<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 1997
REGISTRATION NO. 333-37621
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
USN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4813 36-3947804
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
---------------
10 SOUTH RIVERSIDE PLAZA,
SUITE 401
CHICAGO, ILLINOIS 60606
(312) 906-3600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
---------------
THOMAS A. MONSON, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
USN COMMUNICATIONS, INC.
10 SOUTH RIVERSIDE PLAZA, SUITE 401
CHICAGO, ILLINOIS 60606
(312) 906-3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPY TO:
GARY P. CULLEN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 407-0700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
---------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
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>
SUBJECT TO COMPLETION, DATED NOVEMBER 21, 1997
PROSPECTUS
USN COMMUNICATIONS, INC.
OFFER TO EXCHANGE ITS LOGO
14 5/8% SERIES B SENIOR DISCOUNT NOTES DUE 2004
FOR ANY AND ALL OF ITS OUTSTANDING
14 5/8% SENIOR DISCOUNT NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
USN Communications, Inc. (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange $1,000 principal amount at maturity of 14 5/8% Series B Senior
Discount Notes due 2004 (the "New Notes") of the Company for each $1,000
principal amount at maturity of the issued and outstanding 14 5/8% Senior
Discount Notes due 2004 (the "Old Notes" and, together with the New Notes, the
"Notes") of the Company from the holders (the "Holders") thereof. As of the
date of this Prospectus, there was $152,725,000 aggregate principal amount at
maturity of the Old Notes outstanding. The terms of the New Notes are identical
in all material respects to the Old Notes, except that the New Notes have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and, therefore, will not bear legends restricting their transfer and will not
contain certain terms providing for an increase in the interest rate on the Old
Notes under certain circumstances relating to the timing of the Exchange Offer.
The New Notes will be senior unsecured obligations of the Company and will
rank pari passu in right of payment with all existing and future senior
unsecured and unsubordinated indebtedness of the Company, and senior in right
of payment to all existing and future subordinated indebtedness of the Company.
The New Notes will be effectively subordinated to all secured indebtedness of
the Company to the extent of the value of the assets securing such indebtedness
and to indebtedness of subsidiaries of the Company. As of September 30, 1997,
there was approximately $0.7 million of secured long-term indebtedness
outstanding to which holders of Old Notes were effectively subordinated in
right of payment and approximately $29.3 million of subsidiary indebtedness to
which holders of Old Notes were structurally subordinated. The Indenture (as
defined) will permit the Company and its subsidiaries to incur additional
indebtedness under certain circumstances. See "Description of the Notes."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined). Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered
(cover page continued on next page)
------------
SEE "RISK FACTORS," BEGINNING ON PAGE 14, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES IN THE
EXCHANGE OFFER.
------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
November , 1997
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
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(cover page continued from previous page)
for resale, resold and otherwise transferred by any Holder thereof (other than
any such Holder which is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act), without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such Holder's business and
such Holder has no arrangement with any person to participate in the
distribution of such New Notes. Notwithstanding the foregoing, each broker-
dealer that receives New Notes for its own account pursuant to the Exchange
Offer must acknowledge that (i) Old Notes tendered by it in the Exchange Offer
were acquired in the ordinary course of its business as a result of market-
making or other trading activities and (ii) it will deliver a prospectus in
connection with any resale of New Notes received in the Exchange Offer. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with any resale of the New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making or other trading activities (other than Old Notes acquired
directly from the Company). The Company has agreed that, for a period of 180
days after the Expiration Date (as defined), it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." Any holder who tenders in the Exchange Offer for the
purpose of participating in a distribution of the New Notes cannot rely on the
Morgan Stanley Letter (as defined) or similar letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date. The Exchange Offer is subject to certain
customary conditions. In the event the Company terminates the Exchange Offer
and does not accept for exchange any Old Notes, the Company will promptly
return the Old Notes to the Holders thereof. The Company will give oral or
written notice of any extension, amendment, non-acceptance or termination of
the Exchange Offer to the Holders of the Old Notes as promptly as practicable,
such notice in the case of any extension to be issued by means of a press
release or other public announcement no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
The Company can, in its sole discretion, extend the Exchange Offer
indefinitely, subject to the Company's obligation to pay Special Interest (as
defined) if the Exchange Offer is not consummated by February 14, 1998 and,
under certain circumstances, file a shelf registration statement with respect
to the Old Notes. The Company has agreed to pay the expenses of the Exchange
Offer. The Company will not receive any proceeds from the Exchange Offer. See
"Use of Proceeds."
Prior to the date of this Prospectus, there has been no public market for
the Notes. The Company does not currently intend to list the New Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. Accordingly, there can be no assurance as to the development
or liquidity of any public market for the New Notes.
The Old Notes were sold by the Company on August 18, 1997 in transactions
which were not registered under the Securities Act, in reliance upon the
exemption provided by Section 4(2) of the Securities Act.
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<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement") under the Securities Act
with respect to the New Notes covered by this Prospectus. This Prospectus does
not contain all of the information set forth in the Exchange Offer
Registration Statement and the exhibits and schedules thereto, certain
portions of which have been omitted pursuant to the rules and regulations of
the Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete. With
respect to each such contract, agreement or other document filed or
incorporated by reference as an exhibit to the Exchange Offer Registration
Statement, reference is made to such exhibit for a more complete description
of the matter involved, and each such statement is qualified in its entirety
to such reference.
The Company is subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other information with
the Commission. The Exchange Offer Registration Statement and reports and
other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also
be available for inspection and copying at the regional offices of the
Commission located at Suite 1400, 500 West Madison Street, Chicago, Illinois
60661 and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies
of such material can be obtained by mail from the Public Reference Section of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. Under the terms of the Indenture pursuant to which the Old Notes
were, and the New Notes will be, issued, the Company will be required to file
with the Commission, and to furnish holders of the Notes with, the
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act, including reports on Forms 10-K, 10-Q and 8-K.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act,
including statements containing the words "believes," "anticipates," "expects"
and words of similar import. All statements other than statements of
historical facts included in this Prospectus including, without limitation,
such statements under "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and located elsewhere herein, regarding the Company or any of the
transactions described herein, including the timing, financing, strategies and
effects of such transactions, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from expectations are disclosed in this
Prospectus, including, without limitation, in conjunction with the forward-
looking statements in this Prospectus and/or under "Risk Factors." The Company
does not intend to update these forward-looking statements.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements and related notes appearing elsewhere in this Prospectus. Except as
otherwise noted, all share numbers contained in this Prospectus reflect a nine-
for-one stock dividend declared by the Company on September 4, 1997, including
share information contained in the Financial Statements and Notes thereto and
in the historical financial data included elsewhere in this Prospectus. Unless
the context indicates otherwise, all references to the Company or USN refer to
USN Communications, 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
USN is one of the fastest growing competitive local exchange carriers
("CLECs") in the United States. The Company offers a bundled package of
telecommunications products, including local and long distance telephony, voice
mail, paging, teleconferencing, Internet access and other enhanced features,
tailored to meet the needs of its customers. The Company primarily targets
small and medium-sized businesses with telecommunications usage of less than
$5,000 per month. The Company's strategy is to continue to increase its
customer base by being more flexible, innovative and responsive to the needs of
its target customers than the regional Bell operating companies ("RBOCs") and
the first-tier interexchange carriers ("IXCs"), which have historically
concentrated their sales and marketing efforts on residential and large
business customers. The Company primarily differentiates itself with a value-
based marketing strategy by providing an integrated, customized package of
telecommunications services on a single bill and responsive customer care.
