outstanding Series A and Series A-2 Preferred
Stock to newly issued shares of Class A Common Stock. The conversion was
consummated on September 30, 1996, and 267,630 shares of Common Stock were
issued in exchange for the outstanding Preferred Stock, including dividends
accrued through the conversion date. There was no dollar impact to the
financial statements.
In September 1996, the Board of Directors also authorized the issuance of up
to 30,000 shares of Preferred Stock designated as 9% Cumulative Convertible
PIK Preferred Stock ("9% Preferred Stock"). The 9% Preferred Stock has a
liquidation preference and stated value of $1,000 per share. Dividends,
payable in additional shares of 9% Preferred Stock, accrue semiannually at an
annual rate of 9% and are fully cumulative. In connection with the Offering,
the Company issued 10,000 shares of its 9% Preferred Stock to its existing
shareholders, for an aggregate purchase price of $10 million.
6. CONTINGENCIES
Loss Contingency--In April 1996, a derivative action was filed by Mr.
Stephen C. Schwartz, the founder and a former director and officer of USNCN
against the Company and specific officers and directors. On July 16, 1996 the
Company agreed with Mr. Schwartz to repurchase Mr. Schwartz's interest, among
other things, for $1.7 million. The financial impact of this transaction was
recorded in the third quarter of fiscal 1996, $328,000 of which represented
compensation expense due to Mr. Schwartz.
Gain Contingency--USNCN has submitted a claim of approximately $1.4 million
with TelCo Two requesting that certain revenues, purportedly not billed by
TelCo Two to its customers, be paid to USNCN. TelCo Two is in the process of
reviewing USNCN's claim and has not formally concluded the amount or terms of
a settlement. While USNCN believes its claim has merit, it is unable to
predict, at this time, whether they will be successful in fully resolving this
matter favorably.
* * * * *
F-19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED HEREIN OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER
OR SOLICITATION IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
TO SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
SUCH DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 2
Prospectus Summary......................................................... 4
Risk Factors............................................................... 16
The Exchange Offer......................................................... 25
Use of Proceeds............................................................ 32
Dividend Policy............................................................ 32
Capitalization............................................................. 33
Selected Historical Consolidated Financial and Operating Data.............. 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................. 35
Industry Overview: The Local Telecommunications Service Industry........... 39
Business................................................................... 41
Management................................................................. 54
Certain Relationships and Related Transactions............................. 60
Stock Ownership............................................................ 63
Description of the Notes................................................... 64
Description of the Warrants................................................ 97
Registration Rights........................................................ 100
Description of Capital Stock............................................... 103
Certain Federal Income Tax Considerations.................................. 106
Plan of Distribution....................................................... 108
Legal Matters.............................................................. 109
Experts.................................................................... 109
Glossary................................................................... 110
Index to Consolidated Financial Statements................................. F-1
</TABLE>
------------
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE NEW NOTES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
----------------
PROSPECTUS
----------------
LOGO
UNITED USN, INC.
$48,500,000
14% SERIES B
SENIOR DISCOUNT NOTES
DUE 2003
NOVEMBER , 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
corporation, subject to certain limitations, to indemnify its directors and
officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection
with any suit or proceeding to which they are a party so long as they acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct
to have been unlawful. The Registrant's Certificate of Incorporation and By-
laws provide that the Registrant shall indemnify its directors and such
officers, employees and agents as the Board of Directors may determine from
time to time, to the fullest extent permitted by Section 145 of the DGCL. The
Registrant has entered into indemnification agreements with its directors and
certain of its officers, employees and agents, which provide that the
Registrant shall indemnify such parties pursuant to Section 145 of the DGCL.
Section 102 of the DGCL permits a Delaware corporation to include in its
certificate of incorporation a provision eliminating or limiting a director's
liability to a corporation or its stockholders for monetary damages for
breaches of fiduciary duty. The enabling statute provides, however, that
liability for breaches of the duty of loyalty, acts or omissions not in good
faith or involving intentional misconduct, or knowing violation of the law,
and the unlawful purchase or redemption of stock or payment of unlawful
dividends or the receipt of improper personal benefits cannot be eliminated or
limited in this manner. The Registrant's Certificate of Incorporation and By-
laws include a provision which eliminates, to the fullest extent permitted,
director liability for monetary damages for breaches of fiduciary duty.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1+ Amended and Restated Certificate of Incorporation of the Registrant.
3.2+ Certificate of Designations, Powers, Rights and Preferences of the
Registrant.
3.3+ Bylaws of the Registrant.
4.1* Indenture, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Trustee, for the
Registrant's 14% Senior Discount Notes due 2003 (the "Senior Note
Indenture").
4.2* Form of the Registrant's 14% Series B Senior Discount Notes due 2003.
4.3* Registration Rights Agreement dated as of September 30, 1996, by and
among the Registrant and the Initial Purchasers named therein.
4.4* Warrant Agreement, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Warrant Agent.
5.1* Legal Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois).
10.1* Indenture, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Trustee, for the
Registrant's 9% Convertible Subordinated Notes due 2004.
10.2+ Employment Agreement, dated as of July 18, 1996, by and between the
Registrant and J. Thomas Elliott.
10.3+ Employment Agreement, dated as of July 18, 1996, by and between the
Registrant and Ronald W. Gavillet.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.4+ Form of Employment Agreement between the Registrant and certain
officers of the Registrant.
10.5+ 1994 Stock Option Plan of the Registrant.
10.6+ Form of Indemnification Agreement between the Registrant and certain
directors and officers of the Registrant.
10.7+ Consulting Agreement, dated January 24, 1995, by and between the
Registrant and Eugene A. Sekulow.
10.8+ Promissory Note, dated December 15, 1995, between the Registrant and
J. Thomas Elliott.
10.9+ Purchase Agreement, dated as of September 25, 1996, by and among the
Registrant and the purchasers named therein.
12.1+ Computation of Earnings to Fixed Charges.
21.1* Subsidiaries of the Registrant.
23.1+ Consent of Deloitte & Touche LLP.
23.2* Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois) (included
in its opinion filed as Exhibit 5.1 hereto).
25.1+ Statement of Eligibility and Qualification on form T-1 under the Trust
Indenture Act of 1939 of Harris Trust and Savings Bank, as Trustee
under the Senior Note Indenture.
99.1+ Form of Letter of Transmittal.
99.2+ Form of Notice of Guaranteed Delivery.
99.3+ Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees.
99.4+ Form of Letter to Clients.
99.5+ Guidelines for Certification of Taxpayer Identification Number on Form
W-9.
</TABLE>
- --------
+Filed herewith.
*To be filed by amendment.
(b) Financial Data Schedules
[None.]
[All schedules are omitted because the required information is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the financial statements or notes thereto.]
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than 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.
II-2
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, 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 shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For purpose of determining any liability under the Securities Act of
1933, as amended, 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 this offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired therein, that was not the subject of and included in the
registration statement when it became effective.
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER NUMBER
------- ----------
<C> <S> <C>
Amended and Restated Certificate of Incorporation of
3.1+ the Registrant.
Certificate of Designations, Powers, Rights and
3.2+ Preferences of the Registrant.
3.3+ Bylaws of the Registrant.
4.1* Indenture, dated as of September 30, 1996, by and
between the Registrant and Harris Trust and Savings
Bank, as Trustee, for the Registrant's 14% Senior
Discount Notes due 2003 (the "Senior Note Indenture").
4.2* Form of the Registrant's 14% Series B Senior Discount
Notes due 2003.
4.3* Registration Rights Agreement, dated as of September
30, 1996, by and among the Registrant and the Initial
Purchasers named therein.
4.4* Warrant Agreement, dated as of September 30, 1996, by
and between the Registrant and Harris Trust and
Savings Bank, as Warrant Agent.
5.1* Legal opinion of Skadden, Arps, Slate, Meagher & Flom
(Illinois).
10.1* Indenture, dated as of September 30, 1996, by and
between the Registrant and Harris Trust and Savings
Bank, as Trustee, for the Registrant's 9% Convertible
Subordinated Notes due 2004.
10.2+ Employment Agreement, dated as of July 18, 1996, by and
between the Registrant and
J. Thomas Elliott.
10.3+ Employment Agreement, dated as of July 18, 1996, by and
between the Registrant and Ronald W. Gavillet.
10.4+ Form of Employment Agreement between the Registrant and
certain officers of the Registrant.
10.5+ 1994 Stock Option Plan of the Registrant.
10.6+ Form of Indemnification Agreement between the
Registrant and certain directors and officers of the
Registrant.
10.7+ Consulting Agreement, dated January 24, 1995, by and
between the Registrant and Eugene A. Sekulow.
10.8+ Promissory Note, dated December 15, 1995, between the
Registrant and J. Thomas Elliott.
10.9+ Purchase Agreement, dated as of September 25, 1996, by
and among the Registrant and the purchasers named
therein.
12.1+ Computation of Earnings to Fixed Charges.
21.1* Subsidiaries of the Registrant.
23.1+ Consent of Deloitte & Touche LLP.
23.2* Consent of Skadden, Arps, Slate, Meagher & Flom
(Illinois) (included in its opinion filed as Exhibit
5.1 hereto).
25.1+ Statement of Eligibility and Qualification on Form T-1
under the Trust Indenture Act of 1939 of Harris Trust
and Savings Bank, as Trustee under the Senior Note
Indenture.
99.1+ Form of Letter of Transmittal.
99.2+ Form of Notice of Guaranteed Delivery.
99.3+ Form of Letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees.
99.4+ Form of Letter to Clients.
99.5+ Guidelines for Certification of Taxpayer Identification
Number on Form W-9.
</TABLE>
- --------
+Filed herewith.
*To be filed by amendment.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
UNITED USN, INC.
ARTICLE ONE
-----------
The name of the corporation is United USN, Inc. (the "Corporation").
ARTICLE TWO
-----------
The address of the Corporation's registered office in the State of Delaware
is 11th floor, Rodney Square North, 11th and Market Streets, County of New
Castle, Wilmington, Delaware 19801. The name of its registered agent at such
address is Corporation Guarantee and Trust Company.
ARTICLE THREE
-------------
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
------------
The total number of shares of stock which the Corporation has authority to
issue is 2,650,000 shares, 2,500,000 of which shall be Class A Common Stock,
with a par value of $.01 per share, with one vote per share, 50,000 of which
shall be Class B Common Stock with a par value of $.01 per share, with no voting
rights except when required by law, and 100,000 of which shall be Preferred
Stock, with a par value of $1.00 per share. Except as to voting rights, the
rights of the Class A Common Stock and the Class B Common Stock, including
without limitation rights regarding payment of dividends, distributions and
liquidations, will be identical in all respects. The holders of the Class A
Common Stock have the right, upon 5 days written notice to the Corporation, to
convert their shares of Class A Common Stock into shares of Class B Common Stock
on a one-for-one conversion basis.
The board of directors of the Corporation (the "Board of Directors") is
expressly authorized, at any time and from time to time, to provide for the
issuance of shares of Preferred Stock in one or more series with such
designations, preferences and relative, participating, optional or other special
rights, and
<PAGE>
such qualifications, limitations or restrictions thereof, as shall be expressed
in the resolution or resolutions providing for the issuance thereof adopted by
the Board of Directors (a "Preferred Stock Designation") and as are not
inconsistent with this Certificate of Incorporation or any amendment thereto,
and as may be permitted by the General Corporation Law of Delaware. Except as
otherwise expressly required by law and except for such voting powers as may be
stated in a Certificate of Designations with respect to any series of Preferred
Stock of the Corporation, the holders of any such series shall have no voting
power whatsoever.
ARTICLE FIVE
------------
The Corporation is to have perpetual existence.
ARTICLE SIX
-----------
The furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter or repeal the
By-laws of the Corporation.
ARTICLE SEVEN
-------------
Meetings of stockholders of the Corporation may be held within or without
the State of Delaware, as the By-laws of the Corporation may provide. The books
of the Corporation may be kept outside the State of Delaware at such place or
places as may be designated from time to time by the Board of Directors or in
the By-laws of the Corporation. Election of directors need not be by written
ballot unless the By-laws of the Corporation so provide.
ARTICLE EIGHT
-------------
The Corporation shall indemnify, to the fullest extent permitted by Section
145 of the General Corporation Law of Delaware, as amended from time to time,
all persons whom it may indemnify pursuant thereto. The personal liability of a
director of the Corporation to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director shall be limited to the
fullest extent permitted by the General Corporation Law of the State of
Delaware, as it now exists or may hereafter be amended. Any repeal or
modification of this paragraph by the stockholders of the Corporation shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
ARTICLE NINE
------------
The Corporation expressly elects not to be governed by Section 203 of the
General Corporation Law of the State of Delaware.
2
<PAGE>
ARTICLE TEN
-----------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation in the manner now or
hereafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
3
<PAGE>
EXHIBIT 3.2
UNITED USN, INC.
CERTIFICATE OF DESIGNATIONS,
POWERS, RIGHTS AND PREFERENCES
OF
9.0% CUMULATIVE CONVERTIBLE
PAY-IN-KIND PREFERRED STOCK
___________________________________________
Pursuant to Section 151(g) of the General
Corporation Law of the State of Delaware
___________________________________________
UNITED USN, INC. (the "Corporation"), a corporation organized and
existing under and by virtue of the provisions of the General Corporation Law of
the State of Delaware (the "DGCL"), certifies as follows:
FIRST: That the Corporation was originally incorporated in the State
of Delaware on April 7, 1994;
SECOND: The Amended and Restated Certificate of Incorporation of the
Corporation (the "Certificate of Incorporation"), authorizes the issuance of
100,000 shares of Preferred Stock, par value $1.00 per share and, further,
authorizes the Board of Directors of the Corporation (the "Board of Directors"),
by resolution or resolutions, at any time and from time to time, to divide and
establish any or all of the unissued shares of Preferred Stock into one or more
classes or series, and without limiting the generality of the foregoing, to fix
and determine the designation of each such class or series, the number of shares
which shall constitute such class or series and certain relative rights and
preferences of the shares of each class or series so established.
<PAGE>
THIRD: The Board of Directors of the Corporation pursuant to
authority conferred upon the Board of Directors under the Certificate of
Incorporation and a meeting on September 20, 1996 of the Board of Directors, at
which a quorum was present and acting throughout, did duly adopt the following
resolutions authorizing the issuance of a series of the Corporation's Preferred
Stock, par value $1.00 per share, and setting forth the terms and provisions of
said Preferred Stock:
RESOLVED, that the Board of Directors, pursuant to authority vested in it
by the provisions of the Certificate of Incorporation, hereby authorizes
the creation and issuance of a series of the Corporation's Preferred Stock,
par value $1.00 per share, which shall in the aggregate consist of up to
30,000 shares of the 100,000 shares of Preferred Stock that the Corporation
now has authority to issue, and hereby fixes the powers, designations,
dividend rate, redemption provisions, voting powers, rights on liquidation
or dissolution, and other preferences and relative participating, optional
or other rights, and the qualifications, limitations or restrictions
thereof (in addition to those set forth in said Certificate of
Incorporation) as follows:
1. Designation. The Preferred Stock of the Corporation created and
authorized for issuance hereby shall be designated as "9.0% Cumulative
Convertible Pay-In-Kind Preferred Stock" (hereinafter the "9% Preferred Stock")
which initially will consist of 30,000 shares of such 9% Preferred Stock.
2. Priority of 9% Preferred Stock. So long as any 9% Preferred Stock
remains outstanding, neither the Corporation nor any Subsidiary (as defined
herein) shall redeem, purchase or otherwise acquire directly or indirectly any
of the Corporation's equity securities other than 9% Preferred Stock
(collectively, the "Junior Securities"), nor shall the Corporation directly or
indirectly pay or declare any dividend or make any distribution upon any Junior
Securities; provided, that the Corporation may purchase shares of the
Corporation's common stock, par value $.01 per share, in accordance with the
provisions of Section 6 of that certain Purchase Agreement, dated as of June 22,
1995, by and among the Corporation and certain
2
<PAGE>
investors, as such agreement may from time to time by amended in accordance with
its terms, or Section 7 of that certain Purchase Agreement, dated as of April
22, 1994, by and among the Corporation and certain investors, as such agreement
may from time to time be amended in accordance with its terms.
As used herein, "Subsidiary" means, with respect to any person, any
corporation, partnership, association or other business entity of which (i) if a
corporation, a majority of the total voting power of shares of stock entitled
(with 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 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 partnership, association or other
business entity if such person or persons shall be allocated a majority of
partnership, association or other business entity gains or losses or shall be or
control the managing general partner of such partnership, association or other
business entity.
3. Dividends.
---------
(a) Holders of shares of 9% Preferred Stock shall be entitled to
receive out of funds legally available for the payment of dividends ("Legally
Available Funds"), cumulative dividends for each share of 9% Preferred Stock
payable at a rate per annum of 9.0% per share in additional shares of 9%
Preferred Stock. Dividends on the shares of 9% Preferred Stock shall accrue
semiannually on September 26 and March 26 (or at such additional times and for
such interim periods, if any, as determined by the Board of Directors) (each of
such dates being a "Dividend Accrual Date"), except that if such date is a
Saturday, Sunday or legal holiday then such dividend shall be accruable on the
next date that is not a Saturday, Sunday or legal holiday or on which banks in
the State of New York are permitted to be closed (a "Business Day"). Each of
such semiannual dividend accruals shall be fully cumulative and shall
3
<PAGE>
accrue (whether or not declared), on a daily basis from the first day of the
semiannual period in which such dividend may be accruable as provided herein;
provided, however, that with respect to the first dividend accrual date
following the issuance of shares of 9% Preferred Stock, such dividend shall
accrue from the date of issuance of 9% Preferred Stock. All accrued but unpaid
dividends shall be compounded semiannually at an annual rate of 9.0%. The Board
of Directors shall declare and pay such accrued dividends at such time and to
the extent permitted by law. No fractional shares of 9% Preferred Stock shall be
issued, so that the number of shares to be paid as a dividend pursuant to this
paragraph shall be rounded to the nearest whole number of shares. Such dividends
shall be paid to the holders of record at the close of business on the date
specified by the Board of Directors at the time such dividend is declared;
provided, however, that such declaration date shall not be more than 60 days nor
less than 10 days prior to the respective Dividend Accrual Date.
(b) All dividends paid with respect to shares of 9% Preferred
Stock pursuant to Section 3(a) shall be paid pro rata to the holders entitled
thereto. All additional shares of 9% Preferred Stock issued as dividends on the
9% Preferred Stock shall be deemed issued on the applicable Dividend Accrual
Date, and will thereupon be duly authorized, validly issued, fully paid and
nonassessable and free and clear of all liens and charges.
(c) Prior to the payment of any dividend declared by the Board
of Directors, the Corporation shall take all action necessary, including,
without limitation, amending its Certificate of Incorporation or this
Certificate of Designations, to ensure that the Corporation has a sufficient
number of authorized but unissued shares of 9% Preferred Stock to pay such
dividend.
(d) Holders of shares of 9% Preferred Stock shall be entitled to
receive the dividends provided for in section 3(a) hereof in preference to and
in priority over any dividends upon any of the Junior Securities.
4
<PAGE>
4. Liquidation Preference. Upon any liquidation, dissolution or
winding up of the Corporation, each holder of 9% Preferred Stock shall be
entitled to be paid, before any distribution or payment is made upon any Junior
Securities, an amount per share in cash equal to One Thousand Dollars ($1,000)
(the "Liquidation Value") plus all accrued and unpaid dividends on all shares of
9% Preferred Stock held by such holder, and the holders of 9% Preferred Stock
shall not be entitled to any further payment. If upon any such liquidation,
dissolution or winding up of the Corporation, the Corporation's assets to be
distributed among the holders of shares of 9% Preferred Stock are insufficient
to permit payment to such holders of the aggregate amount that they are entitled
to be paid, then the entire assets to be distributed shall be distributed
ratably among such holders based upon the aggregate Liquidation Value plus all
accrued and unpaid dividends on shares of 9% Preferred Stock held by each such
holder. Prior to the time of any liquidation, dissolution or winding up of the
Corporation, the Corporation shall declare for payment all accrued and unpaid
dividends with respect to shares of 9% Preferred Stock. The Corporation shall
mail written notice of such liquidation, dissolution or winding up, not less
than 60 days prior to the payment date stated therein, to each record holder of
9% Preferred Stock. Neither the consolidation or merger of the Corporation into
or with any other entity or entities, nor the sale or transfer by the
Corporation of all or any part of its assets, nor the reduction of the capital
stock of the Corporation, shall be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of this Section 4, unless such
sale or transfer shall be in connection with a plan of liquidation, dissolution
or winding up of the Corporation.
5. Redemption.
----------
(a) Mandatory Redemption. To the extent permitted by law, as
mandatory redemptions for the retirement of the outstanding shares of 9%
Preferred Stock, the Corporation shall redeem, out of Legally Available Funds on
March 26, 2006 (the "Mandatory Redemption Date"), all of the shares of 9%
Preferred Stock initially issued and then outstanding, at a price per share of
9% Preferred Stock equal to the Liquidation Value plus an amount in cash equal
to all accrued but unpaid dividends to the Mandatory Redemption Date.
Immediately prior to authorizing or
5
<PAGE>
making such redemption with respect to shares of 9% Preferred Stock, the
Corporation, by resolution of its Board of Directors shall, to the extent of any
Legally Available Funds, declare a dividend on shares of 9% Preferred Stock
payable on the Mandatory Redemption Date in an amount equal to any accrued and
unpaid dividends on shares of 9% Preferred Stock as of such date and, if the
Corporation does not have sufficient Legally Available Funds to declare and pay
all dividends accrued at the time of such redemption, any remaining accrued and
unpaid dividends shall be added to the redemption price. If the Corporation
shall fail to discharge its obligation to redeem the aforementioned outstanding
shares of 9% Preferred Stock required to be redeemed pursuant to this section
5(a) (the "Mandatory Redemption Obligation"), the Mandatory Redemption
Obligation shall be discharged as soon as the Corporation is able to discharge
such Mandatory Redemption Obligation. If and so long as the Mandatory Redemption
Obligation shall not be fully discharged, (i) dividends on such 9% Preferred
Stock shall continue to accrue and be added to the dividend payable pursuant to
the second preceding sentence and (ii) the Corporation shall not declare or pay
any dividend or make any distribution on its securities not otherwise permitted
by this Certificate of Designations.
(b) Notice of Redemption. Upon the redemption by the
Corporation of shares of 9% Preferred Stock pursuant to Section 5(a) above, a
notice of such redemption shall be given by first-class mail, postage prepaid,
mailed not less than 30 nor more than 60 days prior to the Mandatory Redemption
Date, to each holder of record of the shares of 9% Preferred Stock to be
redeemed, at such holder's address as the same appears on the stock books of the
Corporation's transfer agent. Each such notice shall state: (i) the Mandatory
Redemption Date; (ii) the number of shares of 9% Preferred Stock to be redeemed;
(iii) the redemption price; (iv) the place or places where certificates for such
shares are to be surrendered for payment of the redemption price; (v) that
payment will be made upon presentation and surrender of such 9% Preferred Stock;
(vi) that dividends on the shares of 9% Preferred Stock to be redeemed shall
cease to accrue following the Mandatory Redemption Date; and (vii) that accrued
and unpaid dividends up to and including the Mandatory Redemption Date will be
paid in accordance with the terms herein. Notice having been mailed as
aforesaid, on and after the Mandatory Redemption Date, unless the
6
<PAGE>
Corporation shall be in default in providing money for the payment of the
redemption price (including an amount equal to any accrued and unpaid dividends
up to and including the Mandatory Redemption Date), (x) dividends on the shares
of 9% Preferred Stock so called for redemption shall cease to accrue, (y) said
shares shall be deemed no longer outstanding and (z) all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from the
Corporation the monies payable upon redemption, without interest thereon, upon
surrender of the certificates evidencing such shares) shall cease. The
Corporation's obligation to provide monies in accordance with the preceding
sentence shall be deemed fulfilled if, on or before the Mandatory Redemption
Date, the Corporation shall deposit with a bank or trust company having an
office or agency in the Borough of Manhattan, City of New York, and having a
capital and surplus of at least $500,000,000, the principal amount of funds
necessary for such redemption, in trust for the account of the holders of the
shares to be redeemed (and so as to be and continue to be available therefor),
with irrevocable instructions and authority to such bank or trust company that
such funds be applied to the redemption of the shares of 9% Preferred Stock so
called for redemption. Any interest accrued on such funds shall be paid to the
Corporation from time to time. Any funds so deposited and unclaimed at the end
of three years from the Mandatory Redemption Date shall be released or repaid to
the Corporation, after which, subject to any applicable laws relating to escheat
or unclaimed property, the holder or holders of such shares of 9% Preferred
Stock so called for redemption shall look only to the Corporation for payment of
the redemption price.
Upon surrender in accordance with said notice of the certificates for
any such shares of 9% Preferred Stock so redeemed (properly endorsed or assigned
for transfer, if the Board of Directors shall so require and the notice shall so
state), such shares shall be redeemed by the Corporation at the applicable
redemption price aforesaid.
Notwithstanding the foregoing, if the Corporation's notice of
redemption has been given pursuant to this Section 5 and any holder of shares of
9% Preferred Stock shall, prior to the close of business on the third Business
Day preceding the Redemption Date, give written notice to the Corporation
pursuant to this Section 5(b) hereof of the conversion of any or all of the
shares to be
7
<PAGE>
redeemed held by such holder (accompanied by a certificate or certificates for
such shares, duly endorsed or assigned to the Corporation), then the conversion
of such shares to be redeemed shall become effective as provided in Section 7.
Any shares so converted shall be counted as shares as to which the Mandatory
Redemption Obligation has been satisfied in full.
6. Voting Rights. (a) Except as herein provided or as otherwise
required by law, holders of 9% Preferred Stock shall have no voting rights.
Whenever, at any time or times, dividends payable on the shares of 9% Preferred
Stock at the time outstanding shall be cumulatively in arrears for two
consecutive semiannual dividend periods, the holders of all shares of 9%
Preferred Stock and any shares of securities of the Corporation upon which like
voting rights have been conferred and are exercisable (the 9% Preferred Stock
and any such other securities, collectively for purposes of this Section 6, the
"Defaulted Preferred Stock"), shall be entitled to elect one director of the
Corporation at the Corporation's next annual meeting of stockholders and at each
subsequent annual meeting of stockholders; provided, however, the shares of
Defaulted Preferred Stock shall be entitled to exercise their voting rights at a
special meeting of the holders of shares of Defaulted Preferred Stock as set
forth in Section 6(b) and Section 6(c). At elections for such directors, each
holder of 9% Preferred Stock shall be entitled to one vote for each share held
(the holders of shares of any other series of Defaulted Preferred Stock ranking
on such a parity being entitled to such number of votes, if any, for each share
of stock held as may be granted to them). Upon the vesting of such right of the
holders of Defaulted Preferred Stock, the maximum authorized number of members
of the Board of Directors shall be automatically increased by one and the
vacancy so created shall be filled by vote of the holders of outstanding
Defaulted Preferred Stock as hereinafter set forth. The right of holders of
Defaulted Preferred Stock, voting separately as a class without regard to
series, to elect a member of the Board of Directors as aforesaid shall continue
until such time as all dividends accumulated and unpaid on the Defaulted
Preferred Stock shall have been paid or declared and funds set aside for payment
in full, at which time such right shall terminate, except as herein or by law
expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned.
8
<PAGE>
(b) Whenever such voting right shall have vested, such right may
be exercised initially either at a special meeting of the holders of shares of
Defaulted Preferred Stock called as hereinafter provided, or at any annual
meeting of stockholders held for the purpose of electing directors, and
thereafter at such meeting or by the written consent of such holders pursuant to
Section 228 of the DGCL.
(c) At any time when such voting right shall have vested in the
holders of shares of Defaulted Preferred Stock entitled to vote thereon, and if
such right shall not already have been initially exercised, an officer of the
Corporation shall, upon the written request of the holder of record of 10% of
the shares of such Defaulted Preferred Stock then outstanding, addressed to the
Secretary of the Corporation, call a special meeting of holders of shares of
such Defaulted Preferred Stock. Such meeting shall be held at the earliest
practicable date upon the notice required for special meetings of stockholders
at the place for holding annual meetings of stockholders of the Corporation or,
if none, at a place designated by the Secretary of the Corporation. If such
meeting shall not be called by the proper officers of the Corporation within 30
days after the personal service of such written request upon the Secretary of
the Corporation, or within 30 days after mailing the same within the United
States, by registered mail, addressed to the Secretary of the Corporation at its
principal office (such mailing to be evidenced by the registry receipt issued by
the postal authorities), then holders of record of 10% of the shares of
Defaulted Preferred Stock then outstanding may designate in writing any person
to call such meeting at the expense of the Corporation, and such meeting may be
called by such person so designated upon the notice required for special
meetings of stockholders and shall be held at the same place as is elsewhere
provided in this paragraph. Any holder of shares of Defaulted Preferred Stock
then outstanding that would be entitled to vote at such meeting shall have
access to the stock books of the Corporation's transfer agent for the purpose of
causing a meeting of stockholders to be called pursuant to the provisions of
this paragraph. Notwithstanding the provisions of this paragraph, however, no
such special meeting shall be called or held during a period within 45 days
immediately preceding the date fixed for the next annual meeting of stockholders
of the Corporation.
9
<PAGE>
(d) Subject to the provisions hereof, the director elected
pursuant to this Section 6 shall serve until the next annual meeting or until
his or her successor shall be elected and qualified. Any director elected by the
holders of Defaulted Preferred Stock may be removed by, and shall not be removed
otherwise than by, the vote of the holders of a majority of the outstanding
shares of the Defaulted Preferred Stock who were entitled to participate in such
election of directors, voting as a separate class, without regard to series, at
a meeting called for such purpose or by written consent as permitted by law and
the Certificate of Incorporation and by-laws of the Corporation. Upon any
termination of the right of the holders of Defaulted Preferred Stock to vote for
a director as herein provided, the term of office of the director then in office
elected by the holders of Defaulted Preferred Stock, voting as a class, without
regard to series, shall terminate immediately. Whenever the term of office of
the director elected by the holders of Defaulted Preferred Stock, voting as a
class, without regard to series, shall so terminate and the special voting
powers vested in the holders of Defaulted Preferred Stock shall have expired,
the number of directors shall be such number as may be provided for in the
Corporation's by-laws irrespective of any increase made pursuant to the
provisions of this Section 6.
(e) So long as any shares of 9% Preferred Stock remain
outstanding, the Corporation will not establish, create, authorize or issue any
shares of securities of the Corporation the terms of which shall provide
specifically that such series shall rank on parity with, or senior to, the 9%
Preferred Stock without the prior written consent of the holders of a majority
of the shares of 9% Preferred Stock then outstanding.
7. Conversion Rights. (a) Each share of 9% Preferred Stock may be
converted, at any time and at the option of the holder, into approximately
7.0623 fully paid, non-assessable shares of the Corporation's Class A Common
Stock, par value $.01 per share (the "Class A Common Stock"), the precise number
of shares to be set forth from time to time in the records of the Corporation
maintained by the Secretary of the Corporation, on and subject to the terms and
conditions of this Section 7.
10
<PAGE>
(b) The number of shares of Class A Common Stock issuable upon
conversion of each share of 9% Preferred Stock shall be determined by the
Conversion Price in effect on the date of conversion (calculated as to each
conversion to the nearest 1/100th of a share). The Conversion Price shall
initially equal approximately $141.59693, the precise Conversion Price to be set
forth from time to time in the records of the Corporation maintained by the
Secretary of the Corporation; provided, however, that such Conversion Price
shall be adjusted and readjusted from time to time as provided in this Section 7
and, as so adjusted and readjusted, shall remain in effect until a further
adjustment or readjustment thereof is required by this Section 7.
(c) Except as may be provided by the Board of Directors, upon
conversion of any shares of 9% Preferred Stock, the Corporation shall not be
obligated to make any payment or adjustment with respect to dividends accrued on
such shares of 9% Preferred Stock through the date of conversion unless the
holder of such shares of 9% Preferred Stock being converted was the record
holder of such shares on the record date for the payment of such dividends.
