<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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)
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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)
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COPY TO:
RONALD W. GAVILLET, ESQ. GARY P. CULLEN, ESQ.
EXECUTIVE VICE PRESIDENT, STRATEGIC & SKADDEN, ARPS, SLATE, MEAGHER & FLOM
EXTERNAL AFFAIRS, GENERAL COUNSEL AND (ILLINOIS)
SECRETARY 333 WEST WACKER DRIVE
UNITED USN, INC. CHICAGO, ILLINOIS 60606
10 SOUTH RIVERSIDE PLAZA, SUITE 401 (312) 407-0700
CHICAGO, ILLINOIS 60606
(312) 906-3600
(NAME, ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR
SERVICE)
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO PUBLIC:
From time to time after the effective date of this Registration Statement.
---------------
If any securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO TO BE OFFERING PRICE OFFERING REGISTRATION
BE REGISTERED REGISTERED PER SECURITY PRICE FEE
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<S> <C> <C> <C> <C>
9% Convertible Subordinated Notes due 2004. 36,000 $767.90(1) $27,644,400 $8,377
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Class A Common Stock, par value $.01 per
Share(2)(3)............................... 268,497 -- -- --
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Warrants to Purchase Class A Common
Stock(4).................................. 48,500 -- -- --
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Class A Common Stock, par value $.01 per
Share(5).................................. 61,550 $.01 $615.50 $1
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</TABLE>
(1) The Proposed Maximum Offering Price per Security with respect to the 9%
Convertible Subordinated Notes due 2004 is based on the actual Offering
Price per Security of $767.90.
(2) Shares issuable upon conversion of $36,000,000 principal amount of 9%
Convertible Subordinated Notes.
(3) Pursuant to Rule 457(i) under the Securities Act, no registration fee is
payable with respect to the Class A Common Stock into which the
Convertible Notes are convertible.
(4) Pursuant to Rule 457(g) under the Securities Act, no registration fee is
payable with respect to the Warrants.
(5) Shares issuable upon exercise of 48,500 Warrants for approximately 1.269
shares per Warrant, at an exercise price of $.01 per share.
---------------
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 27, 1996
PROSPECTUS
UNITED USN, INC.
9% CONVERTIBLE SUBORDINATED NOTES DUE 2003
WARRANTS TO PURCHASE CLASS A COMMON STOCK
CLASS A COMMON STOCK
This Prospectus relates to (i) $36.0 million in aggregate principal amount at
maturity of 9% Convertible Subordinated Notes due 2004 (the "Convertible
Notes"), (ii) 48,500 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") of United USN, Inc. (the "Company") at an initial
exercise price of $.01 per share (the "Initial Warrants") and (iii) up to
330,047 shares of Class A Common Stock which includes (a) up to 268,497 shares
of Class A Common Stock issuable upon conversion of the Convertible Notes (the
"Convertible Note Shares") and (b) 61,550 shares of Class A Common Stock
issuable upon exercise of the Initial Warrants (the "Warrant Shares") which may
be offered for sale from time to time by the selling securityholders (the
"Selling Securityholders"). See "Selling Securityholders." This Prospectus also
relates to the initial issuance of the Warrant Shares by the Company. The
Convertible Notes, the Initial Warrants, the Convertible Note Shares and the
Warrant Shares are collectively referred to herein as the "Securities." The
Company will not receive any proceeds from the sale of the Securities by the
Selling Securityholders but will receive proceeds upon the exercise of the
Initial Warrants of $.01 per share.
The Convertible Notes were issued 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
"Trustee"). The Convertible Note Indenture provides that the Convertible Notes
may be converted into Class A Common Stock at a conversion price of $134.08 per
share (the "Conversion Price"), subject to adjustment under certain
circumstances described herein. See "Description of Securities--Convertible
Notes--Conversion Rights." The Convertible Note Indenture also provides that
the Convertible Notes will accrete interest at a rate of 9% per annum,
compounded semiannually, to an aggregate principal amount of $36.0 million by
September 30, 1999, and thereafter will bear interest at a rate of 9% per annum
which will be payable in cash semiannually. For the period from September 30,
1996 until September 30, 1999, the number of shares into which the Convertible
Notes are convertible will increase as the interest on the Convertible Notes
accretes. On September 30, 1996, the Convertible Notes were, in the aggregate,
convertible into 206,179 shares of Class A Common Stock. On September 30, 1999,
the Convertible Notes will be, in the aggregate, convertible into 268,497
shares of Class A Common Stock, assuming no adjustment to the Conversion Price
and no conversion of any Convertible Notes prior to that date.
There is currently no established trading market for the Securities nor any
assurance that any such market may develop.
(cover page continued on next page)
-----------
SEE "RISK FACTORS," BEGINNING ON PAGE 15, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE SECURITIES.
-----------
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.
-----------
The date of this Prospectus is , 1997.
<PAGE>
(cover page continued from previous page)
The sale and/or distribution of the Securities by the Selling
Securityholders may be effected from time to time through brokers, agents,
dealers or underwriters in one or more transactions (which may involve crosses
and principal trades, including block transactions), in special offerings,
exchange distributions or secondary distributions, or otherwise, at market
prices prevailing at the time of the sale, at prices related to such
prevailing market prices or at negotiated prices. To the extent required, the
specific Securities to be sold, the name of the Selling Securityholders, the
purchase price, the public offering price, the name of any such brokers,
agents, dealers or underwriters, and any applicable commission or discount
with respect to a particular offer will be set forth in an accompanying
Prospectus Supplement. See "Plan of Distribution."
Upon any sale of the Securities, the Selling Securityholders and the
participating agents, brokers or dealers may be deemed to be underwriters as
that term is defined in the Securities Act of 1933, as amended (the
"Securities Act"), and commissions or discounts or any profit realized on the
resale of such Securities held by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
No underwriter is initially being utilized in connection with this offering.
The Company will pay all expenses incurred in connection with this offering,
other than fees and expenses of the Selling Securityholders. See "Plan of
Distribution."
Prior to the date of this Prospectus, there has been no public market for
the Securities. The Company does not currently intend to list the Securities
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 Securities.
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 Securities; 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 Securities 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
Securities 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-1 (the "Registration Statement") under the Securities Act with respect to
the Securities being offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the 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 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 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. Under the terms of
the Convertible Note Indenture and a warrant agreement, dated as of September
30, 1996 (the "Warrant Agreement"), by and between the Company and Harris
Trust and Savings Bank, as warrant agent (the "Warrant Agent"), the Company
will be required to file with the Commission, and to furnish holders of the
Convertible Notes and the Initial 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
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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 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.
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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
"Private Placement") 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 14% Senior Discount Notes due 2003
(the "Senior Notes" and, together with the Convertible Notes, the "Notes") and
Initial Warrants to purchase 61,550 shares, subject to adjustment under certain
circumstances, of 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 Senior Notes were issued pursuant to the terms of an
indenture, dated as of September 30, 1996, (the "Senior Note Indenture"), by
and between the Company and Harris Trust and Savings Bank, as trustee, and the
Convertible Notes were issued pursuant to the terms of the Convertible Note
Indenture. The Senior Note Indenture and the Convertible Note Indenture are
collectively referred to herein as the "Indentures." The Indentures 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
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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 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. 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 Securities--
Convertible Notes." On November 15, 1996, the Company filed an exchange offer
registration statement on Form S-4 with the Commission pursuant to which the
Company will offer to exchange its 14% Series B Senior Discount Notes due 2003
(the "New Senior Notes") for any and all outstanding 14% Senior Discount Notes
due 2003 (the "Old Senior Notes"). The terms of the New Senior Notes are
identical in all material respects to the Old Senior Notes, except that the New
Senior 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 Senior Notes under
certain circumstances relating to the timing of the exchange offer as provided
by the Senior Note Indenture.
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>
SUMMARY DESCRIPTION OF THE SECURITIES
THE CONVERTIBLE NOTES
Convertible Notes......... $36,000,000 aggregate principal amount at
maturity of 9% Convertible Subordinated Notes
due 2004.
Maturity Date............. September 30, 2004.
Yield..................... 9% per annum (computed on a semiannual bond
equivalent basis) and calculated from September
30, 1996.
Interest.................. The Convertible Notes accrete interest at a
rate of 9%, compounded semiannually to an
aggregate principal amount of $36,000,000 by
September 30, 1999. Thereafter, the Convertible
Notes will bear interest 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. See "Description of
Securities--Convertible Notes--Principal,
Maturity and Interest."
Original Issue Discount... For federal income tax purposes, the
Convertible Notes are treated as having been
issued with "original issue discount" generally
equal to the difference between the issue price
of the Convertible Notes and the sum of all
payments (whether designated as principal or
interest) to be made thereon. Each holder of a
Convertible 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 it holds such
Convertible Note. See "Certain Federal Income
Tax Considerations."