The Company is presently providing service to customers in certain states in
the NYNEX Corporation ("NYNEX") region (New York and Massachusetts) and the
Ameritech Corporation ("Ameritech") region (Illinois, Ohio and Michigan) and is
currently in negotiations to expand its bundled services offering throughout
the 14-state Bell Atlantic/NYNEX region and the 5-state Ameritech region.
Management anticipates implementing service in at least six additional states
in these regions by the end of 1998. In August 1997, NYNEX merged with Bell
Atlantic. The Company continues to operate in the former NYNEX regions, which
are now a part of the Bell Atlantic territory.
During the first nine months of 1997, the Company increased aggregate local
access lines sold from 10,283 lines to 135,172 lines, a compound growth rate of
more than 33% per month, including the sale of 55,851 lines in the third
quarter alone. As of September 30, 1997, the Company had 116,591 access lines
in service, including 51,449 lines which were provisioned in the third quarter.
Services are primarily marketed through an approximately 325 member direct
salesforce in 27 offices located in five states. As part of its customer-
focused product offering, the Company provides personalized customer service,
24 hours a day, 365 days per year, through its two regional customer care
centers.
COMPETITIVE ADVANTAGES
Providing local exchange services is a highly complex process that requires
overcoming significant barriers to entry. Since inception, the Company has
spent significant time, resources and capital to enter the local market. In the
process, it has gained substantial experience in this complicated market
segment. Consequently, the Company believes it has the following competitive
advantages:
. COMPLEMENTARY RELATIONSHIPS WITH RBOCS. The Company believes that the RBOCs'
networks will continue to be the predominant means for providing local
telecommunications services to the Company's target customers for the
foreseeable future. Accordingly, the Company has positioned itself to take
advantage of the opportunities created by the Telecommunications Act of 1996
(the "Telecommunications Act") by leveraging its complementary relationships
with the RBOCs. The Telecommunications Act requires the RBOCs to complete a
number of "checklist" items in order to qualify for long distance entry in
their local
service areas. By moving aggressively to enter into resale agreements and to
develop electronic interfaces with the RBOCs, the Company believes it has
positioned itself to play a key role in enabling the RBOCs to meet a
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number of those requirements. The Company was the first to enter into
comprehensive resale agreements with Ameritech and NYNEX, served as the
systems beta customer for Ameritech, NYNEX and Bell Atlantic and is currently
one of the largest CLECs in terms of access lines in service in the Ameritech
and NYNEX markets. Consequently, the Company is often requested by state and
federal regulators to provide information on the Company's experiences. The
Company believes its complementary relationships with the RBOCs have
facilitated the Company's rapid growth in its existing markets and enabled it
to become a valuable and viable resale channel partner. The Company further
believes, based on discussions with RBOC officials and industry experts, that
the RBOCs will continue to develop strong resale channel partners in an effort
to mitigate the potential negative effects of facilities-based competition.
. UNIQUE RESALE AGREEMENTS. The Company has executed comprehensive local
exchange resale agreements with Ameritech for the greater metropolitan
Chicago area, Ohio and Michigan, and with NYNEX for the State of New York. In
addition to the cost advantages associated with the term and volume
commitment contracts, these contracts provide "most favored nation" and other
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 and NYNEX local services. In
addition, the Company has executed interim resale agreements with Ameritech
for the State of Wisconsin and with NYNEX for the State of Massachusetts. The
Company is currently in negotiations to expand its resale agreements
throughout the 14-state combined Bell Atlantic/NYNEX region and the 5-state
Ameritech region. In advance of completing these negotiations, the Company
plans to enter certain additional states by reselling local service pursuant
to state-mandated wholesale discounts. The Company estimates, based on data
compiled by the Federal Communications Commission ("FCC"), that the regions
covered by the current comprehensive Ameritech and NYNEX resale agreements
include access to over 10 million business access lines. Management believes
that upon expansion into the remaining Bell Atlantic/NYNEX region and the
Ameritech region, the Company will have access to approximately 20 million
business access lines. The Company continuously evaluates opportunities to
enter into agreements with additional RBOCs, other local and long distance
service providers and enhanced and other value-added service providers in
order to aggressively build its customer base as well as to provide
additional services to its existing customers while reducing costs.
. PROPRIETARY ELECTRONIC PROVISIONING AND INTERFACE SYSTEMS. By serving as the
systems beta customer for Ameritech, NYNEX and Bell Atlantic, the Company was
among the first CLECs to develop electronic provisioning systems for resale
of RBOC services. Development of provisioning systems is critical for
carriers seeking to grow rapidly in the complex, competitive local
telecommunications market. These systems must address the numerous technical
configurations associated with local service, including correctly coding
customers into data bases for 911, 411, white pages and customer service, as
well as provisioning thousands of local services, known as universal service
ordering codes ("USOCs"). Electronic provisioning between the Company and its
RBOC vendors allows the Company to provision a significantly greater volume
of lines than would be possible if transmitting orders by mail or facsimile.
Moreover, because the proprietary systems developed by the Company lessen
manual input and reduce repetitive data entry, the Company experiences
improved efficiency and accuracy in transmitted orders, thereby reducing
costs and increasing customer satisfaction. The Company believes it has
established an industry leadership position in the deployment of these
systems, and it is committed to their continuous improvement.
. LARGEST DIRECT SALESFORCE AMONG CLECS IN ITS MARKETS. The Company's services
are currently sold through an approximately 325 member direct salesforce,
located in 27 offices in Illinois, Ohio, Michigan, New York and
Massachusetts. Additionally, the Company intends to hire approximately 175
new salespeople over the next 12 months to expand service in the Ameritech
and combined Bell Atlantic/NYNEX regions. The Company primarily recruits
salespeople with experience in selling competitive telecommunications
services to businesses in the markets where they are based. The Company's
salesforce is trained in-house with a rigorous customer-focused training
program that promotes activity-based selling. Salespeople are given an
incentive
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through a commission structure, with a target of 50% of a salesperson's
compensation based on performance. The Company believes its large,
experienced, face-to-face salesforce has been, and will continue to be,
vitally important to expanding its customer base in today's highly competitive
telecommunications industry environment.