(d) Upon surrender to the Corporation at the office of the
transfer agent or such other place or places, if any, as the Board of Directors
may determine, of certificates duly endorsed to the Corporation or in blank for
shares of 9% Preferred Stock to be converted together with appropriate evidence
of the payment of any transfer or similar tax, if required, and written
instructions to the Corporation requesting conversion of such shares and
specifying the name and address of the person, corporation, firm or other entity
to whom such shares of Class A Common Stock are to be issued, the Corporation
shall issue the number of full shares of Class A Common Stock rounded to the
nearest whole number issuable upon conversion thereof as of the time of such
surrender and as promptly as practicable thereafter will deliver certificates
for such shares of Class A Common Stock. No fractional shares of Common Stock
shall be issued pursuant to this Section 7. Upon surrender of a certificate
representing shares of 9% Preferred Stock to be converted in part, in addition
to the foregoing, the Corporation shall also issue to such holder a new
certificate representing any unconverted shares of 9% Preferred Stock
represented by the certificate surrendered for conversion.
11
<PAGE>
(e) The Corporation shall pay all documentary, stamp, or similar
issue or transfer tax due on the issue of shares of Class A Common Stock
issuable upon conversion of shares of 9% Preferred Stock; provided, however,
that the holder of shares of 9% Preferred Stock so converted shall pay any such
tax which is due because such shares are to be issued in the name other than
that of such holder.
(f) The Conversion Price in effect at any time shall be adjusted
as follows:
(1) If the Corporation shall, at any time or from time to
time, effect a subdivision of the outstanding Class A Common Stock or Class
B Common Stock, par value $.01 per share (the "Class B Common Stock" and,
together with the Class A Common Stock, the "Common Stock"), the Conversion
Price in effect immediately before such subdivision shall be
proportionately decreased and, conversely, if the Corporation shall, at any
time or from time to time, effect a combination of the outstanding Common
Stock, the Conversion Price in effect immediately before such combination
shall be proportionately increased. Any adjustment under this subdivision
shall become effective at the close of business on the record date fixed
for the applicable subdivision or combination.
(2) In the event the Corporation shall, at any time or from
time to time, make or issue to all holders of shares of Common Stock (or
fix a record date for the determination of holders of Common Stock entitled
to receive), a dividend or other distribution payable in shares of Common
Stock, then the Conversion Price then in effect shall be decreased as of
the time of such issuance (or, in the event such a record date shall have
been fixed, as of the close of business on such record date) in accordance
with the following formula:
O
C/1/ = C x -------
0 + N
where:
C/1/ = the adjusted Conversion Price.
12
<PAGE>
C = the current Conversion Price.
O = the number of shares of Common Stock outstanding immediately
prior to the applicable issuance (or the close of business
on the record date).
N = the number of additional shares of Common Stock issued in
payment of such dividend of distribution.
(g) No adjustment in the Conversion Price need be made
unless the adjustment pursuant to Section 7(f)(1) and (2) would require an
increase or decrease of at least 1% in the Conversion Price.
(h) No adjustment need be made for a change in the par value of
the Common Stock.
(i) Whenever the Conversion Price is adjusted, the Corporation
shall promptly mail to holders of 9% Preferred Stock a notice of adjustment
briefly stating the facts requiring the adjustment and the manner of computing
it.
(j) The Corporation shall reserve and at all times keep
available, free from preemptive rights, out of its authorized but unissued
stock, for the purpose of effecting the conversion of shares of 9% Preferred
Stock, such number of shares of its duly authorized Class A Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of 9% Preferred Stock.
8. Limitation and Rights Upon Insolvency. Notwithstanding any other
provision of this Certificate of Designations, the Corporation shall not be
required to pay any dividend on, or to pay any amount in respect of any
redemption of, shares of 9% Preferred Stock at a time when immediately after
making such payment the Corporation is or would be rendered insolvent (as
defined by applicable law), provided that the obligation of the Corporation to
make any such payment shall not be extinguished in the event the foregoing
limitation applies.
13
<PAGE>
9. Shares to Be Retired. Any share of 9% Preferred Stock
converted, redeemed or otherwise acquired by the Corporation shall be retired
and cancelled and shall not be reissued, sold or transferred.
10. Record Holders. The Corporation and the Corporation's
transfer agent may deem and treat the record holder of any shares of 9%
Preferred Stock as the true and lawful owner thereof for all purposes, and
neither the Corporation nor the Corporation's transfer agent shall be affected
by any notice to the contrary.
11. Registration on Transfer. The Corporation shall keep at its
principal office a register for the registration of 9% Preferred Stock. Upon the
surrender of any certificate representing 9% Preferred Stock at such place, the
Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares represented by the surrendered certificate. Each such new certificate
shall be registered in such name and shall represent such number of shares of 9%
Preferred Stock as is requested by the holder of the surrendered certificate and
shall be substantially identical in form to the surrendered certificate, and
dividends shall accrue on the shares of 9% Preferred Stock represented by such
new certificate or certificates from the date to which dividends have been fully
paid on such 9% Preferred Stock represented by the surrendered certificate.
12. Replacement. Upon receipt of evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing shares of 9% Preferred Stock, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor, its own agreement shall be
satisfactory), or, in the case of any such mutilation, upon surrender of such
certificate, the Corporation shall (at its own expense) execute and deliver in
lieu of such certificate a new certificate of like kind representing the number
of shares of 9% Preferred Stock represented by such lost, stolen or mutilated
certificate, and dividends shall accrue on the shares of 9% Preferred
14
<PAGE>
Stock represented by such new certificate from the date to which dividends have
been fully paid on such shares of 9% Preferred Stock represented by the lost,
stolen, destroyed or mutilated certificate.
13. Notice. Except as may otherwise be provided for herein, all
notices referred to herein shall be in writing, and all notices hereunder shall
be deemed to have been given upon, the earlier of receipt of such notice or
three Business Days after the mailing of such notice if sent by registered mail
(unless first-class mail shall be specifically permitted for such notice under
the terms of this Certificate of Designations) with postage prepaid, addressed:
if to the Corporation, to its offices at 10 South Riverside Plaza, Suite 401,
Chicago, Illinois 60606 (Attention: General Counsel) or to an agent of the
Corporation designated as permitted by the Certificate of Incorporation or, if
to any holder of shares of 9% Preferred Stock, to such holder at the address of
such holder of 9% Preferred Stock as listed in the stock record books of the
Corporation (which may include the records of the Corporation's transfer agent);
or to such other address as the Corporation or holder, as the case may be, shall
have designated by notice similarly given.
15
<PAGE>
IN WITNESS WHEREOF, United USN, Inc. has caused this Certificate
of Designations, Powers, Preferences and Rights to be executed by J. Thomas
Elliott, its President and Chief Executive Officer as of this 26th day of
September, 1996.
UNITED USN, INC.
By: /s/ J. Thomas Elliott
------------------------
16
<PAGE>
EXHIBIT 3.3
================================================================================
BYLAWS
OF
UNITED USN, INC.
================================================================================
ARTICLE I
Offices and Agent
1. Principal Office. The principal office of the Corporation may be
located within or without the State of Delaware, as designated by the board of
directors. The Corporation may have other offices and places of business at such
places within or without the State of Delaware as shall be determined by the
directors.
2. Registered Office and Agent. The Corporation shall have and maintain at
all times (a) a registered office in the State of Delaware, which office shall
be located at 1209 Orange Street, Wilmington, Delaware 19801, and (b) a
registered agent located at such address whose name is The Corporation Trust
Company, until changed from time to time as provided by the General Corporation
Law of the State of Delaware ("Delaware Corporation Law").
ARTICLE II
Stockholders Meetings
1. Annual Meetings. The annual meeting of stockholders for the election of
directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on such date and at such time as
determined by resolution of the board of directors. If, at the place of the
meeting, this date shall fall upon a legal holiday, then such meeting shall be
held on the next succeeding business day at the same hour. If no annual meeting
is held in accordance with the foregoing provisions, the board of directors
shall cause the meeting to be held as soon thereafter as convenient. If no
annual meeting is held in accordance with the foregoing provisions, a special
meeting may be held in lieu of the annual meeting, and any action taken at that
special meeting shall have the same effect as if it had been taken at the annual
meeting, and in such case all references in these Bylaws to the annual meeting
of stockholders shall be deemed to refer to such special meeting.
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<PAGE>
2. Special Meetings. Except as otherwise provided in these Bylaws or
Delaware Corporation Law, special meetings of the stockholders of the
Corporation may be called for any purpose at any time by the president, shall be
called by the secretary if directed by the board of directors and shall be
called by the secretary upon the written request of holders of shares entitled
to cast not less than twenty percent of the votes entitled to notice of and to
vote at such special meeting. Such written request of such stockholders shall
specify the purpose or purposes of, and a proposed date for, the meeting and
shall be delivered to the secretary. Upon receipt of such written request, the
secretary shall fix a date and time for such meeting, which such date shall be
the earliest legally permissible date under Delaware Corporation Law.
3. Place of Meetings. All meetings of stockholders of the Corporation
shall be held within or without the State of Delaware as may be designated by
the board of directors or the president, or, if not designated, at the
registered office of the Corporation.
4. Notice of Meeting. Except as otherwise provided in these Bylaws or
Delaware Corporation Law, written notice of any meeting of stockholders stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose for which the meeting is called, shall be delivered either
personally or by mail to each stockholder of record entitled to vote at such
meeting not less than ten (10) nor more than sixty (60) days before the date of
the meeting, by or at the direction of the board of directors, the president or
the secretary. If mailed, such notice shall be deemed to be delivered as to any
stockholder of record when deposited in the United States mail addressed to the
stockholder at his address as it appears on the stock transfer books of the
Corporation, with postage prepaid. When a meeting is adjourned to another time
or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty (30) 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 of record entitled to vote at the meeting.
5. Waiver of Notice. Any stockholder, either before or after any
stockholder' meeting, may waive in writing notice of the meeting, and his waiver
shall be deemed the equivalent of giving notice. Attendance at a meeting by a
stockholder shall constitute a waiver of notice, except when the stockholder
attends a 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.
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<PAGE>
6. Fixing of Record Date. For the purpose of determining the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, 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 of the Corporation may fix, in
advance, a record date which shall be not more than sixty (60) days nor less
than ten (10) days prior to the date of such meeting, nor more than sixty (60)
days prior to any other action. If no record date is fixed, the record date for
determining the 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. The record date for
determining the stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the board of directors is
necessary, shall be the day on which the first written consent is expressed. 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 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.
7. Stockholders List. The officer who has charge of the stock ledger of
the Corporation shall prepare and make, at least ten (10) 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 (10) days prior to the meeting, at a place within the city 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 who is present.
8. Proxies. A stockholder entitled to vote at a meeting of stockholders
or to express consent or dissent to corporate action in writing without a
meeting may authorize another person or persons to act for him by proxy. No
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period.
9. Voting Rights. Each stockholder shall have one vote for each share of
a stock entitled to vote held of record by such stockholder and a proportionate
vote for each fractional share so
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<PAGE>
held, unless otherwise provided in the Certificate of Incorporation.
Persons holding stock in a fiduciary capacity shall be entitled to vote the
shares so held. Persons whose stock is pledged shall be entitled to vote, unless
in the transfer by the pledgor on the books of the Corporation he has expressly
empowered the pledgee to vote thereon, in which case only the pledgee, or his
proxy, may represent such stock and vote thereon.
If shares having voting power stand of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, tenants by the entirety, or otherwise, of if two or more persons have
the same fiduciary relationship respecting the same shares, unless the secretary
of the Corporation is given written notice to the contrary and is furnished with
a copy of the instrument or order appointing them or creating the relationship
wherein it is so provided, their acts with respect to voting shall have the
following effect: (i) if only one votes, his act binds all; (ii) if more than
one vote, the act of the majority so voting binds all; and (iii) if more than
one vote, but the vote is evenly split on any particular matter, each fraction
may vote the securities in question proportionately, or any person voting the
shares or a beneficiary, if any, may apply to the Court of Chancery or any court
of competent jurisdiction in the State of Delaware to appoint an additional
person to act with the persons so voting the shares. The shares shall then be
voted as determined by a majority of such persons and the person appointed by
the Court. If a tenancy is held in unequal interests, a majority or even-split
for the purpose of this subsection shall be a majority or even-split in
interest.
10. Quorum and Required Vote. Except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws, the holders of a majority of the
shares entitled to vote at the meeting, present in person or by proxy, shall
constitute a quorum for the transaction of business. If a quorum is present, the
affirmative vote of a majority of the shares present or represented by proxy at
the meeting and entitled to vote on the subject matter shall be the act of the
stockholders, and, if there are two or more classes of stock entitled to vote as
separate classes, then, in the case of each such class, the affirmative vote of
a majority of the shares of that class present or represented by proxy at the
meeting shall be the vote of such class unless a different vote is required by
an express provision of law, the Certificate of Incorporation or these Bylaws.
11. Informal Action By Stockholders. Except as otherwise provided in the
Certificate of Incorporation, any action required by the provisions of Delaware
Corporation Law to be taken or any action which may be taken at a stockholders'
meeting may be taken without a meeting without prior notice and without a vote,
if a consent in writing, setting forth the action so taken, shall be
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<PAGE>
signed by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous consent shall be given to those stockholders who have not
consented in writing. Any action taken pursuant to such written consent of the
stockholders shall have the same force and effect as if taken by the
stockholders at a meeting thereof.
ARTICLE III
Board of Directors
------------------
1. Number, Qualification and Term of Office. Except as otherwise
provided in the Certificate of Incorporation or Delaware Corporation Law, the
business and affairs of the Corporation shall be managed by or under the
direction of a board of directors consisting of a minimum of five members and a
maximum of 11 members. Directors need not be stockholders of the Corporation.
The stockholders of the Corporation may establish the Corporation. The
stockholders of the Corporation may establish the size of the board of directors
from time to time by increasing or decreasing the number of directors within the
minimum and maximum numbers of members set forth above. The size of the board of
directors shall not be established by the members of the board of directors.
Subject to the provisions of that certain Stockholders Agreement dated as of
April 20, 1994 by and among the Corporation, CIBC Wood Gundy Ventures, Inc.,
Chemical Venture Capital Associates and each of the stockholders listed on the
Schedule of UNHC Stockholders attached thereto, and except as otherwise provided
in these Bylaws, each director shall be elected at each annual meeting of
stockholders and shall hold such office until the next annual meeting of
stockholders and until his successor shall be elected and shall qualify. No
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director.
2. Vacancies. Except as otherwise provided in these Bylaws, any vacancy
in the board of directors, however occurring, including a vacancy
resulting from an enlargement of the board, shall be filled by the
stockholders of the Corporation. No vacancy in the board of directors
shall be filled by the board of directors. A director elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in
office, and a director chosen to fill a position resulting from an
increase in the number of directors shall hold office until the next
annual meeting of stockholders and until his successor is elected and
qualified, or until his earlier death, resignation or removal.
3. Removal. Except as otherwise provided in these Bylaws, any director
or the entire board of directors may be removed with or without cause by the
holders of a majority of the shares then entitled to vote at an election of
directors.
<PAGE>
4. Resignation. Any director may resign by delivering has written
resignation to the Corporation at its principal office addressed to the
president or secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
5. Compensation. Directors may be paid such compensation for their
services and such requirements for expenses of attendance at meetings as the
board of directors may from time to time determine. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
ARTICLE IV
Meetings of the Board
---------------------
1. Place of Meetings. The regular or special meetings of the board of
directors or any committee designated by the board shall be held at the
principal office of the Corporation or at any other place within or without the
State of Delaware that a majority of the board of directors or any such
committee, as the case may be, may designate from time to time by resolution.
2. Regular Meetings. The board of directors shall meet (i) at least once
during each of the fiscal quarters of the Corporation and (ii) once each year
immediately after and at the same place as the annual meeting of the
stockholders for the purpose of electing officers and transacting such other
business as may come before the meeting. The board of directors or any committee
designated by the board may provide, by resolution, for the holding of
additional regular meetings within or without the State of Delaware without
notice of the time and place of such meeting other than such resolution;
provided that any director who is absent when such resolution is made shall be
given notice of said resolution.
3. Special Meetings. Special meetings of the board of directors or any
committee designated by the board may be held at any time and place, within or
without the State of Delaware, designated in a call by the chairman of the
board, if any, by the president or by any member of the board of directors or by
a majority of the members of any such committee, as the case may be. Any special
meeting of the board of directors called by a member of the board of directors
shall be held on the earliest legally permissible date under Delaware
Corporation Law.
4. Notice of Special Meetings. Except as otherwise provided in these
Bylaws or the laws of the State of Delaware, written notice of each special
meeting of the board of directors or any committee thereof setting forth the
time and place of the meeting shall be given to each director by the secretary
or by the
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<PAGE>
officer or director calling the meeting not less than one (1) day prior to the
time fixed for the meeting. Notice of special meetings may be either given
personally, personally by telephone, or by sending a copy of the notice through
the United States mail or by telegram, telex or telecopy, charges prepaid, to
the address of each director appearing on the books of the Corporation. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail so addressed, with postage prepaid thereon. If notice be given by
telegram, such notice shall be deemed to be delivered when the telegram, telex
or telecopy, is delivered to the telegraph, telex or telecopy operator. Neither
the business to be transacted at, nor the purpose of, any regular or special
meeting of the board of directors need be specified in the notice or waiver of
notice of such meeting.
5. Waiver of Notice. A director may waive, in writing, notice of any
special meeting of the board of directors or any committee thereof, either
before, at, or after the meeting; and his waiver shall be deemed the equivalent
of giving notice. By attending or participating in a regular or special
meeting, a director waives any required notice of such meeting unless the
director, at the beginning of the meeting, objects to the holding of the meeting
or the transacting of business at the meeting.
6. Quorum and Action at Meeting. At meetings of the board of directors or
any committee designated by the board, a majority of the members of the board of
directors, or a majority of the members of any such committee, as the case may
be, shall constitute a quorum for the transaction of business. In the event one
or more of the directors shall be disqualified to vote at any meeting, then the
required quorum shall be reduced by one for each such director so disqualified;
provided, however, that in no case shall less than one-third (1/3) of the number
so fixed constitute a quorum. If a quorum is present, the act of the majority
of directors in attendance shall be the act of the board of directors or any
committee thereof, as the case may be, unless the act of a greater number is
required by these Bylaws, the Certificate of Incorporation or Delaware
Corporation Law. If a quorum shall not be present at any meeting of the board
of directors, the directors present thereat may adjourn that meeting from time
to time, without notice other than announcement at the meeting, until a quorum
shall be present.
7. Presumption of Assent. A director who is present at a meeting of the
board of directors or a committee thereof when action is taken is deemed to have
assented to the action taken unless: (i) he objects at the beginning of such
meeting to the holding of the meeting or the transacting of business at the
meeting; (ii) he contemporaneously requests that his dissent from the action
taken be entered in the minutes of such meeting; or (iii) he gives written
notice of his dissent to the presiding officer of such meeting before its
adjournment or to the secretary of the Corporation immediately after adjournment
of such meeting. The
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<PAGE>
right of dissent as to a specific action taken at a meeting of a board or a
committee thereof is not available to a director who votes in favor of such
action.
8. Committees. The board of directors may, by a resolution passed by a
majority of the whole board of directors, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members of the committee 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 the absent or disqualified member. Any such committee, to the extent
provided in the resolution of the board of directors and subject to the
provisions of Delaware Corporation Law, 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, and may authorize the seal of the Corporation to
be affixed to all such papers which may require it. Each such committee shall
keep minutes and make such reports as the board of directors may from time to
time request. Except as the board of directors may otherwise determine, any
committee may make rules for the conduct of its business, but, unless otherwise
provided by the directors or in such rules, its business shall be conducted as
nearly as possible in the same manner as is provided in these Bylaws for the
board of directors.
9. Informal Action by Directors. Except as otherwise provided in the
Certificate of Incorporation, any action required or permitted by Delaware
Corporation Law to be taken at any meeting of the board of Directors or any
committee thereof may be taken without a meeting if all members of the board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the board or committee.
10. Telephonic Meetings. Directors or any members of any committee
designated by the board may participate in a meeting of the board or committee
by means of a conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other at the same time.
Such participation shall constitute presence in person at the meeting.
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<PAGE>
ARTICLE V
Officers and Agents
-------------------
1. Enumeration, Election and Term. The officers of the Corporation shall
consist of a president, a secretary, a treasurer and such other officers with
such other titles as may be deemed necessary or desirable by the board of
directors, including one or more vice presidents, assistant treasurers and
assistant secretaries and a chairman of the board. Any number of offices may be
held by the same person and no officer need be a stockholder or a resident of
the State of Delaware. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, each officer shall hold office until his
successor is elected and qualified or until his earlier death, resignation or
removal. The officers of the Corporation shall be elected annually by the board
of directors at the first meeting of the board held after each annual meeting of
the stockholders.
2. General Duties. All officers and agents of the Corporation, as between
themselves and the Corporation, shall have such authority and shall perform
such duties in the management of the Corporation as may be provided in these
Bylaws or as may be determined by resolution of the board of directors not
inconsistent with these Bylaws. In all cases where the duties of any officer,
agent or employee are not prescribed by the Bylaws or by the board of directors,
such officer, agent or employee shall follow the orders and instructions of the
Chairman.
3. Vacancies. The board of directors may fill any vacancy occurring in any
office for any reason and may, in its discretion, leave any vacancy unfilled for
such period as it may determine other than a vacancy in the office of president
or secretary. The officer so selected shall hold office until his successor is
elected and qualified or until his earlier death, resignation or removal.
4. Compensation. The board of directors from time to time shall fix the
compensation of the officers of the Corporation. The compensation of other
agents and employees of the Corporation may be fixed by the board of directors,
or by any committee designated by the board or by an officer to whom that
function has been delegated by the board.
5. Resignation and Removal. Any officer may resign by delivering his
written resignation to the Corporation at its principal office addressed to the
president or secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event. Any officer or agent of the Corporation may be removed, with or
without cause, by a vote of the majority of the members of the board of
directors whenever in its judgment the best interests of the Corporation may be
served thereby, but such
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removal shall be without prejudice to the contract rights, if any, of the
person so removed. Election or appointment of an officer or an agent shall not
of itself create contract rights.
6. Chairman and Chief Executive Officer. The chairman and chief executive
officer shall be the chief executive officer of the corporation, shall preside
at all meetings of the board of directors and all meetings of the stockholders
and shall have such other powers and perform such duties as are specified in
these bylaws and as may from time to time be assigned to him by the board of
directors. Whenever the president is unable to serve, by reason of sickness,
absence or otherwise, the chairman and chief executive officer shall perform all
of the duties and responsibilities and exercise all powers of the president.
The chairman and chief executive officer shall have general and active
management of the business of the corporation and shall see that all orders and
resolutions of the board of directors are carried into effect. The chairman and
chief executive officer shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the board of
directors to some other officer or agent of the corporation. The chairman and
chief executive officer shall have general powers of supervision and shall be
the final arbitrator of all differences between officers of the corporation,
and such decision as to any matter affecting the corporation subject only to the
board of directors.
7. President and Chief Operating Officer. The president and chief
operating officer shall be the chief operating officers of the corporation,
shall in the absence of the chairman and chief executive officers perform the
duties and exercise the powers of the chief executive officer. The president and
chief operating officer shall have concurrent power with the chairman and chief
executive officer to sign bonds, mortgages, certificates for shares and other
contracts and documents requiring a seal, under the seal of the corporation,
except where required or permitted by law to be otherwise signed and executed
and except where signing and execution thereof shall be expressly delegated by
the board of directors to some other officer or agent of the corporation. In
general, the president and chief operating officer shall perform all duties
incident to the office of president and chief operating officer and such other
duties as the chairman and chief executive officer or the board of directors may
from time to time prescribe.
8. Vice Presidents. Each vice president shall have such powers and perform
such duties as the board of directors may from time to time prescribe or as the
president may from time to time delegate to him. At the request of the
president, in the case of the president's absence or inability to act, any vice
president may temporarily act in his place. In the case of the death of the
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president, or in the case of his absence or inability to act without having
designated a vice president or vice presidents to act temporarily in his place,
the board of directors, by resolution, may designate a vice president or vice
president to perform the duties of the president. If no such designation shall
be made, the chairman of the board of directors, if any, shall exercise such
powers and perform such duties, as provided in Section 7 above, but if the
Corporation has no chairman of the board of directors, or if the chairman is
able to act in place of the president, all of the vice presidents may exercise
such powers and perform such duties.
9. Secretary. The secretary shall keep or cause to be kept in books
provided for that purpose, the minutes of the meetings of the stockholders,
executive committee, if any, and any other committees, and of the board of
directors; shall see that all notices are duly given in accordance with the
provisions of these Bylaws and as required by law; shall be custodian of the
records and of the seal of the Corporation and see that the seal is affixed to
all documents, the execution of which on behalf of the Corporation under its
seal is duly authorized and in accordance with the provisions of these Bylaws;
and, in general, shall perform all duties incident to the office of secretary
and such other duties as may, from time to time, be assigned to him by the board
of directors or by the president. In the absence of the secretary or his
inability to act, the assistant secretaries, if any, shall act with the same
powers and shall be subject to the same restrictions as are applicable to the
secretary.
10. Treasurer. The treasurer shall have custody of corporate funds and
securities. He shall keep full and accurate accounts of receipts and
disbursements and shall deposit all corporate monies and other valuable effects
in the name and to the credit of the Corporation in the depository or
depositories of the Corporation, and shall render an account of his transactions
as treasurer and of the financial condition of the Corporation to the president
and/or the board of directors upon request. Such power given to the treasurer to
deposit and disburse funds shall not, however, preclude any other officer or
employee of the Corporation from also depositing and disbursing funds when
authorized to do so by the board of directors. The treasurer shall, if required
by the board of directors, give the Corporation a bond in such amount and with
such surety or sureties as may be ordered by the board of directors for the
faithful performance of the duties of his office. The treasurer shall have such
other powers and perform such other duties as may be from time to time
prescribed by the board of directors or the president. In the absence of the
treasurer or his inability to act, the assistant treasurers, if any, shall act
with the same authority and shall be subject to the same restrictions as are
applicable to the treasurer.
11. Delegation of Duties. Whenever an officer is absent, or whenever, for
any reason, the board of directors may
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deem it desirable, the board may delegate the powers and duties of an officer to
any other officer or officers or to any director or directors.
ARTICLE VI
Indemnification of Officers, Directors and Others
-------------------------------------------------
1. Indemnification: Third Party Actions. The Corporation shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he or she is or was a
director, officer, employee or agent, of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interest of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
2. Indemnification: Derivative Actions. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he
or she is or was a director, officer, employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection with the defense or settlement
of such action or suit if he or she acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
Corporation and, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the court in which
such action or suit was brought shall determine upon
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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 shall deem proper.
3. Mandatory Indemnification. To the extent that a director or officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Sections 1
and 2 of this Article VI or in defense of any claim, issue or matter therein, he
or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection therewith.
4. Authorization for Indemnification. Any indemnification under Sections 1
and 2 of this Article VI (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he or she had met the applicable standard of conduct set
forth in Sections 1 and 2 of this Article VI. Such determination shall be made
(1) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
5. Advance Payment of Expenses. Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the corporation as authorized in this Article VI. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
6. Non-exclusive. The indemnification and advancement of expenses provided
by, or granted pursuant to, the other subsections of this Article VI shall not
be deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding such
office, and shall continue, unless otherwise provided when authorized or
ratified, as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
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7. Insurance. The corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him or her and incurred by him or her in any such capacity, or arising out of
his or her status as such, whether or not the corporation would have the power
to indemnify him or her against such liability under the provisions of this
Article VI.
8. Definitions. For purposes of this Article VI, the following terms
shall have the following meanings:
(a) references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise shall stand in the same position under the provisions
of this Article VI with respect to the resulting or surviving corporation as he
or she would have with respect to such constituent corporation if its separate
existence had continued;
(b) references to "other enterprises" shall include employee benefit
plans;
(c) references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan;
(d) references to "serving at the request of the Corporation" shall
include any service as a director, officer, employee or agent of the Corporation
which imposes duties on, or involves services by, such director, officer,
employee, or agent with respect to an employee benefit plan, its participants,
or beneficiaries; and
(e) a person who acted in good faith and in a manner he reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan shall be deemed to have acted in a manner "not opposed
to the interests of the Corporation" as referred to in this Article VI.
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ARTICLE VII
Capital Stock
-------------
1. Certificates of Stock. The shares of the Corporation shall be
represented by certificates, provided that the board of directors of the
Corporation may, by resolution, provide that some or all of any or all classes
or series of its stock shall be uncertificated shares. Any such resolution
shall not apply to shares represented by a certificate until such certificate is
surrendered to the Corporation. Notwithstanding the adoption of such a
resolution by the board of directors, every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the Corporation by
the chairman or vice chairman of the board of directors, or the president or
vice president, and by the treasurer or an assistant treasurer, or the secretary
or an assistant secretary of the Corporation representing the number of shares
registered in certificate form. Any or all the signatures on the 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 he
were such officer, transfer agent or registrar at the date of issue.
2. Issuance of Stock. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the Corporation
or the whole or any part of any unissued balance of the authorized capital
stock of the Corporation held in its treasury may be issued, sold, transferred
or otherwise disposed of by resolution of the board of directors in such manner,
for such consideration and on such terms as the board of directors may
determine. Consideration for such shares of capital stock shall be expressed in
dollars, and shall not be less than the par value or stated value therefor, as
the case may be. The par value for shares, if any, shall be stated in the
Certificate of Incorporation, and the stated value for shares, if any, shall be
fixed from time to time by the board of directors.
3. Lost Certificates. The board of directors may direct a new certificate
to be issued in place of any previously issued certificate alleged to have been
destroyed or lost if the owner makes an affidavit or affirmation of that fact
and produces such evidence of loss or destruction as the board may require. The
board, in its discretion, may as a condition precedent to the issuance of a new
certificate require the owner to give the Corporation a bond as indemnity
against any claim that may be made against the Corporation relating to the
allegedly destroyed or lost certificate.
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4. Transfer of Shares. Subject to applicable law, shares of stock of the
Corporation may be transferred on its books upon the surrender to the
Corporation or its transfer agent of the certificates representing such shares,
if any, duly endorsed or accompanied by a written assignment or power of
attorney duly executed and with such proof of authority or authenticity of
signature as the Corporation or its transfer agent may reasonably require. In
that event, the surrendered certificate shall be cancelled, new certificates
issued to the persons entitled to them, if any, and the transaction recorded on
the books of the Corporation.
5. Registered Stockholders. 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 the other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of the State of Delaware.
6. Stock Ledger. An appropriate stock journal and ledger shall be kept by
the secretary or such registrars or transfer agents as the directors by
resolution may appoint in which all transactions in the shares of stock of the
Corporation shall be recorded.
7. Restriction on Transfer of Shares. Notice of any restriction on the
transfer of the stock of the Corporation shall be placed on each certificate of
stock issued or in the case of uncertificated shares contained in the notice
sent to the registered owner of such shares in accordance with the provisions of
the Delaware Corporation Law.
ARTICLE VIII
Fiscal Year
-----------
The fiscal year of the Corporation shall be determined by the board of
directors and set forth in the minutes of the directors. Said fiscal year may be
changed from time to time by the board of directors in its discretion.
ARTICLE IX
Dividends
---------
Dividends upon the capital stock of the Corporation, subject to the
provisions of the Certificate of Incorporation, if any, may be declared by the
board of directors at any regular or
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special meeting, pursuant to law. Dividends may be paid in cash, in property, or
in shares of the capital stock, Subject to the provisions of the Certificate of
Incorporation. 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
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think in the best interest of the Corporation,
and the directors may modify or abolish any such reserve in the manner in which
it was created.
ARTICLE X
Amendments
----------
Subject to repeal or change by action of the stockholders, the stockholders
may amend, supplement or repeal these Bylaws or adopt new Bylaws, and all such
changes shall affect and be binding upon the holders of all shares heretofore as
well as hereafter authorized, subscribed for or offered.
ARTICLE XI
Miscellaneous
-------------
1. Gender. Whenever required by the context, the singular shall include the
plural, the plural the singular, and one gender shall include all genders.
2. Invalid Provision. The invalidity or unenforceability of any particular
provision of these Bylaws shall not affect the other provisions herein, and
these Bylaws shall be construed in all respects as if such invalid or
unenforceable provision was omitted.
3. Governing Law. These Bylaws shall be governed by and construed in
accordance with the laws of the State of Delaware.
I, Charles Buckman, as Secretary of United USN, Inc., hereby certify that
the foregoing Bylaws were adopted by the Board of Directors of the Corporation
effective as of April 8, 1994.