Sinking Fund.............. None.
Optional Redemption....... The Convertible Notes are not redeemable, in
whole or in part, at any time prior to
September 30, 2000. At any time from September
30, 2000 to September 30, 2002, the Company may
redeem all but not less than all of the
Convertible Notes if the Price (as defined in
the Convertible Note Indenture) of the Common
Stock is at least 150% of the Conversion Price
for the Convertible Notes for 30 consecutive
days, at a redemption price equal to 100% of
the principal amount thereof plus accrued and
unpaid interest, if any, and Special Interest
(as defined herein), if any, to the date of
redemption; 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. Thereafter, the Company may
redeem, in whole or in part, the Convertible
Notes at a redemption price equal to 100% of
the principal amount thereof, plus accrued and
unpaid interest, if any, and Special Interest,
if any.
Conversion Rights and
Initial Conversion
Price....................
The Convertible Notes are convertible into
Class A Common Stock (the "Convertible Note
Shares"), at the option of the holders of
Convertible Notes prior to redemption or final
maturity of the Convertible Notes, initially at
a conversion price of $134.08 per share,
9
<PAGE>
subject to adjustment as described below and as
described in "Description of Securities--
Convertible Notes." The right to convert
Convertible Notes that have been called for
redemption will terminate at the close of
business on the business day preceding the
redemption date.
Adjustment of Conversion In the event that the Company consummates a
Price.................... 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 is less than
$122,500,000 based upon such sale or sales,
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. See
"Description of Securities--Convertible Notes--
Conversion Rights." The Conversion Price may be
adjusted if Convertible Note Contingent
Warrants are issued in 1999. See "Description
of Securities--Convertible Notes--Issuance of
Contingent Warrants." The Conversion Price may
also be adjusted under certain conditions on or
prior to September 30, 1997 if the Company has
not consummated a Qualified Public Offering or
a Qualified Sale of the Company has not
occurred. See "Description of Securities--
Convertible Notes--Additional Invested Equity."
Ranking................... The Convertible Notes are senior, unsecured
subordinated obligations of the Company. The
Convertible Notes are subordinated in right of
payment to the Senior Notes. Otherwise, the
Convertible Notes rank pari passu in right of
payment with all other existing and future
unsecured indebtedness of the Company. The
Convertible Notes are 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 from
dividends and distributions from its
subsidiaries. The Company's subsidiaries have
no obligation to pay amounts due on the
Convertible Notes and will not guarantee the
Convertible Notes; provided, that if a
subsidiary guarantees any Indebtedness of the
Company, such subsidiary will be obligated to
guarantee the Convertible Notes. Therefore, the
Convertible Notes are 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 Convertible 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 are subject to the prior claims of
that subsidiary's creditors (including trade
creditors). See "Risk
10
<PAGE>
Factors--Holding Company Structure; Source of
Repayment of Convertible Notes; Effective
Subordination of Convertible Notes to
Indebtedness of Subsidiaries."
Change of Control......... Upon a Change of Control, each holder of the
Convertible Notes will have the right to
require the Company to repurchase all or any
part of such holder's Convertible Notes at a
price equal to 101% of the Accreted Value
thereof or, in the case of any such repurchase
on or after September 30, 1999, 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 Convertible Notes upon a Change
of Control. See "Description of Securities--
Convertible Notes--Repurchase at the Option of
Holders upon a Change of Control."
Termination of Trading.... Upon a Termination of Trading (as defined
herein), each holder of a Convertible Note will
have the right to require the Company to
repurchase all or any part of such holder's
Convertible Notes at a price equal to 100% of
the Accreted Value or 100% of the principal
amount thereof, as the case may be, 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 Convertible Notes
upon a Termination of Trading. See "Description
of Securities--Convertible Notes--Right to
Require Repurchase of Convertible Notes Upon a
Termination of Trading."
Guarantees................ The Convertible Note Indenture provides that
any subsidiary that guarantees Indebtedness of
the Company will guarantee (a "Convertible Note
Guarantee") unconditionally on a senior basis
(except with respect to the Senior Notes and
the Senior Note Guarantees), the payment of
principal, premium, if any, interest and
Special Interest, if any, on the Convertible
Notes and amounts payable upon a Change of
Control, an Asset Sale Offer or a Termination
of Trading. See "Description of Securities--
Convertible Notes--Certain Covenants--
Limitation on Issuances of Guarantees by
Restricted Subsidiaries."
Additional Equity......... If the Company does not achieve consolidated
total revenues (calculated in accordance with
GAAP) of at least $8,500,000 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 $10,000,000 of Additional Invested
Equity (as defined herein) or (B) (i) grant to
the holders of the Convertible Notes the right
to purchase for $10,000,000 additional
convertible securities of the Company
convertible into 16 2/3% of the outstanding
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 exercisable for Common Stock
representing up to 5% of the
11
<PAGE>
outstanding Common Stock for a purchase price
of $.01 per share on a fully diluted basis
(subject to certain exceptions) after giving
effect to the issuance of such warrants, and
(iii) adjust the Conversion Price by dividing
the Conversion Price in effect immediately
prior to the issuance of such convertible
securities and warrants by 1.15.
Certain Covenants......... The Convertible Note Indenture contains certain
limited covenants which, among other things,
restrict the ability of the Company and certain
of its subsidiaries to sell assets or engage in
mergers or acquisitions. In addition, the
Convertible Note Indenture imposes
limits on the ability of certain of the
Company's subsidiaries to issue guarantees. See
"Description of Securities--Convertible Notes--
Certain Covenants," "--Assets Sales" and "--
Consolidation, Merger, Conveyance, Lease or
Transfer."
Registration Rights....... Under the terms of a registration rights
agreement dated as of September 30, 1996 by and
between the Company and the Initial Purchasers
(the "Registration Rights Agreement"), the
Company is required to keep the Registration
Statement of which this Prospectus forms a part
effective for a specified period. See
"Registration Rights."
For additional information concerning the Convertible Notes, see "Description
of Securities--Convertible Notes."
THE INITIAL WARRANTS
Initial Warrants.......... Initial Warrants, which, when exercised, would
entitle the holders thereof to purchase, in the
aggregate, 61,550 shares of Class A Common
Stock (equal to approximately 12% of the
outstanding shares of the Common Stock, on a
fully diluted basis as of the date of this
Prospectus).
Expiration of Warrants.... September 30, 2003 (the "Expiration Date").
Exercise.................. Each Initial Warrant entitles the holder
thereof to purchase approximately 1.27 shares
of Class A Common Stock (subject to adjustment
as described herein) at an initial exercise
price of $.01 per share. The Initial Warrants
may be exercised at any time beginning 180 days
after the date of original issuance thereof or
earlier upon the occurrence of certain
circumstances and on or prior to the Expiration
Date. See "Description of Securities--Initial
Warrants--Certain Terms."
Adjustments............... The number of shares of Class A Common Stock
for which an Initial Warrant is exercisable and
the purchase price thereof are subject to
adjustment from time to time upon the
occurrence of certain events, including, among
other things, certain issuances of options or
convertible securities, certain dividends and
distributions and certain changes in options
and convertible securities. An Initial Warrant
does not entitle the holder thereof to receive
any dividends paid on Class A Common Stock.
12
<PAGE>
Registration Rights....... Under the terms of the Registration Rights
Agreement, the Company is required to keep the
Registration Statement of which this Prospectus
forms a part effective for a specified period.
See "Registration Rights."
For additional information concerning the Initial Warrants, see "Description
of Securities--Initial Warrants."
THE CLASS A COMMON STOCK
Class A Common Stock...... 330,047 shares of Class A Common Stock of the
Company, par value $.01 per share.
Convertible Note Shares... 268,497 shares of Class A Common Stock available
for issuance by the Company upon conversion of the
Convertible Notes by the holders thereof.
Warrant Shares............ 61,550 shares of Class A Common Stock available for
issuance by the Company upon exercise of the
Initial Warrants by the holders thereof.
Voting Rights............. Shares of Class A Common Stock are entitled to one
vote per share on all matters submitted to a vote
of the stockholders.
Dividends................. Holders of Class A Common Stock have the right to
receive dividends when and as dividends are
declared by the Board of Directors of the Company,
subject to the rights of any holders of preferred
stock. See "Description of Capital Stock." The
Company intends to retain its earnings, if any, and
therefore does not anticipate paying dividends in
the foreseeable future. See "Dividend Policy." In
addition, the Senior Note Indenture includes
significant limitations on the Company's ability to
pay dividends to the holders of Common Stock. See
"Certain Other Indebtedness."
Conversion Rights......... Holders of Class A Common Stock have the right to
convert their shares of Class A Common Stock into
shares of Class B Common Stock on a one-to-one
basis at any time.