. STRATEGIC FLEXIBILITY. The Company believes that its business strategy
affords it more flexibility to take advantage of regulatory and industry
dynamics than its facilities-based competitors. For example, the FCC's
position on unbundled network elements has evolved to the point where
competitors are now able to purchase on an economic basis unbundled network
elements from the RBOCs and rebundle them into an alternative local service
option. The Company expects to exploit this opportunity by rebundling network
elements, thus expanding its products offering and improving its strategic
position. In addition, the increased construction by facilities-based CLECs
has improved the value of the Company's services by creating alternative
resale partners other than RBOCs. The Company is currently evaluating
proposals from facilities-based CLECs to provision local service.
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 in its target markets. The Company expects to achieve
this goal through the successful implementation of its growth strategy which
includes the following:
. PROVIDE AN INTEGRATED TELECOMMUNICATIONS SOLUTION. A key element in building
its customer base while minimizing churn has been, and will continue to be,
the implementation of a marketing and operating strategy which emphasizes an
integrated telecommunications solution to its target market. To a large
extent, the Company's target customers have not previously been provided the
opportunity to purchase bundled services. The Company attracts and retains
customers by combining responsive customer care with a pricing package to
provide high-quality service at a cost which is usually afforded to only
large business customers. Specifically, the Company provides a single source
and bill for integrated local and long distance telephony, voicemail, paging,
teleconferencing, Internet access and other enhanced and value-added
telecommunications services, with a single point of contact for customer
service, product inquiries, repairs and billing questions. Based on its
experience, the Company believes that this marketing and customer service
approach has minimized customer acquisition costs and churn.
. FOCUS ON LARGE, UNDERSERVED MARKET. The Company utilizes a direct sales
approach and primarily focuses its marketing efforts on small and medium-
sized businesses with telecommunications usage of less than $5,000 per month.
The Company believes this target market is best served by a direct sales
approach because most of these customers do not employ in-house
telecommunications specialists and in most cases obtain services from various
vendors. The Company's experience indicates that these customers prefer a
single source for all their telecommunications requirements, including
products, billing and service. The Company believes that its gross margins on
services provided to its target market are generally higher than for larger
business customers. Since the RBOCs and the first-tier IXCs primarily
concentrate their sales and marketing efforts on residential and large
business customers, the Company will continue to focus its marketing on this
underserved market to rapidly expand its customer base.
. LEVERAGE UBIQUITOUS NETWORKS. The Company believes that a key factor in its
success has been its ability to provide through the RBOC networks the
complete range of local services currently provided by RBOCs across their
entire service territories. There is currently no competing network with the
product breadth, capacity and geographic reach of the RBOC networks. By
contrast, facilities-based CLECs are currently limited primarily to servicing
customers in areas where they have network facilities.
. RAPID MARKET ENTRY. The Company believes its ability to enter a market early
and provide ubiquitous service will continue to allow it to rapidly build a
customer base across a large geographic area prior to the lifting of
regulatory restrictions on the ability of first-tier IXCs and RBOCs to offer
integrated services. Based on recent public announcements, the Company does
not believe that any RBOC will provide in-region long distance services prior
to 1999. As a non-facilities based provider, the Company believes it is able
to build a customer base quickly and efficiently without incurring
significant costs and the developmental delays inherent in
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constructing network and transmission facilities. In addition, the Company's
proprietary software interface systems facilitate its rapid customer
acquisition strategy by allowing it to provision high volumes of access lines.
. EXPAND LOCAL SERVICES. The Company plans to expand its local services
offering, positioning it to offer a full range of local services over a broad
geographic area at a competitive cost, by: (i) entering into term and volume
resale agreements in new territories with RBOCs; (ii) entering into resale
agreements with one or more facilities-based CLECs; (iii) rebundling network
elements from RBOCs; and (iv) reselling local service in new territories
pursuant to state-mandated wholesale discounts prior to entering into resale
agreements with RBOCs and/or facilities-based CLECs in such territories. The
Company believes, based on its experience and industry analysts' reports, as
well as recent regulatory and industry developments, that RBOCs have an
incentive to continue to negotiate wholesale agreements with respect to small
and medium-sized businesses to stabilize this revenue base and deter
migration of such customers to RBOCs' facilities-based competitors. The
Company also believes that its demonstrated sales and provisioning expertise
is attractive to facilities-based CLECs which may not be having similar
success.
The Company, a Delaware corporation (formerly United USN, Inc.), 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.
RECENT DEVELOPMENTS
On August 18, 1997, the Company consummated a private placement (the
"Offering") under Rule 144A of the Securities Act, pursuant to which the
Company issued and sold 1,527,250 units (the "Units") consisting of $152.7
million aggregate principal amount at maturity of Old Notes and warrants to
purchase 2,053,900 shares of Class A Common Stock (the "Initial Warrants"). The
net proceeds of the Offering were $96.5 million. The Old Notes were issued
pursuant to the terms of an Indenture (the "Indenture"), dated as of August 15,
1997, by and between the Company and Harris Trust and Savings Bank, as trustee.
The Indenture provides that (i) in the event that, on or prior to September 30,
1998, the Company does not consummate one or more Public Equity Offerings (as
defined), or otherwise issue in one or more transactions additional equity
securities of the Company, resulting in aggregate net proceeds to the Company
of $50 million, based on an equity valuation of the Company of at least $160
million, the Company will be obligated to issue to the holders of the Notes
warrants (the "Contingent Warrants," and, together with the Initial Warrants,
the "Warrants") exercisable for Class A Common Stock representing 5% of the
Common Stock of the Company on a fully-diluted basis after giving effect to
such issuance. In connection with and subsequent to the Offering, the Company
has also issued and sold to certain of its existing stockholders, their
affiliates and certain new investors, $45.2 million of the Company's 9.0%
Cumulative Convertible Pay-In-Kind Preferred Stock, Series A (the "Series A
Preferred Stock").
In connection with the Offering, Merrill Lynch Global Allocation Fund, Inc.