/s/ Charles E. Buckman
-----------------------------
Charles E. Buckman, Secretary
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Exhibit 10.2
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of July 18, 1996, by and between J. Thomas Elliott
(the "Executive") and United USN, Inc., a Delaware corporation (the "Company")
and, as to Sections 5(c)(iii) and 5(c)(iv) hereof only, the current shareholders
of the Company listed on the signature pages hereof (the "Original
Shareholders").
WHEREAS, during the course of Executive's employment with the Company, the
Executive has performed outstanding services for the Company; and
WHEREAS, it is deemed by the Company to be in the best interests of the
Company to assure continuation of Executive's employment; and
WHEREAS, the Company and the Executive have determined to enter into this
Agreement pursuant to which the Company will continue to employ the Executive on
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the Executive, and
the Executive hereby accepts such employment, on the terms and conditions
hereinafter set forth.
2. Term. This Agreement shall become effective on the date hereof (the
"Effective Date"). Unless earlier terminated as herein provided, the Executive's
employment with the Company hereunder shall commence at the Effective Date and
shall end on the last day of the "Term". For purposes of this Agreement, the
"Term" of this Agreement shall mean the full three-year term of the Agreement,
plus any extensions made as provided in this Section 2. On each anniversary of
the Effective Date, the Term shall automatically be extended for an additional
year unless, not later than ninety (90) days prior to any such anniversary, the
Company or the Executive shall have given notice not to extend the Term. For
purposes of this Agreement, the "Employment Period" (which
<PAGE>
in no event shall extend beyond the Term) shall mean the period during which
Executive has an obligation to render services hereunder, as described in
Section 3 hereof, taking into account any Notice of Termination (as defined in
Section 6(e) hereof) which may be given by either the Company or the Executive.
Nothing in this Section shall limit the right of the Company or the Executive to
terminate the Executive's employment hereunder on the terms and conditions set
forth in Section 6 hereof.
3. Position and Duties. On and after the Effective Date, the Executive
shall serve as President and Chief Executive Officer of the Company and shall
have such additional duties and responsibilities as may be assigned to him by
the Board of Directors of the Company (the "Board"), provided that such duties
and responsibilities are consistent with the Executive's positions as President
and Chief Executive Officer of the Company. The Executive shall report to the
Board. The Executive agrees to devote substantially all his full working time,
attention and energies during normal business hours to the performance of his
duties for the Company, provided that the Executive may serve as a director on
the boards of such companies and organizations as may be agreed upon in writing
by the Board and the Executive.
4. Place of Performance and Related Expenses. The principal place of
employment and office of the Executive shall be in Chicago, Illinois or such
other location as may be agreed to in writing by the Executive. If the Executive
decides to relocate, or is required by the Company to relocate, to the Chicago
area (the "Relocation"), the Company shall reimburse the Executive for all
reasonable relocation expenses up to $50,000 (and any additional amount agreed
to by the Board) incurred with respect to the relocation of the Executive and
his family. The Company shall reimburse the Executive for all reasonable
commuting expenses until a Relocation occurs. The Company shall also reimburse
the Executive for all reasonable expenses which he may incur with respect to
temporary living quarters in the Chicago area until a Relocation occurs. If any
such relocation, commuting or living-quarters expenses are treated as taxable
income to the Executive, the Company shall make an additional payment to the
Executive which shall make him whole with respect to the imposition of any
Federal, state or local income tax on such taxable income.
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<PAGE>
5. Compensation and Related Matters.
(a) Base Salary. As compensation for the performance by the
Executive of his duties hereunder, the Company shall pay the Executive an annual
base salary of One Hundred Ninety-five Thousand Dollars ($195,000) (such amount,
as it may be increased from time to time, is hereinafter referred to as "Base
Salary"). Base Salary shall be payable in accordance with the Company's normal
payroll practices, shall be reviewed annually and may be increased upon review
by the Board. Base Salary, once increased, shall not be decreased.
(b) Annual Bonus. The Executive shall be entitled to an annual
bonus (the "Annual Bonus") for each calendar year which ends within the
Employment Period, including, without limitation, the year in which this
Agreement is executed. Subject to meeting performance objectives established by
the Board and approval of the Annual Bonus by the Board, the Executive's Annual
Bonus shall be at least fifty percent (50%) of his then-current Base Salary. In
the discretion of the Board, or its designated committee, upon the attainment of
reasonable performance goals established by the Board (or such committee) in
good faith, the Annual Bonus paid for any year may exceed such percentage of
Base Salary. The Annual Bonus for each fiscal year which ends within the
Employment Period shall be paid as soon as practicable after the end of such
year, and no later than the thirtieth (30th) day immediately following the end
of such fiscal year. The percentage of Base Salary which determines the
Executive's Annual Bonus opportunity shall be reviewed by the Board annually and
may be increased upon review by the Board. Within the ten-(10)-day period
immediately following any Change in Control (as defined in Section 9 hereof),
the Company shall pay the Executive a lump sum amount equal to a pro rata
portion of the Annual Bonus for the year in which the Change in Control occurs,
calculated by multiplying the award that the Executive would have earned for the
entire year, assuming the achievement, at the target level, of any performance
goals established with respect to such award, by a fraction the numerator of
which shall be the number of days of employment in such year up to and including
the date of the Change in Control and the denominator of which shall be three-
hundred-sixty-five (365).
(c) Stock Options. The Executive shall be entitled to
participate, at a level appropriate to his
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<PAGE>
positions with the Company, in any stock option plan or stock-based compensation
plan which the Company maintains from time to time. The Executive already holds
certain stock options ("Options") for shares of common stock of the Company
("Shares") under the Company's 1994 Stock Option Plan (the "1994 Plan"). The
Company agrees that it will take such actions as are necessary (including,
without limitation, amendment of the 1994 Plan and options outstanding
thereunder, subject to any required consents of participants therein) to assure
the following:
(i) All Options held by the Executive shall become fully vested and
exercisable and all restrictions upon any restricted Shares held by the
Executive will lapse immediately prior to a Change in Control;
(ii) During the Employment Period, if the Company shall at any time or from
time to time raise capital by selling shares of Company stock of any class,
the Executive shall have the right to purchase three and eight-tenths
percent (3.8%) of the shares which are being sold, upon the same terms and
conditions as such shares are being sold to others;
(iii) If one or more of the Original Shareholders (including, for purposes
of this Section 5(c)(iii), their respective successors) shall sell to any
Person (as defined in Section 9(b) hereof) any of their Shares in the
Company under circumstances such that the sale transaction creates a Change
in Control at a time (whether or not during the Employment Period) when the
Executive holds Options or owns any Shares as a result of the exercise of
any Option or otherwise, the Original Shareholders shall require such
Person to purchase, at the Executive's election, the same percentage of the
Executive's Shares (including any Shares acquired by the Executive pursuant
to exercise of an Option which has become fully vested and exercisable
immediately prior to the Change in Control and any Shares as to which
restrictions have lapsed immediately prior to the Change in Control) as the
percentage of the aggregate Shares of the Original Shareholders which is
being purchased; the purchase from the Executive shall be made on the same
terms and for the same consideration as the purchase from the Original
Shareholders;
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(iv) If one or more of the Original Shareholders (including, for purposes
of this Section 5(c)(iv), their respective successors) shall sell to any
Person Shares in the Company which constitute twenty percent (20%) of the
Shares outstanding on the date of such sale at a time (whether or not
during the Employment Period) when no equity securities of the Company are
listed and traded on a national securities exchange or on the Nasdaq
National Market and when the Executive holds Options or owns any Shares as
a result of the exercise of any Option or otherwise, the Original
Shareholders shall require the such Person to purchase, at the Executive's
election, the same percentage of the Executive's Shares as the percentage
of the aggregate Shares of the Original Shareholders which is being
purchased; the purchase from the Executive shall be made on the same terms
and for the same consideration as the purchase from the Original
Shareholders; and
(v) Upon the occurrence during the Employment Period of any event not
described in Sections 5(c)(ii) through 5(c)(iv) hereof which affects the
Shares in such a way that an adjustment of the Options is appropriate in
order to prevent dilution of the rights of the Executive under the Options
(including, without limitation, any dividend or other distribution (whether
in cash or in kind), recapitalization, stock split, reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase,
or share exchange, or other similar corporate transaction or event), the
Company shall make appropriate equitable adjustments, which may include,
without limitation, adjustments to any or all of the number and kind of
shares of stock of the Company (or other securities) which may thereafter
be issued in connection with future grants of options pursuant to this
Section 5(c) and which may thereafter be issued upon exercise of the then
outstanding Options and adjustments to the exercise prices of all such
Options.
(d) Expenses. The Company shall reimburse the Executive for all
reasonable business expenses, subject to the applicable and reasonable policies
and procedures of the Company in force from time to time.
(e) Services Furnished. The Company shall furnish the Executive
with appropriate office space
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and such other facilities and services as shall be suitable to the Executive's
position and adequate for the performance of his duties as set forth in Section
3 hereof, such office space and other facilities and services to be furnished at
the location set forth in Section 4 hereof.
(f) Other Benefits. The Company shall provide to the Executive
such employee benefit and compensation plans and arrangements and fringe
benefits as are generally available to senior officers of the Company.
6. Termination. The Executive's employment hereunder may be terminated
as follows:
(a) Death. The Executive's employment shall terminate upon his
death. Upon such a termination, the Executive's estate or designated
beneficiary, as the case may be, shall become entitled to the payments provided
in Section 7(b) hereof.
(b) Disability. If, as a result of the Executive's incapacity due
to physical or mental illness (as determined by a medical doctor mutually agreed
to by the Executive or his legal representative and the Company), the Executive
shall have been absent from his duties hereunder on a full-time basis for either
one-hundred-eighty (180) consecutive days or for an aggregate two-hundred-ten
(210) days within a consecutive two-hundred-seventy (270) day period and, within
thirty (30) days after Notice of Termination is given, shall not have returned
to the performance of his duties hereunder on a full-time basis ("Disability"),
the Company may terminate the Executive's employment for Disability. Upon such a
termination, the Executive shall become entitled to the payments provided in
Section 7(b) hereof.
(c) Cause. The Company may terminate the Executive's employment
hereunder for "Cause" (as defined in this Section 6(c)). Upon such a
termination, the Executive shall become entitled to the payments provided in
Section 7(b) hereof. For purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon (i) the willful
(or grossly negligent) and continued failure by the Executive to substantially
perform his duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness or any such actual
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or anticipated failure after the issuance of a "Notice of Termination" by the
Executive for "Good Reason", as defined in Section 6(d)(i) hereof, or during a
"Window Period", as defined in Section 6(d)(ii) hereof), after demand for
substantial performance is delivered by the Company that specifically identifies
the manner in which the Company believes the Executive has not substantially
performed his duties, (ii) the willful or grossly negligent engaging by the
Executive in misconduct, (iii) any breach by the Executive of any of the
provisions of Section 10 hereof, or (iv) the Executive's being convicted of, or
pleading guilty to, a felony. For purposes of this paragraph, no act, or failure
to act, on the Executive's part shall be considered "willful" unless done, or
omitted to be done, by him not in good faith and without reasonable belief that
his action or omission was in the best interest of the Company. Further, unless
the Executive has been convicted of, or pleaded guilty to, a felony, the
Executive shall not be deemed to have been terminated for Cause without (1)
reasonable notice to the Executive setting forth the reasons for the Company's
intention to terminate for Cause, (2) an opportunity for the Executive, together
with his counsel, to be heard before the Board, and (3) delivery to the
Executive of a Notice of Termination from the Board finding that, in the good
faith opinion of a majority of the Board, the Executive was guilty of conduct
set forth above in clause (i), (ii) or (iii) of the second sentence of this
Section 6(c), and specifying the particulars thereof in reasonable detail.
(d) Termination by the Executive.
(i) The Executive may terminate his employment hereunder for
"Good Reason", which, for purposes of this Agreement, shall mean (A) assignment
of duties materially inconsistent with his status as President and Chief
Executive Officer, or substantial adverse alteration in responsibilities, which
assignment or alteration is not cured within thirty (30) days after notice from
the Executive; (B) any failure of the Company to pay any compensation to
Executive within thirty (30) days of the Executive's notice to Company that
payment is overdue; or (C) Company's breach of a material term or condition of
the Agreement, and failure to correct breach within thirty (30) days after the
Executive's notice thereof (specifying in reasonable detail the particulars of
such noncompliance). Upon a Good Reason termination,
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the Executive shall become entitled to the payments and benefits provided in
Section 7(c) hereof.
(ii) The Executive may terminate his employment hereunder
without Good Reason by giving a Notice of Termination during a "Window Period",
which, for purposes of this Agreement, shall mean the sixty-(60)-day period
beginning with the first day following the ninety-(90)-day period which
immediately follows a Change in Control. Upon a Window Period termination, the
Executive shall become entitled to the payments and benefits provided in Section
7(c) hereof.
(iii) The Executive may terminate his employment hereunder
without Good Reason and outside of a Window Period, upon giving three months
notice to the Company. In the event of such a termination, the Executive shall
comply with any reasonable request of the Company to assist in providing for an
orderly transition of authority, but such assistance shall not delay the
Executive's termination of employment longer than six months beyond the giving
of the Executive's Notice of Termination. Upon such a termination, the Executive
shall become entitled to the payments provided in Section 7(b) hereof.
(e) Notice of Termination. Any purported termination of the
Executive's employment (other than termination pursuant to Section 6(a) hereof)
shall be communicated by written Notice of Termination to the other party hereto
in accordance with Section 15 hereof. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice that shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
(f) Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean the following: (i) if the Executive's employment is
terminated by his death, the date of his death; (ii) if the Executive's
employment is terminated pursuant to Section 6(b) hereof, thirty (30) days after
the Notice of Termination is given; (iii) if the Executive's employment is
terminated pursuant to Section 6(c) hereof, the date specified in the Notice of
Termination; (iv) if the Executive's employment is terminated pursuant to
Section
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6(d)(i) or 6(d)(ii) hereof, thirty (30) days after the Notice of Termination is
given; and (v) if the Executive's employment is terminated pursuant to Section
6(d)(iii) hereof, the date determined in accordance with said Section.
(g) Dispute Concerning Termination. If within fifteen (15) days
after any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 6(g)), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier to occur of (i) the date on which the Term ends or (ii) the
date on which the dispute is finally resolved, either by mutual written
agreement of the parties or by the final determination of a court of law, which
is not subject to appeal; provided, however, that the Date of Termination shall
be extended by a notice of dispute given by the Executive only if such notice is
given in good faith and the Executive pursues the resolution of such dispute
with reasonable diligence.
(h) Compensation During Dispute. If the Date of Termination is
extended in accordance with Section 6(g) hereof, the Company shall continue to
pay the Executive the full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, Base Salary and Annual
Bonus) and continue the Executive as a participant in all compensation, benefit
and insurance plans in which the Executive was participating when the notice
giving rise to the dispute was given, until the Date of Termination, as
determined in accordance with Section 6(g) hereof. Amounts paid under this
Section 6(h) are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
7. Compensation During Disability or Upon Termination.
(a) Disability Period. During any period during the Term that the
Executive fails to perform his duties hereunder as a result of incapacity due to
physical or mental illness ("Disability Period"), the Executive shall continue
to (i) receive his full Base Salary, (ii) remain eligible to receive an Annual
Bonus under Section 5(b) hereof, and (iii) participate in the plans
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and arrangements described in Section 5(f) hereof (except to the extent such
participation is not permitted under the terms of such plans and arrangements).
Such payments made to the Executive during the Disability Period shall be
reduced by the sum of the amounts, if any, payable to the Executive at or prior
to the time of any such payment under disability benefit plans of the Company or
under the Social Security disability insurance program, and which amounts were
not previously applied to reduce any such payment.
(b) Termination other than (x) by the Company without Cause, (y)
by the Executive with Good Reason, or (z) by the Executive during a Window
Period. If the Executive's employment hereunder is terminated other than (x) by
the Company without Cause, (y) by the Executive with Good Reason, or (z) by the
Executive during a Window Period, then:
(i) as soon as practicable after the Date of Termination,
the Company shall pay any amounts earned, accrued or owing the Executive
hereunder for services prior to the Date of Termination to the Executive
(or the Executive's estate or designated beneficiary, as the case may be);
and
(ii) the Company shall have no additional obligations to the
Executive (or the Executive's estate or designated beneficiary) under this
Agreement except to the extent provided in Sections 5(c) and 5(d) hereof or
otherwise provided in the applicable plans and programs of the Company.
(c) Termination (x) by Company without Cause, (y) by the
Executive with Good Reason or (z) by the Executive during a Window Period. If
the Executive's employment hereunder is terminated (x) by the Company without
Cause, (y) by the Executive with Good Reason, or (z) by the Executive during
Window Period, then:
(i) as soon as practicable after the Date of Termination,
the Company shall pay any amounts earned, accrued or owing the Executive
hereunder for services prior to the Date of Termination to the Executive;
(ii) notwithstanding any provision of any Annual Bonus plan
to the contrary, the Company shall pay to the Executive, as soon as
practica-
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ble after the Date of Termination, a lump sum amount, in cash, equal to the
sum of (A) any Annual Bonus which has been allocated or awarded to the
Executive for a completed fiscal year preceding the Date of Termination
under any Annual Bonus plan, and (B) a pro rata portion to the Date of
Termination of the Annual Bonus for the year in which the Date of
Termination occurs, calculated by multiplying the award that the Executive
would have earned for the entire year, assuming the achievement, at the
target level, of any performance goals established with respect to such
award, by a fraction the numerator of which shall be the number of days of
employment in such year up to and including the Date of Termination and the
denominator of which shall be three-hundred-sixty-five (365); provided,
however, that any amount otherwise payable pursuant to this clause (B) of
this Section 7(c)(ii) shall be reduced by any pro-rated Annual Bonus
payment already received by the Executive pursuant to Section 5(b) hereof
with respect to the year in which the Date of Termination occurs;
(iii) in lieu of any further salary or bonus payments to
the Executive for periods subsequent to the Date of Termination, the
Company shall pay as a severance payment to the Executive (in a lump sum
within the ten (10) days immediately following the Date of Termination) an
amount (the "Severance Amount") equal to one year's Base Salary at the
Executive's highest annual Base Salary rate in effect during the Employment
Period;
(iv) subject to the Executive's continuing compliance
with Section 11 hereof, the Company shall pay to the Executive an amount
equal to one year's Base Salary at the Executive's highest annual Base
Salary rate in effect during the Employment Period; such amount shall be
paid in substantially equal monthly or more frequent installments over the
two-year period immediately following the Date of Termination; such
installment payments shall cease upon any violation of Section 11 hereof;
(v) the Company shall maintain in full force and effect,
for the continued benefit of the Executive until the later of (x) the
second anniversary of the Date of Termination or (y) the end of the Term,
each "employee welfare benefit
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plan" (as defined in section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), other than any disability
plan, in which the Executive was entitled to participate immediately prior
to the Date of Termination, provided that the Executive's continued
participation is possible under the general terms and provisions of such
plans. In the event that the Executive's participation in any such plan is
barred, the Company shall arrange to provide the Executive with benefits
substantially similar to those which the Executive would otherwise have
been entitled to receive under the plan from which his continued
participation is barred;
(vi) if the Date of Termination shall occur within the
two (2) years immediately following a Change in Control, then, in lieu of
Shares issuable upon exercise of the Executive's Options (which Options
shall be cancelled upon the making of the payment referred to below), the
Company shall pay the Executive a lump sum amount, in cash, equal to the
product of (1) the excess of (x) the higher of the "Fair Market Value" (as
defined in Section 7(d) hereof) of a Share on the Date of Termination or
the highest price per Share actually paid in connection with such Change in
Control over (y) the exercise price per Share of each such Option held by
the Executive (whether or not then fully exercisable), times (2) the number
of Shares covered by such Option;
(vii) if the Date of Termination shall occur within the
two (2) years immediately following a Change in Control, then, upon
surrender by the Executive of all Shares owned outright by him and all
rights which he may have to any restricted Shares, in payment for and in
lieu of all such Shares, the Company shall pay the Executive a lump sum
amount, in cash, equal to the product of (1) the higher of the Fair Market
Value of a Share on the Date of Termination or the highest price per Share
actually paid in connection with such Change in Control, times (2) the
number of all such Shares (whether or not restricted) of the Executive; and
(viii) the Company shall have no additional obligations to
the Executive under this Agreement except to the extent provided in
Sections
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5(c) and 5(d) hereof or otherwise provided in the applicable plans and
programs of the Company.
(d) Fair Market Value. For purposes of this Agreement, if the
Shares are publicly traded on any date for which the "Fair Market Value" of a
Share is required by this Agreement, the "Fair Market Value" shall be the
closing price of a Share on the date the Fair Market Value is to be determined,
or if no sale is reported for such date, then on the next preceding date for
which a sale is reported. If the Shares are not publicly traded on any date for
which the Fair Market Value of a Share is required by this Agreement, the Fair
Market Value shall be determined in accordance with the following procedure: The
Executive and the Company shall each select a nationally recognized appraiser,
which shall determine a value for a Share of the Company. If the higher of the
two original appraisal values is not more than ten percent (10%) above the lower
appraisal value, the Fair Market Value shall be the value agreed upon by the two
original appraisers or, in the absence of such an agreement, the Fair Market
Value shall be the average of the two original appraisal values. If the higher
of the two original appraisal values is more than ten percent (10%) above the
lower appraisal value, the two appraisers shall select a third nationally
recognized appraiser who shall determine a Fair Market Value which shall be at
least equal to the lower appraisal value and whose determination of the Fair
Market Value shall be final.
8. No Mitigation. The Executive shall not be required to mitigate
amounts payable pursuant to Section 7 hereof by seeking other employment or
otherwise, but any payments made or benefits provided pursuant to Section
7(c)(v) hereof shall be offset by any similar payments or benefits made
available without cost to the Executive from any subsequent employment during
the Term (determined immediately prior to such termination of employment).
9. Change in Control.
(a) For purposes of this Agreement, a "Change in Control" shall
be deemed to have occurred if an event set forth in any one of the following
paragraphs (i)-(iv) shall have occurred:
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(i) any Person (as defined in Section 9(b) hereof) is or
becomes the Beneficial Owner (as defined in Section 9(c) hereof), directly
or indirectly, of securities of the Company representing thirty-five
percent (35%) or more of the combined voting power of the Company's then
outstanding securities, excluding any Person who becomes such a Beneficial
Owner in connection with a transaction described in clause (x) of paragraph
(iii) below; or
(ii) prior to any initial public offering, the following
individuals cease for any reason to constitute a majority of the number of
directors then serving: individuals who, on the date hereof, constitute the
Board and any new director (other than a director whose initial assumption
of office is in connection with an actual or threatened election contest,
including but not limited to a consent solicitation, relating to the
election of directors of the Company) whose appointment or election by the
Board or nomination for election by the Company's stockholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved
or recommended; or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation or the issuance of
voting securities of the Company in connection with a merger or
consolidation of the Company (or any direct or indirect subsidiary of the
Company) pursuant to applicable stock exchange requirements, other than (x)
a merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or any parent
thereof) at least fifty percent (50%) of the combined voting power of the
securities of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (y) a merger
or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirect-
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ly, of securities of the Company representing thirty-five percent (35%) or
more of the combined voting power of the Company's then outstanding
securities; or
(iv) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of the
Company's assets.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of the Company
immediately following such transaction or series of transactions.
(b) For purposes of this Agreement, "Person" shall have the
meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended from time to time (the "Exchange Act"), as modified and used in Sections
13(d) and 14(d) thereof, except that such term shall not include (i) the Company
or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any of its affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, or (v) any of the following entities or their
affiliates: BT Capital Partners, Inc., Chase Capital Partners, CIBC Wood Gundy
Ventures, Inc., Hancock Venture Partners IV and Enterprises &
Transcommunications, L.P.
(c) For purposes of this Agreement, "Beneficial Owner" shall
have the meaning set forth in Rule 13d-3 under the Exchange Act.
10. Gross-Up Payment.
(a) Whether or not the Executive becomes entitled to the
Severance Amount, if any of the payments
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or benefits received or to be received by the Executive in connection with a
Change in Control or the Executive's termination of employment (whether pursuant
to the terms of this Agreement or any other plan, arrangement or agreement with
the Company, any Person whose actions result in a Change in Control or any
Person affiliated with the Company or such Person) (such payments or benefits,
excluding the Gross-Up Payment, being hereinafter referred to as the "Total
Payments") will be subject to the Excise Tax, the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income and employment taxes and Excise
Tax upon the Gross-Up Payment, shall be equal to the Total Payments.
(b) For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amount of such Excise Tax,
(i) all of the Total Payments shall be treated as "parachute payments" (within
the meaning of section 280G(b)(2) of the Internal Revenue Code of 1986, as
amended from time to time (the "Code")) unless, in the opinion of tax counsel
("Tax Counsel") reasonably acceptable to the Executive and selected by the
accounting firm which was, immediately prior to the Change in Control, the
Company's independent auditor (the "Auditor"), such payments or benefits (in
whole or in part) do not constitute parachute payments, including by reason of
section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within
the meaning of section 280G(b)(l) of the Code shall be treated as subject to the
Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments
(in whole or in part) represent reasonable compensation for services actually
rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of
the Base Amount allocable to such reasonable compensation, or are otherwise not
subject to the Excise Tax, and (iii) the value of any noncash benefits or any
deferred payment or benefit shall be determined by the Auditor in accordance
with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal income tax at the highest marginal rate of federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the
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Date of Termination (or if there is no Date of Termination, then the date on
which the Gross-Up Payment is calculated for purposes of this Section 10), net
of the maximum reduction in federal income taxes which could be obtained from
deduction of such state and local taxes.
(c) In the event that the Excise Tax is finally determined to be
less than the amount taken into account hereunder in calculating the Gross-Up
Payment, the Executive shall repay to the Company, at the time that the amount
of such reduction in Excise Tax is finally determined, the portion of the Gross-
Up Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Executive
to the extent that such repayment results in a reduction in Excise Tax and/or a
federal, state or local income or employment tax deduction) plus interest on the
amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B)
of the Code. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder in calculating the Gross-Up Payment (including by
reason of any payment the existence or amount of which cannot be determined at
the time of the Gross-Up Payment), the Company shall make an additional Gross-Up
Payment in respect of such excess (plus any interest, penalties or additions
payable by the Executive with respect to such excess) at the time that the
amount of such excess is finally determined. The Executive and the Company shall
each reasonably cooperate with the other in connection with any administrative
or judicial proceedings concerning the existence or amount of liability for
Excise Tax with respect to the Total Payments.
(d) The payment provided in this Section 10 shall be made not
later than the tenth (10th) day following the Date of Termination; provided,
however, that if the amount of such payment cannot be finally determined on or
before such day, the Company shall pay to the Executive on such day an estimate,
as determined in accordance with this Section 10 of the minimum amount of such
payment to which the Executive is clearly entitled and shall pay the remainder
of such payment (together with interest on the unpaid remainder (or on all such
payments to the extent the Company fails to make such payments when due) at 120%
of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined but in no event later than the
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thirtieth (30th) day after the Date of Termination. In the event that the amount
of the estimated payment exceeds the amount subsequently determined to have been
due, such excess shall constitute a loan by the Company to the Executive,
payable on the fifth (5th) business day after demand by the Company (together
with interest at 120% of the rate provided in section 1274(b)(2)(B) of the
Code). At the time that payments are made under this Section 10, the Company
shall provide the Executive with a written statement setting forth the manner in
which such payments were calculated and the basis for such calculations
including, without limitation, any opinions or other advice the Company has
received from Tax Counsel, the Auditor or other advisors or consultants (and any
such opinions or advice which are in writing shall be attached to the
statement).
11. Confidentiality, Noncompetition and Nonsolicitation.
(a) The Executive will not, during or after the Term, disclose
to any entity or person any information (including, but not limited to,
information about customers or about the design, manufacture or marketing of
products or services) which is treated as confidential by the Company and to
which the Executive gains access by reason of his position as an employee of the
Company.
(b) While the Executive continues to be an employee of the
Company and for the two-year period immediately following his Date of
Termination, the Executive shall not, within any geographic region of the United
States of America in which the Company then conducts business or in which the
Company plans to conduct business pursuant to a business strategy adopted by the
Board before the Executive's termination of employment, except as permitted by
the Company upon its prior written consent, (i) enter, directly or indirectly,
into the employ of, or render or engage in, directly or indirectly, any services
to any person, firm or corporation which directly competes with the Company with
respect to any business then conducted by the Company or any business which the
Company plans to enter pursuant to a business strategy adopted by the Board
before the Executive's termination of employment (a "Competitor"), or (ii)
become interested, directly or indirectly, in any such Competitor as an
individual, partner, shareholder, creditor, director, officer, principal, agent,
employee,
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trustee, consultant, advisor or in any other relationship or capacity. The
ownership of up to one percent (1%) of any class of the outstanding securities
of any publicly traded corporation, even though such corporation may be a
Competitor, shall not be deemed as constituting an interest in such Competitor
which violates clause (ii) of the immediately preceding sentence.
(c) While the Executive continues to be an employee of the
Company and for the two-year period immediately following his Date of
Termination, the Executive shall not, except as permitted by the Company upon
its prior written consent, (i) attempt, directly or indirectly, to induce any
employee employed by or performing services for the Company (or its affiliates)
to be employed or perform services elsewhere, or (ii) solicit, directly or
indirectly, the customers of the Company (or its affiliates), the suppliers of
the Company (or its affiliates) or entities or individuals having other business
relationships with the Company (or its affiliates) for the purpose of
encouraging them to terminate (or reduce or detrimentally alter) their
respective relationships with the Company (or its affiliates).
(d) Any violation by the Executive of Section 11(a), 11(b) or
11(c) hereof occurring after the Date of Termination shall entitle the Company
to cease making any payments and providing any benefits otherwise required under
Section 7(c) hereof. Additionally, the Company shall have the right and remedy
to have the provisions of this Section 11 specifically enforced, including by
temporary and/or permanent injunction, it being acknowledged and agreed that any
such violation may cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company.
12. Independence and Severability of Section 11 Provisions. Each of
the rights and remedies enumerated in Section 11 hereof shall be independent of
the others and shall be severally enforceable and all of such rights and
remedies shall be in addition to, and not in lieu of, any other rights and
remedies available to the Company under law or in equity. If any of the
covenants contained in Section 11 hereof or if any of the rights or remedies
enumerated in Section 11 hereof, or any part of any of them, is hereafter
construed to be invalid or unenforceable, the same shall not affect the
remainder of the covenant or covenants or rights or remedies which
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shall be given full effect without regard to the invalid portions. If any of the
covenants contained in Section 11 is held to be unenforceable because of the
duration of such provision or the area covered thereby, the parties agree that
the court making such determination shall have the authority to reduce the
duration and/or area of such provision, and in its reduced form said provision
shall then be enforceable.
13. Indemnification. The Company shall indemnify the Executive to
the full extent authorized by law and the Charter and By-Laws of the Company, as
applicable, for all expenses, costs, liabilities and legal fees which the
Executive may incur in the discharge of his duties hereunder. The Executive
shall be insured under the Company's Directors' and Officers' Liability
Insurance Policy as in effect from time to time. Any termination of the
Executive's employment or of this Agreement shall have no effect on the
continuing operation of this Section 13.
14. Successors; Binding Agreement.
(a) The Company will require any purchaser of all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Executive, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
executes and delivers the agreement provided for in this Section 14 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
(b) This Agreement and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts would still be payable to him hereunder if he had continued to live, all
such amounts unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
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15. Notices. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or received by facsimile or three
(3) days after mailing by United States certified mail, return receipt
requested, postage prepaid, addressed, if to the Executive, to the address
inserted below the Executive's signature on the final page hereof and, if to the
Company, to the address set forth below, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon actual receipt:
To the Company:
United USN, Inc.
10 South Riverside Plaza
Chicago, Illinois 60022
Attention: Secretary
16. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of any lack of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Illinois (without regard to its principles of conflicts of laws).
All references to sections of ERISA shall be deemed also to refer to any
successor provisions to such sections. Payments provided for hereunder shall be
paid net of any applicable withholding required under federal, state or local
law and any additional withholding to which the Executive has agreed. The
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect. Captions and Section headings in
this Agreement are provided merely for convenience and shall not affect the
interpretation of any of the provisions herein. The obligations of the Company
and the Executive
21
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under this Agreement which by their nature may require either partial or total
performance after the expiration of the Term shall survive such expiration.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
18. Entire Agreement. This Agreement supersedes, as of the Effective
Date, all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by the parties hereto in
respect of the subject matter contained herein; and any prior agreement of the
parties hereto in respect of the subject matter contained herein shall be
terminated and cancelled as of the Effective Date.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
UNITED USN, INC.