Liquidation Rights........ Upon any liquidation, dissolution or winding up of
the affairs of the Company, whether voluntary or
involuntary, any assets remaining after
satisfaction of the rights of creditors and the
rights of any holders of preferred stock will be
distributed to the holders of Common Stock. See
"Description of Capital Stock."
Registration Rights....... Under the terms of the Registration Rights
Agreement, the Company is required to keep the
Registration Statement of which this Prospectus
forms a part effective for a specified period. See
"Registration Rights."
For additional information concerning the Class A Common Stock, see
"Description of Capital Stock."
RISK FACTORS
Prospective investors in the Securities should carefully consider the matters
set forth under the caption "Risk Factors" prior to making a decision
concerning whether to purchase such Securities.
13
<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.
14
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors in the Securities should consider carefully the following factors.
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 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
Securities. 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 Convertible
Notes, to repay its obligations on the Convertible Notes at maturity and to
satisfy its other debt obligations 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 Convertible Notes commencing in 2000 or to repay its
obligations on the Convertible Notes. See "Description of Securities--
Convertible 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
15
<PAGE>
the proceeds from private sales of its equity securities. Pursuant to the
terms of the Convertible Notes, the Company will, at such time as interest is
payable on the Convertible 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 $3.2 million per year). The fully accreted principal
amount of the Convertible Notes of $36.0 million, will become due on September
30, 2004. In addition, commencing March 30, 2000, cash interest on the Senior
Notes will accrue semiannually at the rate of 14% per annum (approximately
$6.8 million per year), and the fully accreted principal amount of the Senior
Notes of $48.5 million will become due on September 30, 2003. 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
Convertible 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
Convertible Notes and its other debt obligations. See "Dividend Policy."
HOLDING COMPANY STRUCTURE; SOURCE OF REPAYMENT OF CONVERTIBLE NOTES; EFFECTIVE
SUBORDINATION OF CONVERTIBLE 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 Convertible Notes and to repay the principal amount of the
Convertible Notes at maturity, or to redeem or repurchase the Convertible
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 Convertible 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 Convertible
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 Convertible 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 Senior Notes are 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 Convertible Notes
will be effectively subordinated to such Indebtedness to the extent of the
value of the assets securing such Indebtedness. The Company's subsidiaries
have no obligation to pay amounts due on the Convertible Notes and have not
guaranteed the Convertible Notes as of the date hereof; however, if a
subsidiary guarantees any Indebtedness of the Company, such subsidiary will be
obligated to guarantee the Convertible Notes. See "Description of Securities--
Convertible Notes--Certain Covenants" and "--Limitation on Issuances of
Guarantees by Restricted Subsidiaries." Therefore, the Convertible Notes, if
not guaranteed in the future, 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 Convertible Notes, to participate in a
distribution of the
16
<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.
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 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,
17
<PAGE>
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.
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
18
<PAGE>
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 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
19
<PAGE>
tariffs containing the currently effective rates, terms and conditions of
service for its resale long distance services. The FCC recently issued
regulations to eliminate this tariff filing requirement for all interstate
nondominant carriers, except for, under certain circumstances, the RBOCs,
effective in late 1996 or early 1997.
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.
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. In August 1996,
the FCC issued regulations that, among other things, established pricing
methodologies and interim default rates for resold incumbent LEC services and
unbundled LEC network elements. A number of parties have filed court appeals
challenging these and other regulations implementing the Telecommunications
Act. All of the court appeals have been consolidated before the U.S. Court of
Appeals for the Eighth Circuit, which has stayed the effect of certain of the
rules (including the provisions establishing pricing methodologies and default
rates for resold services and unbundled network elements). The U.S. Supreme
Court declined to dissolve the stay, and the court of appeals' decision is not
expected before the middle of 1997. Some of the same parties and certain other
parties also have asked the FCC to reconsider these and other regulations
implementing the Telecommunications Act. The Company cannot predict the
outcome of the FCC's reconsideration proceeding or the court appeals, either
of which could have a material adverse impact on the Company. In addition, 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
20
<PAGE>
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 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. 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 CONVERTIBLE NOTES AND THE COMPANY
The Convertible Notes were issued at a substantial discount from their
principal amount at maturity. Cash payments of interest on the Convertible
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
Convertible Notes and the "issue price" of the Convertible Notes) has accrued
from the Issue Date of the Convertible Notes and 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
Convertible Notes--Original Issue Discount." Similar results may apply under
state tax laws. In addition, to the extent the Convertible 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." To the extent the rules applicable to 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 Convertible Notes
did not constitute corporate acquisition indebtedness.
21
<PAGE>
If a bankruptcy case were to be commenced by or against the Company under
the United States Bankruptcy Code, the claim of a holder of the Convertible
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 A PUBLIC MARKET; VOLATILITY OF STOCK PRICE
There is currently no public market for the Securities. There can be no
assurance as to the liquidity of any markets that may develop for the
Securities, the ability of holders of Securities to sell their Securities or
the price at which holders would be able to sell their Securities. Future
trading prices of the Securities 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 intends to make a market in some or all of the Securities.
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 an active trading market for the Securities will develop, or
if one does develop, that it will be sustained. The Company does not intend to
apply for listing of any of the Securities on any securities exchange or for
quotation through the National Association of Securities Dealers Automated
Quotation System.
Historically, the market price for securities of emerging companies have
been highly volatile. Future announcements concerning the Company or its
competitors, technological innovations or government regulations may
significantly impact the market price of the Securities.
ABSENCE OF DIVIDENDS
The Company has never paid dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future. Earnings, if
any, which might be generated from operations of the Company will be used to
finance growth of the Company. See "Dividend Policy." The Senior Note
Indenture includes significant limitations on the Company's ability to pay
dividends to the holders of Common Stock. 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."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Class A Common Stock in the public market or the
perception that such sales could occur could have a material adverse effect on
the price of the Class A Common Stock. In the event that all of the
Convertible Notes and Initial Warrants that are outstanding as of the date of
this Prospectus are converted or exercised, as the case may be, the Company
will have outstanding 1,046,572 shares of Class A Common Stock. All of the
268,497 shares of Class A Common Stock issuable upon the conversion of the
Convertible Notes and the 61,550 shares of Class A Common Stock issuable after
March 29, 1997 upon exercise of the Initial Warrants will be available for
immediate sale without restriction under the Securities Act, subject in the
case of certain holders to the restrictions applicable to affiliates pursuant
to Rule 144 ("Rule 144") under the Securities Act. The 716,525 shares of Class
A Common Stock outstanding as of the date of this Prospectus are restricted
shares ("Restricted Shares") under the Securities Act and may be sold only if
they are registered or qualify for an exemption from registration under Rule
144. Certain of the Company's current directors and executive officers, who,
as of the date of this Prospectus, beneficially hold shares or options to
purchase shares of Class A Common Stock which, in the aggregate, total 728,844
shares (all of which are Restricted Shares), have agreed not to sell any of
these shares until March 29, 1997 without the prior written consent of Smith
Barney Inc. In addition, as of the date of this Prospectus, the Company has
outstanding 10,000 shares of 9% Preferred Stock, which are convertible into
70,623 shares of Class A Common Stock at the current conversion ratio, and
options to purchase 94,487 shares of Class A Common Stock. Pursuant to a
registration agreement dated April 20, 1994, as amended and restated on June
22, 1995, the Company has granted certain registration rights to the Original
Purchasers (as defined herein). See "Certain Relationships and Related
Transactions--Formation of the Company" and "Registration Rights."
In addition, the Company is obligated, under certain circumstances, to issue
to holders of the Convertible Notes and the Senior Notes Contingent Warrants
exercisable for Class A Common Stock representing up to 5.5%
22
<PAGE>
(subject to adjustment) in the aggregate of the Class A Common Stock on a fully
diluted basis after giving effect to the issuance of such Contingent Warrants.
See "Description of Securities--Convertible Notes" and "Certain Other
Indebtedness." Under certain circumstances, the Company will be required to
offer to holders of Convertible Notes the right to acquire additional
convertible securities and warrants. See "Description of Securities--
Convertible Notes--Additional Invested Equity." Pursuant to the terms of the
Indentures under which the Company may become obligated to issue the foregoing
Contingent Warrants and additional convertible securities and warrants, the
Company must register such securities for resale.
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 Private Placement, Merrill
Lynch Global Allocation Fund, Inc. holds Convertible Notes which were
convertible into 206,179 shares of Class A Common Stock as of September 30,
1996 and will be convertible into 268,497 shares of Class A Common Stock as of
September 30, 1999 and Warrants which will be exercisable at any time after
March 29, 1997 for 61,550 shares of Class A Common Stock, in each case subject
to adjustment as described herein.
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 Convertible Notes at 101% of the Accreted
Value or 101% of principal amount, as the case may be, of the Convertible 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 Convertible Notes of
their rights to require the Company to offer to purchase Convertible 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 Convertible 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 Convertible Notes. See "Description of Securities--Convertible Notes."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Securities by
the Selling Securityholders, but will receive proceeds upon the exercise of the
Initial Warrants of $.01 per share.