("MLGAFI") and Merrill Lynch Equity/Convertible Series (Global Allocation
Portfolio) (collectively, "MLAM"), the current holders of all of the Company's
14% Senior Discount Notes due 2003 (the "14% Senior Notes") and 9% Convertible
Subordinated Discount Notes due 2004 (the "Convertible Notes") issued by the
Company in the 1996 Private Placement (as defined), consented (the "Consent")
to the amendment of an Indenture ("the 14% Senior Note Indenture"), dated as of
September 30, 1996 by and between the Company and Harris Trust and Savings
Bank, as trustee, and an Indenture ("the Convertible Note Indenture"), dated as
of September 30, 1996 by and between the Company and Harris Trust and Savings
Bank, as trustee, to allow the Company to, among other things, issue the Notes
on a pari passu basis with the 14% Senior Notes and senior in right of payment
to the Convertible Notes. In connection with the Consent, among other things,
the Company granted to MLAM an option to purchase convertible notes of the
Company on terms substantially similar to the Convertible Notes (the "Consent
Convertible Notes") for an aggregate purchase price of $10.0 million. The
option was exercised by MLAM on October 24, 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview."
On October 21, 1997, the Company filed a registration statement with the
Commission registering the Company's initial public offering (the "Initial
Public Offering") of up to $90.0 million of the Company's Common Stock.
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THE EXCHANGE OFFER
The Exchange Offer........ New Notes are being offered in exchange for a like
face amount of Old Notes. As of the date hereof,
$152,725,000 aggregate principal amount at maturity
of Old Notes is outstanding. The Company will issue
the New Notes to Holders promptly following the
Expiration Date. See "Risk Factors--Consequences of
Failure to Exchange." Holders of the Old Notes do
not have appraisal or dissenter's rights in
connection with the Exchange Offer under the
Delaware General Corporation Law, the governing law
of the state of incorporation of the Company.
Minimum Condition......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered or accepted for exchange.
Expiration Date........... 5:00 p.m., New York City time, on , 1998,
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
Registration Rights The Old Notes were sold by the Company on August
Agreement................ 18, 1997 to Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Donaldson,
Lufkin & Jenrette Securities Corporation (together,
the "Initial Purchasers"), who placed the Old Notes
with institutional investors. In connection
therewith, the Company executed and delivered for
the benefit of the holders of the Old Notes a
registration rights agreement (the "Registration
Rights Agreement") providing, among other things,
for the Exchange Offer.
Conditions to the The Exchange Offer is subject to certain customary
Exchange Offer........... conditions, which may be waived by the Company. See
"The Exchange Offer--Conditions." The Company
reserves the right to terminate or amend the
Exchange Offer at any time prior to the Expiration
Date upon the occurrence of any such condition. NO
VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED
TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR
PROXY THEREFOR) IS BEING SOUGHT HEREBY.
Procedures for Tendering
OldNotes.................
Each Holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Old Notes and any other required
documentation to the exchange agent (the "Exchange
Agent") at the address set forth
herein. By executing the Letter of Transmittal,
each Holder will represent to the Company, among
other things, that (i) the New Notes acquired
pursuant to the Exchange Offer by the Holder and
any beneficial owners of Old Notes are being
obtained in the ordinary course of business of the
person receiving such New Notes, (ii) neither the
Holder nor such beneficial owner is participating
in, intends to participate in or has an arrangement
or understanding with any person
8
<PAGE>
to participate in the distribution of such New
Notes and (iii) neither the Holder nor such
beneficial owner is an "affiliate," as defined
under Rule 405 of the Securities Act, of the
Company. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes,
where such Old Notes were acquired by such broker
or dealer as a result of market-making activities
or other trading activities (other than
Old Notes acquired directly from the Company), may
participate in the Exchange Offer but may be deemed
an "underwriter" under the Securities Act and,
therefore, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker or dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the
Securities Act. See "The Exchange Offer--Procedures
for Tendering" and "Plan of Distribution."
Special Procedures for
Beneficial Owners........
Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered Holder
promptly and instruct such registered Holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering his Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed
bond power from the registered Holder. The transfer
of registered ownership may take considerable time.
See "The Exchange Offer--Procedures for Tendering."
Guaranteed Delivery Holders of Old Notes who wish to tender their Old
Procedures............... Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date must
tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
See "The Exchange Offer--Withdrawal of Tenders."
Acceptance of Old Notes
and Delivery of New
Notes.................... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
Federal Income Tax The exchange of Old Notes for New Notes by
Consequences............. tendering holders should not be a taxable exchange
for federal income tax purposes, and such holders
should not recognize any taxable gain or loss or
any interest income for federal income tax purposes
as a result of such exchange (assuming no Special
Interest becomes due).
9
<PAGE>
Use of Proceeds........... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Effect on Holders of Old As a result of the making of this Exchange Offer,
Notes.................... and upon acceptance for exchange of all validly
tendered Old Notes pursuant to the terms of this
Exchange Offer, the Company will have fulfilled a
covenant contained in the terms of the Old Notes
and the Registration Rights Agreement and,
accordingly, the holders of the Old Notes will have
no further registration or other rights under the
Registration Rights Agreement, except under certain
limited circumstances. Holders of the Old Notes who
do not tender their Old Notes in the Exchange Offer
will continue to hold such Old Notes and will be
entitled to all the rights and limitations
applicable thereto under the Indenture. All
untendered, and tendered but unaccepted, Old Notes
will continue to be subject to the restrictions on
transfer provided for in the Old Notes and the
Indenture. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the
trading market, if any, for the Old Notes not so
tendered could be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange Old
Notes."
Exchange Agent............ Harris Trust Company of New York is serving as
Exchange Agent in connection with the Exchange
Offer. See "The Exchange Offer--Exchange Agent."
10
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The Exchange Offer applies to $152,725,000 aggregate principal amount at
maturity of Old Notes. The terms of the New Notes are identical in all material
respects to the Old Notes, except that the New Notes have been registered under
the Securities Act and, therefore, will not bear legends restricting their
transfer and will not contain certain terms providing for an increase in the
interest rate on the Old Notes under certain circumstances relating to the
timing of the Exchange Offer, which rights will terminate when the Exchange
Offer is consummated. The New Notes will evidence the same debt as the Old
Notes and will be entitled to the benefits of the Indenture, under which both
the Old Notes were, and the New Notes will be, issued. See "Description of the
Notes."
The New Notes............. $152,725,000 aggregate principal amount at
Stated Maturity of 14 5/8% Series B Senior
Discount Notes due 2004.
Maturity.................. August 15, 2004.
Interest Payment Dates.... February 15 and August 15, commencing February
15, 2001.
Yield..................... 14 5/8% per annum (computed on a semi-annual
bond equivalent basis) and calculated from
August 18, 1997.
Interest.................. The New Notes will accrete interest at a rate
of 14 5/8% compounded semiannually, to an
aggregate principal amount of $152,725,000 by
August 15, 2000. Thereafter, the New Notes will
bear interest at the rate of 14 5/8% per annum
which will be payable in cash semiannually on
February 15 and August 15 of each year
commencing February 15, 2001. See "Description
of the Notes--Principal, Maturity and
Interest."