By: /s/ Thomas C. Brandenburg
------------------------------
Name:
Title:
/s/ J. Thomas Elliott
------------------------------
J. Thomas Elliott
------------------------------
------------------------------
------------------------------
Address
Signed and agreed upon, as to
Sections 5(c)(iii) and 5(c)(iv) hereof only:
BT CAPITAL PARTNERS, INC.
By: /s/ Paul S. Lattanzio
------------------------
Name:
Title:
22
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CHASE CAPITAL PARTNERS
By: /s/ Donald J. Hofmann, Jr.
--------------------------------
Name:
Title:
CIBC WOOD GUNDY VENTURES, INC.
By: /s/ Richard J. Brekka
--------------------------------
Name:
Title:
HANCOCK VENTURE PARTNERS IV
By: /s/ William A. Johnston
--------------------------------
Name:
Title:
ENTERPRISES & TRANSCOMMUNICATIONS, L.P.
By: /s/ William P. Glasgow
--------------------------------
Name:
Title:
/s/ Thomas C. Brandenburg
--------------------------------
Thomas C. Brandenburg
/s/ Richard J. Brekka
---------------------------------
Richard J. Brekka
/s/ William P. Glasgow
---------------------------------
William P. Glasgow
/s/ Donald J. Hofmann, Jr.
---------------------------------
Donald J. Hofmann, Jr.
/s/ William A. Johnston
---------------------------------
William A. Johnston
23
<PAGE>
/s/ Paul S. Lattanzio
--------------------------------
Paul S. Lattanzio
24
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of July 18, 1996, by and between Ronald W.
Gavillet (the "Executive") and United USN, Inc., a Delaware corporation (the
"Company") and, as to Sections 5(c)(iii) and 5(c)(iv) hereof only, the current
shareholders of the Company listed on the signature pages hereof (the "Original
Shareholders").
WHEREAS, during the course of Executive's employment with the Company,
the Executive has performed outstanding services for the Company; and
WHEREAS, it is deemed by the Company to be in the best interests of
the Company to assure continuation of Executive's employment; and
WHEREAS, the Company and the Executive have determined to enter into
this Agreement pursuant to which the Company will continue to employ the
Executive on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the Executive,
and the Executive hereby accepts such employment, on the terms and conditions
hereinafter set forth.
2. Term. This Agreement shall become effective on the date hereof
(the "Effective Date"). Unless earlier terminated as herein provided, the
Executive's employment with the Company hereunder shall commence at the
Effective Date and shall end on the last day of the "Term". For purposes of this
Agreement, the "Term" of this Agreement shall mean the full three-year term of
the Agreement, plus any extensions made as provided in this Section 2. On each
anniversary of the Effective Date, the Term shall automatically be extended for
an additional year unless, not later than ninety (90) days prior to any such
anniversary, the Company or the Executive shall have given notice not to extend
the Term. For purposes of this Agreement, the "Employment Period" (which in no
event shall extend beyond the Term) shall mean the period during which Executive
has an obligation to render
<PAGE>
services hereunder, as described in Section 3 hereof, taking into account any
Notice of Termination (as defined in Section 6(e) hereof) which may be given by
either the Company or the Executive. Nothing in this Section shall limit the
right of the Company or the Executive to terminate the Executive's employment
hereunder on the terms and conditions set forth in Section 6 hereof.
3. Position and Duties. On and after the Effective Date, the
Executive shall serve as Executive Vice President, External & Strategic Affairs,
General Counsel and Secretary of the Company and shall have such additional
duties and responsibilities as may be assigned to him by the Chief Executive
Officer of the Company, provided that such duties and responsibilities are
consistent with the Executive's positions as Executive Vice President, External
& Strategic Affairs, General Counsel and Secretary of the Company. The Executive
shall report to the Chief Executive Officer of the Company. The Executive agrees
to devote substantially all his full working time, attention and energies during
normal business hours to the performance of his duties for the Company, provided
that the Executive may serve as a director on the boards of such companies and
organizations as may be agreed upon in writing by the Board of Directors of the
Company (the "Board") and the Executive.
4. Place of Performance. The principal place of employment and
office of the Executive shall be in Chicago, Illinois or such other location as
may be agreed to in writing by the Executive.
5. Compensation and Related Matters.
(a) Base Salary. As compensation for the performance by the
Executive of his duties hereunder, the Company shall pay the Executive an annual
base salary of One Hundred Eighty-five Thousand Dollars ($185,000) (such amount,
as it may be increased from time to time, is hereinafter referred to as "Base
Salary"). Base Salary shall be payable in accordance with the Company's normal
payroll practices, shall be reviewed annually and may be increased upon such
review. Base Salary, once increased, shall not be decreased.
(b) Annual Bonus. The Executive shall be entitled to an annual
bonus (the "Annual Bonus") for each calendar year which ends within the
Employment Period, including, without limitation, the year in which this
2
<PAGE>
Agreement is executed. Subject to meeting performance objectives established by
the Board and approval of the Annual Bonus by the Board, the Executive's Annual
Bonus shall be at least fifty percent (50%) of his then-current Base Salary. In
the discretion of the Board, or its designated committee, upon the attainment of
reasonable performance goals established by the Board (or such committee) in
good faith, the Annual Bonus paid for any year may exceed such percentage of
Base Salary. The Annual Bonus for each fiscal year which ends within the
Employment Period shall be paid as soon as practicable after the end of such
year, and no later than the thirtieth (30th) day immediately following the end
of such fiscal year. The percentage of Base Salary which determines the
Executive's Annual Bonus opportunity shall be reviewed by the Board annually and
may be increased upon review by the Board. Within the ten-(10)-day period
immediately following any Change in Control (as defined in Section 9 hereof),
the Company shall pay the Executive a lump sum amount equal to a pro rata
portion of the Annual Bonus for the year in which the Change in Control occurs,
calculated by multiplying the award that the Executive would have earned for the
entire year, assuming the achievement, at the target level, of any performance
goals established with respect to such award, by a fraction the numerator of
which shall be the number of days of employment in such year up to and including
the date of the Change in Control and the denominator of which shall be three-
hundred-sixty-five (365).
(c) Stock Options. The Executive shall be entitled to
participate, at a level appropriate to his positions with the Company, in any
stock option plan or stock-based compensation plan which the Company maintains
from time to time. The Executive already holds certain stock options ("Options")
for shares of common stock of the Company ("Shares") under the Company's 1994
Stock Option Plan (the "1994 Plan"). The Company agrees that it will take such
actions as are necessary (including, without limitation, amendment of the 1994
Plan and options outstanding thereunder, subject to any required consents of
participants therein) to assure the following:
(i) All Options held by the Executive shall become fully vested and
exercisable and all restrictions upon any restricted Shares held by the
Executive will lapse immediately prior to a Change in Control;
3
<PAGE>
(ii) During the Employment Period, if the Company shall at any time or
from time to time raise capital by selling shares of Company stock of any
class, the Executive shall have the right to purchase two-and-one-half
percent (2.5%) of the shares which are being sold, upon the same terms and
conditions as such shares are being sold to others;
(iii) If one or more of the Original Shareholders (including, for purposes
of this Section 5(c)(iii), their respective successors) shall sell to any
Person (as defined in Section 9(b) hereof) any of their Shares in the
Company under circumstances such that the sale transaction creates a Change
in Control at a time (whether or not during the Employment Period) when the
Executive holds Options or owns any Shares as a result of the exercise of
any Option or otherwise, the Original Shareholders shall require such
Person to purchase, at the Executive's election, the same percentage of the
Executive's Shares (including any Shares acquired by the Executive pursuant
to exercise of an Option which has become fully vested and exercisable
immediately prior to the Change in Control and any Shares as to which
restrictions have lapsed immediately prior to the Change in Control) as the
percentage of the aggregate Shares of the Original Shareholders which is
being purchased; the purchase from the Executive shall be made on the same
terms and for the same consideration as the purchase from the Original
Shareholders;
(iv) If one or more of the Original Shareholders (including, for purposes
of this Section 5(c)(iv), their respective successors) shall sell to any
Person Shares in the Company which constitute twenty percent (20%) of the
Shares outstanding on the date of such sale at a time (whether or not
during the Employment Period) when no equity securities of the Company are
listed and traded on a national securities exchange or on the Nasdaq
National Market and when the Executive holds Options or owns any Shares as
a result of the exercise of any Option or otherwise, the Original
Shareholders shall require the such Person to purchase, at the Executive's
election, the same percentage of the Executive's Shares as the percentage
of the aggregate Shares of the Original Shareholders which is being
purchased; the purchase from the Executive shall be made on the
4
<PAGE>
same terms and for the same consideration as the purchase from the Original
Shareholders; and
(v) Upon the occurrence during the Employment Period of any event not
described in Sections 5(c)(ii) through 5(c)(iv) hereof which affects the
Shares in such a way that an adjustment of the Options is appropriate in
order to prevent dilution of the rights of the Executive under the Options
(including, without limitation, any dividend or other distribution (whether
in cash or in kind), recapitalization, stock split, reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase,
or share exchange, or other similar corporate transaction or event), the
Company shall make appropriate equitable adjustments, which may include,
without limitation, adjustments to any or all of the number and kind of
shares of stock of the Company (or other securities) which may thereafter
be issued in connection with future grants of options pursuant to this
Section 5(c) and which may thereafter be issued upon exercise of the then
outstanding Options and adjustments to the exercise prices of all such
Options.
(d) Expenses. The Company shall reimburse the Executive for all
reasonable business expenses, subject to the applicable and reasonable policies
and procedures of the Company in force from time to time.
(e) Services Furnished. The Company shall furnish the Executive
with appropriate office space and such other facilities and services as shall be
suitable to the Executive's position and adequate for the performance of his
duties as set forth in Section 3 hereof, such office space and other facilities
and services to be furnished at the location set forth in Section 4 hereof.
(f) Other Benefits. The Company shall provide to the Executive
such employee benefit and compensation plans and arrangements and fringe
benefits as are generally available to senior officers of the Company.
6. Termination. The Executive's employment hereunder may be
terminated as follows:
5
<PAGE>
(a) Death. The Executive's employment shall terminate upon his death.
Upon such a termination, the Executive's estate or designated beneficiary, as
the case may be, shall become entitled to the payments provided in Section 7(b)
hereof.
(b) Disability. If, as a result of the Executive's incapacity due to
physical or mental illness (as determined by a medical doctor mutually agreed to
by the Executive or his legal representative and the Company), the Executive
shall have been absent from his duties hereunder on a full-time basis for either
one-hundred-eighty (180) consecutive days or for an aggregate two-hundred-ten
(210) days within a consecutive two-hundred-seventy (270) day period and, within
thirty (30) days after Notice of Termination is given, shall not have returned
to the performance of his duties hereunder on a full-time basis ("Disability"),
the Company may terminate the Executive's employment for Disability. Upon such a
termination, the Executive shall become entitled to the payments provided in
Section 7(b) hereof.
(c) Cause. The Company may terminate the Executive's employment
hereunder for "Cause" (as defined in this Section 6(c)). Upon such a
termination, the Executive shall become entitled to the payments provided in
Section 7(b) hereof. For purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon (i) the willful
(or grossly negligent) and continued failure by the Executive to substantially
perform his duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness or any such actual or
anticipated failure after the issuance of a "Notice of Termination" by the
Executive for "Good Reason", as defined in Section 6(d)(i) hereof, or during a
"Window Period", as defined in Section 6(d)(ii) hereof), after demand for
substantial performance is delivered by the Company that specifically identifies
the manner in which the Company believes the Executive has not substantially
performed his duties, (ii) the willful or grossly negligent engaging by the
Executive in misconduct, (iii) any breach by the Executive of any of the
provisions of Section 10 hereof, or (iv) the Executive's being convicted of, or
pleading guilty to, a felony. For purposes of this paragraph, no act, or failure
to act, on the Executive's part shall be considered "willful" unless done, or
omitted to be done, by him not in good faith and without reasonable belief that
his action or omission was
6
<PAGE>
in the best interest of the Company. Further, unless the Executive has been
convicted of, or pleaded guilty to, a felony, the Executive shall not be deemed
to have been terminated for Cause without (1) reasonable notice to the Executive
setting forth the reasons for the Company's intention to terminate for Cause,
(2) an opportunity for the Executive, together with his counsel, to be heard
before the Board, and (3) delivery to the Executive of a Notice of Termination
from the Board finding that, in the good faith opinion of a majority of the
Board, the Executive was guilty of conduct set forth above in clause (i), (ii)
or (iii) of the second sentence of this Section 6(c), and specifying the
particulars thereof in reasonable detail.
(d) Termination by the Executive.
(i) The Executive may terminate his employment hereunder for
"Good Reason", which, for purposes of this Agreement, shall mean (A) assignment
of duties materially inconsistent with his status as Executive Vice President,
External & Strategic Affairs, General Counsel and Secretary, or substantial
adverse alteration in responsibilities, which assignment or alteration is not
cured within thirty (30) days after notice from the Executive; (B) any failure
of the Company to pay any compensation to Executive within thirty (30) days of
the Executive's notice to Company that payment is overdue; or (C) Company's
breach of a material term or condition of the Agreement, and failure to correct
breach within thirty (30) days after the Executive's notice thereof (specifying
in reasonable detail the particulars of such noncompliance). Upon a Good Reason
termination, the Executive shall become entitled to the payments and benefits
provided in Section 7(c) hereof.
(ii) The Executive may terminate his employment hereunder without
Good Reason by giving a Notice of Termination during a "Window Period", which,
for purposes of this Agreement, shall mean the sixty-(60)-day period beginning
with the first day following the ninety-(90)-day period which immediately
follows a Change in Control. Upon a Window Period termination, the Executive
shall become entitled to the payments and benefits provided in Section 7(c)
hereof.
(iii) The Executive may terminate his employment hereunder
without Good Reason and outside of a Window Period, upon giving three months
notice to the
7
<PAGE>
Company. In the event of such a termination, the Executive shall comply with any
reasonable request of the Company to assist in providing for an orderly
transition of authority, but such assistance shall not delay the Executive's
termination of employment longer than six months beyond the giving of the
Executive's Notice of Termination. Upon such a termination, the Executive shall
become entitled to the payments provided in Section 7(b) hereof.
(e) Notice of Termination. Any purported termination of the
Executive's employment (other than termination pursuant to Section 6(a) hereof)
shall be communicated by written Notice of Termination to the other party hereto
in accordance with Section 15 hereof. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice that shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
(f) Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean the following: (i) if the Executive's employment is
terminated by his death, the date of his death; (ii) if the Executive's
employment is terminated pursuant to Section 6(b) hereof, thirty (30) days after
the Notice of Termination is given; (iii) if the Executive's employment is
terminated pursuant to Section 6(c) hereof, the date specified in the Notice of
Termination; (iv) if the Executive's employment is terminated pursuant to
Section 6(d)(i) or 6(d)(ii) hereof, thirty (30) days after the Notice of
Termination is given; and (v) if the Executive's employment is terminated
pursuant to Section 6(d)(iii) hereof, the date determined in accordance with
said Section.
(g) Dispute Concerning Termination. If within fifteen (15) days
after any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 6(g), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier to occur of (i) the date on which the Term ends or (ii) the
date on which the dispute is finally resolved, either by mutual written
agreement of the parties
8
<PAGE>
or by the final determination of a court of law, which is not subject to appeal;
provided, however, that the Date of Termination shall be extended by a notice of
dispute given by the Executive only if such notice is given in good faith and
the Executive pursues the resolution of such dispute with reasonable diligence.
(h) Compensation During Dispute. If the Date of Termination is
extended in accordance with Section 6(g) hereof, the Company shall continue to
pay the Executive the full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, Base Salary and Annual
Bonus) and continue the Executive as a participant in all compensation, benefit
and insurance plans in which the Executive was participating when the notice
giving rise to the dispute was given, until the Date of Termination, as
determined in accordance with Section 6(g) hereof. Amounts paid under this
Section 6(h) are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
7. Compensation During Disability or Upon Termination.
(a) Disability Period. During any period during the Term that the
Executive fails to perform his duties hereunder as a result of incapacity due to
physical or mental illness ("Disability Period"), the Executive shall continue
to (i) receive his full Base Salary, (ii) remain eligible to receive an Annual
Bonus under Section 5(b) hereof, and (iii) participate in the plans and
arrangements described in Section 5(f) hereof (except to the extent such
participation is not permitted under the terms of such plans and arrangements).
Such payments made to the Executive during the Disability Period shall be
reduced by the sum of the amounts, if any, payable to the Executive at or prior
to the time of any such payment under disability benefit plans of the Company or
under the Social Security disability insurance program, and which amounts were
not previously applied to reduce any such payment.
(b) Termination other than (x) by the Company without Cause, (y)
by the Executive with Good Reason, or (z) by the Executive during a Window
Period. If the Executive's employment hereunder is terminated other than (x) by
the Company without Cause, (y) by the
9
<PAGE>
Executive with Good Reason, or (z) by the Executive during a Window Period,
then:
(i) as soon as practicable after the Date of Termination, the
Company shall pay any amounts earned, accrued or owing the Executive
hereunder for services prior to the Date of Termination to the Executive
(or the Executive's estate or designated beneficiary, as the case may be);
and
(ii) the Company shall have no additional obligations to the
Executive (or the Executive's estate or designated beneficiary) under this
Agreement except to the extent provided in Sections 5(c) and 5(d) hereof or
otherwise provided in the applicable plans and programs of the Company.
(c) Termination (x) by Company without Cause, (y) by the
Executive with Good Reason, or (z) by the Executive during a Window Period. If
the Executive's employment hereunder is terminated (x) by the Company without
Cause, (y) by the Executive with Good Reason, or (z) by the Executive during a
Window Period, then:
(i) as soon as practicable after the Date of Termination, the
Company shall pay any amounts earned, accrued or owing the Executive
hereunder for services prior to the Date of Termination to the Executive;
(ii) notwithstanding any provision of any Annual Bonus plan to
the contrary, the Company shall pay to the Executive, as soon as
practicable after the Date of Termination, a lump sum amount, in cash,
equal to the sum of (A) any Annual Bonus which has been allocated or
awarded to the Executive for a completed fiscal year preceding the Date of
Termination under any Annual Bonus plan, and (B) a pro rata portion to the
Date of Termination of the Annual Bonus for the year in which the Date of
Termination occurs, calculated by multiplying the award that the Executive
would have earned for the entire year, assuming the achievement, at the
target level, of any performance goals established with respect to such
award, by a fraction the numerator of which shall be the number of days of
employment in such year up to and including the Date of Termination and the
denominator of which shall be three-hundred-sixty-five (365); provided,
however, that
10
<PAGE>
any amount otherwise payable pursuant to this clause (B) of this Section
7(c)(ii) shall be reduced by any pro-rated Annual Bonus payment already
received by the Executive pursuant to Section 5(b) hereof with respect to
the year in which the Date of Termination occurs;
(iii) in lieu of any further salary or bonus payments to the
Executive for periods subsequent to the Date of Termination, the Company
shall pay as a severance payment to the Executive (in a lump sum within the
ten (10) days immediately following the Date of Termination) an amount (the
"Severance Amount") equal to one year's Base Salary at the Executive's
highest annual Base Salary rate in effect during the Employment Period;
(iv) subject to the Executive's continuing compliance with
Section 11 hereof, the Company shall pay to the Executive an amount equal
to one year's Base Salary at the Executive's highest annual Base Salary
rate in effect during the Employment Period; such amount shall be paid in
substantially equal monthly or more frequent installments over the two-year
period immediately following the Date of Termination; such installment
payments shall cease upon any violation of Section 11 hereof;
(v) the Company shall maintain in full force and effect, for the
continued benefit of the Executive until the later of (x) the second
anniversary of the Date of Termination or (y) the end of the Term, each
"employee welfare benefit plan" (as defined in section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), other than
any disability plan, in which the Executive was entitled to participate
immediately prior to the Date of Termination, provided that the Executive's
continued participation is possible under the general terms and provisions
of such plans. In the event that the Executive's participation in any such
plan is barred, the Company shall arrange to provide the Executive with
benefits substantially similar to those which the Executive would otherwise
have been entitled to receive under the plan from which his continued
participation is barred;
11
<PAGE>
(vi) if the Date of Termination shall occur within the two (2)
years immediately following a Change in Control, then, in lieu of Shares
issuable upon exercise of the Executive's Options (which Options shall be
cancelled upon the making of the payment referred to below), the Company
shall pay the Executive a lump sum amount, in cash, equal to the product of
(1) the excess of (x) the higher of the "Fair Market Value" (as defined in
Section 7(d) hereof) of a Share on the Date of Termination or the highest
price per Share actually paid in connection with such Change in Control
over (y) the exercise price per Share of each such Option held by the
Executive (whether or not then fully exercisable), times (2) the number of
Shares covered by such Option;
(vii) if the Date of Termination shall occur within the two (2)
years immediately following a Change in Control, then, upon surrender by
the Executive of all Shares owned outright by him and all rights which he
may have to any restricted Shares, in payment for and in lieu of all such
Shares, the Company shall pay the Executive a lump sum amount, in cash,
equal to the product of (1) the higher of the Fair Market Value of a Share
on the Date of Termination or the highest price per Share actually paid in
connection with such Change in Control, times (2) the number of all such
Shares (whether or not restricted) of the Executive; and
(viii) the Company shall have no additional obligations to the
Executive under this Agreement except to the extent provided in Sections
5(c) and 5(d) hereof or otherwise provided in the applicable plans and
programs of the Company.
(d) Fair Market Value. For purposes of this Agreement, if the Shares
are publicly traded on any date for which the "Fair Market Value" of a Share is
required by this Agreement, the "Fair Market Value" shall be the closing price
of a Share on the date the Fair Market Value is to be determined, or if no sale
is reported for such date, then on the next preceding date for which a sale is
reported. If the Shares are not publicly traded on any date for which the Fair
Market Value of a Share is required by this Agreement, the Fair Market Value
shall be determined in accordance with the following procedure: The Executive
and the Company shall
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<PAGE>
each select a nationally recognized appraiser, which shall determine a value for
a Share of the Company. If the higher of the two original appraisal values is
not more than ten percent (10%) above the lower appraisal value, the Fair Market
Value shall be the value agreed upon by the two original appraisers or, in the
absence of such an agreement, the Fair Market Value shall be the average of the
two original appraisal values. If the higher of the two original appraisal
values is more than ten percent (10%) above the lower appraisal value, the two
appraisers shall select a third nationally recognized appraiser who shall
determine a Fair Market Value which shall be at least equal to the lower
appraisal value and whose determination of the Fair Market Value shall be final.
8. No Mitigation. The Executive shall not be required to mitigate
amounts payable pursuant to Section 7 hereof by seeking other employment or
otherwise, but any payments made or benefits provided pursuant to Section
7(c)(v) hereof shall be offset by any similar payments or benefits made
available without cost to the Executive from any subsequent employment during
the Term (determined immediately prior to such termination of employment).
9. Change in Control.
(a) For purposes of this Agreement, a "Change in Control" shall
be deemed to have occurred if an event set forth in any one of the following
paragraphs (i)-(iv) shall have occurred:
(i) any Person (as defined in Section 9(b) hereof) is or
becomes the Beneficial Owner (as defined in Section 9(c) hereof), directly
or indirectly, of securities of the Company representing thirty-five
percent (35%) or more of the combined voting power of the Company's then
outstanding securities, excluding any Person who becomes such a Beneficial
Owner in connection with a transaction described in clause (x) of paragraph
(iii) below; or
(ii) prior to any initial public offering, the following
individuals cease for any reason to constitute a majority of the number of
directors then serving: individuals who, on the date hereof, constitute the
Board and any new director (other than a director whose initial assumption
of
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office is in connection with an actual or threatened election contest,
including but not limited to a consent solicitation, relating to the
election of directors of the Company) whose appointment or election by the
Board or nomination for election by the Company's stockholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved
or recommended; or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation or the issuance of
voting securities of the Company in connection with a merger or
consolidation of the Company (or any direct or indirect subsidiary of the
Company) pursuant to applicable stock exchange requirements, other than (x)
a merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or any parent
thereof) at least fifty percent (50%) of the combined voting power of the
securities of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (y) a merger
or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company representing
thirty-five percent (35%) or more of the combined voting power of the
Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately
14
<PAGE>
prior to such transaction or series of transactions continue to have
substantially the same proportionate ownership in an entity which owns all or
substantially all of the assets of the Company immediately following such
transaction or series of transactions.
(b) For purposes of this Agreement, "Person" shall have the meaning
given in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended from
time to time (the "Exchange Act"), as modified and used in Sections 13(d) and
14(d) thereof, except that such term shall not include (i) the Company or any of
its subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, or (v) any of the following entities or their
affiliates: BT Capital Partners, Inc., Chase Capital Partners, CIBC Wood Gundy
Ventures, Inc., Hancock Venture Partners IV and Enterprises &
Transcommunications, L.P.
(c) For purposes of this Agreement, "Beneficial Owner" shall have the
meaning set forth in Rule 13d-3 under the Exchange Act.
10. Gross-Up Payment.
(a) Whether or not the Executive becomes entitled to the Severance
Amount, if any of the payments or benefits received or to be received by the
Executive in connection with a Change in Control or the Executive's termination
of employment (whether pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with the Company, any Person whose actions result
in a Change in Control or any Person affiliated with the Company or such Person)
(such payments or benefits, excluding the Gross-Up Payment, being hereinafter
referred to as the "Total Payments") will be subject to the Excise Tax, the
Company shall pay to the Executive an additional amount (the "Gross-Up Payment")
such that the net amount retained by the Executive, after deduction of any
Excise Tax on the Total Payments and any federal, state and local income and
employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the
Total Payments.
15
<PAGE>
(b) For purposes of determining whether any of the Total Payments
will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of
the Total Payments shall be treated as "parachute payments" (within the meaning
of section 280G(b)(2) of the Internal Revenue Code of 1986, as amended from time
to time (the "Code")) unless, in the opinion of tax counsel ("Tax Counsel")
reasonably acceptable to the Executive and selected by the accounting firm which
was, immediately prior to the Change in Control, the Company's independent
auditor (the "Auditor"), such payments or benefits (in whole or in part) do not
constitute parachute payments, including by reason of section 280G(b)(4)(A) of
the Code, (ii) all "excess parachute payments" within the meaning of section
280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in
the opinion of Tax Counsel, such excess parachute payments (in whole or in part)
represent reasonable compensation for services actually rendered (within the
meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount
allocable to such reasonable compensation, or are otherwise not subject to the
Excise Tax, and (iii) the value of any noncash benefits or any deferred payment
or benefit shall be determined by the Auditor in accordance with the principles
of sections 280G(d)(3) and (4) of the Code. For purposes of determining the
amount of the Gross-Up Payment, the Executive shall be deemed to pay federal
income tax at the highest marginal rate of federal income taxation in the
calendar year in which the Gross-Up Payment is to be made and state and local
income taxes at the highest marginal rate of taxation in the state and locality
of the Executive's residence on the Date of Termination (or if there is no Date
of Termination, then the date on which the Gross-Up Payment is calculated for
purposes of this Section 10), net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and local taxes.
(c) In the event that the Excise Tax is finally determined to be less
than the amount taken into account hereunder in calculating the Gross-Up
Payment, the Executive shall repay to the Company, at the time that the amount
of such reduction in Excise Tax is finally determined, the portion of the Gross-
Up Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Executive
to the extent that such repayment results in a
16
<PAGE>
reduction in Excise Tax and/or a federal, state or local income or employment
tax deduction) plus interest on the amount of such repayment at 120% of the rate
provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax
is determined to exceed the amount taken into account hereunder in calculating
the Gross-Up Payment (including by reason of any payment the existence or amount
of which cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess) at the time that the amount of such excess is finally determined. The
Executive and the Company shall each reasonably cooperate with the other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Total
Payments.
(d) The payment provided in this Section 10 shall be made not later
than the tenth (10th) day following the Date of Termination; provided, however,
that if the amount of such payment cannot be finally determined on or before
such day, the Company shall pay to the Executive on such day an estimate, as
determined in accordance with this Section 10 of the minimum amount of such
payment to which the Executive is clearly entitled and shall pay the remainder
of such payment (together with interest on the unpaid remainder (or on all such
payments to the extent the Company fails to make such payments when due) at 120%
of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined but in no event later than the thirtieth (30th) day
after the Date of Termination. In the event that the amount of the estimated
payment exceeds the amount subsequently determined to have been due, such excess
shall constitute a loan by the Company to the Executive, payable on the fifth
(5th) business day after demand by the Company (together with interest at 120%
of the rate provided in section 1274(b)(2)(B) of the Code). At the time that
payments are made under this Section 10, the Company shall provide the Executive
with a written statement setting forth the manner in which such payments were
calculated and the basis for such calculations including, without limitation,
any opinions or other advice the Company has received from Tax Counsel, the
Auditor or other advisors or consultants (and any such opinions or advice which
are in writing shall be attached to the statement).
17
<PAGE>
11. Confidentiality, Noncompetition and Nonsolicitation.
---------------------------------------------------
(a) The Executive will not, during or after the Term, disclose to any
entity or person any information (including, but not limited to, information
about customers or about the design, manufacture or marketing of products or
services) which is treated as confidential by the Company and to which the
Executive gains access by reason of his position as an employee of the Company.
(b) While the Executive continues to be an employee of the Company and
for the two-year period immediately following his Date of Termination, the
Executive shall not, within any geographic region of the United States of
America in which the Company then conducts business or in which the Company
plans to conduct business pursuant to a business strategy adopted by the Board
before the Executive's termination of employment, except as permitted by the
Company upon its prior written consent, (i) enter, directly or indirectly, into
the employ of, or render or engage in, directly or indirectly, any services to
any person, firm or corporation which directly competes with the Company with
respect to any business then conducted by the Company or any business which the
Company plans to enter pursuant to a business strategy adopted by the Board
before the Executive's termination of employment (a "Competitor"), or (ii)
become interested, directly or indirectly, in any such Competitor as an
individual, partner, shareholder, creditor, director, officer, principal, agent,
employee, trustee, consultant, advisor or in any other relationship or capacity.
The ownership of up to one percent (1%) of any class of the outstanding
securities of any publicly traded corporation, even though such corporation may
be a Competitor, shall not be deemed as constituting an interest in such
Competitor which violates clause (ii) of the immediately preceding sentence.
Notwithstanding the preceding provisions of this Section 11(b), the Executive
may render legal services to businesses which are directly competitive with the
Company so long as the Executive, in rendering such legal services, does not
violate any attorney-client privilege or any duties of confidentiality and non-
disclosure owed to the Company under this Agreement, under any other agreement
between the Executive and the Company, or otherwise.
18
<PAGE>
(c) While the Executive continues to be an employee of the Company
and for the two-year period immediately following his Date of Termination, the
Executive shall not, except as permitted by the Company upon its prior written
consent, (i) attempt, directly or indirectly, to induce any employee employed by
or performing services for the Company (or its affiliates) to be employed or
perform services elsewhere, or (ii) solicit, directly or indirectly, the
customers of the Company (or its affiliates), the suppliers of the Company (or
its affiliates) or entities or individuals having other business relationships
with the Company (or its affiliates) for the purpose of encouraging them to
terminate (or reduce or detrimentally alter) their respective relationships with
the Company (or its affiliates).
(d) Any violation by the Executive of Section 11(a), 11(b) or 11(c)
hereof occurring after the Date of Termination shall entitle the Company to
cease making any payments and providing any benefits otherwise required under
Section 7(c) hereof. Additionally, the Company shall have the right and remedy
to have the provisions of this Section 11 specifically enforced, including by
temporary and/or permanent injunction, it being acknowledged and agreed that any
such violation may cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company.