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 includes significant limitations on the
Company's ability to pay dividends to the holders of Common Stock. See "Certain
Other Indebtedness." In addition, the terms of the 9% Preferred Stock and the
Purchase Agreements 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."
23
<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 September 30, 1996, and 61,550 shares reserved for issuance
upon exercise of the Initial Warrants.
24
<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>
- --------
(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.
25
<PAGE>
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 Venture Capital Associates, L.P., 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 "Original Investors")
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
26
<PAGE>
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.
27
<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.
28
<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.
29
<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
30
<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.
31
<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.
32
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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
33
<PAGE>
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
42
<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 U.S. Supreme Court declined to dissolve the stay, and the
court of appeals' 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
43
<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.
44
<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
Gerald J. Sweas......... 49 Executive Vice President and Chief Financial Officer
Ryan Mullaney........... 40 Executive Vice President, Sales
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.
45
<PAGE>
Gerald J. Sweas, Executive Vice President and Chief Financial Officer,
joined the Company in November 1996. From 1989 to 1996, Mr. Sweas was Vice
President Finance and Administration, Treasurer and Chief Financial Officer of
Norand Corporation, a wireless data communications networks company. From 1985
to 1988, Mr. Sweas was Vice President Finance, Treasurer and Chief Financial
Officer of Sargent-Welch Scientific Company and from 1978 to 1985 served as
Controller and Assistant Secretary of that company. Mr. Sweas holds a B.B.A.
from Loyola University in Chicago, Illinois and an M.B.A. from the University
of Wisconsin, Madison and is a Certified Public Accountant.
Ryan Mullaney, Executive Vice President, Sales, joined the Company in
October 1996. From 1995 to 1996, Mr. Mullaney served as Vice President, Sales,
USA West for Citizens Telecom, a medium-sized telecommunications company,
where he managed sales in 13 states. From 1993 to 1995, Mr. Mullaney was
Director of Member Development for McLeod Telemanagement Organization, where
his duties included management of the company's field sales and service
organization. From 1991 to 1993, Mr. Mullaney was National Sales Director of
Centex Telemanagement, responsible for developing sales in the national
market. Prior to 1991, Mr. Mullaney worked for various telecommunications
companies, including two companies which he owned and at which he served as
President. Mr. Mullaney has a B.A. from the University of Nevada, Las Vegas.
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 Chase Capital Partners
(formerly known as Chemical Venture Partners) since 1992. Chase Capital
Partners is the sole general partner of Chase Venture Capital Associates, L.P.
Prior to joining Chase Capital Partners, he was head of MH Capital Partners,
Inc., the equity investment arm of Manufacturers Hanover.
46
<PAGE>
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.
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.
47
<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 give the holder the
right 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 employment of Mr. Sweas in November 1996, Mr. Sweas
was granted 5,000 options with an exercise price of $1.50 per share, 2,000
options with an exercise price not to exceed approximately $67.00 per share
and 4,000 options with an exercise price not to exceed approximately $134.00
per share. In connection with the employment of Mr. Mullaney in October 1996,
Mr. Mullaney was granted 4,000 options with an exercise price of $1.50 per
share and 3,500 options with an exercise price not to exceed approximately
$134.00 per share. All of the 18,500 options described in this paragraph give
the holder the right to purchase a corresponding number of shares of Class A
Common Stock.
48
<PAGE>
In connection with the issuance of the 9% Preferred Stock (as defined
herein) and the consummation of the Private Placement, 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.
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.
49
<PAGE>
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.
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. In November 1996, Mr. Gerald J. Sweas entered
into an agreement with the Company pursuant to which he became the Company's
Executive Vice President and Chief Financial Officer. 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, Gavillet and Sweas are $195,000, $185,000 and $150,000,
respectively. In addition, subject to the attainment of certain performance
objectives, each is entitled to an annual bonus. With respect to Messrs.
Elliott and Gavillet, 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. Each of Messrs. Elliott's
and Gavillet's agreements also provides 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.
With respect to each of Messrs. Elliott and Gavillet, if their employment is
terminated by the Company without "Cause" or by either 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. With respect to Mr. Sweas, if his employment is
terminated by the Company without "Cause" or by him with "Good Reason" (each
as defined in his agreement): (i) all amounts earned, accrued or owing to him
shall be paid as soon as practicable; (ii) the Company must pay a lump sum
equal to the sum of (A) any annual bonus paid to Mr. Sweas for a fiscal year
completed prior to the date of termination, plus (B) a pro rata portion of the
annual bonus that would have been payable to Mr. Sweas in the year of such
termination, assuming the achievement of all performance goals, plus (C) if
Mr. Sweas complies with the noncompete and nonsolicitation provisions of his
agreement for the 18-month period following termination, the greater of the
amount of Mr. Sweas' highest annual base salary during the term of his
agreement or the aggregate amount of base salary payable to Mr. Sweas through
the end of the term of such agreement; and (iii) the Company must maintain in
full force and effect all employee benefit plans for the benefit of Mr. Sweas
for the longer of a one-year period or the remaining term of his 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. With respect to Messrs. Elliott and Gavillet, upon a Change in
Control the executive's options will become exercisable and the restrictions
on Mr. Elliott's Restricted Shares will lapse. With respect to Mr. Sweas, upon
a Change of Control the Company shall pay, in exchange for the cancellation of
any options and the surrender of any shares held by him, an amount equal to
the fair market value of the shares held by Mr.
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<PAGE>
Sweas or issuable upon exercise of any such options (less the applicable
exercise price). Upon a Change of Control, the Company shall pay to each of
Messrs. Elliott, Gavillet and Sweas, within the 10-day period following such
Change of Control, an amount equal to the pro rata portion of the annual bonus
that would have been payable to such executive during such year, assuming the
achievement of all performance goals. 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 and Mr. Sweas has agreed to
similar restrictions for the term of his employment with the Company and for
an additional period of 18 months thereafter.
On December , 1996, Mr. Ryan Mullaney entered into an employment agreement
with the Company. Mr. Mullaney's agreement provides for a base salary of
$125,000 and an annual bonus (targeted at $75,000) based upon certain
performance standards established by the Board of Directors of the Company.
The agreement also provides that Mr. Mullaney will be entitled to receive
certain payments in the event that his employment is terminated other than for
cause. Mr. Mullaney has agreed not to compete with the Company during the term
of his employment and for a specified period 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.
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
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<PAGE>
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 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
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 Private Placement, 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
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<PAGE>
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 Private Placement.
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 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 Private Placement, 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 Private Placement was converted into one
share of Class A Common Stock. See "Description of Capital Stock--Common
Stock."
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As described above, by requisite vote, the Original Purchasers waived their
Preemptive Rights and Registration Rights with respect to the Private
Placement. The Original Purchasers also approved, and the Company took all
necessary action to effect prior to the consummation of the Private Placement,
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 Private Placement, 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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<PAGE>
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 Venture Capital Associates, L.P.................... 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. (7)(8)............................ 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.
(7) The address of Mr. Hofmann is the address of Chase Venture Capital
Associates, L.P. listed above.
(8) These shares are owned of record by Chase Venture Capital Associates, L.P.
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<PAGE>
DESCRIPTION OF SECURITIES
For purposes of this description of the Securities, 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.
CONVERTIBLE NOTES
GENERAL
The Convertible Notes were issued pursuant to the Convertible Note
Indenture. 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 of 1939 as in effect on the
date of the Indenture (the "Trust Indenture Act"). The following summaries of
certain provisions of the Convertible Note Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the provisions of the Convertible Note Indenture. The Convertible Notes
are subject to all such terms, and holders of the Convertible Notes are
referred to the Convertible Note Indenture and the Trust Indenture Act for a
complete statement of such terms. Copies of the Convertible Note Indenture are
available from the Company upon request. The statements and definitions of
terms under this caption relating to the Convertible Notes and the Convertible
Note Indenture are summaries and do not purport to be complete. Such summaries
make use of certain terms defined in the Convertible Note Indenture and are
qualified in their entirety by express reference to the Convertible Note
Indenture. Certain terms used herein are defined below under "--Certain
Definitions."
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 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
Convertible Notes and did not guarantee the Convertible Notes on their Issue
Date; however, if a Restricted Subsidiary guarantees any indebtedness of the
Company, such Restricted Subsidiary will be obligated to guarantee the
Convertible Notes on a senior subordinated basis. See "--Certain Covenants--
Limitation on Issuances of Guarantees by Restricted Subsidiaries." As a
result, the Convertible 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 Convertible 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 valid pari passu
loans and advances made by the Company) of the Company and its creditors,
including the holders of Convertible 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 Convertible 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 Convertible Notes; Effective Subordination
of Notes to Indebtedness of Subsidiaries."