Original Issue Discount... For federal income tax purposes, the New Notes
will be treated as having been issued with
"original issue discount" generally equal to
the difference between the issue price of the
New Notes and the sum of all payments (whether
designated as principal or interest) to be made
thereon. Each holder of a New Note must include
in gross income for federal income tax purposes
a portion of such original issue discount for
each day during each taxable year in which a
New Note is held. See "Certain Federal Income
Tax Considerations."
Ranking...................
The New Notes will be senior unsecured
obligations of the Company and will rank pari
passu in right of payment with all existing and
future senior unsecured and unsubordinated
indebtedness of the Company, including the 14%
Senior Notes, and senior in right of payment to
all existing and future subordinated
indebtedness of the Company, including the
Convertible Notes and the Consent Convertible
Notes. The New Notes will be effectively
subordinated to all secured indebtedness of the
Company to the extent of the value of the
assets securing such indebtedness and to
indebtedness of subsidiaries of the Company. As
of September 30, 1997, there was approximately
$0.7 million of secured long-term indebtedness
outstanding to which holders of Old Notes were
effectively subordinated in right of payment
and approximately $29.3 million of subsidiary
indebtedness to which holders of Old Notes were
structurally subordinated. See "Description of
the Notes--General."
11
<PAGE>
Sinking Fund.............. None.
Optional Redemption....... The New Notes will be redeemable at the option
of the Company, in whole or in part, at any
time on or after August 15, 2002, at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the
date of redemption. In addition, in the event
that after the Issue Date and prior to August
15, 2000, the Company consummates one or more
Public Equity Offerings, the Company may redeem
up to 35% of the aggregate principal amount at
Stated Maturity of Notes with the net proceeds
thereof at a price of 114.63% of the Accreted
Value thereof, together with accrued and unpaid
interest, if any, to the date of redemption;
provided, that immediately after giving effect
to such redemption, not less than 65% of the
aggregate principal amount at Stated Maturity
of the Notes originally issued remains
outstanding. See "Description of the Notes--
Optional Redemption."
Change of Control.........
Following the occurrence of a Change of
Control, the Company will be required to make
an offer to purchase the New Notes at a
purchase price equal to 101% of the Accreted
Value thereof, or in the case of any such
repurchase after August 15, 2000, 101% of the
principal amount at maturity thereof plus
accrued and unpaid interest, if any, to the
date of purchase. The Company may not have
available sufficient funds or the financial
resources necessary to satisfy its obligations
to repurchase the New Notes and other debt that
may become repayable upon a Change of Control,
including the 14% Senior Notes, the Convertible
Notes and the Consent Convertible Notes. See
"Description of the Notes--Repurchase at the
Option of Holders upon a Change of Control."
Certain Covenants......... The Indenture contains certain covenants,
including, among others, covenants with respect
to the following matters: (i) limitation on
asset sales and the disposition of proceeds
thereof; (ii) limitation on indebtedness; (iii)
limitation on issuances of guarantees by
restricted subsidiaries; (iv) limitation on
liens; (v) limitation on sale and leaseback
transactions; (vi) limitation on dividends or
distributions in respect of the Company's
capital stock or making of certain other
restricted payments, including investments;
(vii) limitations on dividends and other
payment restrictions affecting subsidiaries;
(viii) limitation on issuance and sale of
capital stock of restricted subsidiaries; (ix)
limitation on transactions with affiliates; (x)
limitation on designations of unrestricted
subsidiaries; (xi) limitation on engaging in
unrelated lines of business; and (xii)
limitation on consolidation, merger,
conveyance, lease or transfer. These covenants
are subject to important exceptions and
qualifications. See "Description of the Notes--
Certain Covenants."
For additional information concerning the New Notes, see "Description of the
Notes."
RISK FACTORS
Holders of the Old Notes should consider carefully the information set forth
in this Prospectus, and in particular, should evaluate the factors set forth
under "Risk Factors" beginning on page 14.
12
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 years ended December 31, 1995 and December 31, 1996 was derived from,
and should be read in conjunction with, the consolidated audited financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus. The summary financial data as of and for the nine-month
periods ended September 30, 1996 and 1997, 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. In
the opinion of management, such interim financial statements reflect all
adjustments (consisting solely of normal recurring adjustments) necessary to
fairly present the information presented for such periods. Results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of results of operations for a full year or indicative of future
periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30,
INCEPTION TO DECEMBER 31, --------------------
DECEMBER 31, -------------------- UNAUDITED
1994 1995 1996 1996 1997
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net service revenue... $ 1,737 $ 7,884 $ 9,814 $ 7,599 $ 26,998
Cost of services...... 1,455 9,076 9,256 6,587 23,983
--------- --------- --------- --------- ---------
Gross margin.......... 282 (1,192) 558 1,012 3,015
Sales and marketing
expense.............. 2,869 5,867 12,612 5,837 43,087
General and
administrative
expense.............. 4,686 11,100 20,665 10,920 26,882
Interest expense...... 26 734 1,797 46 8,573
Interest and other
income (1)........... 152 646 9,469 8,572 1,889
Minority interest..... -- 150 -- -- --
--------- --------- --------- --------- ---------
Net loss.............. $ (7,147) $ (18,097) $ (25,047) $ (7,219) $ (73,638)
========= ========= ========= ========= =========
Accumulated preferred
dividends............ $ 707 $ 3,103 $ 3,691 $ 3,466 $ 1,012
Net loss to common
shareholder.......... $ (7,854) $ (21,200) $ (28,738) $ (10,685) $ (74,650)
Net loss per common
share................ $ (6.56) $ (7.01) $ (5.63) $ (2.44) $ (10.35)
Weighted average
shares outstanding... 1,196,780 3,025,200 5,102,330 4,384,993 7,212,511
OTHER DATA:
EBITDA (2)............ $ (7,087) $ (15,901) $ (30,390) $ (14,386) $ (64,429)
Cash flows from
operating activities. (6,141) (14,308) (24,098) (14,092) (57,822)
Cash flows from
investing activities. (1,708) (2,556) 7,274 7,647 (10,071)
Cash flows from
financing activities. 13,828 24,589 63,689 64,157 125,018
Depreciation and
amortization......... 186 2,258 2,329 1,360 2,525
Capital expenditures.. 1,728 1,740 2,259 285 10,071
Ratio of earnings to
fixed charges (3).... -- -- -- -- --
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------- --------------------
UNAUDITED
1994 1995 1996 1996 1997
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.......... $ 5,979 $ 13,705 $ 60,569 $ 71,390 $ 117,944
Total assets.......... 12,747 20,471 78,052 88,083 179,157
Long-term debt (net of
current maturities).. 3,176 518 59,864 58,352 167,287
Redeemable preferred
stock................ 15,306 44,396 10,045 9,853 41,049
Common stockholders'
equity (deficit)..... (7,830) (28,768) (3,606) 14,022 (58,428)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1997 1997 1997
OPERATING DATA: ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Local access line
sold................. 4,630 10,283 35,397 79,321 135,172
Local access lines in
service.............. 4,356 8,364 18,557 65,142 116,591
Total employees....... 225 464 641 766 868
Direct salesforce..... 81 206 252 325 325
</TABLE>
- -------
(1) Interest and other income for the year ended December 31, 1996 and 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.