12. Independence and Severability of Section 11 Provisions. Each of
the rights and remedies enumerated in Section 11 hereof shall be independent of
the others and shall be severally enforceable and all of such rights and
remedies shall be in addition to, and not in lieu of, any other rights and
remedies available to the Company under law or in equity. If any of the
covenants contained in Section 11 hereof or if any of the rights or remedies
enumerated in Section 11 hereof, or any part of any of them, is hereafter
construed to be invalid or unenforceable, the same shall not affect the
remainder of the covenant or covenants or rights or remedies which shall be
given full effect without regard to the invalid portions. If any of the
covenants contained in Section 11 is held to be unenforceable because of the
duration of such provision or the area covered thereby, the parties agree that
the court making such determination shall have the authority to reduce the
duration and/or area of such provision, and in its reduced form said provision
shall then be enforceable.
19
<PAGE>
13. Indemnification. The Company shall indemnify the Executive to
the full extent authorized by law and the Charter and By-Laws of the Company, as
applicable, for all expenses, costs, liabilities and legal fees which the
Executive may incur in the discharge of his duties hereunder. The Executive
shall be insured under the Company's Directors' and Officers' Liability
Insurance Policy as in effect from time to time. Any termination of the
Executive's employment or of this Agreement shall have no effect on the
continuing operation of this Section 13.
14. Successors; Binding Agreement.
(a) The Company will require any purchaser of all or substantially
all of the business and/or assets of the Company, by agreement in form and
substance satisfactory to the Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
executes and delivers the agreement provided for in this Section 14 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
(b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts would still
be payable to him hereunder if he had continued to live, all such amounts unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's devisee, legatee, or other designee or, if there be
no such designee, to the Executive's estate.
15. Notices. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or received by facsimile or three
(3) days after mailing by United States certified mail, return receipt
requested, postage prepaid, addressed, if to the Executive, to the address
inserted below the Executive's signature on the final page hereof and, if to the
Company, to the address set forth below,
20
<PAGE>
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall be
effective only upon actual receipt:
To the Company:
United USN, Inc.
10 South Riverside Plaza
Chicago, Illinois 60022
Attention: President
16. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of any lack of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Illinois (without regard to its principles of conflicts of laws).
All references to sections of ERISA shall be deemed also to refer to any
successor provisions to such sections. Payments provided for hereunder shall be
paid net of any applicable withholding required under federal, state or local
law and any additional withholding to which the Executive has agreed. The
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect. Captions and Section headings in
this Agreement are provided merely for convenience and shall not affect the
interpretation of any of the provisions herein. The obligations of the Company
and the Executive under this Agreement which by their nature may require either
partial or total performance after the expiration of the Term shall survive such
expiration.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
21
<PAGE>
18. Entire Agreement. This Agreement supersedes, as of the Effective
Date, all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by the parties hereto in
respect of the subject matter contained herein, including, without limitation,
the Employment Agreement between the Executive and the Company dated November 7,
1994; and any prior agreement of the parties hereto in respect of the subject
matter contained herein shall be terminated and cancelled as of the Effective
Date. Notwithstanding the foregoing, the Agreement concerning Ownership of
Intellectual Property and Non-Competition Responsibilities between the Executive
and the Company dated January 30, 1995, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
UNITED USN, INC.
By /s/ Thomas C. Brandenburg
-------------------------------
Name:
Title:
/s/ Ronald W. Gavillet
----------------------------------
Ronald W. Gavillet
----------------------------------
----------------------------------
----------------------------------
Address
Signed and agreed upon, as to
Sections 5(c)(iii) and 5(c)(iv) hereof only:
BT CAPITAL PARTNERS, INC.
By: /s/ Paul S. Lattanzio
- --------------------------------
Name:
Title:
22
<PAGE>
CHASE CAPITAL PARTNERS
By: /s/ Donald J. Hofmann, Jr.
- --------------------------------
Name:
Title:
CIBC WOOD GUNDY VENTURES, INC.
By: /s/ Richard J. Brekka
- --------------------------------
Name:
Title:
HANCOCK VENTURE PARTNERS IV
By: /s/ William A. Johnston
- --------------------------------
Name:
Title:
ENTERPRISES & TRANSCOMMUNICATIONS, L.P.
By: /s/ William P. Glasgow
- --------------------------------
Name:
Title:
/s/ Thomas C. Brandenburg
- --------------------------------
Thomas C. Brandenburg
/s/ Richard J. Brekka
- --------------------------------
Richard J. Brekka
/s/ William P. Glasgow
- --------------------------------
William P. Glasgow
/s/ Donald J. Hofmann, Jr.
- --------------------------------
Donald J. Hofmann, Jr.
/s/ William A. Johnston
- --------------------------------
William A. Johnston
23
<PAGE>
/s/ Paul S. Lattanzio
- --------------------------------
Paul S. Lattanzio
24
<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of [DATE] by and between [NAME OF OFFICER] (the
"Executive") and United USN, Inc., a Delaware corporation (the "Company").
WHEREAS, it is deemed by the Company to be in the best interests of the
Company to assure the Executive's employment; and
WHEREAS, the Company and the Executive have determined to enter into this
Agreement pursuant to which the Company will employ the Executive on the terms
and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the Executive,
and the Executive hereby accepts such employment, on the terms and conditions
hereinafter set forth.
2. Term. This Agreement shall become effective on the date hereof
(the "Effective Date"). Unless earlier terminated as herein provided, the
Executive's employment with the Company hereunder shall commence at the
Effective Date and shall end on the last day of the "Term". For purposes of this
Agreement, the "Term" of this Agreement shall mean the full two-year term of the
Agreement, plus any extensions made as provided in this Section 2. On each
anniversary of the Effective Date, the Term shall automatically be extended for
an additional year unless, not later than ninety (90) days prior to any such
anniversary, the Company or the Executive shall have given notice not to extend
the Term. For purposes of this Agreement, the "Employment Period" (which in no
event shall extend beyond the Term) shall mean the period during which Executive
has an obligation to render services hereunder, as described in Section 3
hereof, taking into account any Notice of Termination (as defined in Section
6(e) hereof) which may be given by either the Company or the Executive. Nothing
in this Section shall limit the right of the Company or the Executive to termi-
<PAGE>
nate the Executive's employment hereunder on the terms and conditions set forth
in Section 6 hereof.
3. Position and Duties. On and after the Effective Date, the Executive
shall serve as [POSITION] of the Company and shall have such additional duties
and responsibilities as may be assigned to him by the Chief Executive Officer of
the Company (or by an executive reasonably designated by the Chief Executive
Officer), provided that such duties and responsibilities are consistent with the
Executive's position as [POSITION] of the Company. The Executive shall report to
the Chief Executive Officer of the Company (or to an executive reasonably
designated by the Chief Executive Officer). The Executive agrees to devote
substantially all his full working time, attention and energies during normal
business hours to the performance of his duties for the Company, provided that
the Executive may serve as a director on the boards of such companies and
organizations as may be agreed upon in writing by the Board of Directors of the
Company (the "Board") and the Executive.
4. Place of Performance. The principal place of employment and office
of the Executive shall be in Chicago, Illinois or such other location as may be
agreed to in writing by the Executive.
5. Compensation and Related Matters.
(a) Base Salary. As compensation for the performance by the
Executive of his duties hereunder, the Company shall pay the Executive an annual
base salary (effective as of July 31, 1996) of [BASE SALARY] (such amount, as it
may be increased from time to time, is hereinafter referred to as "Base
Salary"). Base Salary shall be payable in accordance with the Company's normal
payroll practices, shall be reviewed annually and may be increased upon such
review. Base Salary, once increased, shall not be decreased.
(b) Annual Bonus. Subject to meeting reasonable performance goals
established by the Chief Executive Officer and subject to the approval of the
Board, the Executive shall be entitled to an annual bonus (the "Annual Bonus")
for each calendar year which ends within the Employment Period, including,
without limitation, the year in which this Agreement is executed. The
Executive's target bonus shall be in the range of fifteen percent (15%) to
thirty percent (30%) of his
2
<PAGE>
then-current Base Salary. The Annual Bonus (if any) for each fiscal year which
ends within the Employment Period shall be paid as soon as practicable after the
end of such fiscal year, and no later than the thirtieth (30th) day immediately
following the end of such fiscal year. The percentage of Base Salary which
determines the Executive's Annual Bonus opportunity shall be reviewed by the
Board annually. Within the ten-(10)-day period immediately following any Change
in Control (as defined in Section 9 hereof), the Company shall pay the Executive
a lump sum amount equal to a pro rata portion of the Annual Bonus for the year
in which the Change in Control occurs, calculated by multiplying the award that
the Executive would have earned for the entire year, assuming the achievement,
at the target level, of any performance goals established with respect to such
award, by a fraction the numerator of which shall be the number of days of
employment in such year up to and including the date of the Change in Control
and the denominator of which shall be three-hundred-sixty-five (365).
(c) Stock Options. The Executive shall be entitled to
participate, at a level appropriate to his position with the Company, in any
stock option plan or stock-based compensation plan which the Company maintains
from time to time. The Executive already holds certain stock options ("Options")
for shares of common stock of the Company ("Shares") under the Company's 1994
Stock Option Plan (the "1994 Plan"). The Company agrees that it will take such
actions as are necessary (including, without limitation, amendment of the 1994
Plan and options outstanding thereunder, subject to any required consents of
participants therein) to assure the following:
(i) All Options held by the Executive shall become fully vested and
exercisable upon a Change in Control (as defined in Section 9 hereof); and
(ii) Upon the occurrence during the Employment Period of any event which
affects the Shares in such a way that an adjustment of the Options is
appropriate in order to prevent dilution of the rights of the Executive
under the Options (including, without limitation, any dividend or other
distribution (whether in cash or in kind), recapitalization, stock split,
reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, or share exchange, or other similar corporate
transac-
3
<PAGE>
tion or event), the Company shall make appropriate equitable adjustments,
which may include, without limitation, adjustments to any or all of the
number and kind of shares of stock of the Company (or other securities)
which may thereafter be issued in connection with future grants of options
pursuant to this Section 5(c) and which may thereafter be issued upon
exercise of the then outstanding Options and adjustments to the exercise
prices of all such Options.
(d) Expenses. The Company shall reimburse the Executive for all
reasonable business expenses, subject to the applicable and reasonable policies
and procedures of the Company in force from time to time.
(e) Services Furnished. The Company shall furnish the Executive
with appropriate office space and such other facilities and services as shall be
suitable to the Executive's position and adequate for the performance of his
duties as set forth in Section 3 hereof, such office space and other facilities
and services to be furnished at the location set forth in Section 4 hereof.
(f) Other Benefits. The Company shall provide to the Executive
such employee benefit and compensation plans and arrangements and fringe
benefits as are generally available to senior officers of the Company.
6. Termination. The Executive's employment hereunder may be terminated
as follows:
(a) Death. The Executive's employment shall terminate upon his
death. Upon such a termination, the Executive's estate or designated
beneficiary, as the case may be, shall become entitled to the payments provided
in Section 7(b) hereof.
(b) Disability. If, as a result of the Executive's incapacity due
to physical or mental illness (as determined by a medical doctor mutually agreed
to by the Executive or his legal representative and the Company), the Executive
shall have been absent from his duties hereunder on a full-time basis for either
one-hundred-eighty (180) consecutive days or for an aggregate two-hundred-ten
(210) days within a consecutive two-hundred-seventy (270) day period and, within
thirty (30) days
4
<PAGE>
after Notice of Termination is given, shall not have returned to the performance
of his duties hereunder on a full-time basis ("Disability"), the Company may
terminate the Executive's employment for Disability. Upon such a termination,
the Executive shall become entitled to the payments provided in Section 7(b)
hereof.
(c) Cause. The Company may terminate the Executive's employment
hereunder for "Cause" (as defined in this Section 6(c)). Upon such a
termination, the Executive shall become entitled to the payments provided in
Section 7(b) hereof. For purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon (i) the willful
(or grossly negligent) and continued failure by the Executive to substantially
perform his duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness or any such actual or
anticipated failure after the issuance of a "Notice of Termination" by the
Executive for "Good Reason", as defined in Section 6(d)(i) hereof, after demand
for substantial performance is delivered by the Company that specifically
identifies the manner in which the Company believes the Executive has not
substantially performed his duties, (ii) the willful or grossly negligent
engaging by the Executive in misconduct, (iii) any breach by the Executive of
any of the provisions of Section 10 hereof, or (iv) the Executive's being
convicted of, or pleading guilty to, a felony. For purposes of this paragraph,
no act, or failure to act, on the Executive's part shall be considered "willful"
unless done, or omitted to be done, by him not in good faith and without
reasonable belief that his action or omission was in the best interest of the
Company. Further, unless the Executive has been convicted of, or pleaded guilty
to, a felony, the Executive shall not be deemed to have been terminated for
Cause without (1) reasonable notice to the Executive setting forth the reasons
for the Company's intention to terminate for Cause, (2) an opportunity for the
Executive, together with his counsel, to be heard before the Board, and (3)
delivery to the Executive of a Notice of Termination from the Board finding
that, in the good faith opinion of a majority of the Board, the Executive was
guilty of conduct set forth above in clause (i), (ii) or (iii) of the second
sentence of this Section 6(c), and specifying the particulars thereof in
reasonable detail.
(d) Termination by the Executive.
5
<PAGE>
(i) The Executive may terminate his employment hereunder for
"Good Reason", which, for purposes of this Agreement, shall mean (A) assignment
of duties materially inconsistent with his executive status, or substantial
adverse alteration in responsibilities, which assignment or alteration is not
cured within thirty (30) days after notice from the Executive; (B) any failure
of the Company to pay any compensation to Executive within thirty (30) days of
the Executive's notice to Company that payment is overdue; or (C) Company's
breach of a material term or condition of the Agreement, and failure to correct
breach within thirty (30) days after the Executive's notice thereof (specifying
in reasonable detail the particulars of such noncompliance). Upon a Good Reason
termination, the Executive shall become entitled to the payments and benefits
provided in Section 7(c) hereof.
(ii) The Executive may terminate his employment hereunder
without Good Reason upon giving three months notice to the Company. In the event
of such a termination, the Executive shall comply with any reasonable request of
the Company to assist in providing for an orderly transition of authority, but
such assistance shall not delay the Executive's termination of employment longer
than six months beyond the giving of the Executive's Notice of Termination. Upon
such a termination, the Executive shall become entitled to the payments provided
in Section 7(b) hereof.
(e) Notice of Termination. Any purported termination of the
Executive's employment (other than termination pursuant to Section 6(a) hereof)
shall be communicated by written Notice of Termination to the other party hereto
in accordance with Section 14 hereof. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice that shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
(f) Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean the following: (i) if the Executive's employment is
terminated by his death, the date of his death; (ii) if the Executive's
employment is terminated pursuant to Section 6(b) hereof, thirty (30) days after
the Notice of Termi-
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nation is given; (iii) if the Executive's employment is terminated pursuant to
Section 6(c) hereof, the date specified in the Notice of Termination; (iv) if
the Executive's employment is terminated pursuant to Section 6(d)(i) or 6(d)(ii)
hereof, thirty (30) days after the Notice of Termination is given; and (v) if
the Executive's employment is terminated pursuant to Section 6(d)(iii) hereof,
the date determined in accordance with said Section.
(g) Dispute Concerning Termination. If within fifteen (15) days
after any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 6(g), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier to occur of (i) the date on which the Term ends or (ii) the
date on which the dispute is finally resolved, either by mutual written
agreement of the parties or by the final determination of a court of law, which
is not subject to appeal; provided, however, that the Date of Termination shall
be extended by a notice of dispute given by the Executive only if such notice is
given in good faith and the Executive pursues the resolution of such dispute
with reasonable diligence.
(h) Compensation During Dispute. If the Date of Termination is
extended in accordance with Section 6(g) hereof, the Company shall continue to
pay the Executive the full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, Base Salary and Annual
Bonus) and continue the Executive as a participant in all compensation, benefit
and insurance plans in which the Executive was participating when the notice
giving rise to the dispute was given, until the Date of Termination, as
determined in accordance with Section 6(g) hereof. Amounts paid under this
Section 6(h) are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
7. Compensation During Disability or Upon Termination.
(a) Disability Period. During any period during the Term that the
Executive fails to perform his duties hereunder as a result of incapacity due to
physi-
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<PAGE>
cal or mental illness ("Disability Period"), the Executive shall continue to (i)
receive his full Base Salary, (ii) remain eligible to receive an Annual Bonus
under Section 5(b) hereof, and (iii) participate in the plans and arrangements
described in Section 5(f) hereof (except to the extent such participation is not
permitted under the terms of such plans and arrangements). Such payments made to
the Executive during the Disability Period shall be reduced by the sum of the
amounts, if any, payable to the Executive at or prior to the time of any such
payment under disability benefit plans of the Company or under the Social
Security disability insurance program, and which amounts were not previously
applied to reduce any such payment.
(b) Termination other than by the Company without Cause or by the
Executive with Good Reason. If the Executive's employment hereunder is
terminated other than by the Company without Cause or by the Executive with Good
Reason, then:
(i) as soon as practicable after the Date of Termination, the
Company shall pay any amounts earned, accrued or owing the Executive
hereunder for services prior to the Date of Termination to the Executive
(or the Executive's estate or designated beneficiary, as the case may be);
and
(ii) the Company shall have no additional obligations to the
Executive (or the Executive's estate or designated beneficiary) under this
Agreement except to the extent provided in Sections 5(c) and 5(d) hereof or
otherwise provided in the applicable plans and programs of the Company.
(c) Termination by Company without Cause or by the Executive with
Good Reason. If the Executive's employment hereunder is terminated by the
Company without Cause or by the Executive with Good Reason, then, subject to the
Executive's continuing compliance with Section 10 hereof:
(i) as soon as practicable after the Date of Termination, the
Company shall pay any amounts earned, accrued or owing the Executive
hereunder for services prior to the Date of Termination to the Executive;
(ii) notwithstanding any provision
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of any Annual Bonus plan to the contrary, the Company shall pay to the
Executive, as soon as practicable after the Date of Termination, a lump sum
amount, in cash, equal to the sum of (A) any Annual Bonus which has been
allocated or awarded to the Executive for a completed fiscal year preceding
the Date of Termination under any Annual Bonus plan, and (B) a pro rata
portion to the Date of Termination of the Annual Bonus for the year in
which the Date of Termination occurs, calculated by multiplying the award
that the Executive would have earned for the entire year, assuming the
achievement, at the target level, of any performance goals established with
respect to such award, by a fraction the numerator of which shall be the
number of days of employment in such year up to and including the Date of
Termination and the denominator of which shall be three-hundred-sixty-five
(365); provided, however, that any amount otherwise payable pursuant to
this clause (B) of this Section 7(c)(ii) shall be reduced by any pro-rated
Annual Bonus payment already received by the Executive pursuant to Section
5(b) hereof with respect to the year in which the Date of Termination
occurs;
(iii) subject to the Executive's continuing compliance with
Section 10 hereof, the Company shall pay as severance payments to the
Executive (in substantially equal installments and in the same manner and
over the same period of time as the Executive's salary payments would have
been made) an amount (the "Severance Amount") equal to the greater of (x)
the amount of the Executive's highest annual Base Salary in effect during
the Term or (y) the aggregate amount of the Executive's Base Salary through
the end of the Term (using, to calculate such amount, the Executive's
highest annual Base Salary in effect during the Term); such installment
payments shall cease upon any violation of Section 10 hereof;
(iv) the Company shall maintain in full force and effect, for
the continued benefit of the Executive until the later of (x) the first
anniversary of the Date of Termination or (y) the end of the Term, each
"employee welfare benefit plan" (as defined in section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), other than
any disability plan, in which
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the Executive was entitled to participate immediately prior to the Date of
Termination, provided that the Executive's continued participation is
possible under the general terms and provisions of such plans. In the event
that the Executive's participation in any such plan is barred, the Company
shall arrange to provide the Executive with benefits substantially similar
to those which the Executive would otherwise have been entitled to receive
under the plan from which his continued participation is barred;
(v) if the Date of Termination shall occur within the two
(2) years immediately following a Change in Control, then, in lieu of
Shares issuable upon exercise of the Executive's Options (which Options
shall be cancelled upon the making of the payment referred to below), the
Company shall pay the Executive a lump sum amount, in cash, equal to the
product of (1) the excess of (x) the higher of the "Fair Market Value" (as
defined in Section 7(d) hereof) of a Share on the Date of Termination or
the highest price per Share actually paid in connection with such Change in
Control over (y) the exercise price per Share of each such Option held by
the Executive (whether or not then fully exercisable), times (2) the number
of Shares covered by such Option;
(vi) if the Date of Termination shall occur within the two
(2) years immediately following a Change in Control, then, upon surrender
by the Executive of all Shares owned outright by him and all rights which
he may have to any restricted Shares, in payment for and in lieu of all
such Shares, the Company shall pay the Executive a lump sum amount, in
cash, equal to the product of (1) the higher of the Fair Market Value of a
Share on the Date of Termination or the highest price per Share actually
paid in connection with such Change in Control, times (2) the number of all
such Shares (whether or not restricted) of the Executive; and
(vii) the Company shall have no additional obligations to
the Executive under this Agreement except to the extent provided in
Sections 5(c) and 5(d) hereof or otherwise provided in the applicable plans
and programs of the Company.
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(d) Fair Market Value. For purposes of this Agreement, if the
Shares are publicly traded on any date for which the "Fair Market Value" of a
Share is required by this Agreement, the "Fair Market Value" shall be the
closing price of a Share on the date the Fair Market Value is to be determined,
or if no sale is reported for such date, then on the next preceding date for
which a sale is reported. If the Shares are not publicly traded on any date for
which the Fair Market Value of a Share is required by this Agreement, the Fair
Market Value shall be determined in accordance with the following procedure: The
Executive and the Company shall each select a nationally recognized appraiser,
which shall determine a value for a Share of the Company. If the higher of the
two original appraisal values is not more than ten percent (10%) above the lower
appraisal value, the Fair Market Value shall be the value agreed upon by the two
original appraisers or, in the absence of such an agreement, the Fair Market
Value shall be the average of the two original appraisal values. If the higher
of the two original appraisal values is more than ten percent (10%) above the
lower appraisal value, the two appraisers shall select a third nationally
recognized appraiser who shall determine a Fair Market Value which shall be at
least equal to the lower appraisal value and whose determination of the Fair
Market Value shall be final.
8. No Mitigation. The Executive shall not be required to mitigate
amounts payable pursuant to Section 7 hereof by seeking other employment or
otherwise, but any payments made or benefits provided pursuant to Section
7(c)(iv) hereof shall be offset by any similar payments or benefits made
available without cost to the Executive from any subsequent employment during
the Term (determined immediately prior to such termination of employment).
9. Change in Control.
(a) For purposes of this Agreement, a "Change in Control" shall
be deemed to have occurred if an event set forth in any one of the following
paragraphs (i)-(iv) shall have occurred:
(i) any Person (as defined in Section 9(b) hereof) is or
becomes the Beneficial Owner (as defined in Section 9(c) hereof), directly
or indirectly, of securities of the Company represent-
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<PAGE>
ing thirty-five percent (35%) or more of the combined voting power of the
Company's then outstanding securities, excluding any Person who becomes
such a Beneficial Owner in connection with a transaction described in
clause (x) of paragraph (iii) below; or
(ii) prior to any initial public offering, the following
individuals cease for any reason to constitute a majority of the number of
directors then serving: individuals who, on the date hereof, constitute the
Board and any new director (other than a director whose initial assumption
of office is in connection with an actual or threatened election contest,
including but not limited to a consent solicitation, relating to the
election of directors of the Company) whose appointment or election by the
Board or nomination for election by the Company's stockholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved
or recommended; or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation or the issuance of
voting securities of the Company in connection with a merger or
consolidation of the Company (or any direct or indirect subsidiary of the
Company) pursuant to applicable stock exchange requirements, other than (x)
a merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or any parent
thereof) at least fifty percent (50%) of the combined voting power of the
securities of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (y) a merger
or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company representing
thirty-five percent (35%) or more of the combined voting power of the
Company's then outstanding securities; or
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<PAGE>
(iv) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of the
Company's assets.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of the Company
immediately following such transaction or series of transactions.
(b) For purposes of this Agreement, "Person" shall have the
meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended from time to time (the "Exchange Act"), as modified and used in Sections
13(d) and 14(d) thereof, except that such term shall not include (i) the Company
or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any of its affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, or (v) any of the following entities or their
affiliates: BT Capital Partners, Inc., Chase Capital Partners, CIBC Wood Gundy
Ventures, Inc., Hancock Venture Partners IV and Enterprises &
Transcommunications, L.P.
(c) For purposes of this Agreement, "Beneficial Owner" shall have
the meaning set forth in Rule 13d-3 under the Exchange Act.
10. Confidentiality, Noncompetition and Nonsolicitation.
(a) The Executive will not, during or after the Term, disclose
to any entity or person any information (including, but not limited to,
information about customers or about the design, manufacture or marketing of
products or services) which is treated as confidential by the Company and to
which the Executive
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<PAGE>
gains access by reason of his position as an employee of the Company.
(b) While the Executive continues to be an employee of the
Company and for the [NONCOMPETITION TIME FRAME] immediately following his Date
of Termination, the Executive shall not, within any geographic region of the
United States of America in which the Company then conducts business or in which
the Company plans to conduct business pursuant to a business strategy adopted by
the Board before the Executive's termination of employment, except as permitted
by the Company upon its prior written consent, (i) enter, directly or
indirectly, into the employ of, or render or engage in, directly or indirectly,
any services to any person, firm or corporation which directly competes with the
Company with respect to any business then conducted by the Company or any
business which the Company plans to enter pursuant to a business strategy
adopted by the Board before the Executive's termination of employment (a
"Competitor"), or (ii) become interested, directly or indirectly, in any such
Competitor as an individual, partner, shareholder, creditor, director, officer,
principal, agent, employee, trustee, consultant, advisor or in any other
relationship or capacity. The ownership of up to one percent (1%) of any class
of the outstanding securities of any publicly traded corporation, even though
such corporation may be a Competitor, shall not be deemed as constituting an
interest in such Competitor which violates clause (ii) of the immediately
preceding sentence. Notwithstanding the preceding provisions of this Section
10(b), the Executive may render legal services to businesses which are directly
competitive with the Company so long as the Executive, in rendering such legal
services, does not violate any attorney-client privilege or any duties of
confidentiality and non-disclosure owed to the Company under this Agreement,
under any other agreement between the Executive and the Company, or otherwise.
(c) While the Executive continues to be an employee of the
Company and for [NONSOLICITATION TIME FRAME] immediately following his Date of
Termination, the Executive shall not, except as permitted by the Company upon
its prior written consent, (i) attempt, directly or indirectly, to induce any
employee employed by or performing services for the Company (or its affiliates)
to be employed or perform services elsewhere, or (ii) solicit, directly or
indirectly, the customers of the Company (or its affiliates), the suppliers of
the Company (or its
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<PAGE>
affiliates) or entities or individuals having other business relationships with
the Company (or its affiliates) for the purpose of encouraging them to terminate
(or reduce or detrimentally alter) their respective relationships with the
Company (or its affiliates).
(d) Any violation by the Executive of Section 10(a), 10(b) or
10(c) hereof occurring after the Date of Termination shall entitle the Company
to cease making any payments and providing any benefits otherwise required under
Section 7(c) hereof. Additionally, the Company shall have the right and remedy
to have the provisions of this Section 10 specifically enforced, including by
temporary and/or permanent injunction, it being acknowledged and agreed that any
such violation may cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company.
11. Independence and Severability of Section 10 Provisions. Each of
the rights and remedies enumerated in Section 10 hereof shall be independent of
the others and shall be severally enforceable and all of such rights and
remedies shall be in addition to, and not in lieu of, any other rights and
remedies available to the Company under law or in equity. If any of the
covenants contained in Section 10 hereof or if any of the rights or remedies
enumerated in Section 10 hereof, or any part of any of them, is hereafter
construed to be invalid or unenforceable, the same shall not affect the
remainder of the covenant or covenants or rights or remedies which shall be
given full effect without regard to the invalid portions. If any of the
covenants contained in Section 10 is held to be unenforceable because of the
duration of such provision or the area covered thereby, the parties agree that
the court making such determination shall have the authority to reduce the
duration and/or area of such provision, and in its reduced form said provision
shall then be enforceable.
12. Indemnification. The Company shall indemnify the Executive to
the full extent authorized by law and the Charter and By-Laws of the Company, as
applicable, for all expenses, costs, liabilities and legal fees which the
Executive may incur in the discharge of his duties hereunder. The Executive
shall be insured under the Company's Directors' and Officers' Liability
Insurance Policy as in effect from time to time. Any termination of the
Executive's employment or of this
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<PAGE>
Agreement shall have no effect on the continuing operation of this Section 12.
13. Successors; Binding Agreement.
(a) The Company will require any purchaser of all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Executive, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
executes and delivers the agreement provided for in this Section 13 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
(b) This Agreement and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts would still be payable to him hereunder if he had continued to live, all
such amounts unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
14. Notices. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or received by facsimile or three
(3) days after mailing by United States certified mail, return receipt
requested, postage prepaid, addressed, if to the Executive, to the address
inserted below the Executive's signature on the final page hereof and, if to the
Company, to the address set forth below, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon actual receipt:
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To the Company:
United USN, Inc.
10 South Riverside Plaza
Chicago, Illinois 60022
Attention: President
15. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of any lack of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Illinois (without regard to its principles of conflicts of laws).
All references to sections of ERISA shall be deemed also to refer to any
successor provisions to such sections. Payments provided for hereunder shall be
paid net of any applicable withholding required under federal, state or local
law and any additional withholding to which the Executive has agreed. The
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect. Captions and Section headings in
this Agreement are provided merely for convenience and shall not affect the
interpretation of any of the provisions herein. The obligations of the Company
and the Executive under this Agreement which by their nature may require either
partial or total performance after the expiration of the Term shall survive such
expiration.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. Entire Agreement. This Agreement supersedes, as of the Effective
Date, all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by the
17
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parties hereto in respect of the subject matter contained herein; and any prior
agreement of the parties hereto in respect of the subject matter contained
herein shall be terminated and cancelled as of the Effective Date.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
UNITED USN, INC.
By:_______________________________
Name:
Title:
----------------------------------
[OFFICER'S NAME]
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Address
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UNITED USN, INC.
1994 STOCK OPTION PLAN
Effective September 29, 1994
1. Purpose of the Plan. The United USN, Inc. 1994 Stock Option Plan
is intended to advance the best interests of United USN, Inc. and its
Subsidiaries by providing the executive officers and other employees of United
USN, Inc. and its Subsidiaries with additional incentives by allowing them to
acquire an ownership interest in United USN, Inc. and thereby encouraging them
to contribute to the success of United USN, Inc.'s business.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" shall mean the Board of Directors of United USN, Inc.
(b) "Cause" shall mean (i) a material breach of a Participant's
employment agreement or, in the absence of a written agreement, the terms
of employment, (ii) a breach of Participant's duty of loyalty to the
Company or any act of dishonesty or fraud with respect to the Company,
(iii) the commission by Participant of a felony, a crime involving moral
turpitude or other act causing material harm to the Company's standing and
reputation, (iv) Participant's continued failure to perform his or her
duties to the Company or (v) Participant's substandard performance. For the
purposes of this Plan, "substandard performance" shall be determined by a
majority of the Board (excluding Participant). The Board shall give
Participant written notice of the Board's concern over Participant's
performance, and Participant shall have 15 days to prepare for a meeting
with the Board, at which time Participant may present any information on
market competitive conditions and any other factors bearing upon
Participant's performance. In assessing Participant's performance, the
Board shall give due consideration to the overall industry experience in
assessing Participant's performance. After due consideration of these
factors, if a majority of the Board (excluding Participant) determines in
good faith that Company would have performed substantially better with
other management and that the future performance of the Company would be
best served by new management, the Board may terminate Participant for
"substandard performance."
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean a committee of the Board appointed to
administer the Plan. The Committee shall be composed of three or more
directors as appointed from time to time to serve by the Board.
<PAGE>
(e) "Common Stock" shall mean the common stock, par value $.01 per
share, of United USN, Inc.
(f) "Company" shall mean United USN, Inc., a Delaware corporation,
and any Subsidiary of United USN, Inc.
(g) "Disability" shall mean the inability, due to illness, accident
injury, physical or mental incapacity or other disability, of any
Participant to effectively carry out his or her duties and obligations to
the Company on a full-time basis or to participate effectively or actively
in the management of the Company for a period of at least 60 consecutive
days or for shorter periods aggregating at least 90 days (whether or not
consecutive) during any twelve month period, as determined in the
reasonable judgment of the Board.