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<PAGE>
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."
PRINCIPAL, MATURITY AND INTEREST
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 Convertible 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.
Principal of, premium, if any, and interest and Special Interest, if any, on
the Convertible Notes is payable 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 Convertible Notes were 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
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<PAGE>
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.
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
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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 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 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 Convertible
Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Convertible 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
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such holder's Convertible 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 Convertible 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 Convertible 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 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 Convertible Note Indenture entitled "Repurchase at the
Option of Holders upon a Change of Control" and that all Convertible 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 Convertible 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
Convertible 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
Convertible Notes or portions thereof purchased pursuant to a Change of
Control Offer will be required to surrender the Convertible Notes, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the
Convertible 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
Convertible Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such Convertible Notes or portions thereof
purchased; (7) that holders whose Convertible Notes are being purchased only
in part will be issued new Convertible Notes equal in principal amount to the
unpurchased portion of the Convertible 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
Securities Exchange Act of 1934, as amended, 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 a Change of
Control Offer.
On the Change of Control Payment Date, the Company will (1) accept for
payment Convertible 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 Convertible 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 Trustee the Convertible Notes so
accepted together with an Officers' Certificate listing the Convertible Notes
or portions thereof tendered to the Company and accepted for payment. The
Paying Agent shall promptly mail to each holder of Convertible Notes so
accepted payment in an amount equal to the Change of Control Purchase Price,
including interest and Special Interest, if applicable, for such Convertible
Notes and the Trustee shall promptly authenticate and mail to each holder a
new Convertible Note equal in principal amount at Stated Maturity to any
unpurchased portion of the Convertible Notes surrendered, if any; provided,
that each such new Convertible 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 Convertible 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 Convertible 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 Convertible 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
Convertible Notes tendered pursuant to such offer or at a time when the
Company is prohibited from purchasing the Convertible 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 Convertible Note Indenture. In addition, one of
the events that constitutes a Change of Control under the Convertible Note
Indenture 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 Convertible Note Indenture 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
for the covenant described below in "--Right to Require Repurchase of
Convertible Notes Upon a Termination of Trading," the Convertible Note
Indenture does not contain any other provisions that permit holders of
Convertible Notes to require that the Company repurchase or redeem Convertible
Notes in the event of a takeover, recapitalization or similar restructuring.
The foregoing provisions may not necessarily afford the holders of the
Convertible 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 Convertible Note Indenture 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 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 Convertible 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
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Guarantee, if applicable (other than Indebtedness to the Company or another
Restricted Subsidiary). Any Net Cash Proceeds 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,
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and Special Interest, if any, thereon to the Repurchase Date. On or prior to
the Repurchase Date, the Company shall deposit with the 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.
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 Convertible Note
Indenture. Certain terms capitalized below but not defined shall have the
meanings ascribed to them under the caption "Certain Definitions."
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Convertible Note Indenture and the Senior Note Indenture 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 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
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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. The Convertible Note
Indenture further provides that if the Guaranteed Indebtedness is pari passu
with the Convertible 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 Convertible 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 Convertible 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.
Restricted and Unrestricted Subsidiaries
The Convertible Note Indenture provides 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.
Issuance of Contingent Warrants
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.
Reports
The Convertible Note Indenture provides 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.
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CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Convertible Note Indenture provides 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 Convertible Note Indenture, as applicable, shall
have occurred and be continuing or would result therefrom;
(iii) 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.
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 Trustee, in form and substance reasonably
satisfactory to the 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 Convertible Note Indenture and that all
conditions precedent in the Convertible Note 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 Convertible Note
Indenture and the related Convertible Notes with the same effect as if such
Surviving Entity had been named as the Company in the Convertible Note
Indenture; and when a Surviving Person duly assumes all of the obligations and
covenants of the Company pursuant to the Convertible Note Indenture and the
Convertible 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 Convertible Note
Indenture:
(a) default in the payment of interest (or Special Interest, if any) on
any Convertible Note issued pursuant to the Convertible Note 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 Convertible Note issued pursuant to the Convertible Note Indenture at
its maturity, upon optional redemption, required repurchase
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(including pursuant to a Change of Control Offer, an Asset Sale Offer, or 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 Convertible
Note as required;
(c) failure by the Company 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," "--
Consolidation, Merger, Conveyance, Lease or Transfer," "--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 the Convertible Note 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 Trustee or to the Company and the Trustee
by holders of at least 25% of the aggregate principal amount at Stated
Maturity of the outstanding Convertible 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 $5 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 $5 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 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
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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) 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 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
Trustee or the holders of not less than 25% of the outstanding aggregate
principal amount at Stated Maturity of the Convertible Notes may declare the
Default Amount, premium, if any, and any accrued and unpaid interest (and
Special Interest, if any) on all such Convertible Notes then outstanding to be
immediately due and payable by a notice in writing to the Company (and to the
Trustee if given by holders of such Convertible Notes), and upon any such
declaration all amounts payable in respect of the Convertible Notes 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
Convertible Notes then outstanding shall become immediately due and payable
without any declaration or other act on the part of the Trustee or any holder
of such Convertible 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 Convertible
Notes has been obtained by the Trustee as provided in the Convertible Note
Indenture. In the event of a declaration of acceleration because an Event of
Default set forth in 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
Convertible Notes. Thereafter, the Default Amount shall equal 100% of
principal amount at Stated Maturity of the Convertible Notes. Under certain
circumstances, the holders of a majority in principal amount at Stated
Maturity of the outstanding Convertible Notes, by notice to the Company and
the Trustee, may rescind an acceleration and its consequences. Subject to all
provisions of the Convertible Note Indenture and applicable law, the holders
of a majority in aggregate principal amount at Stated Maturity of the
Convertible Notes at the time outstanding have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee.
The holders of a majority in aggregate principal amount at Stated Maturity
of the Convertible Notes then outstanding by notice to the Trustee may on
behalf of the holders of all such Convertible Notes waive any existing Default
or Event of Default and its consequences under the Convertible Note 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 Convertible Notes. Subject to the provisions of the Convertible Note
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Convertible Note
Indenture at the request, order or direction of any of the holders, unless
such holders have offered to the Trustee reasonable security or indemnity.
Subject to the provisions of the Convertible Note Indenture and applicable
law, the holders of a majority in aggregate principal amount at Stated
Maturity of the Convertible Notes at the time outstanding have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred upon the
Trustee.
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The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Convertible Note Indenture, and the Company is
required within five Business Days after becoming aware of any Default or
Event of Default, to deliver to the 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 Trustee may, at any time and from time to time, without
notice to or consent of any holder of Convertible Notes, enter into one or
more indentures supplemental to the Convertible Note Indenture, (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 the
Convertible Note Indenture and the Convertible 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 the Convertible Note Indenture;
(iii) to add any additional Events of Default; (iv) to provide for
uncertificated Convertible Notes in addition to or in place of certificated
Convertible Notes; (v) to evidence and provide for the acceptance of
appointment under the Convertible Note Indenture of a successor Trustee; (vi)
to cure any ambiguity in the Convertible Note Indenture, to correct or
supplement any provision in the Convertible Note Indenture which may be
inconsistent with any other provision therein or to add any other provisions
with respect to matters or questions arising under the Indenture; provided,
that such actions shall not adversely affect the interests of the holders in
any material respect; (vii) to secure the Convertible Notes; (viii) to provide
for Guarantees as required under the Convertible Note 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; or (x) to comply with the requirements of the Commission in order to
effect or maintain the qualification of the Convertible Note 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 Convertible Notes, the
Company and the Convertible Note Trustee may enter into one or more indentures
supplemental to the Convertible Note Indenture for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of the Convertible Note 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 Convertible Note: (i) change the
Stated Maturity of the principal of, or any installment of interest (including
Special Interest, if any) on, any 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 Convertible Note, 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
Convertible Notes, the consent of whose holders is necessary for any such
supplemental indenture or required for any waiver of compliance with certain
provisions of the Convertible Note Indenture or any Convertible Note
Guarantees or certain Defaults thereunder; (iii) 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;
(iv) modify the obligations of the Company to make offers to purchase
Convertible 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 to repurchase the Convertible Notes; or (v) 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 Convertible Notes may, on behalf of the
holders of all such Convertible Notes, waive any past Default under the
Convertible Note Indenture and its consequences, except Default in the payment
of the principal of (or premium, if any) or interest on any Convertible 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 Convertible Note affected.
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.