(2) EBITDA consists of operating income (loss) before depreciation and
amortization. While EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flow from
operating activities, which are determined in accordance with generally
accepted accounting principles, EBITDA is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results and as a tool for measuring the ability of the
Company to service its debt. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs. See the Consolidated Statements
of Cash Flows of the Company and the related notes to the Consolidated
Financial Statements thereto included herein.
(3) 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, 1995 and 1996 by $7.1 million, $17.4 million and $23.2
million, respectively, and for the nine-month period ended September 30,
1996 and 1997 by $7.2 million and $65.1 million, respectively.
13
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, before tendering
their Old Notes for the New Notes offered hereby, holders of Old Notes should
consider carefully the following factors, which may be generally applicable to
the Old Notes as well as to the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, including Exxon Capital Holdings
Corporation, SEC No-Action Letter (available April 13, 1988) (the "Exxon
Capital Letter"), Morgan Stanley & Co. Incorporated, SEC No-Action Letter
(available June 5, 1991) (the "Morgan Stanley Letter"), and similar letters,
the Company believes that the New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold or otherwise transferred by any Holder
thereof (other than any such Holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act
provided that such New Notes are acquired in the ordinary course of such
Holder's business and such Holder has no arrangement with any person to
participate in the distribution of such New Notes. Notwithstanding the
foregoing, each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with any resale of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company). The Company has agreed that, for a period of 180 days from
the Expiration Date, it will make this Prospectus available to any broker-
dealer for use in connection with any such resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer for the purpose of participating
in a distribution of the New Notes cannot rely on the Morgan Stanley Letter or
similar letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for the Old Notes not so tendered
could be adversely affected. See "The Exchange Offer."
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
such Old Notes, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of the Old Notes desiring
to tender such Old Notes in exchange for New Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to tenders of Old Notes
for exchange. Holders of Old Notes who do not exchange their Old Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Notes as set forth in the legend thereon.
See "The Exchange Offer."
NEGATIVE CASH FLOW AND OPERATING LOSSES; LIMITED OPERATING HISTORY
The Company has experienced 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
14
<PAGE>
flow. For the period from April 20, 1994 to December 31, 1994 and the fiscal
year ended December 31, 1995, the Company's operating losses were $7.3 million
and $18.2 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 $33.1 million for the
year ended December 31, 1996. The Company lost $15.3 million (excluding the
$8.1 million non-recurring gain) and $73.6 million for the first nine months
of 1996 and 1997, respectively. The Company expects to realize additional
operating losses on a consolidated basis while it continues to expand and
develop its service offerings and its customer base. There can be no assurance
that the Company will be able to develop or expand its customer base or that
it will achieve profitability in future years.
The Company has a limited operating history. Prospective investors,
therefore, have limited historical financial information about the Company
upon which to base an evaluation of its performance and an investment in the
New Notes offered hereby. Given the Company's limited operating history, there
can be no assurance that the Company will be able to achieve or sustain
positive cash flow from operating activities or to implement its growth
strategy. See "Business--Growth Strategy."
SUBSTANTIAL LEVERAGE
The Company has and will continue to have consolidated indebtedness that is
substantial in relation to its stockholders' deficit. As of September 30,
1997, the Company had $167.3 million principal amount of long-term debt and a
total common stockholders' deficit of $58.4 million. See "Capitalization."
The Company's ability to make cash payments with respect to the Notes, to
repay its obligations on the Notes at maturity and to satisfy its other debt
obligations 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. Because the
Company currently has a consolidated cash flow deficit, there can be no
assurance that the Company will be able to make cash interest payments on the
Notes commencing February 15, 2001, or to repay its obligations on the Notes
at maturity. In addition, cash interest will commence accruing on the 14%
Senior Notes on March 30, 2000 and on the Convertible Notes on September 30,
1999. See "--Future Cash Obligations." The Indenture permits the Company and
its subsidiaries to incur additional indebtedness under certain circumstances
including up to $45 million under a Credit Facility (as defined), $30 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.
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including the following: (i) the
Company will have significant and increasing cash interest expense and
significant principal repayment obligations with respect to outstanding
indebtedness, including the Notes, the 14% Senior Notes, the Convertible Notes
and the Consent Convertible Notes; (ii) the Company's degree of leverage and
related debt service obligations may make it more vulnerable than some of its
competitors to the effects of an economic downturn or other adverse
developments; and (iii) the Company's ability to obtain additional financing
could be impaired. In addition, pursuant to the terms of the Indenture and the
14% Senior Note Indenture, the ability of the Company to sell assets is
restricted. See "Description of the Notes."
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, the proceeds from
the September 30, 1996 sale (the "1996 Private Placement") to MLGAFI of the
14% Senior Notes and related warrants to purchase Class A Common Stock and the
Convertible Notes and the proceeds from the Offering. Commencing August 15,
2000, cash interest on the Notes will accrue semiannually at the rate of 14
5/8% per annum (approximately $22.3 million per year). 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), and commencing
March 30, 2000, cash interest on the 14% Senior Notes will accrue semiannually
at the rate of 14% per annum (approximately $6.8 million per year). The fully
accreted principal amounts of the 14% Senior Notes and the Convertible Notes
of $48.5 million and $36.0 million, respectively, will become due on September
30, 2003 and September 30, 2004, respectively. Pursuant to the Consent,
holders of the 14% Senior Notes may exchange 14% Senior Notes for Additional
Notes, which have a higher interest rate and would therefore increase the
Company's cash obligations commencing March 30, 2000. The Consent Convertible
Notes will accrete in value in the same manner as the Convertible Notes and
will become due on September 30, 2004. 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 all such notes and other
debt.
ADDITIONAL CAPITAL REQUIREMENTS
The Company anticipates that it will require substantial additional capital
by the third quarter of 1998 in order to meet planned capital expenditures and
anticipated negative operating cash flow. Sources of funding for the Company's
future financing requirements may include public offerings or private
placements of equity and/or debt securities, bank loans and additional capital
contributions from new or existing stockholders. There can be no assurance
that additional financing will be available to the Company, or, if available,
that it can be obtained on a timely basis and on terms acceptable to the
Company and within the limitations contained in the Indenture and the 14%
Senior Note Indenture. Failure to obtain such financing could result in the
delay or abandonment of the Company's development and expansion plans.