(h) "Employee" shall mean any person, including officers, employed by
the Company.
(i) "Fair Market Value" of the Common Stock shall be determined by
the Committee or, in the absence of the Committee, by the Board.
(j) "Incentive Stock Option" shall mean any Option intended to
qualify as an incentive stock option within the meaninq of Section 422 of
the Code or any successor provision.
(k) "Nonqualified Stock Option" shall mean an Option not intended to
qualify as an Incentive Stock Option.
(l) "Option" shall mean an Incentive Stock Option or a Nonqualified
Stock option granted pursuant to the Plan.
(m) "Option Agreement" shall mean the written option agreement
entered into between the Company and the Participant upon the grant of any
Option.
(n) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(o) "Participant" shall mean any executive officer or other key
employee of the Company who has been selected to participate in the Plan by
the Committee or the Board.
(p) "Plan" shall mean the United USN, Inc. 1994 Stock Option Plan.
(q) "Qualified Public Offering" shall mean the sale, in an
underwritten public offering registered under the Securities Act of 1933,
as amended, of shares of Common Stock having an aggregate value of at least
$20 million.
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<PAGE>
(r) "Sale of United USN, Inc." shall mean a merger or consolidation
effecting a change in control of United USN, Inc., a sale of all or
substantially all of United USN, Inc.'s assets or a sale of a majority of
United USN, Inc.'s outstanding voting securities.
(s) "Share" shall mean one share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(t) "Subsidiary" shall mean a "subsidiary corporation," of United USN,
Inc. whether now or hereafter existing, as such term is defined in Section
424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 10
of the Plan, the maximum aggregate number of Shares which may be issued pursuant
to the Plan is 24,076. The Shares may be either authorized but unissued shares,
treasury shares, reacquired shares, or any combination thereof. If an Option
should expire or become unexercisable for any reason without having been
exercised in full, any Shares which would otherwise have been issuable pursuant
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. Administration of the Plan. The Plan shall be administered by the
Committee; provided, however, that if for any reason the Committee shall not
have been appointed by the Board, all authorized duties of the Committee under
the Plan shall be vested in and exercised by the Board. Subject to the
provisions of the Plan, the Committee shall have the authority, in its
discretion: (i) to grant Incentive Stock Options or Nonqualified Stock Options;
(ii) to determine the Fair Market Value of the Common Stock; (iii) to determine
in accordance with Section 7(b) of the Plan the exercise price per share of
Options to be granted; (iv) to determine the Participants to whom, and the time
or times at which, Options shall be granted and the number of Shares to be
represented by each Option; (v) to interpret the Plan; (vi) to prescribe, amend,
and rescind rules and regulations relating to the Plan; (vii) to determine the
terms and provisions of each Option granted (which need not be identical),
including but not limited to the vesting schedule for each Option granted, and
modify or amend the terms of each outstanding Option; (viii) to reduce the
exercise price per share of outstanding and unexercised Options; (ix) to
accelerate or defer the exercise date of any outstanding Option; (x) to
authorize any person to execute on behalf of the Company any instrument required
to effectuate the grant of an Option previously granted by the Committee; and
(xi) to make all other determinations (except a determination of "Cause" which
shall be made by the Board) deemed necessary or advisable for the administration
of the Plan. All decisions, determinations, and interpretations of the Committee
shall be final and binding on all Participants and any other holders of any
Options granted under the Plan.
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<PAGE>
5. Eligibility.
(a) Options may be granted to Employees who, in the opinion of the
Committee, contribute significantly to the Company. The directors of the
Company who are not Employees shall not be eligible to participate in the
Plan.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonqualified Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair
Market Value of the Common Stock with respect to which Options designated
as Incentive Stock Options are exercisable for the first time by any
Optionee during any calendar year (under all plans of the Company) exceeds
$100,000, such Options shall be treated as Nonqualified Stock Options.
(c) For purposes of Section 5 (b), Options shall be taken into account
in the order in which they were granted, and the Fair Market Value of the
Common Stock shall be determined as of the time the Option with respect to
such Shares is granted.
6. Term of Plan. The Plan shall become effective upon the latest of
the following two events to occur: (a) approval of the Plan by the stockholders
of United USN, Inc. and (b) adoption of the Plan by the Board. The Plan shall
continue in effect for ten (10) years from the effective date, unless sooner
terminated in accordance with the provisions of Section 15 of the Plan.
7. Terms of Options. Unless otherwise determined by the Committee and
set forth in the Option Agreement, Options granted pursuant to the Plan shall
have the following terms:
(a) The Option exercise period for each Option shall be no more than
ten (10) years from the date of the grant.
(b) The per Share exercise price of the Options shall be determined by
the Committee and may be fixed at the time of grant, float in accordance
with a predetermined formula, or any combination thereof; provided,
however, that the per Share exercise price shall not be less than 100% of
the Fair Market Value of the Common Stock on the date of grant.
(c) Options shall be exercisable at such time or times as the
Committee shall determine at or subsequent to the grant date.
(d) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined
by the Committee at the time of grant and may consist of cash and/or check.
The Committee may determine, in its discretion, that additional forms of
payment
-4-
<PAGE>
will be permitted, including, but not limited to, by delivery of Shares
held by the Participant having a Fair Market Value equal to the exercise
price. The Committee, in its discretion, may at any time prior to the
exercise of an Option determine that certain forms of payment may not be
available to a particular Participant.
(e) If permitted by the Committee, in its sole discretion, a
Participant may elect to pay withholding tax obligations by having the
Company withhold Shares having a value equal to the amount of tax required
to be withheld. The value of the Shares to be withheld shall equal the Fair
Market Value of the Shares on the day the Option is exercised.
8. Exercise of Option.
(a) Each Option may be exercised in whole or in part; provided,
however, that no Option may be exercised for a fraction of a Share. An
Option shall be deemed to be exercised when written notice of such exercise
has been given to the Company in accordance with the terms of the Option
Agreement by the person entitled to exercise the Option and full payment
for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Committee,
consist of any consideration and method of payment allowable under Section
7 (d) of the Plan. Until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of
the Company) of the stock certificate evidencing such Shares, no right to
vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such stock
certificate promptly upon exercise of the Option.
(b) In no event shall any part of any Option be exercisable after the
date of expiration thereof (the "Expiration Date"), as determined by the
Committee pursuant to paragraph 7(a) above.
(c) Except as otherwise provided by the Committee in the Option
Agreement, any portion of a Participant's Option that was not vested and
exercisable on the date of the termination of such Participant's employment
for whatever reason shall expire and be forfeited as of such date;
provided, however, that: (i) if any Participant dies or becomes subject to
any Disability, such Participant's Option will expire 90 days after the
date of his or her death or Disability, but in no event after the
Expiration Date, (ii) if any Participant retires (with the approval of the
Committee or the Board), his or her Option will expire 90 days after the
date of his or her retirement, but in no event after the Expiration Date,
and (iii) if any Participant is discharged for any reason other
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<PAGE>
than for Cause, such Participant's Option will expire 30 days after the
date of his or her discharge, but in no event after the Expiration Date.
9. Non-Transferability of Options. Options granted under the Plan may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner, other than by will or by the laws of descent or distribution, and may be
exercised, during the lifetime of the Participant, only by the Participant. In
the event of the death of a Participant, the exercise of Options granted
hereunder shall be made only by the executor or administrator of the estate of
the deceased Participant or the person or persons to whom the deceased
Participant's rights under the Option shall pass by will or the laws of descent
and distribution.
10. Adjustments Upon Changes in Capitalization or Sale.
(a) In the event of a reorganization, recapitalization, stock dividend
or stock split, or combination or other change in the shares of Common
Stock, the Board or the Committee may, in its sole discretion, in order to
prevent the dilution or enlargement of rights under outstanding Options,
make such adjustments in the number and type of Shares authorized by or
granted under the Plan, the number and type of Optioned Stock and the
exercise prices specified therein as may be determined to be appropriate
and equitable.
(b) In the event of a Sale of United USN, Inc. or a Qualified Public
Offering, the Committee may provide, in its discretion, that the Options
shall become immediately exercisable by any Participants at the time of the
Sale of United USN, Inc. or the Qualified Public offering and that such
Options shall terminate if not exercised as of the date of the Sale of
United USN, Inc., the Qualified Public Offering or other prescribed period
of time.
11. Written Agreement. Each Option granted hereunder to a Participant
shall be embodied in a written Option Agreement which shall be signed by the
participant and by a duly authorized officer of United USN, Inc. for and in the
name and on behalf of United USN, Inc. and shall be subject to the terms and
conditions prescribed herein (including, but not limited to, (i) the right of
United USN, Inc. and such other persons as the Committee shall designate
("Designees") to repurchase from each Participant, and such Participant's
permitted transferees, all shares of Common Stock issued or issuable to such
Participant on the exercise of an Option in the event of such Participant's
termination of employment, (ii) rights of first refusal granted to United USN,
Inc. and Designees, (iii) holdback and other registration right restrictions in
the event of a public registration of any equity securities of United USN, Inc.
and (iv) any other terms and conditions which the Committee shall deem necessary
and desirable.
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<PAGE>
12. Listing, Registration and Compliance with Laws and Regulations.
Options shall be subject to the requirement that if at any time the Committee
shall determine, in its discretion, that the listing, registration or
qualification of the Shares subject to the Options upon any securities exchange
or under any state or federal securities or other law or regulation, or the
consent or approval of any governmental regulatory body, is necessary or
desirable as a condition to or in connection with the granting of the Options or
the issuance or purchase of shares thereunder, no Options may be granted or
exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee. The holders of such Options will
supply the Company with such certificates, representations and information as
the Company shall request and shall otherwise cooperate with the Company in
obtaining such listing, registration, qualification, consent or approval. In the
case of officers and other persons subject to Section 16(b) of the Securities
Exchange Act of 1934, as amended, the Committee may at any time impose any
limitations upon the exercise of an Option that, in the Committee's discretion,
are necessary or desirable in order to comply with such Section 16(b) and the
rules and regulations thereunder. If United USN, Inc., as part of an offering of
securities or otherwise, finds it desirable because of federal or state
regulatory requirements to reduce the period during which any Options may be
exercised, the Committee may, in its discretion and without the Participant's
consent, so reduce such period on not less than 15 days' written notice to the
holders thereof.
13. Rights of Participants. Nothing in the Plan shall interfere with
or limit in any way the right of the Company to terminate any Participant's
employment at any time (with or without Cause), nor confer upon any Participant
any right to continue in the employ of the Company for any period of time or to
continue his or her present (or any other) rate of compensation and, except as
otherwise provided under this Plan or by the Committee in the Option Agreement,
in the event of any Participant's termination of employment (including, but not
limited to, the termination of a Participant's employment by the Company without
Cause) any portion of such Participant's Option that was not previously vested
and exercisable will expire and be forfeited as of the date of such termination.
No Employee shall have a right to be selected as a Participant or, having been
so selected, to be selected again as a Participant.
14. Withholding of Taxes. The Company shall be entitled, if necessary
or desirable, to withhold from any Participant from any amounts due and payable
by the Company to such Participant (or secure payment from such Participant in
lieu of withholding) the amount of any withholding or other tax due from the
Company with respect to any Shares issuable under the Plan, and the Company may
defer such issuance unless indemnified to its satisfaction.
-7-
<PAGE>
15. Amendment, Suspension and Termination of Plan. The Board or the
Committee may suspend or terminate the Plan or any portion thereof at any time
and may amend it from time to time in such respects as the Board or the
Committee may deem advisable; provided, however, that no such amendment shall be
made without stockholder approval to the extent such approval is required by
law, agreement or the rules of any exchange upon which the Common Stock is
listed, and no such amendment, suspension or termination shall impair the rights
of Participants under outstanding Options without the consent of the
Participants affected thereby. No Options shall be granted hereunder after the
tenth anniversary of the adoption of the Plan.
16. Amendment, Modification and Cancellation of Outstanding Options.
The Committee may amend or modify any Option in any manner to the extent that
the Committee would have had the authority under the Plan initially to grant
such Option; provided that no such amendment or modification shall impair the
rights of any Participant under any Option without the consent of such
Participant. With the Participant's consent, the Committee may cancel any Option
and issue a new Option to such Participant.
17. Indemnification. In addition to such other rights of
indemnification as they may have as members of the Board or the Committee, the
members of the Committee shall be indemnified by the Company against all costs
and expenses reasonably incurred by them in connection with any action, suit or
proceeding to which they or any of them may be party by reason of any action
taken or failure to act under or in connection with the Plan or any Option
granted thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding; provided, however, that any such Committee member shall be
entitled to the indemnification rights set forth in this paragraph 17 only if
such member has acted in good faith and in a manner that such member reasonably
believed to be in or not opposed to the best interests of the Company and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
that such conduct was unlawful, and further provided that upon the institution
of any such action, suit or proceeding a Committee member shall give the Company
written notice thereof and an opportunity, at its own expense, to handle and
defend the same before such Committee member undertakes to handle and defend it
on his or her own behalf.
Adopted by United USN, Inc.
Board of Directors on
September 29, 1994
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<PAGE>
Exhibit 10.6
INDEMNIFICATION AGREEMENT
AGREEMENT, effective as of [DATE], between United USN, Inc., a
Delaware corporation (the "Company"), and [INDEMNITEE] (the "Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk
of litigation and other claims being asserted against directors and officers of
public companies in today's environment;
WHEREAS, the By-laws of the Company permit the Company to indemnify
and advance expenses to its directors and officers to the full extent permitted
by law and the Indemnitee has been serving and continues to serve as a director
or officer of the Company in part in reliance on such By-laws;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, and in part to provide Indemnitee
with specific contractual assurance that the protection promised by the
aforesaid By-laws will be available to Indemnitee (regardless of, among other
things, any amendment to or revocation of such By-laws or any change in the
composition of the Company's Board of Directors or acquisition transaction
relating to the Company), the Company wishes to provide in this Agreement for
the indemnification of and the advancing of expenses to Indemnitee to the
fullest extent (whether partial or complete) permitted by law and as set forth
in this Agreement and, to the extent insurance is obtained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
NOW, THEREFORE, in consideration of the premises ant of Indemnitee
continuing to serve the Company directly or, at its request, another enterprise,
and
<PAGE>
intending to be legally bound hereby, the parties hereto agree as follows:
1. Certain Definitions:
-------------------
(a) Change in Control: shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 30% or more of
the total voting power represented by the Company's then outstanding Voting
Securities (ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least two-
thirds (2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof or
(iii) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the Voting Securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting Securities of the surviving entity) at least 80% of
the total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of (in one transaction or a series of transactions) all or substantially
all the Company's assets.
(b) Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether instituted by the Company
or any other party, that Indemnitee in good faith believes might
2
<PAGE>
lead to the institution of any such action, suit or proceeding, whether civil,
criminal, administrative, investigative or other.
(c) Expenses: include attorneys' fees and all other costs,
expenses and obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
(e) Independent Legal Counsel: an attorney or firm of
attorneys, selected in accordance with the provisions of Section 3, who shall
not have otherwise performed services for the Company or Indemnitee within the
last five years (other than with respect to matters concerning the rights of
Indemnitee under this Agreement or of other indemnitees under similar indemnity
agreements).
(f) Reviewing Party: (i) the Board of Directors by a quorum
consisting of directors who were not parties to such Claim or (ii) if such a
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by Independent Legal Counsel.
(g) Voting Securities: any securities of the Company vote
generally in the election of directors.
2. Basic Indemnification Arrangement. (a) In the event Indemnitee
was, is or becomes a party to or witness or other participant in, or is
threatened to be made a party to or witness or other participant in, a Claim by
reason of (or arising in part out of) an Indemnifiable Event, the Company shall
indemnify Indemnitee to the fullest extent permitted by law as soon as
3
<PAGE>
practicable but in any event no later than thirty days after written demand is
presented to the Company, against any and all Expenses, judgments, fines,
penalties and amounts paid in settlement (including all interest, assessments
and other charges paid or payable in connection with or in respect of such
Expenses, judgments, fines, penalties or amounts paid in settlement) of such
Claim. Notwithstanding anything in this Agreement to the contrary, prior to a
Change in Control Indemnitee shall not be entitled to indemnification pursuant
to this Agreement in connection with any Claim initiated by Indemnitee unless
the Board of Directors has authorized or consented to the initiation of such
Claim. If so requested by Indemnitee, the Company shall advance (within two
business days of such request) any and all Expenses to Indemnitee (an "Expense
Advance").
(b) Notwithstanding the foregoing, (i) the obligations of the
Company under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which the
Independent Legal Counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced or thereafter commences legal proceedings in a court of competent
jurisdiction to secure a determination that Indemnitee should be indemnified
under applicable law, any determination made by the Reviewing Party that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the CompanY for
any Expense Advance until a final judicial determination is made with respect
thereto (as to which all rights of appeal therefrom have been exhausted or
lapsed). If there has not been a Change in Control, the Reviewing Party shall be
selected by the Board of Directors, and if there has been such a Change in
Control, the Reviewing Party shall be the Independent Legal Counsel referred to
in Section 3 hereof. If there has been no
4
<PAGE>
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively would not be permitted to be indemnified in whole or in
part under applicable law, Indemnitee shall have the right to commence
litigation in any court in the State of Delaware having subject matter
jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change
in Control of the Company then with respect to all matters thereafter arising
concerning the rights of Indemnitee to indemnity payments and Expense Advances
under this Agreement or any other agreement or Company By-law now or hereafter
in effect relating to Claims for Indemnifiable Events, the Company shall seek
legal advice only from Independent Legal Counsel selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent the Indemnitee would be
permitted to be indemnified under applicable law. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to fully
indemnify such counsel against any and all expenses (including attorneys' fees),
claims, liabilities and damages arising out of or relating to this Agreement or
its engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall
indemnify Indemnitee against any and all expenses (including attorneys' fees)
and, if requested by Indemnitee, shall (within two business days of such
request) advance such expenses to Indemnitee which are incurred by Indemnitee in
connection with any action brought by Indemnitee for (i) indemnification or
advance payment of Expenses by the Company under this Agreement or any other
agreement or Company By-law now or hereafter in effect relating to Claims for
Indemnifiable Events and for (ii) recovery under any directors' and officers'
liability insurance policies maintained by the Company,
5
<PAGE>
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity, Etc. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of a Claim but not, however, for all of the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion thereof to which
Indemnitee is entitled. Moreover, notwithstanding any other provision of this
Agreement, to the extent that Indemnitee has been successful on the merits or
otherwise in defense of any or all Claims relating in whole or in part to an
Indemnifiable Event or in defense of any issue or matter therein, including
dismissal without prejudice, Indemnitee shall be indemnified against all
Expenses incurred in connection therewith.
6. Burden of Proof. In connection with any determination by the
Reviewing Party or otherwise as to whether Indemnitee is entitled to be
indemnified hereunder, the burden of proof shall be on the Company to establish
that Indemnitee is not so entitled.
7. No Presumptions. For purposes of this Agreement, the termination
of any claim, action, suit or proceeding, by judgment, order, settlement
(whether with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief.
6
<PAGE>
8. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall
be in addition to any other rights Indemnitee may have under the Company's By-
laws or the Delaware General Corporation Law or otherwise. To the extent that a
change in the Delaware General Corporation Law (whether by statute or judicial
decision) permits greater indemnification by agreement than would be afforded
currently under the Company's By-laws and this Agreement, it is the intent of
the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
9. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company director or officer.
10. Period of Limitations. No legal action shall be brought and no
cause of action shall be asserted by or in the right of the Company against
Indemnitee or Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period provided, however, that if any shorter period
of limitations is otherwise applicable to any such cause of action, such shorter
period shall govern.
11. Amendments, Etc. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
12. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents
7
<PAGE>
necessary to enable the Company effectively to bring suit to enforce such
rights.
13. No Duplication of Payments. The Company shall not be liable
under this Agreement to make any payment in connection with any Claim made
against Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, By-law or otherwise) of the amounts
otherwise indemnifiable hereunder.
14. Binding Effect, Etc. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors and assigns, including any direct or indirect successor by
purchase, merger, consolidation or otherwise to all or substantially all of the
business and/or assets of the Company; spouses; heirs; executors and personal
and legal representatives. This Agreement shall continue in effect regardless of
whether Indemnitee continues to serve as an officer or director of the Company.
15. Severability. The provisions of this Agreement shall be
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) is held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable in any
respect, and the validity and enforceability of any such provision in every
other respect and of the remaining provisions hereof shall not be in any way
impaired and shall remain enforceable to the fullest extent permitted by law.
16. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
this [DATE].
UNITED USN, INC.
By
---------------------------------------
Name:
Title:
----------------------------------------
Name:
9
<PAGE>
Exhibit 10.7
EUGENE A. SEKULOW
WESTCHESTER FINANCIAL CENTER
50 MAIN STREET, 10TH FLOOR
WHITE PLAINS, NEW YORK 10606
TELEPHONE 914-662-2006
FAX 914-662-7704
January 24, 1995
VIA FAX (312)906-3655
AND MAIL
U.S. Network Corporation
10 South Riverside Plaza, Suite 300
Chicago, IL 60606-3709
ATTN: MR. THOMAS C. BRANDENBURG
-------------------------
Dear Mr. Brandenburg:
This will confirm our agreement whereby you have retained my services as a
consultant and I have agreed to perform consulting services for you:
1. The term of this agreement shall commence on January 1, 1995 and shall
terminate on December 31, 1995 ("termination date"), provided, however, that the
term may be extended with your and my written consent. Should either of us
decide not to extend this agreement, we will give the other thirty days written
notice. This agreement will also terminate in the event of my death or in the
event that I become disabled from performing the contemplated services.
2. You have agreed to pay me a consulting fee of forty-eight thousand
($48,000.00) dollars for one year ending on the termination date, payable in
twelve installments on the first day of each month commencing January 1995. In
consideration of this fee, I agree to provide two days per month of
consultation, including preparation and travel time. Travel time during weekends
and holidays shall be included in the number of travel days. In the event that,
at your request, I devote more than two days per month to consulting for you,
such excess will be billed at two thousand five hundred ($2,500.00) dollars per
day.
3. You will reimburse me for reasonable and appropriate travel and other
expenses incurred by me in the performance of services under this agreement.
You agree that domestic travel will be first class and that foreign travel will
be first class. Unless otherwise agreed by you in writing, domestic per diem
expenses for meals and lodging will be three hundred ($300) dollars plus local
transportation, and foreign per diem expenses will not exceed thirty (30%)
percent of my daily fee plus local transportation.
<PAGE>
U.S. Network Corporation
Page Two
January 24, 1995
4. You recognize that I have consulting arrangements with other entities
and that my commitment in paragraph 2 with respect to the number of days per
month of consultation is subject to reasonable adjustment with your consent
which you will not unreasonably withhold.
5. You and I agree not disclose to, or discuss with, any person any of the
terms and conditions of this agreement or any information concerning our
relationship or the services which I am rendering to you.
Please sign and return to me the enclosed copy of this agreement.
Sincerely,
/s/ Eugene A. Sekulow
Eugene A. Sekulow
EAS/tp
AGREED TO:
U.S. NETWORK CORPORATIONS
By:
--------------------------------
<PAGE>
U.S. Network Corporation
January 5, 1996
VIA FACSIMILE
(914) 682-7784
AND MAIL
- --------
Eugene A. Sekulow
Westchester Financial Center
50 Main Street, 10th Floor
White Plains, New York 10606
Dear Gene:
This letter, once agreed upon by your signature below, will serve as a one
(1) year extension to the consulting agreement dated January 24, 1995. All other
terms remain unchanged.
We look forward to your continued valuable services.
Very truly yours,
/s/ Robert J. Luth
Robert J. Luth
Executive Vice President
and Chief Financial Officer
cc: Thomas C. Brandenburg
AGREED TO:
/s/ Eugene A. Sekulow
- ---------------------
Eugene A. Sekulow
<PAGE>
Exhibit 10.8
PROMISSORY NOTE
December 15, 1995 $75,000.00
Chicago, Illinois
The undersigned J. Thomas Elliott hereby promises to pay to the order of
United USN, Inc. the principal sum of $75,000.00. Payment of said principal
shall be due and payable on or before January 2, 1997.
Presentment for payment, protest, notice of protest and notice of nonpayment
are hereby waived.
J. Thomas Elliott
/s/ J. Thomas Elliott
----------------------------
<PAGE>
Exhibit 10.9
PURCHASE AGREEMENT
DATED AS OF SEPTEMBER 25, 1996
BY AND AMONG
CIBC WOOD GUNDY VENTURES, INC.,
CHASE CAPITAL PARTNERS,
HANCOCK VENTURE PARTNERS IV - DIRECT FUND, L.P.,
BT CAPITAL PARTNERS, INC.,
NORTHWOOD CAPITAL PARTNERS LLC,
NORTHWOOD VENTURES,
ENTERPRISES & TRANSCOMMUNICATIONS, L.P.
AND
UNITED USN, INC.
<PAGE>
TABLE OF CONTENTS
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<C> <S> <C>
Section 1. Authorization and Closing..................................... 2
1A. Authorization of 9% Preferred Stock........................... 2
1B. Purchase and Sale of 9% Preferred Stock....................... 2
1C. The Closing................................................... 2
Section 2. Conditions to Each Purchaser's Obligation at the Closing...... 2
2A. Representations and Warranties; Covenants..................... 2
2B. Certificate of Designations................................... 3
2C. Certificate of Incorporation and By-laws...................... 3
2D. Sale of 9% Preferred Stock to Each Purchaser.................. 3
2E. Blue Sky Clearance............................................ 3
2F. Closing Documents............................................. 3
2G. Proceedings................................................... 4
Section 3. Covenants..................................................... 5
3A. Financial Statements and Other Information.................... 5
3B. Affirmative Covenants......................................... 8
3C. Compliance with Agreements.................................... 10
3D. Current Public Information.................................... 10
Section 4. Transfer of Restricted Securities............................. 10
Section 5. Representations and Warranties of the Company................. 12
5A. Organization and Corporate Power.............................. 12
5B. Capital Stock and Related Matters............................. 12
5C. Authorization; No Breach...................................... 13
Section 6. Definitions................................................... 14
Section 7. Miscellaneous................................................. 15
7A. Expenses...................................................... 15
7B. Remedies...................................................... 16
7C. Purchaser's Investment Representations........................ 16
</TABLE>
i
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<TABLE>
<CAPTION>
Page
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<S> <C> <C>
7D. Purchasers' Authorization..................................... 17
7E. Treatment of the 9% Preferred Stock........................... 17
7F. Consent to Amendments......................................... 17
7G. Survival of Representations and Warranties.................... 18
7H. Successors and Assigns........................................ 18
7I. Capital and Surplus; Special Reserves......................... 18
7J. Generally Accepted Accounting Principles...................... 18
7K. Severability.................................................. 19
7L. Counterparts.................................................. 19
7M. Descriptive Headings; Interpretation.......................... 19
7N. Governing Law................................................. 19
7O. Notices....................................................... 19
7P. Understanding Among the Purchasers............................ 20
7Q. Indemnification............................................... 20
7R. Right to Rescind.............................................. 20
SCHEDULE OF PURCHASERS.................................................... 24
</TABLE>
ii
<PAGE>
Schedules and Exhibits
- ----------------------
Schedule of Purchasers
Exhibit A Certificate of Designations
Exhibit B Certificate of Amendment
Exhibit C Certificate of Incorporation
iii
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT is made as of September 25, 1996 (this
"Agreement") by and among United USN, Inc., a Delaware corporation (the
"Company"), CIBC Wood Gundy Ventures, Inc., a Delaware corporation ("CIBC"),
Chase Capital Partners (as successor to Chemical Venture Capital Associates, a
California limited partnership ("Chemical")), a New York general partnership
("Chase"), Hancock Venture Partners IV - Direct Fund, L.P., a Delaware limited
partnership ("Hancock"), BT Capital Partners, Inc., a Delaware corporation
("BT"), Northwood Capital Partners LLC, a New York limited liability company
("Northwood Capital"), Northwood Ventures, a New York limited partnership
("Northwood Ventures"), and Enterprises & Transcommunications, L.P., a Delaware
limited partnership ("Prime" and collectively with CIBC, Chase, Hancock,
Northwood Capital and Northwood Ventures, the "Purchasers"). Unless otherwise
defined herein, capitalized terms used herein are defined in Section 6 hereof.
The Company, CIBC, Chemical and Hancock are parties to a Purchase
Agreement dated as of April 20, 1994, as amended as of June 10, 1994, and
November 1, 1994 (as so amended, the "First Purchase Agreement"), pursuant to
which CIBC, Chemical and Hancock purchased from the Company certain shares of
the Company's Series A 10% Senior Cumulative Preferred Stock, par value $1.00
per share (the "Series A Preferred Stock"), and Common Stock, par value $.01 per
share (the "Common Stock"). The Purchasers are also parties to a certain
Purchase Agreement dated as of June 22, 1995 (as amended, the "Second Purchase
Agreement"), pursuant to which the Purchasers purchased from the Company certain
shares of the Company's Series A-2 10% Senior Cumulative Preferred Stock, par
value $1.00 per share the "Series A-2 Preferred Stock"), and Common Stock. The
Purchasers desire to purchase from the Company and the Company desires to sell
to the Purchasers shares of the Company's 9.0% Cumulative Convertible Pay-In-
Kind Preferred Stock, par value $1.00 per share (the "9% Preferred Stock").
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE>
Section 1. Authorization and Closing.
1A. Authorization of 9% Preferred Stock. The Company shall
authorize the issuance and sale to the Purchasers of an aggregate of Ten
Thousand (10,000) shares of 9% Preferred Stock having the rights and preferences
set forth in Exhibit A attached hereto.
1B. Purchase and Sale of 9% Preferred Stock. At the Closing,
the Company shall sell to each Purchaser and, subject to the terms and
conditions set forth herein, each Purchaser shall purchase from the Company the
respective number of shares of 9% Preferred Stock set forth opposite such
Purchaser's name on the Schedule of Purchasers attached hereto at a price of One
Thousand Dollars ($1,000) per share.
1C. The Closing. Subject to the satisfaction of the conditions
set forth in Section 2, the closing of the transactions contemplated by Sections
1A and 1B (the "Closing") shall take place at the offices of the Company, 10
South Riverside Plaza, Chicago, Illinois 60606 at 10:00 a.m. local time on
September 26, 1996, or at such other place as may be mutually agreeable to the
Company and each Purchaser. At the Closing, the Company shall arrange to deliver
to each Purchaser stock certificates evidencing the shares of 9% Preferred Stock
to be purchased by such Purchaser, registered in such Purchaser's or its
nominee's name, upon payment of the purchase price thereof by wire transfer of
immediately available funds to the Company's account at Harris Trust and Savings
Bank, Chicago, Illinois, in the amounts set forth opposite such Purchaser's name
on the Schedule of Purchasers.
Section 2. Conditions to Each Purchaser's Obligation at the Closing.
The obligation of each Purchaser to purchase and pay for the 9% Preferred Stock
at the Closing is subject to the satisfaction as of the Closing of the following
conditions:
2A. Representations and Warranties; Covenants. The
representations and warranties contained in Section 5 hereof shall be true and
correct at and as of the Closing as though then made, except to the extent of
changes caused by the transactions expressly contemplated herein, and the
Company shall have performed in all
2
<PAGE>
material respects all of the covenants required to be performed by them
hereunder prior to the Closing.
2B. Certificate of Designations. The Company shall have duly
adopted, executed and filed with the Secretary of State of the State of Delaware
the Certificate of Designations, Powers, Rights and Preferences (the
"Certificate of Designations"), substantially in the form of Exhibit A attached
hereto, and the Company shall not have adopted or filed any other document
designating terms, relative rights or preferences of the 9% Preferred Stock or
any other preferred stock of the Company (other than that certain Amended and
Restated Certificate of Designations with respect to the Series A Preferred
Stock and the Series A-2 Preferred Stock, as contemplated by that certain
Preliminary Offering Memorandum, dated as of September 20, 1996, of the Company
(the "Preliminary Offering Memorandum"), and any certificates of elimination
with respect to the Series A Preferred Stock and the Series A-2 Preferred Stock
as may be required). The Certificate of Designations shall be in full force and
effect as of the Closing under the laws of the State of Delaware and shall not
have been amended or modified.
2C. Certificate of Incorporation. The Company's Certificate of
Incorporation shall be in full force and effect as of the Closing and shall not
have been otherwise amended or modified.