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SATISFACTION AND DISCHARGE OF THE CONVERTIBLE NOTE INDENTURE, DEFEASANCE
The Company may 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 Convertible Notes, and the Convertible Note
Indenture shall cease to be of further effect as to all outstanding
Convertible Notes (except as to (i) rights of registration of transfer,
substitution and exchange of the Convertible Notes 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 Convertible Notes (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 Trustee under the
Convertible Note Indenture, (iv) conversion rights under the Convertible Note
Indenture, and (v) certain other specified provisions in the Convertible Note
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 Trustee, in trust for
the benefit of the holders, at any time prior to the Stated Maturity of the
Convertible Notes 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 Convertible
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 Convertible Notes then outstanding on the dates on which
any such payments are due in accordance with the terms of the Convertible Note
Indenture and of such Convertible 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 Trustee of an
opinion of outside counsel acceptable to the 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 the trust or the Trustee being
subject to regulation under the Investment Company Act of 1940.
THE TRUSTEE
Harris Trust and Savings Bank is the Trustee under the Convertible Note
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 Convertible Notes have the right to direct
the time, method and place of conducting any proceeding for exercising any
remedy available to the Trustee, subject to certain exceptions. Except during
the continuance of an Event of Default under the Convertible Note Indenture,
the Trustee will perform only such duties as are specifically set forth in the
Convertible Note Indenture. The Convertible Note Indenture provides that in
case an Event of Default shall occur (which shall not be cured or waived), the
Trustee will be required, in the exercise
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of its rights and powers under the Convertible Note Indenture, to use the
degree of care of a prudent person in the conduct of such person's own
affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Convertible Note Indenture
at the request of any of the holders of the Convertible Notes, as the case may
be, unless such holders shall have offered to the 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
Convertible Notes or the Convertible Note Indenture 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 Convertible 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 Convertible 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 Convertible Note Indenture 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 Convertible Notes in accordance with the
Convertible Note Indenture. The Company, the Registrars and the Trustee 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 Convertible Note Indenture.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Convertible Note Indenture. Reference is made to the Convertible Note
Indenture for the full definition of all such terms, as well as any
capitalized terms used herein for which no definition is provided.
"Accreted Value" means, 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;
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(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.
"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.
"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.
"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.
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"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.
"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
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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, 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
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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.
"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 the description of the
Securities 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'
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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).
"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
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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 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.
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"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 Convertible Notes were first
authenticated and delivered under the 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).
"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,
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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.
"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
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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.
"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;
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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.
"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,
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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.
"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.
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INITIAL WARRANTS
GENERAL
The Initial Warrants were 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 subject to all terms in the Warrant Agreement and holders
of Initial 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
Initial 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 1.269311203 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 this Prospectus.
CERTAIN TERMS
Exercise
In order to exercise all or any of the Initial 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 an
Initial Warrant is being exercised. Payment for securities upon exercise of an
Initial 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 Initial 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 Initial 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 Initial
Warrants evidenced by a Warrant Certificate are to be exercised, a new Warrant
Certificate will be issued for the remaining number of Initial Warrants. All
Warrant Shares or other securities issuable by the Company upon the exercise
of the Initial Warrants shall be validly issued, fully paid and nonassessable.
No fractional Warrant Shares will be issued upon exercise of the Initial
Warrants. If any fraction of a Warrant Share would, except for the foregoing
provision, be issuable upon the exercise of any Initial 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
Initial Warrant is presented for exercise, multiplied by such fraction,
computed to the nearest whole cent.
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Certificates for Initial 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 Initial Warrants will be able to exercise their Initial Warrants
only if a registration statement relating to the Warrant Shares is then
effective under, or the exercise of such Initial Warrants is exempt from the
registration requirements of, the Securities Act. See "Registration Rights."
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 Initial 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 Initial 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
Initial 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 Initial Warrants, as if the Initial Warrants had been exercised
immediately prior to such event, less the Exercise Price. Upon receipt of such
payment, if any, the Initial 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 Initial 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 Initial Warrants.
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No Rights as Stockholders
The holders of unexercised Initial 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
Initial 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.
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent of
the holders of the Initial 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 Initial Warrants shall require the written consent of the holders of a
majority of the then outstanding Initial Warrants. The consent of each holder
of the Initial 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 Initial Warrants would be decreased (other than
pursuant to adjustments provided in the Warrant Agreement).
CLASS A COMMON STOCK
See "Description of Capital Stock" for a description of the Class A Common
Stock.
REGISTRATION RIGHTS
With respect to the Convertible Notes, the Initial 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 Convertible Notes and the Initial Warrants. Pursuant to the
Registration Rights Agreement, the Company is required to keep the
Registration Statement, of which this Prospectus forms a part, effective for a
specified time period. If the Registration Statement ceases to be effective or
fails to be usable for its intended purpose without being succeeded
immediately by a post-effective amendment to such Registration Statement that
cures such failure and that is itself declared effective for a period of more
than 30 consecutive business days, then commencing on the day following the
date on which such default occurs, the Company agrees to pay to each holder of
the Convertible Notes during the first 90-day period immediately following the
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 during which such default continues, up to a maximum rate of 1.5%
per annum. Special Interest shall cease to be payable when the Registration
Statement again becomes effective or usable. A holder of Convertible Notes who
is not entitled to the benefits of the Registration Statement (i.e., such
holder has not elected to include information in the Registration Statement)
shall not be entitled to such Special Interest. Reference is made to the
Registration Rights Agreement, a copy of which can be obtained from the
Company upon request, for further information with respect to the provisions
of such agreement. In addition, the Company has entered into the Investors
Registration Agreement, pursuant to which the Original Purchasers may, subject
to certain limitations, require the Company to register for public resale all
or part of the Common Stock held by the Original Purchasers. See "Risk
Factors--Shares Eligible for Future Sale" and "Certain Relationships and
Related Transactions--Formation of the Company."
CERTAIN OTHER INDEBTEDNESS
On September 30, 1996, the Company issued $48.5 million in aggregate
principal amount at maturity of 14% Senior Discount Notes due 2003 (the
"Senior Notes"). The Senior Notes are general, unsecured obligations of the
Company and rank pari passu in right of payment with all existing and future
senior unsecured
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indebtedness of the Company, and will be senior in right of payment to all
existing and future subordinated indebtedness of the Company. The terms of the
Senior Notes are as set forth in an indenture, dated as of September 30, 1996
(the "Senior Note Indenture"), by and between the Company and Harris Trust and
Savings Bank, as trustee, and are similar in many respects to the terms of the
Convertible Notes.
Under the terms of the Senior Note Indenture, the Company may not, and may
not permit its Restricted Subsidiaries to, directly or indirectly, incur any
Indebtedness (including Acquired Indebtedness), and the Company may not issue
any Disqualified Stock; provided, that the Company may incur Indebtedness or
issue Disqualified Stock if, after giving effect to such issuance or occurrence
on a pro forma basis, the Indebtedness to Operating Cash Flow Ratio of the
Company does not exceed 5 to 1.0. The Senior Note Indenture provides certain
exceptions to the foregoing limitation, including, among other things, up to
$45 million of indebtedness under the Credit Facility (as defined herein), up
to $30 million of which may be secured, Vendor Financing (as defined herein)
not to exceed a certain amount and Refinancing Indebtedness (as defined
herein).
The Senior Note Indenture limits the Company's ability to repurchase or pay
dividends on the Class A Common Stock. Until the Company's obligations under
the Senior Note Indenture are defeased, the Company cannot declare or pay any
dividend on its Capital Stock (other than dividends, distributions or payments
made solely in Qualified Stock of the Company) or purchase, redeem, acquire or
retire any of its Capital Stock unless (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 payment and the incurrence of any Indebtedness the net proceeds of which
are used to finance such payment, the Company could incur at least $1.00 of
additional Indebtedness pursuant to the Senior Note Indenture and (iii) after
giving effect to such payment on a pro forma basis, the aggregate amount
expended or declared for all such payments (as well as other 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 quarter immediately preceding
the Issue Date and ending on the last day of the fiscal quarter immediately
preceding the date of such 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 the 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 under
the Senior Note Indenture, minus (E) 100% of the amount of certain Investments
made by the Company, including, among others, pursuant to clause (iii) of the
following paragraph subsequent to the Issue Date of the Senior Notes.
Notwithstanding the foregoing limitations, the Company may (i) pay 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) retire any Capital Stock of the
Company in exchange for or out of the proceeds of the substantially concurrent
sale of Qualified Stock of the Company; and (iii) purchase, redeem, retire or
acquire any Common Stock 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
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option plan in effect on the Issue Date of the Senior Notes or upon the death,
disability, retirement or termination of employment of such management, 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.
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 Senior Note 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.
In addition, the Senior Note Indenture contains certain other covenants,
including (i) a limitation on the creation or assumption of liens with respect
to the property or assets of the Company, (ii) a limitation on the ability of
the Company to enter into any Sale and Leaseback Transactions (as defined
herein), (iii) a limitation on the ability of the Company to make any
Restricted Payments (as defined herein), (iv) a limitation on the issuance of
any capital stock of any Restricted Subsidiary of the Company, (v) a limitation
on the ability of the Company to enter into any Affiliate Transactions (as
defined herein) and (vi) a limitation on the lines of business in which the
Company may engage. Reference is made to the Senior Note Indenture, a copy of
which can be obtained from the Company upon request, for further information
with respect to the foregoing covenants.