HOLDING COMPANY STRUCTURE; SOURCE OF REPAYMENT OF NOTES; EFFECTIVE
SUBORDINATION OF NOTES TO INDEBTEDNESS OF SUBSIDIARIES
As a holding company that conducts virtually all of its business through
subsidiaries, the Company has no source of operating cash flow other than
dividends and distributions from its subsidiaries. In order to pay cash
interest on the Notes, the 14% Senior Notes, the Convertible Notes and the
Consent Convertible Notes when cash interest is payable thereon, and to repay
the principal amount of the Notes, the 14% Senior Notes, the Convertible Notes
and the Consent Convertible Notes at their respective maturities or to redeem
or repurchase the Notes, the 14% Senior Notes, the Convertible Notes or the
Consent 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 Indenture and the
14% Senior Note Indenture limit the Company's ability to incur additional
indebtedness.
If the Company is required to conduct an offering of its capital stock or to
refinance the Notes, its ability to do so on acceptable terms, if at all, will
be affected by several factors, including financial market conditions and the
value and performance of the Company at the time of such offering or
refinancing, which in turn may be affected by many factors, including economic
and industry cycles. There can be no assurance that an offering of the
Company's capital stock or a refinancing of the Notes can or will be completed
on satisfactory terms, that such offering or refinancing would be sufficient
to enable the Company to make any payments with respect to the Notes if
required or that such offering or refinancing would be permitted by the terms
of the debt instruments of the Company and its subsidiaries then in effect.
The Old Notes are and the New Notes will be unsecured senior obligations of
the Company and will rank pari passu in right of payment with all existing and
future senior unsecured and unsubordinated indebtedness of
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the Company, including the 14% Senior Notes. The Indenture permits the Company
to enter into a Credit Facility under which the Company may incur up to $45
million of Indebtedness (as defined), $30 million of which may be secured. If
such Indebtedness is secured, the Notes will be effectively subordinated to
such Indebtedness to the extent of the value of the assets securing such
Indebtedness. The Company's subsidiaries have no obligation to pay amounts due
on the Notes and have not guaranteed the Notes as of the date hereof; however,
if a subsidiary guarantees any Indebtedness of the Company in the future, such
subsidiary will be obligated to guarantee the Notes. See "Description of the
Notes--Certain Covenants--Limitation on Issuances of Guarantees by Restricted
Subsidiaries." Therefore, the 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, 1997, 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 $29.3 million. Any rights of the Company and its creditors, including the
holders of the Notes, to participate in the assets of any of the Company's
subsidiaries upon any liquidation or reorganization of any such subsidiary
will be subject to the prior claims of that subsidiary's creditors, including
trade creditors.
DEPENDENCE ON BILLING SERVICES AND IMPLEMENTATION
The accurate and prompt billing of the Company's customers is essential to
the Company's operations and future profitability. Historically, the Company
has relied on two third-party vendors to provide billing services and is
currently in the process of transitioning to a single vendor. No assurances
can be made that the transition to a single vendor will not adversely affect
the Company's financial condition and results of operations. Presently, the
Company relies, to a significant extent, on its billing vendor to rate, print
and mail its customers' bills, and the Company is not in a position to control
the management of or the provisioning of billing services by such vendor. In
addition, such vendor has limited financial resources and personnel, and the
Company's expected growth may strain such vendor's available resources. The
Company is currently exploring a number of alternatives with respect to its
billing services, but there can be no assurance that any such alternatives
will be successfully implemented. The failure of any third-party vendor to
provision all of the billing services required by the Company or the failure
by the Company to implement other alternatives could have a material adverse
effect on the financial condition and results of operations of the Company.
In addition, the Company is dependent upon the prompt collection of payment
of its customers' bills and, in turn, upon the creditworthiness of its
customers and the continued implementation of adequate revenue assurance
programs. The failure of its customers to pay their bills in a timely manner
or the Company's failure to continue to implement adequate revenue assurance
programs could have a material adverse affect on the Company's financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
DEPENDENCE ON RELATIONSHIPS 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 customer phone calls. For each local
exchange market in which the Company operates, there currently is a single
provider from whom the Company can purchase local exchange services on a
ubiquitous basis. Under the Telecommunications Act, the Company is entitled to
access to local exchange services in such markets. 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 financial condition and results of
operations. In addition, the accurate and prompt billing of the Company's
customers 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, and such
carrier's failure to do so could have a material adverse effect on the
Company's financial condition and results of operations. For example, there
have been a number of provisioning and billing difficulties related to the
local and long distance
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services provided to business customers in Manhattan, New York pursuant to an
agreement with NYNEX. The problems included failure to provision customers,
lost customer traffic information and receipt by customers of 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,
the Company or its billing vendor may cause interruption in service and/or
reduced capacity for the Company's customers. In the event that the Company's
long distance carriers are unable to handle the growth in customer 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 local exchange carriers ("LECs") are unable to handle the
provisioning or growth in customer 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 continue to intensify in the future due to
regulatory changes, including continued implementation 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.
Additionally, the long distance market is already significantly more
competitive than the local exchange market because the incumbent local
exchange carriers ("ILECs"), including the RBOCs, have historically had a
monopoly position within the local exchange market.
In the local exchange market, the Company also faces competition or
prospective competition from one or more CLECs, many of which have
significantly greater financial resources than the Company, and from other
competitive providers, including some non-facilities-based providers like the
Company. For example, AT&T Corp. ("AT&T"), MCI Communications Corporation
("MCI") and Sprint Corporation ("Sprint"), among other carriers, have each
begun to offer local telecommunications services in major U.S. markets using
their own facilities or by resale of the ILECs' or other providers' services.
In fact, certain competitors, including AT&T, MCI and Sprint, have entered
into interconnection agreements with Ameritech with respect to the States of
Illinois, Michigan and Ohio. These competitors either have begun or in the
near future likely will begin offering local exchange service in those states,
subject to the joint marketing restrictions under the Telecommunications Act
described below. In addition, some of these competitors have entered into
interconnection agreements with NYNEX and either have begun or in the near
future likely will begin offering local exchange service in New York and
Massachusetts, subject to such joint marketing restrictions. In addition to
these long distance service providers, entities that currently offer or are
potentially capable of offering switched services include CLECs, cable
television companies, electric utilities, other long distance carriers,
microwave carriers, wireless telephone system operators and large customers
who build private networks. Many facilities-based CLECs and long distance
carriers, for example, have committed substantial resources to building their
networks or to purchasing CLECs or IXCs with complementary facilities. By
building or purchasing a network or entering into interconnection agreements
or resale agreements with ILECs, including RBOCs, a facilities-based provider
can offer single source local and long distance services similar to those
offered by the Company. Such additional alternatives may provide such
competitors with greater flexibility and a lower cost structure than the
Company.