2D. Sale of 9% Preferred Stock to Each Purchaser. The Company
shall have consummated the sale to each other Purchaser of all 9% Preferred
Stock contemplated by Section 1B to be sold to each such other Purchaser and the
Company shall have arranged to tender duly executed certificates for the 9%
Preferred Stock to be purchased by such Purchaser hereunder at the Closing.
2E. Blue Sky Clearance. The Company shall have made all pre-
sale filings under applicable state securities laws necessary, if any, to
consummate the issuance of the 9% Preferred Stock pursuant to this Agreement in
compliance with such laws.
2F. Closing Documents. The Company shall deliver to each
Purchaser as promptly as practicable following the Closing all of the following
documents:
3
<PAGE>
(i) an Officer's Certificate, dated the date of the
Closing, stating that the conditions specified in Section 1 and
paragraphs 2A through 2E, inclusive, have been fully satisfied;
(ii) certified copies 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 documents
contemplated hereby, the filing of the Certificate of Designations,
the filing of the Certificate of Amendment;
(iii) certified copies of the Certificate of Incorporation
(as amended by the Certificate of Amendment), the Certificate of
Designations and the Company's by-laws, each as in effect at the
Closing;
(iv) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of
the transactions hereunder (including, without limitation, all blue
sky law filings and waivers of all preemptive rights and rights of
first refusal);
(v) duly completed and executed SBA Forms 480, 652 and Part
A of 1031; and
(vi) such other documents relating to the transactions
contemplated by this Agreement as any Purchaser or its special counsel
may reasonably request.
2G. Proceedings. All corporate and other proceedings taken or
required to be taken by the Company in connection with the transactions
contemplated hereby to be consummated at or prior to the Closing and all
documents incident thereto shall be satisfactory in form and substance to
the Purchasers and their special counsel.
4
<PAGE>
Section 3. Covenants.
---------
3A. Financial Statements and Other Information. The Company
shall deliver to any Qualified Holder (other than any such holder actively
engaged in the telecommunications industry and in good faith determined by
the Company's board of directors to be a competitor of the Company or any
of its Subsidiaries):
(i) As soon as available but in any event within 45 days
after the end of each quarterly accounting period in each fiscal year
(other than the fourth such quarterly accounting period of any 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 consolidating 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;
(ii) accompanying the financial statements referred to in
subparagraph (ii), an Officer's Certificate, in the form attached to
the First Purchase Agreement, stating that there is no Event of
Noncompliance (as defined in the First Purchase Agreement) in
existence and that neither the Company nor any of its Subsidiaries is
in default under any of its other material agreements or, if any Event
of Noncompliance or any such default exists, 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; and
a management discussion and analysis of such financial statements and
comparisons;
(iii) within the 90 days after the end of each fiscal year,
unaudited consolidating and audited consolidated statements of income
and cash flows of the Company and its Subsidiaries for such fiscal
year, and unaudit-
5
<PAGE>
ed consolidating and audited consolidated balance sheets of the
Company and its Subsidiaries as of the end of such fiscal year and
accompanied by (a) with respect to the consolidated portions of such
statements, an opinion containing no exceptions or qualifications
(except for qualifications regarding specified contingent liabilities)
of an independent accounting firm of recognized national standing, (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
an Event of Noncompliance in existence or that there was any other
default by the Company or any Subsidiary in the fulfillment of or
compliance with any of the terms, covenants, provisions or conditions
of any other material agreement to which the Company or any Subsidiary
is a party or, if such accountants have reason to believe any Event of
Noncompliance or other default by the Company or any Subsidiary
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 of the Company;
(iv) promptly upon receipt thereof, any additional reports,
management letters or other detailed information concerning
significant aspects of the Company's or its Subsidiaries' operations
or financial affairs given to the Company or its Subsidiaries by its
independent accountants (and not otherwise contained in other
materials provided hereunder);
(v) promptly (but in any event within five business days)
after the discovery or receipt of notice of any Event of
Noncompliance, any default under any material agreement to which the
Company or any of its Subsidiaries is a party or any other material
adverse event or circumstance affecting the Company or any Subsidiary
(including the filing of any material litigation against the Company
or any Sub-
6
<PAGE>
sidiary 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;
(vi) within 10 days after transmission thereof, copies of all
financial statements, proxy statements, reports and any other general
written communications that the Company sends to its stockholders and
copies of all registration statements and all regular, special or periodic
reports that it files, or any of its officers or directors file with
respect to the Company, with the Securities and Exchange Commission (the
"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 its Subsidiaries to
the public concerning material developments in the business of the Company
or its Subsidiaries;
(vii) unless included with the unaudited consolidating financial
statements otherwise delivered pursuant to this Section 3A, within 10 days
after receipt thereof, copies of all financial statements provided by USN
Communications Northeast, Inc. ("USNCN") to the Company unless such
financial statements have been forwarded to each Purchaser by USNCN; and
(viii) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any Person
entitled to receive information under this Section 3A may reasonably
request.
Each of the financial statements referred to in any of subparagraphs (i) and
(iii) shall be true and correct in all material respects as of the dates and for
the periods stated therein, be prepared in accordance with generally accepted
accounting principles consistently applied, subject in the case of the unaudited
financial statements
7
<PAGE>
to changes resulting from normal year-end audit adjustments (none of which
would, alone 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 except for the absence of
footnotes.
Notwithstanding the foregoing, the provisions of this Section 3A,
other than Section 3A(viii), shall cease to be effective so long as the Company
(a) is subject to the periodic reporting requirements of the Securities Exchange
Act of 1934, as amended (the "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 3A all reports and other materials
filed by the Company with the Commission pursuant to the periodic reporting
requirements of the Exchange Act; provided, that so long as any 9% Preferred
Stock remains outstanding, the Company shall continue to deliver to each
Qualified Holder the information specified in Sections 3A(i), 3A(iii)(b) and
3A(v).
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 Section 3A shall
use its best efforts to maintain the confidentiality of all nonpublic
information obtained by it hereunder which the Company or its Subsidiaries has
reasonably designated as proprietary or confidential in nature; provided, that
each such Person may, to the extent required by law, disclose such information
in connection with the sale or transfer of any 9% Preferred Stock if such
Person's transferee agrees in writing to be bound by the provisions hereof.
3B. Affirmative Covenants. So long as a Purchaser holds any 9%
Preferred Stock, the Company shall, and shall cause each Subsidiary to:
(i) at all times cause to be done all things necessary to
maintain, preserve and renew its corporate existence and all material
licenses, authorizations and permits necessary to the conduct of its
businesses;
8
<PAGE>
(ii) maintain and keep its properties in good repair, working
order and condition, and from time to time make all necessary or desirable
repairs, renewals and replacements, so that its businesses may be properly
and advantageously conducted at all times;
(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 (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 pursuant
to any contract or agreement, whether oral or written, express or implied,
as such obligations become due, unless and to the extent that the same are
being contested in good faith and by appropriate proceedings and 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 would reasonably be
expected to have a material adverse effect upon the financial condition,
operating results, assets, operations or business prospects of the Company
and its Subsidiaries taken as a whole;
(vi) apply for and continue in force with good and responsible
insurance companies adequate insurance covering risks of
9
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such types and in such amounts as are customary for well-insured
corporations of similar size engaged in similar lines of business; and
(vii) maintain proper books of record and account which fairly
present 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.
3C. Compliance with Agreements. The Company shall perform and observe
all of its obligations to each holder of the 9% Preferred Stock set forth in the
Certificate of Incorporation (as amended by the Certificate of Amendment), the
Certificate of Designations and the Company's by-laws.
3D. Current Public Information. At all times after the Company has
filed a registration statement with the Commission pursuant to the requirements
of either the Securities Act of 1933, as amended (the "Securities Act") or the
Exchange Act, the Company shall file all reports required to be filed by it
under the Securities Act and the Exchange Act and the rules and regulations
adopted by the Commission thereunder and shall take such further action as any
holder or holders of Restricted Securities may reasonably request, all to the
extent required to enable such holders to sell Restricted Securities pursuant to
(i) Rule 144 adopted by the 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 Commission or (ii) a registration statement on Form S-2 or S-3 or
any similar registration form hereafter adopted by the Commission. Upon request,
the Company shall deliver to any holder of Restricted Securities a written
statement as to whether it has complied with such requirements.
Section 4. Transfer of Restricted Securities.
(i) Restricted Securities are transferable only pursuant to (a)
public offerings registered under the Securities Act, (b) Rule 144 or Rule
144A of the Commission (or any
10
<PAGE>
similar rule or rules then in force) if such rule is available, and (c)
subject to the conditions specified in subparagraph (ii) below, any other
legally available means of transfer.
(ii) In connection with the transfer of any Restricted Securities
(other than a transfer described in subparagraph (i)(a) or (b) above), the
holder thereof shall (unless such requirement is waived in writing by the
Company) 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
7C. 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 subparagraph and Section 7C.
(iii) Upon the request of any holder of Restricted Securities
that are eligible for sale pursuant to Rule 144(k) together with the
delivery to the Company of an opinion of counsel that no subsequent
transfer of such Restricted Securities shall require registration under the
Securities Act, the Company shall remove the foregoing legend from the
certificates representing such holder's Restricted Securities.
11
<PAGE>
Section 5. Representations and Warranties of the Company. As a
material inducement to the Purchasers to enter into this Agreement and purchase
the 9% Preferred Stock, the Company hereby represents and warrants that:
5A. Organization and Corporate Power. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and is qualified to do business in
every jurisdiction in which its ownership of property or conduct of business
requires it to qualify. The Company has all requisite corporate power and
authority and all licenses, permits and authorizations necessary to own and
operate its properties, to carry on its businesses as now conducted and
presently proposed to be conducted and to carry out the transactions
contemplated by this Agreement. The copies of the Company's and each
Subsidiary's charter documents and by-laws that have been furnished to the
Purchasers' special counsel reflect all amendments made thereto at any time
prior to the date of this Agreement and are correct and complete.
5B. Capital Stock and Related Matters.
(i) As of the Closing and immediately thereafter, the
authorized capital stock of the Company shall be as set forth in the
Preliminary Offering Memorandum.
(ii) As of the Closing, all of the outstanding shares of the
Company's capital stock shall be validly issued, fully paid and
nonassessable.
(iii) Except as described in the Preliminary Offering
Memorandum, there are no statutory or contractual stockholders'
preemptive rights or rights of refusal with respect to the issuance of
the 9% Preferred Stock hereunder. The Company and its Subsidiaries
have not violated any applicable federal or state securities laws in
connection with the offer, sale or issuance of any of their capital
stock, and the offer, sale and issuance of the 9% Preferred Stock
hereunder does not require registration under the Securities Act or
any
12
<PAGE>
applicable state securities laws. Except as described in the Offering
Memorandum and pursuant to the Amended Stockholders Agreement, to the
best of the Company's knowledge, there are no agreements between the
stockholders of the Company or its Subsidiaries with respect to the
voting or transfer of the capital stock of the Company or its
Subsidiaries or with respect to any other aspect of the affairs of the
Company or its Subsidiaries.
5C. Authorization; No Breach. The execution, delivery and
performance of this Agreement and all other agreements contemplated hereby to
which the Company is a party, and the filing of the Certificate of Designations
and the Certificate of Amendment have been duly authorized by the Company. This
Agreement, the Certificate of Amendment, the Certificate of Incorporation, the
Certificate of Designations and all other agreements contemplated hereby each
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms, except as such enforcement may be limited by (i) any
applicable constitutional, bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect relating
to or affecting creditors' rights generally and (ii) general principles of
equity (regardless of whether enforceability is considered in a proceeding in
equity or at law. The execution and delivery by the Company of this Agreement
and all other agreements contemplated hereby to which the Company is a party,
the offering, sale and issuance of the 9% Preferred Stock hereunder, the filing
of the Certificate of Amendment and the Certificate of Designations, and the
fulfillment of and compliance with the respective terms hereof and thereof by
the Company do not and shall 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 any 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 pursuant to, the Certificate of Amendment or the
Certificate of Designations or the charter or by-laws of
13
<PAGE>
the Company or any Subsidiary, or any law, statute, rule or regulation to which
the Company or any Subsidiary is subject, or any agreement, instrument, order,
judgment or decree to which the Company or any Subsidiary is subject.
Section 6. Definitions. For the purposes of this Agreement, the
following terms have the meanings set forth below:
"Certificate of Amendment" means an amendment to the Company's
Certificate of Incorporation in the form set forth in Exhibit B hereto.
"Certificate of Designations" means the Company's Certificate of
Designations, Powers, Rights and Preferences of 9.0% Cumulative Convertible
Accruing Pay-In-Kind Preferred Stock establishing the terms and the relative
rights and preferences of the 9% Preferred Stock in the form set forth in
Exhibit A hereto.
"Certificate of Incorporation" means the Company's Amended and
Restated Certificate of Incorporation in the form set forth in Exhibit C hereto.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a limited liability company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Qualified Holder" means any (i) Purchaser, so long as such Purchaser
holds 9% Preferred Stock, or (ii) holder of at least 15% of the outstanding 9%
Preferred Stock.
"Restricted Securities" means (i) the 9% Preferred Stock issued
hereunder, and (ii) any securities issued with respect to the securities
referred to in clause (i) 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) become eligible for sale
pursuant to Rule 144 (or any similar provision
14
<PAGE>
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 in
paragraph 7C have been delivered by the Company in accordance with paragraph
4(ii). Whenever any particular securities cease to be Restricted Securities, the
holder thereof shall be entitled to receive from the Company, without expense,
new certificates representing such securities not bearing a Securities Act
legend of the character set forth in paragraph 7C.
"Subsidiary" means, with respect to any Person, any corporation,
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 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 partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses or shall be or control the managing
director or general partner of such partnership, association or other business
entity.
Section 7. Miscellaneous.
7A. Expenses. The Company agrees to pay, and hold each
Purchaser harmless against liability for the payment of, (i) the fees and
expenses of their special counsel arising in connection with the negotiation and
execution of this Agreement and the consummation of the transactions
contemplated by this Agreement which shall be payable at the Closing or, if the
Closing does not occur, payable upon demand, (ii) all out-of-pocket costs and
expenses and consultants, fees in connection with the negotiation and execution
of this Agreement and the consummation of the transactions contemplated by this
15
<PAGE>
Agreement which shall be payable at Closing or, if the Closing does not occur,
payable upon demand, (iii) the 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, the agreements contemplated hereby, the Certificate
of Incorporation (as amended by the Certificate of Amendment) or the Certificate
of Designations, (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 9% Preferred Stock, (v) the fees and expenses
incurred with respect to the enforcement of the rights granted under this
Agreement, the agreements contemplated hereby, the Certificate of Incorporation
(as amended by the Certificate of Amendment) or the Certificate of Designations,
(vi) the fees and expenses incurred by each such Person 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 or its
Subsidiaries which mentions such Person, and (vii) the reasonable fees and
expenses incurred by any such Person in connection with any transaction, claim
or event which such Person believes affects the Company or its Subsidiaries and
as to which such Person seeks advice of counsel.
7B. Remedies. Each holder of 9% Preferred Stock shall have all
rights and remedies set forth in this Agreement and the Certificate of
Incorporation (as amended by the Certificate of Amendment) and the Certificate
of Designations and all rights and remedies which such holders have been granted
at any time under any other agreement or contract and all of the rights which
such holders have 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.
7C. Purchaser's Investment Representations. Each Purchaser
hereby represents that it is an "accredited investor" within the meaning of Rule
501(a) of Regulation D promulgated under the Securities Act, 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
16
<PAGE>
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 any Purchaser and subsequent holders of Restricted Securities from
transferring such securities in compliance with the provisions of Section 4
hereof. Each certificate for Restricted Securities shall be imprinted with a
legend in substantially the following form:
"The securities represented by this certificate were originally issued on
September __, 1996, and have not been registered under the Securities Act
of 1933, as amended. The transfer of the securities represented by this
certificate is subject to the conditions specified in the Purchase
Agreement, dated as of September __, 1996, between the issuer (the
"Company") and certain investors, and the Company reserves the right to
refuse the transfer of such securities until such conditions have been
fulfilled with respect to such transfer. A copy of such conditions shall be
furnished by the Company to the holder hereof upon written request and
without charge."
7D. Purchasers' Authorization. Each Purchaser's investment
committee or similar authority has approved and authorized the consummation of
the transactions contemplated by this Agreement.
7E. Treatment of the 9% Preferred Stock. The Company covenants
and agrees that (i) so long as federal income tax laws prohibit a deduction for
distributions made by the Company with respect to preferred stock, it shall
treat all distributions paid by it on the 9% Preferred Stock as non-deductible
dividends on all of its tax returns and (ii) it shall treat the 9% Preferred
Stock as preferred stock in all of its financial statements and other reports
and shall treat all distributions paid by it on the 9% Preferred Stock as
dividends on preferred stock in such statements and reports.
7F. Consent to Amendments. Except as otherwise expressly
provided herein, the provisions of this Agreement may be amended or waived and
the Company may take any action herein prohibited, or omit to perform
17
<PAGE>
any act herein required to be performed by it, only if the Company has obtained
the written consent of the holders of not less than two-thirds of the
outstanding shares of 9% Preferred Stock. No other course of dealing between the
Company and the holder of any 9% Preferred Stock or any delay in exercising any
rights hereunder or under the Certificate of Incorporation (as amended by the
Certificate of Amendment) or the Certificate of Designations shall operate as a
waiver of any rights of any such holders.
7G. Survival of Representations and Warranties. All
representations and warranties contained 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 any Purchaser or on its behalf.
7H. Successors and Assigns. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the 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 any Purchaser's benefit as a
purchaser or holder of 9% Preferred Stock are also for the benefit of, and
enforceable by, any subsequent holder of such 9% Preferred Stock.
7I. 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 the State of Delaware) in respect of the 9% Preferred
Stock issued pursuant to this Agreement shall be equal to the aggregate par
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
the State of Delaware without the prior written consent of each of the
Purchasers.
7J. Generally Accepted Accounting Principles. Where any
accounting determination or calculation
18
<PAGE>
is required to be made under this Agreement or the exhibits hereto, such
determination or calculation (unless otherwise provided) shall be made in
accordance with generally accepted accounting principles, consistently applied,
except that if because of a change in generally accepted accounting principles
the Company would have to alter a previously utilized accounting method or
policy in order to remain in compliance with generally accepted accounting
principles, such determination or calculation shall continue to be made in
accordance with the Company's previous accounting methods and policies, unless
otherwise directed by each of the Purchasers.
7K. 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.
7L. Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
7M. Descriptive Headings; Interpretation. The descriptive
headings of this Agreement are inserted for convenience only and do not
constitute a Section of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
7N. Governing Law. The corporate law of the State of Delaware
shall govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity and
interpretation of this Agreement and the exhibits and schedules hereto shall be
governed by the internal law, and not the law of conflicts, of the State of New
York.
7O. 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 when
19
<PAGE>
delivered personally to the recipient, dispatched by telegram or electronic
facsimile transmission (confirmed in writing by mail simultaneously dispatched),
sent to the recipient by reputable express courier service (charges prepaid) or
mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
shall be sent to each Purchaser at the address indicated on the Schedule of
Purchasers and to the Company at the address indicated below:
United USN, Inc.
10 South Riverside Plaza, Suite 316
Chicago, Illinois 60606
Attention: Secretary
Telephone: (312) 906-3600
Facsimile: (312) 906-3636
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
7P. Understanding Among the Purchasers. The determination of
each Purchaser to purchase the 9% Preferred Stock pursuant to this Agreement has
been made by such Purchaser independent of any other 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 and its Subsidiaries which may have been made or given by any other
Purchaser or by any agent or employee of any other Purchaser.
7Q. Indemnification. The Company agrees to indemnify and hold
each Purchaser harmless against and in respect of any and all direct out-of-
pocket damages, losses, liabilities, obligations, costs and expenses (including
reasonable attorneys' fees) which the Purchasers, or any of them, may suffer or
incur as a result of a breach of any of the representations, warranties or
agreements by the Company set forth herein (notwithstanding any investigations
or verifications made by or on behalf of the Purchasers).
7R. Right to Rescind. Notwithstanding anything to the contrary
contained in this Agreement, in the event that the transactions contemplated by
the
20
<PAGE>
Preliminary Offering Memorandum (specifically, the sale and settlement thereof
with respect to the securities of the Company offered by the Preliminary
Offering Memorandum) shall not have been consummated on or prior to December 31,
1996 or shall have been abandoned, the Company has the absolute right to rescind
and reverse the effect of the sales of the shares of 9% Preferred Stock and the
other transactions contemplated by this Agreement and, upon such rescission and
reversal, this Agreement shall terminate and be of no further force or effect.
* * * * *
21
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
UNITED USN, INC.
------------------------------------
By: J. Thomas Elliott
Its: President and Chief Executive
Officer
BT CAPITAL PARTNERS, INC.
------------------------------------
By:
---------------------------------
Its:
--------------------------------
CIBC WOOD GUNDY VENTURES, INC.
------------------------------------
By:
---------------------------------
Its:
--------------------------------
CHASE CAPITAL PARTNERS
------------------------------------
By:
---------------------------------
Its:
--------------------------------
22
<PAGE>
HANCOCK VENTURE PARTNERS IV -
DIRECT FUND, L.P.
By: Back Bay Partners XII L.P.
By: Hancock Venture Partners, Inc.
------------------------------------
By:
---------------------------------
Its:
--------------------------------
NORTHWOOD CAPITAL PARTNERS LLC
------------------------------------
By:
---------------------------------
Its:
--------------------------------
NORTHWOOD VENTURES
------------------------------------
By:
---------------------------------
Its:
--------------------------------
ENTERPRISES &
TRANSCOMMUNICATIONS, L.P.
------------------------------------
By:
---------------------------------
Its:
--------------------------------
23
<PAGE>
SCHEDULE OF PURCHASERS
----------------------
<TABLE>
<CAPTION>
No. of Total Purchase
Shares of 9% Price for 9%
Name and Addresses Preferred Stock Preferred Stock
- ---------------------------------- ---------------- ---------------
<S> <C> <C>
BT Capital Partners, Inc. 1,797.429 $ 1,797,429
130 Liberty Street
New York, New York 10006
Chase Capital Partners 2,426.437 2,426,437
380 Madison Avenue, 12th Floor
New York, New York 10017-2070
CIBC Wood Gundy Ventures, Inc. 2,426.437 2,426,437
425 Lexington Avenue
New York, New York 10017-3903
Hancock Venture Partners IV - 2,395.464 2,395,464
Direct Fund, L.P.
One Financial Center, 44th Floor
Boston, Massachusetts 02111
Northwood Capital Partners LLC
485 Underhill Boulevard
Syosset, New York 11791 (
(356.813 356,813
Northwood Ventures (
485 Underhill Boulevard
Syosset, New York 11791
Enterprises & 597.420 597,420
Transcommunications, L.P.
3000 One American Center
600 Congress Avenue
Austin, Texas 78701
Total ---------- -----------
10,000 $10,000,000
========== ===========
24
</TABLE>
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1994 1995 1995 1996
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Income (loss) before
cumulative effects of
accounting changes...... $(7,146,789) $(18,097,026) $(12,547,402) $(7,219,144)
Income tax expense
(benefit)............... -- -- -- --
----------- ------------ ------------ -----------
Income (loss) before
income taxes............ (7,146,789) (18,097,026) (12,547,402) (7,219,144)
Fixed charges included in
income:
Interest and related
charges on debt....... 9,379 132,095 83,254 19,893
Portion of rentals
deemed to be interest. 16,731 601,471 416,403 26,064
----------- ------------ ------------ -----------
Total fixed charges
included in income...... 26,110 733,566 499,657 45,957
----------- ------------ ------------ -----------
Earnings available for
fixed charges........... $(7,120,679) $(17,363,460) $(12,047,745) $(7,173,187)
=========== ============ ============ ===========
Fixed Charges:
Fixed charges included
in income............. $ 26,110 $ 733,566 $ 499,657 $ 45,957
Interest capitalized in
the period............ -- -- -- --
----------- ------------ ------------ -----------
Total fixed charges...... $ 26,110 $ 733,566 $ 499,657 $ 45,957
=========== ============ ============ ===========
Ratio of earnings to
fixed charges........... -- -- -- --
=========== ============ ============ ===========
</TABLE>
<PAGE>
Exhibit 23.1
[Letterhead of Deloitte & Touche LLP]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement, dated November 15, 1996,
of United USN, Inc. on Form S-4, of our report dated March 15, 1996,
accompanying the consolidated financial statements of United USN, Inc. and
subsidiaries, appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected Historical
Consolidated Financial and Operating Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
November 15, 1996
Chicago, Illinois
<PAGE>
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
Statement of Eligibility
Under the Trust Indenture Act of 1939
of a Corporation Designated to Act as Trustee
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2) ______
HARRIS TRUST AND SAVINGS BANK
(Name of Trustee)
Illinois 36-1194448
(State of Incorporation) (I.R.S. Employer Identification No.)
111 West Monroe Street, Chicago, Illinois 60603
(Address of principal executive offices)
Judith Bartolini, Harris Trust and Savings Bank,
311 West Monroe Street, Chicago, Illinois, 60606
312-461-2527 phone 312-461-3525 facsimile
(Name, address and telephone number for agent for service)
UNITED USN, INC.
(Name of obligor)
Delaware 36-3947804
(State of Incorporation) (I.R.S. Employer Identification No.)
10 South Riverside Plaza
Suite 401
Chicago, Illinois 60606-3709
(Address of principal executive offices)
Debt Securities
(Title of indenture securities)
<PAGE>
1. GENERAL INFORMATION. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Commissioner of Banks and Trust Companies, State of Illinois,
Springfield, Illinois; Chicago Clearing House Association, 164 West
Jackson Boulevard, Chicago, Illinois; Federal Deposit Insurance
Corporation, Washington, D.C.; The Board of Governors of the Federal
Reserve System,Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Harris Trust and Savings Bank is authorized to exercise corporate
trust powers.
2. AFFILIATIONS WITH OBLIGOR. If the Obligor is an affiliate of the Trustee,
describe each such affiliation.
The Obligor is not an affiliate of the Trustee.
3. thru 15.
NO RESPONSE NECESSARY
16. LIST OF EXHIBITS.
1. A copy of the articles of association of the Trustee is now in effect
which includes the authority of the trustee to commence business and to
exercise corporate trust powers.
A copy of the Certificate of Merger dated April 1, 1972 between Harris
Trust and Savings Bank, HTS Bank and Harris Bankcorp, Inc. which
constitutes the articles of association of the Trustee as now in effect
and includes the authority of the Trustee to commence business and to
exercise corporate trust powers was filed in connection with the
Registration Statement of Louisville Gas and Electric Company, File No.
2-44295, and is incorporated herein by reference.
2. A copy of the existing by-laws of the Trustee.
A copy of the existing by-laws of the Trustee was filed in connection
with the Registration Statement of C-Cube Microsystems Inc., File No.
33-97166, and is incorporated herein by reference.
3. The consents of the Trustee required by Section 321(b) of the Act.
(included as Exhibit A on page 2 of this statement)
4. A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority.
(included as Exhibit B on page 3 of this statement)
1
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
HARRIS TRUST AND SAVINGS BANK, a corporation organized and existing under the
laws of the State of Illinois, has duly caused this statement of eligibility to
be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of Chicago, and State of Illinois, on the 14th day of November, 1996.
HARRIS TRUST AND SAVINGS BANK
By: /s/ J. Bartolini
-----------------------------
J. Bartolini
Vice President
EXHIBIT A
The consents of the trustee required by Section 321(b) of the Act.
Harris Trust and Savings Bank, as the Trustee herein named, hereby consents that
reports of examinations of said trustee by Federal and State authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
request therefor.
HARRIS TRUST AND SAVINGS BANK
By: /s/ J. Bartolini
-----------------------------
J. Bartolini
Vice President
2
<PAGE>
EXHIBIT B
Attached is a true and correct copy of the statement of condition of Harris
Trust and Savings Bank as of September 30, 1996, as published in accordance with
a call made by the State Banking Authority and by the Federal Reserve Bank of
the Seventh Reserve District.
[LOGO OF HARRIS BANK]
Harris Trust and Savings Bank
111 West Monroe Street
Chicago, Illinois 60603
of Chicago, Illinois, And Foreign and Domestic Subsidiaries, at the close of
business on September 30, 1996, a state banking institution organized and
operating under the banking laws of this State and a member of the Federal
Reserve System. Published in accordance with a call made by the Commissioner of
Banks and Trust Companies of the State of Illinois and by the Federal Reserve
Bank of this District.
Bank's Transit Number 71000288
<TABLE>
<CAPTION>
THOUSANDS
ASSETS OF DOLLARS
<S> <C> <C>
Cash and balances due from depository institutions:
Non-interest bearing balances and currency and coin............... $ 1,751,494
Interest bearing balances......................................... $ 839,856
Securities:.................................................................
a. Held-to-maturity securities $ 0
b. Available-for-sale securities $ 3,137,919
Federal funds sold and securities purchased under agreements to resell in
domestic offices of the bank and of its Edge and Agreement
subsidiaries, and in IBF's:
Federal funds sold................................................ $ 478,625
Securities purchased under agreements to resell................. $ 0
Loans and lease financing receivables:
Loans and leases, net of unearned income.......................... $ 7,897,067
LESS: Allowance for loan and lease $ 108,949
losses........................................ -----------
Loans and leases, net of unearned income, allowance, and reserve
(item 4.a minus 4.b).............................................. $ 7,788,118
Assets held in trading accounts............................................. $ 74,302
Premises and fixed assets (including capitalized leases).................... $ 172,267
Other real estate owned..................................................... $ 142
Investments in unconsolidated subsidiaries and associated companies......... $ 60
Customer's liability to this bank on acceptances outstanding................ $ 100,950
Intangible assets........................................................... $ 299,478
Other assets................................................................ $ 563,022
-----------
TOTAL ASSETS $15,206,233
===========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
Deposits:
In domestic offices............................................................. $ 8,013,146
Non-interest bearing...................................................... $3,248,897
Interest bearing.......................................................... $4,764,249
In foreign offices, Edge and Agreement subsidiaries,
and IBF's.................................................................... $ 2,055,520
Non-interest bearing...................................................... $ 32,775
Interest bearing.......................................................... $2,022,745
Federal funds purchased and securities sold under agreements
to repurchase in domestic offices of the bank and of
its Edge and Agreement subsidiaries, and in IBF's:
Federal funds purchased................................................... $ 886,457
Securities sold under agreements to repurchase............................ $ 1,841,475
Trading Liabilities............................................................... $ 40,157
Other borrowed money:
a. With remaining maturity of one year or less................................... $ 606,331
b. With remaining maturity of more than one year................................. $ 9,434
Bank's liability on acceptances executed and outstanding.......................... $ 100,950
Subordinated notes and debentures................................................. $ 310,000
Other liabilities................................................................. $ 186,408
---------------------------
TOTAL LIABILITIES................................................................. $14,049,878
===========================
EQUITY CAPITAL
Common stock...................................................................... $ 100,000
Surplus........................................................................... $ 600,295
a. Undivided profits and capital reserves....................................... $ 486,054
b. Net unrealized holding gains (losses)
on available-for-sale securities........................................... ($29,994)
===========================
TOTAL EQUITY CAPITAL.............................................................. $ 1,156,355
===========================
Total liabilities, limited-life
preferred stock, and equity capital............................................. $15,206,233
===========================
</TABLE>
I, Steve Neudecker, Vice President of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System and
is true to the best of my knowledge and belief.
STEVE NEUDECKER
10/30/96
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and, to the best of our
knowledge and belief, has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and the
Commissioner of Banks and Trust Companies of the State of Illinois and is true
and correct.
EDWARD W. LYMAN,
ALAN G. McNALLY,
MARIBETH S. RAHE
Directors.
4
<PAGE>
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
14% SENIOR DISCOUNT NOTES DUE 2003
OF
UNITED USN, INC.
PURSUANT TO THE PROSPECTUS DATED , 1996
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED.
TO: HARRIS TRUST COMPANY OF NEW YORK, AS EXCHANGE AGENT
By Registered or By Overnight Courier: By Hand:
Certified Mail: Harris Trust Company of New York
Harris Trust Company of
Harris Trust Company of 77 Water Street, 4th Floor New York
New York New York, NY 10005 Receive Window
Wall Street Station 77 Water Street, 5th
P.O. Box 1010 Floor
New York, NY 10268-1010 New York, NY
By Facsimile:
(212) 701-7636
(212) 701-7637
Confirm by telephone:
(212) 701-7618
Delivery of this instrument to an address other than as set forth above or
transmission of instructions via a facsimile number other than the one listed
above will not constitute a valid delivery. The instructions accompanying this
Letter of Transmittal should be read carefully before this Letter of
Transmittal is completed.