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.
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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 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.
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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.
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 investment in the Securities, as well as certain potential
federal income tax consequences to the Company with respect to the Securities.
Except where noted, it deals only with Convertible Notes, and Initial Warrants
held as capital assets by 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. PROSPECTIVE PURCHASERS CONSIDERING AN INVESTMENT IN THE
CONVERTIBLE NOTES, INITIAL WARRANTS OR COMMON STOCK ARE URGED TO CONSULT THEIR
TAX ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSIDERATIONS THAT MAY BE
SPECIFIC TO THEM AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY
OTHER TAXING JURISDICTION.
TAXATION OF THE CONVERTIBLE NOTES
Original Issue Discount. The Convertible Notes were issued with original
issue discount ("OID") for federal income tax purposes. Accordingly, each
holder of Convertible Notes generally will be required to include OID in income
as it accrues on a yield-to-maturity basis over the term of the Convertible
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 Convertible Note equals the excess of the stated redemption price
at maturity of such Convertible Note over its issue price. The stated
redemption price at maturity includes all payments required to be made on the
Convertible 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 Convertible 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 Convertible Notes was the
initial price at which a substantial portion of the Convertible Notes were sold
(not including sales to bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters or wholesalers) which was
$767.90 per Convertible Note.
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 holder holds the debt instrument. 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
Convertible Notes is generally equal to the product of the adjusted issue price
of the Convertible Notes at the beginning of the accrual period (the issue
price of the Convertible Notes determined as described above, generally
increased by all prior accruals of OID) and the Convertible Notes' yield-to-
maturity (the discount rate, which, when applied to all payments under the
Convertible Notes, results in a present value equal to the issue price of the
Convertible 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 Convertible Notes were
held by the holders.
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Premium. If a holder purchases a Convertible Note for an amount that is
greater than such Convertible Note's stated redemption price at maturity, such
holder will be considered to have purchased such Convertible 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
Convertible 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 Convertible Note (including an original purchaser) purchases
the Convertible Note for an amount greater than the Convertible Note's adjusted
issue price but less than such Convertible 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.
Market Discount. If a holder purchases a Convertible Note for an amount that
is less than its adjusted issue price, by at least .025% of its adjusted issue
price times the number of remaining whole years to maturity, then such holder
will be considered to have purchased such Convertible Note with "market
discount" equal in amount to such difference between the adjusted issue price
and purchase price. In that event, gain realized by the holder upon the sale,
retirement or certain other dispositions of the Convertible Note will be
treated as ordinary interest income to the extent of the accrued market
discount. Market discount on a Convertible Note will be treated as accruing
ratably over such Note's term, or, at the holder's election, under a constant
yield method. In addition, such holder will be required to defer the deduction
of a portion of the interest paid on any indebtedness incurred or continued to
purchase or carry the Convertible Note (unless such holder elects to include
market discount in income currently as it accrues, on either a ratable or
constant yield basis). Such election, once made, applies to all market discount
bonds acquired by the taxpayer on or after the first day of the taxable year to
which such election applies, and may not be revoked without the consent of the
IRS.
Registration of the Notes. If, within the applicable period after the
original issuance of the Convertible Notes, this Registration Statement has not
become effective, or certain other events constituting a Convertible Note
Registration Default occur, Special Interest shall become payable in cash with
respect to the Convertible Notes. See "Registration Rights--Convertible Notes."
This rate increase should not result in a deemed reissuance or taxable exchange
of the Convertible Notes. Similarly, in the event that within the applicable
period following the date of original issuance of the Convertible Notes, the
Company does not effect a Qualified Public Offering or if there has not been a
Qualified Sale of the Company, the Convertible Note Indenture will require the
Company to issue Convertible Note Contingent Warrants to the holders of the
Convertible Notes. The issuance of the Contingent Warrants should not result in
a deemed taxable exchange of the Convertible 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 Convertible Notes. A holder will generally recognize gain or
loss upon the sale, exchange, retirement or other disposition of Convertible
Notes equal to the difference between the amount realized on the disposition
and the holder's adjusted tax basis in the Convertible Notes. A holder's
adjusted tax basis in a Convertible Note will generally be the cost of the
Convertible Note, increased by any OID previously included in income by such
holder (and the accrual of market discount, if any, which the holder has
previously included in income) and decreased by the amount of any deductions
for amortizable bond premium. Except as described above under "Market
Discount," such gain or loss generally would be capital gain or loss and would
be long-term capital gain or loss if the holding period for the Convertible
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
Convertible 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.
The Convertible 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 Convertible 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.
WARRANTS
Exercise. No gain or loss will be recognized for federal income tax purposes
upon exercise of a Warrant (except that gain will be recognized to the extent
cash is received in lieu of fractional shares). A holder's initial tax basis in
an Initial Warrant will be equal to the price the holder pays for such Warrant.
A holder's initial tax basis in a Contingent Warrant will be equal to the fair
market value on the date of issuance, assuming such holder receives the
Contingent Warrant from the Company as a result of the failure by the Company
to consummate a Qualified Public Offering or Qualified Sale of the Company. The
tax basis of shares of Common Stock acquired upon exercise of a Warrant will be
equal to the sum of (i) the holder's tax basis in such Warrant and (ii) the
exercise price. The holding period of such Common Stock acquired upon exercise
of the Warrants will begin on the date of exercise of the Warrant, unless the
Warrant is treated as stock for federal income tax purposes (as discussed
below). In the event the Warrant is treated as stock, the holding period of the
Common Stock acquired upon exercise will include the period during which the
Warrants were held.
Disposition. In general, the sale, exchange or other taxable disposition of a
Warrant will result in gain or loss to the holder in an amount equal to the
difference between the amount realized on such sale, exchange or other
disposition and the holder's tax basis in the Warrant. Such gain or loss
generally will be long-term capital gain or loss if the Warrant is held by the
holder for more than one year at the time of the disposition and the Common
Stock issuable upon exercise of such Warrant would have been a capital asset if
acquired by the holder. However, the IRS might assert that the sale of a
Warrant to the Company does not constitute a sale or exchange and that the
holder should recognize ordinary income or loss. The IRS also could contend
that the Warrants represent an equity interest in the Company because, among
other things, the Warrants are exercisable for nominal consideration. In the
event the Warrants are treated as stock for Federal income tax purposes, the
sale of Warrants to the Company should be governed by the stock redemption
provisions of Section 302 of the Code. In such a case, redemptions of Warrants
by the Company would be treated as a dividend and taxed as ordinary income to
the extent of the Company's current and accumulated earnings and profits,
unless, taking into account certain constructive ownership rules, the holder
terminated his entire equity interest in the Company or the redemption was "not
essentially equivalent to a dividend." In a published ruling, the IRS has
indicated that a holder whose actual and constructive stock ownership in an
issuer was minimal and who exercised no control
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over corporate affairs was generally entitled to capital gain or loss treatment
upon the redemption of his stock so long as his percentage stock ownership was
thereby reduced.
Expiration. The expiration of a Warrant should generally result in a long-
term capital loss to the holder equal to the holder's tax basis in the Warrant
if the Warrant is held by the holder for more than one year at the time of the
expiration and the Common Stock issuable upon exercise of the Warrant would
have been a capital asset if acquired by him.
Adjustments to Conversion Ratio. Adjustments made to the number of shares
that may be acquired upon the exercise of a Warrant, or the failure to make
such adjustments, may result in a taxable distribution to the holders of
Warrants pursuant to Section 305 of the Code.
CONVERSION OF CONVERTIBLE NOTES
Exercise. A holder's conversion of Convertible Notes into Class A Common
Stock generally will not be a taxable event (except with respect to cash
received in lieu of a fractional share of Class A Common Stock) for federal
income tax purposes. A holder's basis in the Class A Common Stock received upon
conversion generally will be the same as the holder's basis (exclusive of any
tax basis allocable to a fractional share) in the underlying Convertible Note.
A holder's holding period in the Class A Common Stock received upon conversion
generally will include the holding period in the underlying Convertible Note.
Adjustments to Conversion Ratio. Adjustments made to the number of shares
that may be acquired upon the conversion of the Convertible Notes, or the
failure to make such adjustments, may result in a taxable distribution to the
holders of Convertible Notes pursuant to Section 305 of the Code.
PLAN OF DISTRIBUTION
The Securities may be offered by the Selling Securityholders from time to
time in transactions for their own account at negotiated prices. The Selling
Securityholders may effect the sale of the Securities by selling the Securities
to or through broker-dealers, and such broker-dealers may receive compensation
in the form of discounts, concessions or commissions from the Selling
Securityholders or the purchasers of Securities for whom such broker-dealers
may act as agent or to whom they sell as principal, or both (which compensation
as to a particular broker-dealer might be in excess of customary commissions).
The Selling Securityholders and any broker-dealers that act in connection with
the sale of the Securities might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commissions received by
them and any profit on the resale of the Securities as principal might be
deemed to be underwriting discounts and commissions under the Securities Act.
At the time a particular sale of any of the Securities is made, to the extent
required, a Prospectus Supplement will be distributed which will set forth the
amount of Securities being sold and the terms of the sale, including the name
or names of any underwriters, brokers, dealers or agents (whether such party is
acting as a principal or as agent for the Selling Securityholders), any
discounts, commissions, concessions and other items constituting compensation
from the Selling Securityholders and any discounts, commissions or concessions
allowed or re-allowed or paid to dealers.
The Company will pay all expenses incident to the sale of the Securities
other than the fees and expenses of the Selling Securityholders and
underwriting discounts and commissions.
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SELLING SECURITYHOLDERS
The Registration Statement of which this Prospectus forms a part has been
filed pursuant to Rule 415 under the Securities Act to afford the holders of
the Securities the opportunity to sell such Securities in a public transaction
rather than pursuant to an exemption from the registration and prospectus
delivery requirements of the Securities Act. In order to avail itself of that
opportunity, a holder must notify the Company in writing of its intention to
sell Securities and request that the Company file a supplement to this
Prospectus or an amendment to the Registration Statement, if required,
identifying such holder as a Selling Securityholder and disclosing such other
information concerning the Selling Securityholder and the Securities to be
sold as may then be required by the Securities Act and the rules of the
Commission. No offer or sale pursuant to this Prospectus may be made by any
holder until such a request has been made and until any such supplement has
been filed or any such amendment has become effective.
The Selling Securityholders of the Securities are Merrill Lynch Global
Allocation Fund, Inc., which holds $36.0 million in aggregate principal amount
at maturity of Convertible Notes and Initial Warrants to purchase 61,550
shares of Class A Common Stock as of the date of this Prospectus and any
persons or entities to which the Securities may be transferred or sold by
Merrill Lynch Global Allocation Fund, Inc.
This Prospectus has been prepared for use by the Initial Purchasers in
connection with offers and sales of the Convertible Notes, the Initial
Warrants, the Convertible Note Shares and the Warrant Shares, 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 Securities 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 Securities.
LEGAL MATTERS
The validity of the Securities 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 have
been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein, 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.
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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.
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
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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.
96
<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 Unaudited 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 UNAUDITED 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 UNAUDITED 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............................................................... 15
Use of Proceeds............................................................ 23
Dividend Policy............................................................ 23
Capitalization............................................................. 24
Selected Historical Consolidated Financial and Operating Data.............. 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................. 26
Industry Overview: The Local Telecommunications Service Industry........... 30
Business................................................................... 32
Management................................................................. 45
Certain Relationships and Related Transactions............................. 51
Stock Ownership............................................................ 55
Description of Securities.................................................. 56
Registration Rights........................................................ 84
Certain Other Indebtedness................................................. 84
Description of Capital Stock............................................... 86
Certain Federal Income Tax Considerations.................................. 89
Plan of Distribution....................................................... 92
Selling Securityholders.................................................... 93
Legal Matters.............................................................. 93
Experts.................................................................... 93
Glossary................................................................... 94
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 SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN-
DERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
----------------
PROSPECTUS
----------------
LOGO
UNITED USN, INC.
9% CONVERTIBLE SUBORDINATED
NOTES DUE 2004
WARRANTS TO PURCHASE CLASS A
COMMON STOCK
CLASS A COMMON STOCK
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses paid or payable in connection
with the offering of the securities being registered hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee...................... $8,378
Printing and Engraving Expenses.......................................... *
Legal Fees and Expenses.................................................. *
Accounting Fees and Expenses............................................. *
Transfer Agent and Registrar Fees........................................ *
Miscellaneous Fees and Expenses.......................................... *
------
Total................................................................ *
======
</TABLE>
- --------
*To be filed by amendment.
ITEM 14. 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 15. RECENT SALES OF UNREGISTERED SECURITIES
(1) On April 20, 1994, Chase Capital Partners and CIBC Wood Gundy Securities
Corp. each purchased from the Registrant 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.
(2) On June 10, 1994, Hancock Venture Capital Associates purchased from the
Registrant 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.
(3) On November 2, 1994, Chase Capital Partners, CIBC Wood Gundy Securities
Corp. and Hancock Venture Capital Associates each purchased from the
Registrant 7,425 shares of Series A Preferred Stock and 69,630 shares of
Common Stock for a total purchase price of $7,500,000.
II-1
<PAGE>
(4) On June 22, 1995, Chase Capital Partners, CIBC Wood Gundy Securities
Corp., Hancock Venture Capital Associates, Northwood Capital Partners LLC,
Northwood Ventures and BT Capital Partners, Inc. purchased from the Registrant
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.
(5) On July 21, 1995, Enterprises & Transcommunications, L.P. purchased from
the Registrant 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.
(6) Pursuant to a recapitalization, in March 1996, Chase Capital Partners,
CIBC Wood Gundy Securities Corp., Hancock Venture Capital Associates,
Northwood Capital Partners LLC, Northwood Ventures, BT Capital Partners, Inc.
and Enterprises & Transcommunications, L.P. purchased, in the aggregate,
110,157 shares of Common Stock for no consideration in order to settle a
dispute relating to the price per share paid for previously purchased shares
of Common Stock.
(7) On September 30, 1996, the Registrant caused its outstanding shares of
Series A Preferred Stock and Series A-2 Preferred Stock to be converted into
newly issued shares of Class A Common Stock.
(8) On September 30, 1996, Chase Capital Partners, CIBC Wood Gundy
Securities Corp., Hancock Venture Capital Associates, Northwood Capital
Partners LLC, Northwood Ventures, BT Capital Partners, Inc. and Enterprises &
Transcommunications, L.P. purchased, in the aggregate, 10,000 shares of 9%
Cumulative Convertible Pay-In-Kind Preferred Stock for an aggregate purchase
price of $10 million.
(9) On September 30, 1996, Merrill Lynch Global Allocation Fund, Inc.
purchased from the Registrant in a Rule 144A offering (a) 48,000 units, each
consisting of a 14% Senior Discount Note due 2003 and a warrant to purchase
approximately 1.27 shares of Class A Common Stock and (b) $36.0 million in
aggregate principal amount at stated maturity of 9% Convertible Subordinated
Notes due 2004 for an aggregate purchase price of $55,967,722.
ITEM 16. 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 9%
Cumulative Convertible Pay-In-Kind Preferred Stock (the "9% Preferred
Stock") 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 9% Convertible Subordinated Notes due 2004 (the
"Convertible Note Indenture").
4.2** Registration Rights Agreement dated as of September 30, 1996, by and
among the Registrant and the Initial Purchasers named therein.
4.3** 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 14% Senior Discount Notes due 2003.
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-2
<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, relating to the 9%
Preferred Stock.
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 Convertible Note Indenture.
</TABLE>
- --------
+Incorporated by reference to the Registrant's Registration Statement on Form
S-4, file number 333-16265.
*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 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby further undertakes:
(4) That, for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
a registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective;
(5) That, for the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(6) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim 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 Act
and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO,
STATE OF ILLINOIS ON NOVEMBER 26, 1996.
UNITED USN, INC.
/s/ J. Thomas Elliott
By: _________________________________
J. Thomas Elliott
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON THE DATES
AND IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ J. Thomas Elliott President, Chief Executive November 26, 1996
____________________________________ Officer and Director
J. Thomas Elliott (Principal Executive
Officer and Director)
/s/ Robert J. Luth (Principal Financial November 26, 1996
____________________________________ Officer, Principal
Robert J. Luth Accounting Officer)
/s/ Thomas C. Brandenburg Chairman of the Board November 26, 1996
____________________________________
Thomas C. Brandenburg
/s/ Richard J. Brekka Director November 26, 1996
____________________________________
Richard J. Brekka
/s/ Donald J. Hofmann, Jr. Director November 26, 1996
____________________________________
Donald J. Hofmann, Jr.
/s/ Paul S. Lattanzio Director November 26, 1996
____________________________________
Paul S. Lattanzio
/s/ William P. Glasgow Director November 26, 1996
____________________________________
William P. Glasgow
Director November , 1996
____________________________________
William A. Johnston
Director November , 1996
____________________________________
Eugene A. Sekulow
</TABLE>
II-5
<PAGE>
Exhibit 23.1
[Letterhead of Deloitte & Touche LLP]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement, dated November 27, 1996,
of United USN, Inc. on Form S-1, 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 27, 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