The undersigned acknowledges that he or she has received the Prospectus,
dated , 1996 (the "Prospectus"), of United USN, Inc. (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together constitute the Company's offer (the "Exchange Offer") to exchange its
14% Series B Senior Discount Notes due 2003 (the "New Notes") for an equal
principal amount of its 14% Senior Discount Notes due 2003 (the "Old Notes"
and, together with the New Notes, the "Notes"). The terms of the New Notes are
identical in all material respects to the Old Notes, except that the New Notes
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), and, therefore, will not bear legends restricting their
transfer and will not contain certain provisions relating to an increase in
the interest rate which were included in the Old Notes under certain
circumstances relating to the timing of the Exchange Offer. The term
"Expiration Date" shall mean 5:00 p.m., New York City time, on ,
1997, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term shall mean the latest date and time to which the
Exchange Offer is extended. Capitalized terms used but not defined herein have
the meaning given to them in the Prospectus.
The Letter of Transmittal is to be used by Holders of Old Notes if
certificates are to be forwarded herewith. Holders of Old Notes whose
certificates are not immediately available, or who are unable to deliver their
certificates and all other documents required by this Letter of Transmittal to
the Exchange Agent on or prior to the Expiration Date, must tender their Old
Notes according to the guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. See
Instruction 1.
<PAGE>
The term "Holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with
respect to the Exchange Offer. Holders who wish to tender their Old Notes must
complete this Letter of Transmittal in its entirety.
The undersigned acknowledges that if it is a broker-dealer holding Old Notes
acquired for its own account as a result of market-making activities or other
trading activities (other than Old Notes acquired directly from the Company),
such Holder may be deemed to be an "Underwriter" within the meaning of the
Securities Act and, therefore, must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of New Notes
received in respect of such Old Notes pursuant to the Exchange Offer.
Notwithstanding the foregoing, the undersigned shall not be deemed to admit
that it is an "Underwriter" within the meaning of such term under the
Securities Act.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THE LETTER OF TRANSMITTAL
DESCRIPTION OF 14% SENIOR DISCOUNT NOTES DUE 2003
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL AMOUNT
PRINCIPAL TENDERED (MUST
NAMES AND ADDRESS(ES) OF AMOUNT BE IN INTEGRAL
REGISTERED HOLDER(S) CERTIFICATE REPRESENTED BY MULTIPLES
(PLEASE FILL IN, IF BLANK) NUMBER(S) CERTIFICATE(S) OF $1,000)*
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Total
- -----------------------------------------------------------------------------------------------
</TABLE>
*Unless indicated in the column labeled "Principal Amount Tendered," any
tendering Holder of 14% Senior Discount Notes due 2003 will be deemed to
have tendered the entire aggregate principal amount represented by the
column labeled "Aggregate Principal Amount Represented by Certificate(s)."
If the space provided above is inadequate, list the certificate numbers and
principal amounts on a separate signed schedule and affix the list to this
Letter of Transmittal.
The minimum permitted tender is $1,000 in principal amount. All other tenders
must be integral multiples of $1,000.
[_]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING (SEE INSTRUCTION 1):
Name(s) of Registered Holder(s) ____________________________________________
Window Ticket Number (if any) ______________________________________________
Date of Execution of Notice of Guaranteed Delivery _________________________
Name of Institution which Guaranteed Delivery ______________________________
[_]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
----------------------------------------------------------------------
2
<PAGE>
SPECIAL REGISTRATION INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6) (SEE INSTRUCTIONS 4, 5 AND 6)
To be completed ONLY if To be completed ONLY if
certificates for Old Notes in a certificates for Old Notes in a
principal amount not tendered, or principal amount not tendered, or
New Notes issued in exchange for New Notes issued in exchange for
Old Notes accepted for exchange, Old Notes accepted for exchange,
are to be issued in the name of are to be sent to someone other
someone other than the than the undersigned, or to the
undersigned. undersigned at an address other
than that shown above.
Issue certificate(s) to:
Deliver certificate(s) to:
Name: _____________________________
(Please Print) Name: _____________________________
(Please Print)
Address: __________________________
Address: __________________________
-----------------------------------
(Include Zip Code) -----------------------------------
(Include Zip Code)
-----------------------------------
(Tax Identification or Social -----------------------------------
Security No.) (Tax Identification or Social
Security No.)
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company the principal amount of Old Notes indicated
above. Subject to and effective upon the acceptance for exchange of the
principal amount of Old Notes tendered in accordance with this Letter of
Transmittal, the undersigned sells, assigns and transfers to, or upon the
order of, the Company all right, title and interest in and to the Old Notes
tendered hereby. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent its agent and attorney-in-fact (with full knowledge that
the Exchange Agent also acts as the agent of the Company) with respect to the
tendered Old Notes with full power of substitution to (i) deliver certificates
for such Old Notes to the Company and deliver all accompanying evidences of
transfer and authenticity to, or upon the order of, the Company and (ii)
present such Old Notes for transfer on the books of the Company and receive
all benefits and otherwise exercise all rights of beneficial ownership of such
Old Notes, all in accordance with the terms of the Exchange Offer. The power
of attorney granted in this paragraph shall be deemed to be irrevocable and
coupled with an interest.
The undersigned hereby represents and warrants that he or she has full power
and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim, when the same are acquired by the Company. The
undersigned and any beneficial owner of Old Notes hereby further represent
that any New Notes acquired in exchange for Old Notes tendered hereby will
have been acquired in the ordinary course of business of the undersigned and
any such beneficial owner of Old Notes receiving such New Notes, that neither
the Holder nor any such beneficial owner is participating in, intends to
participate in or has an arrangement or understanding with any person to
participate in the distribution of such New Notes and that neither the Holder
nor any such beneficial owner is an "affiliate," as defined in Rule 405 under
the Securities Act, of the Company. The undersigned and each beneficial owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the New Notes must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any secondary resale transactions of the New Notes acquired by such person and
may not rely on the position of the Staff of the Securities and Exchange
Commission set forth in the no-action letters discussed in the Prospectus
under the caption "The Exchange Offer." If the undersigned is not a broker-
dealer, the undersigned represents that it is
3
<PAGE>
not engaged in, and does not intend to engage in, a public distribution of New
Notes. The undersigned and each beneficial owner will, upon request, execute
and deliver any additional documents deemed by the Exchange Agent or the
Company to be necessary or desirable to complete the assignment, transfer and
purchase of the Old Notes tendered hereby.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
or written notice thereof to the Exchange Agent.
If any tendered Old Notes are not accepted for exchange pursuant to the
Exchange Offer for any reason, certificates for any such unaccepted Old Notes
will be returned, without expense, to the undersigned at the address shown
below or at a different address as may be indicated herein under "Special
Delivery Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer, subject only to withdrawal of
such tenders on the terms set forth in the Prospectus under the caption "The
Exchange Offer--Withdrawal of Tenders."
Unless otherwise indicated under "Special Registration Instructions," please
issue the certificates representing the New Notes issued in exchange for the
Old Notes accepted for exchange and any certificates for Old Notes not
tendered or not exchanged, in the name(s) of the undersigned. Similarly,
unless otherwise indicated under "Special Delivery Instructions," please send
the certificates representing the New Notes issued in exchange for the Old
Notes accepted for exchange and any certificates for Old Notes not tendered or
not exchanged (and accompanying documents, as appropriate) to the undersigned
at the address shown below the undersigned's signature(s). In the event that
both "Special Registration Instructions" and "Special Delivery Instructions"
are completed, please issue the certificates representing the New Notes issued
in exchange for the Old Notes accepted for exchange in the name(s) of, and
return any certificates for Old Notes not tendered or not exchanged to, the
person(s) so indicated. The undersigned understands that the Company has no
obligation pursuant to the "Special Registration Instructions" and "Special
Delivery Instructions" to transfer any Old Notes from the name of the
registered Holder(s) thereof if the Company does not accept for exchange any
of the Old Notes so tendered.
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their certificates and all other
documents required by this Letter of Transmittal to the Exchange Agent prior
to the Expiration Date, may tender their Old Notes according to the guaranteed
delivery procedures set forth in the Prospectus under the caption "The
Exchange Offer--Guaranteed Delivery Procedures." See Instruction 1 regarding
the completion of this Letter of Transmittal printed below.
4
<PAGE>
PLEASE SIGN HERE WHETHER OR NOT
OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
X Date:____________________
--------------------------------------------------
X Date:____________________
--------------------------------------------------
Signature(s) of Registered Holder(s) or Authorized Signatory
Area Code and Telephone Number: _____________________________________________
The above lines must be signed by the registered holder(s) as their
name(s) appear(s) on the Old Notes or by person(s) authorized to become
registered holder(s) by a properly completed bond power from the registered
holder(s), a copy of which must be transmitted with this Letter of
Transmittal. If the Old Notes to which this Letter of Transmittal relate are
held of record by two or more joint holders, then all such holders must sign
this Letter of Transmittal. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, then such person
must (i) set forth his or her full title below and (ii) unless waived by the
Company, submit evidence satisfactory to the Company of such person's
authority so to act. See Instruction 4 regarding the completion of this
Letter of Transmittal printed below.
Name(s): ____________________________________________________________________
(Please Print)
-----------------------------------------------------------------------------
Capacity: ___________________________________________________________________
Address: ____________________________________________________________________
(Include Zip Code)
Signature(s) Guaranteed by an Eligible Institution:
(If required by Instruction 4)
-----------------------------------------------------------------------------
(Authorized Signature)
-----------------------------------------------------------------------------
(Title)
-----------------------------------------------------------------------------
(Name of Firm)
Date: ___________________
5
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES; GUARANTEED DELIVERY
PROCEDURES. The tendered Old Notes as well as a properly completed and duly
executed copy of this Letter of Transmittal or facsimile hereof and any other
documents required by this Letter of Transmittal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. The method of delivery of the tendered Old
Notes, this Letter of Transmittal and all other required documents to the
Exchange Agent is at the election and risk of the Holder and, except as
otherwise provided below, the delivery will be deemed made only when actually
received by the Exchange Agent. Instead of delivery by mail, it is recommended
that the Holder use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure timely delivery. No Letter of
Transmittal or Old Notes should be sent to the Company.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter
of Transmittal or any other documents required hereby to the Exchange Agent
prior to the Expiration Date must tender their Old Notes according to the
guaranteed delivery procedures set forth in the Prospectus. Pursuant to such
procedure: (a) such tender must be made by or through an Eligible Institution
(defined below); (b) prior to the Expiration Date, the Exchange Agent must
have received from the Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile transmission, mail or
hand delivery) setting forth the name and address of the Holder, the
certificate number or numbers of such Old Notes and the principal amount of
Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after the
Expiration Date, this Letter of Transmittal (or facsimile hereof) together
with the certificate(s) representing the Old Notes and any other required
documents will be deposited by the Eligible Institution with the Exchange
Agent; and (c) such properly completed and executed Letter of Transmittal (or
facsimile hereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer and all other documents required by this
Letter of Transmittal must be received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date, all as provided in
the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures." Any Holder who wishes to tender his or her Old Notes pursuant to
the guaranteed delivery procedures described above must ensure that the
Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m.,
New York City time, on the Expiration Date. Upon request to the Exchange
Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to
tender their Old Notes according to the guaranteed delivery procedures set
forth above.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes, and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
irregularities or conditions of tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in this Letter of Transmittal) shall be firm and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor shall any of them
incur any liability for failure to give such notification. Tenders of Old
Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.
6
<PAGE>
2. TENDER BY HOLDER. Only a Holder of Old Notes may tender such Old Notes in
the Exchange Offer. Any beneficial owner of Old Notes who is not the
registered holder and who wishes to tender should arrange with such registered
holder to execute and deliver this Letter of Transmittal on such owner's
behalf or must, prior to completing and executing this Letter of Transmittal
and delivering his or her Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's name or obtain a properly
completed bond power from the registered holder.
3. PARTIAL TENDERS. Tenders of Old Notes will be accepted only in integral
multiples of $1,000. If less than the entire principal amount of any Old Notes
is tendered, the tendering Holder should fill in the principal amount tendered
in the fourth column of the box entitled "Description of 14% Senior Discount
Notes due 2003" above. The entire principal amount of any Old Notes delivered
to the Exchange Agent will be deemed to have been tendered unless otherwise
indicated. If the entire principal amount of all Old Notes is not tendered,
then Old Notes for the principal amount of Old Notes not tendered and a
certificate or certificates representing New Notes issued in exchange for any
Old Notes accepted will be sent to the Holder at his or her registered
address, unless a different address is provided in the appropriate box on this
Letter of Transmittal, promptly after the Old Notes are accepted for exchange.
4. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile hereof)
is signed by the registered holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered holder or holders of Old Notes tendered and the certificate or
certificates for New Notes issued in exchange therefor is to be issued (or any
untendered principal amount of Old Notes is to be reissued) to the registered
holder and neither the "Special Delivery Instructions" nor the "Special
Registration Instructions" has been completed, then such holder need not and
should not endorse any tendered Old Notes, nor provide a separate bond power.
In any other case, such holder must either properly endorse the Old Notes
tendered or transmit a properly completed separate bond power with this Letter
of Transmittal with the signatures on the endorsement or bond power guaranteed
by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered holder or holders of any Old Notes listed, such Old
Notes must be endorsed or accompanied by appropriate bond powers in each case
signed as the name of the registered holder or holders appears on the Old
Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, evidence satisfactory to the Company of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 4 must be guaranteed by an Eligible Institution which is a member
of (a) the Securities Transfer Agents Medallion Program, (b) the New York
Stock Exchange Medallion Signature Program or (c) the Stock Exchange Medallion
Program.
Except as otherwise provided below, all signatures on this Letter of
Transmittal must be guaranteed by a firm that is a member of a registered
national securities exchange or the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934,
as amended (an "Eligible Institution"). Signatures on this Letter of
Transmittal need not be guaranteed if (a) this Letter of Transmittal is signed
by the registered holder(s) of the Old Notes tendered herewith and such
holder(s) have not completed the box set forth herein entitled "Special
Registration Instructions" or the box entitled "Special Delivery Instructions"
or (b) such Old Notes are tendered for the account of an Eligible Institution.
7
<PAGE>
5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering Holders should
indicate, in the applicable box or boxes, the name and address to which New
Notes or substitute Old Notes for principal amounts not tendered or not
accepted for exchange are to be issued or sent, if different from the name and
address of the person signing this Letter of Transmittal. In the case of
issuance in a different name, the taxpayer identification or social security
number of the person named must also be indicated.
6. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are
to be registered in the name of, any person other than the registered holder
of the Old Notes tendered hereby, or if tendered Old Notes are registered in
the name of any person other than the person signing this Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Old Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or on any other
persons) will be payable by the tendering Holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with this Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering Holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
7. WAIVER OF CONDITIONS. The Company reserves the right, in its sole
discretion, to amend, waive or modify specified conditions in the Exchange
Offer in the case of any Old Notes tendered.
8. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus or this Letter
of Transmittal may be directed to the Exchange Agent at the address specified
in the Prospectus. Holders may also contact their broker, dealer, commercial
bank, trust company or other nominee for assistance concerning the Exchange
Offer.
(DO NOT WRITE IN SPACE BELOW)
<TABLE>
<CAPTION>
CERTIFICATE
SURRENDERED OLD NOTES TENDERED OLD NOTES ACCEPTED
- ------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------
</TABLE>
Delivery Prepared by Checked by Date
8
<PAGE>
UNITED USN, INC.
NOTICE OF GUARANTEED DELIVERY
OF
14% SENIOR DISCOUNT NOTES DUE 2003
As set forth in the Prospectus, dated , 1996 (as the same may be
amended from time to time, the "Prospectus"), of United USN, Inc. (the
"Company") under the caption "The Exchange Offer--Guaranteed Delivery
Procedures," this form or one substantially equivalent hereto must be used to
accept the Company's offer (the "Exchange Offer") to exchange its 14% Series B
Senior Discount Notes due 2003 (the "New Notes"), which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), for an
equal principal amount of its 14% Senior Discount Notes due 2003 (the "Old
Notes"), if (i) certificates representing the Old Notes to be exchanged are
not lost but are not immediately available or (ii) time will not permit all
required documents to reach the Exchange Agent prior to the Expiration Date.
This form may be delivered by an Eligible Institution by mail or hand delivery
or transmitted, via facsimile, to the Exchange Agent at its address set forth
below not later than 5:00 p.m., New York City Time, on , 1997.
All capitalized terms used herein but not defined herein shall have the
meanings ascribed to them in the Prospectus.
The Exchange Agent is:
HARRIS TRUST COMPANY OF NEW YORK
By Registered or By Overnight Courier: By Hand:
Certified Mail: Harris Trust Company of New York
Harris Trust Company of
Harris Trust Company of 77 Water Street, 4th Floor New York
New York New York, NY 10005 Receive Window
Wall Street Station 77 Water Street, 5th
P.O. Box 1010 Floor
New York, NY 10268-1010 New York, NY
By Facsimile:
(212) 701-7636
(212) 701-7637
Confirm by telephone:
(212) 701-7618
DELIVERY, OR TRANSMISSION VIA FACSIMILE, OF THIS INSTRUMENT TO AN ADDRESS
OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
The undersigned hereby tender(s) for exchange to the Company, upon the terms
and subject to the conditions set forth in the Prospectus and Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes set forth below pursuant to the guaranteed delivery procedures set
forth in the Prospectus under the caption "The Exchange Offer--Guaranteed
Delivery Procedures."
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on , 1997, unless
extended by the Company. With respect to the Exchange Offer, "Expiration Date"
means such time and date, or if the Exchange Offer is extended, the latest
time and date to which the Exchange Offer is so extended by the Company.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Notice of Guaranteed
Delivery shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
<PAGE>
Principal Amount of Old Notes
Exchanged: $ ________________________
SIGNATURES
Certificate Nos. of Old Notes (if
available)
-----------------------------------
Signature of Owner
-------------------------------------
-----------------------------------
Signature of Owner (if more than -------------------------------------
one)
Total $ _____________________________
Dated:
IF OLD NOTES WILL BE DELIVERED BY
Name(s): __________________________ BOOK-ENTRY TRANSFER, PROVIDE THE DE-
POSITORY TRUST COMPANY ("DTC") AC-
COUNT NO.:
----------------------------
(Please Print)
Account No.: ________________________
Address: __________________________
-----------------------------
-----------------------------
(Include Zip Code)
Area Code and
Telephone No. _____________________
Capacity (full title), if signing
in a
representative capacity____________
Taxpayer Identification or
Social Security No.: ______________
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., or is a commercial bank or trust company having an office or
correspondent in the United States, or is otherwise an "eligible guaranteed
institution" within the meaning of Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended, guarantees deposit with the Exchange Agent of the
Letter of Transmittal (or facsimile thereof), together with the Old Notes
tendered hereby in proper form for transfer (or confirmation of the book-entry
transfer of such Old Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility described in the Prospectus under the caption "The Exchange
Offer--Guaranteed Delivery Procedures" and in the Letter of Transmittal) and
any other required document, all by 5.00 p.m., New York City time, on the
fifth New York Stock Exchange trading day following the Expiration Date.
Name of Firm: _______________________ -------------------------------------
Authorized Signature
Address: ____________________________
Name: _______________________________
- -------------------------------------
Title: ______________________________
Area Code and Telephone No.: ________
Date: _______________________________
NOTE: DO NOT SEND OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF OLD NOTES
MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, THE LETTER OF TRANSMITTAL.
2
<PAGE>
UNITED USN, INC.
OFFER TO EXCHANGE ITS
14% SERIES B SENIOR DISCOUNT NOTES DUE 2003
FOR ANY AND ALL OF ITS OUTSTANDING
14% SENIOR DISCOUNT NOTES DUE 2003
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997 UNLESS EXTENDED.
To Brokers, Dealers, Commercial Banks, , 1996
Trust Companies and Other Nominees:
United USN, Inc., a Delaware corporation, (the "Company") is offering upon
the terms and conditions set forth in the Prospectus, dated , 1996
(as the same may be amended from time to time, the "Prospectus"), and in the
related Letter of Transmittal enclosed herewith, to exchange (the "Exchange
Offer") its 14% Series B Senior Discount Notes due 2003 (the "New Notes") for
an equal principal amount of its 14% Senior Discount Notes due 2003 (the "Old
Notes" and together with the New Notes, the "Notes"). As set forth in the
Prospectus, the terms of the New Notes are identical in all material respects
to the Old Notes, except for certain transfer restrictions relating to the Old
Notes and except that the New Notes will not contain certain provisions
relating to an increase in the interest rate which were included in the Old
Notes under certain circumstances relating to the timing of the Exchange
Offer. Old Notes may only be tendered in integral multiples of $1,000.
THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE "THE EXCHANGE
OFFER--CONDITIONS" IN THE PROSPECTUS.
Enclosed herewith for your information and forwarding to your clients are
copies of the following documents:
1. The Prospectus, dated , 1996.
2. The Letter of Transmittal to exchange Notes for your use and for the
information of your clients. Facsimile copies of the Letter of Transmittal
may be used to exchange Notes.
3. A form of letter which may be sent to your clients for whose accounts
you hold Old Notes registered in your name or in the name of your nominee,
with space provided for obtaining such client's instructions with regard to
the Exchange Offer.
4. A Notice of Guaranteed Delivery.
5. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9.
6. A return envelope addressed to Harris Trust Company of New York, the
Exchange Agent.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS
PROMPTLY AS POSSIBLE. PLEASE NOTE THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED. PLEASE FURNISH COPIES
OF THE ENCLOSED MATERIALS TO THOSE OF YOUR CLIENTS FOR WHOM YOU HOLD OLD NOTES
REGISTERED IN YOUR NAME OR IN THE NAME OF YOUR NOMINEE AS QUICKLY AS POSSIBLE.
In all cases, exchanges of Old Notes accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(a) certificates representing such Old Notes, (b) the Letter of Transmittal
(or facsimile thereof) properly completed and duly executed with any required
signature guarantees, and (c) any other documents required by the Letter of
Transmittal.
<PAGE>
If holders of Old Notes wish to tender, but it is impracticable for them to
forward their certificates for Old Notes prior to the expiration of the
Exchange Offer or to comply with the book-entry transfer procedures on a
timely basis, a tender may be offered by following the guaranteed delivery
procedure described in the Prospectus under "The Exchange Offer--Guaranteed
Delivery Procedures."
The Exchange Offer is not being made to (nor will tenders be accepted from
or on behalf of) holders of Old Notes residing in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
The Company will not pay any fees or commissions to brokers, dealers or
other persons for soliciting exchanges of Notes pursuant to the Exchange
Offer. The Company will, however, upon request, reimburse you for customary
clerical and mailing expenses incurred by you in forwarding any of the
enclosed materials to your clients. The Company will pay or cause to be paid
any transfer taxes payable on the transfer of Notes to it, except as otherwise
provided in Instruction 6 of the Letter of Transmittal.
Questions and requests for assistance with respect to the Exchange Offer or
for copies of the Prospectus and Letter of Transmittal may be directed to the
Exchange Agent at its address set forth in the Prospectus or at (312) 461-
3525.
Very truly yours,
United USN, Inc.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE COMPANY, OR ANY AFFILIATE THEREOF, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENT OR USE ANY DOCUMENT ON
BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED
DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
2
<PAGE>
UNITED USN, INC.
OFFER TO EXCHANGE ITS
14% SERIES B SENIOR DISCOUNT NOTES DUE 2003
FOR ANY AND ALL OF ITS OUTSTANDING
14% SENIOR DISCOUNT NOTES DUE 2003
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997 (THE "INITIAL EXPIRATION DATE"), UNLESS EXTENDED.
To Our Clients:
Enclosed for your consideration is a Prospectus, dated , 1996 (as
the same may be amended from time to time, the "Prospectus"), and a Letter of
Transmittal (the "Letter of Transmittal") relating to the offer by United USN,
Inc. (the "Company") to exchange (the "Exchange Offer") its 14% Series B
Senior Discount Notes due 2003 (the "New Notes") for an equal principal amount
of its 14% Senior Discount Notes due 2003 (the "Old Notes") upon the terms and
conditions set forth in the Prospectus and in the related Letter of
Transmittal. As set forth in the Prospectus, the terms of the New Notes are
identical in all material respects to the Old Notes, except for certain
transfer restrictions relating to the Old Notes and except that the New Notes
will not contain certain provisions relating to an increase in the interest
rate which were included in the Old Notes under certain circumstances relating
to the timing of the Exchange Offer. The Exchange Offer is subject to certain
customary conditions. See "The Exchange Offer" in the Prospectus. Old Notes
may be tendered only in integral multiples of $1,000.
The material is being forwarded to you as the beneficial owner of Old Notes
carried by us for your account or benefit but not registered in your name. An
exchange of any Old Notes may only be made by us as the registered Holder and
pursuant to your instructions. Therefore, the Company urges beneficial owners
of Old Notes registered in the name of a broker, dealer, commercial bank,
trust company or other nominee to contact such Holder promptly if they wish to
exchange Old Notes in the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to exchange
any or all such Old Notes held by us for your account or benefit, pursuant to
the terms and conditions set forth in the Prospectus and Letter of
Transmittal. We urge you to read carefully the Prospectus and Letter of
Transmittal before instructing us to exchange your Old Notes.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to exchange Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer expires at 5:00 pm., New
York City time, on , 1997, unless extended. With respect to the
Exchange Offer, "Expiration Date" means the Initial Expiration Date, or if the
Exchange Offer is extended, the latest time and date to which the Exchange
Offer is so extended by the Company. Tender of Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of $1,000 principal amount of
the New Notes for each $1,000 principal amount of the Old Notes, of which
$48,500,000 aggregate principal amount of the Old Notes was outstanding as
of September 30, 1996. The terms of the New Notes are identical in all
material respects to the Old Notes, except for certain transfer
restrictions relating to the Old Notes and except that the New Notes will
not contain certain provisions relating to an increase in the interest rate
which were included in the Old Notes under certain circumstances relating
to the timing of the Exchange Offer.
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE "THE EXCHANGE
OFFER--CONDITIONS" IN THE PROSPECTUS.
<PAGE>
3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New
York City time, on , 1997, unless extended.
4. The Company has agreed to pay the expenses of the Exchange Offer.
5. Any transfer taxes incident to the transfer of Notes from the
tendering Holder to the Company will be paid by the Company, except as
provided in the Prospectus and the Letter of Transmittal.
The Exchange Offer is not being made to, nor will exchanges be accepted from
or on behalf of, holders of Old Notes residing in any jurisdiction in which
the making of the Exchange Offer or acceptance thereof would not be in
compliance with the laws of such jurisdiction.
If you wish us to exchange any or all of your Old Notes held by us for your
account or benefit, please so instruct us by completing, executing and
returning to us the instruction form that appears below. THE ACCOMPANYING
LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATIONAL PURPOSES ONLY AND
MAY NOT BE USED BY YOU TO EXCHANGE OLD NOTES HELD BY US AND REGISTERED IN YOUR
NAME FOR YOUR ACCOUNT OR BENEFIT.
2
<PAGE>
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of United USN,
Inc.
This will instruct you to exchange the aggregate principal amount of Old
Notes indicated below (or, if no aggregate principal amount is indicated
below, all Old Notes) held by you for the account or benefit of the
undersigned, pursuant to the terms of and conditions set forth in the
Prospectus and the Letter of Transmittal.
Aggregate Principal Amount of Old Notes to be exchanged
$ *
*I (WE) UNDERSTAND THAT IF I (WE) -------------------------------------
SIGN THESE INSTRUCTION FORMS WITHOUT -------------------------------------
INDICATING AN AGGREGATE PRINCIPAL SIGNATURE(S)
AMOUNT OF OLD NOTES IN THE SPACE -------------------------------------
ABOVE, ALL OLD NOTES HELD BY YOU FOR -------------------------------------
MY (OUR) ACCOUNT WILL BE EXCHANGED. -------------------------------------
-------------------------------------
(PLEASE PRINT NAME(S) AND ADDRESS
HERE)
DATED: ______________________________
-------------------------------------
(AREA CODE AND TELEPHONE NUMBER)
-------------------------------------
(TAXPAYER IDENTIFICATION OR SOCIAL
SECURITY NUMBER)
- --------
* Unless otherwise indicated, it will be assumed that all of your Old Notes
are to be exchanged.
3
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER.--Social Security numbers have nine digits separated by two hyphens:
i.e. 000-00-0000. Employer identification numbers have nine digits separated
by only one hyphen: i.e. 00-0000000. The table below will help determine the
number to give the payer.
- --------------------------------------- ---------------------------------------
<TABLE>
<CAPTION>
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF --
-----------------------------------
<S> <C>
9. A valid trust, estate, or The legal entity
pension trust (Do not furnish
the identifying
number of the
personal
representative or
trustee unless
the legal entity
itself is not
designated in the
account
title.)(5)
10. Corporate account The corporation
11. Religious, charitable, or The organization
educational organization
account
12. Partnership account held The partnership
in the name of the business
13. Association, club, or The organization
other tax-exempt
organization
14. A broker or registered The broker or
nominee nominee
15. Account with the The public entity
Department of Agriculture
in the name of a public
entity (such as a State or
local government, school
district, or prison) that
receives agricultural
program payments
</TABLE>
<TABLE>
<CAPTION>
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF--
- -----------------------------------------------
<S> <C>
1. An individual's account The individual
2. Two or more individuals The actual owner
(joint account) of the account
or, if combined
funds, any one of
the
individuals(1)
3. Husband and wife (joint The actual owner
account) of the account
or, if
joint funds,
either person(1)
4. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
5. Adult and minor (joint The adult or, if
account) the minor is the
only contributor,
the minor(1)
6. Account in the name of The ward, minor,
guardian or committee for a or incompetent
designated ward, minor, or person(3)
incompetent person
7. a. The usual revocable The grantor-
savings trust account trustee(1)
(grantor is also
trustee)
b. So-called trust account The actual
that is not a legal or owner(1)
valid trust under State
law
8. Sole proprietorship The owner(4)
account
</TABLE>
---------------------------------------
(1) List first and circle the name of the person whose number you furnish.
- ---------------------------------------
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER OF SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service and
apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
.A corporation.
.A financial institution.
. An organization exempt from tax under section 501(a), or an individual
retirement plan.
. The United States or any agency or instrumentality thereof.
. A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
. A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
. An international organization or any agency, or instrumentality thereof.
. A registered dealer in securities or commodities registered in the U.S.
or a possession of the U.S.
. A real estate investment trust.
. A common trust fund operated by a bank under section 584(a)
. An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
. An entity registered at all times under the Investment Company Act of
1940.
. A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
. Payments to nonresident aliens subject to withholding under section 1441.
. Payments to partnerships not engaged in a trade or business in the U.S.
and which have at least one nonresident partner.
. Payments of patronage dividends where the amount received is not paid in
money.
. Payments made by certain foreign organizations.
. Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
. Payments of interest on obligations issued by individuals. Note: You may
be subject to backup withholding if this interest is $600 or more and is
paid in the course of the payer's trade or business and you have not pro-
vided your correct taxpayer identification number to the payer.
. Payments of tax-exempt interest (including exempt-interest dividends un-
der section 852).
. Payments described in section 6049(b)(5) to non-resident aliens.
. Payments on tax-free covenant bonds under section 1451.
. Payments made by certain foreign organizations.
. Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT
TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS,
ALSO SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends,
that are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045, and 6050A.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend, inter-
est, or other payments to give taxpayer identification numbers to payers who
must report the payments to IRS. IRS uses the numbers for identification pur-
poses. Payers must be given the numbers whether or not recipients are required
to file tax returns. Beginning January 1, 1993, payers must generally withhold
31% of taxable interest, dividend, and certain other payments to a payee who
does not furnish a taxpayer identification number to a payer. Certain penal-
ties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you
fail to furnish your taxpayer identification number to a payer, you are sub-
ject to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS.--If you fail to
include any portion of an includible payment for interest, dividends, or pat-
ronage dividends in gross income, such failure will be treated as being due to
negligence and will be subject to a penalty of 5% on any portion of an under-
payment attributable to that failure unless there is clear and convincing evi-
dence to the contrary.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or im-
prisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE