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In addition, some of these CLECs and other facilities-based providers of local
exchange service are acquiring or being acquired by IXCs that are not subject
to joint marketing restrictions. These combined entities may provide a bundled
package of telecommunications products, including local and long distance
telephony, that is in direct competition with the products offered by the
Company.
With respect to wireless telephone system operators, the FCC has 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 customers, 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.
The Company will also face competition from other fixed wireless services,
including Multichannel Multipoint Distribution Service ("MMDS"), 28 GHz Local
Multipoint Distribution Service ("LMDS") and 38 GHz wireless communications
systems, 2.8 GHz Wireless Communications Service ("WCS"), FCC Part 15
unlicensed wireless radio devices, and other services that use existing point-
to-point wireless channels on other frequencies. The FCC has announced plans to
hold an auction for LMDS licenses in all markets for the provision of high
capacity, wide-area fixed wireless point-to-multipoint systems. In addition,
the FCC has adopted rules to auction geographical area wide licenses for the
operation of fixed wireless point-to-multipoint communications services in the
38 GHz band, although many 38 GHz licenses have already been issued nationwide.
The LMDS auction is scheduled to begin in February 1998 and the 38 GHz auction
is expected to occur later in 1998. The MMDS service, also known as "wireless
cable," also currently competes for metropolitan wireless broadband services.
At present, wireless cable licenses are used primarily for the distribution of
video programming and have only a limited capability to provide two-way
communications needed for wireless broadband telecommunications services, but
there can be no assurance that this will continue to be the case. The FCC has
initiated a proceeding to determine whether to provide wireless cable operators
with greater technical flexibility to offer two-way services. Cellular, PCS and
CMRS providers may also offer fixed services over their licensed frequencies.
Finally, the FCC has allocated a number of spectrum blocks for use by wireless
devices that do not require site or network licensing. A number of vendors have
developed such devices that may provide competition to the Company, in
particular for certain low data-rate transmission services.
Under the Telecommunications Act and related federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
availability of broad-based local resale and the 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.
In August 1997, the FCC denied the application of Ameritech, the RBOC in
three states where the Company operates, for in-region long distance authority
in Michigan. The Company anticipates that a number of RBOCs, including
Ameritech and Bell Atlantic, will file additional applications for in-region
long distance authority in 1998. However, based on recent public announcements,
the Company does not believe that any RBOC will provide in-region long distance
services prior to 1999. The FCC will have 90 days from the date an application
is filed for in-region long distance authority to decide whether to grant or
deny the application. Once
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the RBOCs are allowed to offer widespread in-region long distance services,
both they and the largest IXCs will be in a position to offer single-source
local and long distance services similar to those 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 ILECs 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 ILECs 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 Bell Atlantic a reasonable
transition to similar commitments. If the Company cannot successfully
negotiate such a transition with Bell Atlantic, 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 customers, 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 customer
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.
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). The long
distance resale agreements typically require certain annual commitments from
the Company. The inability of the Company to meet its minimum annual
commitments or designated 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
long-distance 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 customer base, any underutilization
charges or rate increases could have a material adverse effect on the
financial condition and results of operations of the Company.
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, including cellular phone service, in the future. 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 cellular products or services to
date. There can be
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no assurance that the Company's products or services will receive market
acceptance in a timely manner, if at all, or that prices and demand in new
markets will be at a level sufficient to provide profitable operations. See
"Industry Overview" and "Business--Competition."
REGULATION AND RISKS OF THE TELECOMMUNICATIONS ACT
The Company is currently subject to federal and state government regulation
of its telecommunications services. The Company is regulated at the federal
level by the FCC. It is required to obtain and maintain an FCC certificate in
connection with its international services, and to file and maintain both
domestic and international tariffs containing the currently effective rates,
terms and conditions of service for its resale long distance services. The FCC
issued regulations eliminating this tariffing requirement for all interstate
nondominant carriers, except for, under certain circumstances, the RBOCs.
Those regulations have been stayed on appeal by third parties, and the Company
is currently required to file tariffs with the FCC.
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 additional competition in local exchange services develops will
depend on a number of factors, including the extent to which each ILEC
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 ILEC 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 ILEC. An ILEC 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 arbitrate their negotiations with various RBOCs and GTE
Corporation ("GTE") because they have been unable to reach agreement with
those RBOCs and GTE for access and interconnection to provide competitive
local exchange services. In addition, all negotiated resale and long distance
agreements must be submitted to and approved by the relevant state public
service commission. The speed with which additional 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. If competition in local
exchange services develops slowly, the ability of the Company to compete may
be adversely affected.
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 ILECs. In August 1996, the FCC
issued regulations that, among other things, established pricing methodologies
and interim default rates for resold ILEC services and for unbundled LEC
network elements. In July 1997, the U.S. Court of Appeals for the Eighth
Circuit struck down certain of the rules (including the provisions
establishing pricing methodologies and default rates for resold services and
unbundled network elements). The appeals court concluded that the
Telecommunications Act granted the states the authority to set the rates for
interconnection, unbundled network elements and resold services and that the
FCC therefore lacked jurisdiction to issue the pricing rules or to preempt
state pricing rules. Although many state commissions followed the FCC's
pricing rules prior to the Eighth Circuit decision and are
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not likely to repudiate these actions, carriers seeking entry into the
competitive local exchange market have expressed concern about the lack of
uniformity in pricing that may result from the court's rejection of national
pricing rules. The Company cannot predict the impact of the Eighth Circuit's
decision on the Company's operations. In October 1997, the same court issued
an order clarifying that the RBOCs were not required to rebundle unbundled
network elements that competing carriers had purchased separately. If upheld,
this ruling would make it more difficult for competitors, including the large
IXCs, to use rebundled unbundled network elements or the "UNE Platform" to
enter the local exchange market. The FCC, numerous IXCs and various other
parties filed petitions for certiorari with the U.S. Supreme Court on November
19, 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 or the court of appeals proceedings, 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. The Company's strategy of
continuing its growth and expansion will place additional demands upon the
Company's current management and other resources and will require additional
working capital, information systems and management, operational and other
financial resources. The continued growth of the Company will depend on
various factors, including, among others, federal and state regulation of the
telecommunications industry, competition, and the ability of LECs, including
the RBOCs, to provision the Company's additional customers. Not all of the
foregoing factors are within the control of the Company. In particular, there
can be no assurance that the RBOCs with which the Company has resale
agreements will be able to provision new customers in a timely manner. 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 has modified and will continue to modify its
billing and customer care systems to address the resale of local services
under the Ameritech and NYNEX agreements. However, there can be no assurance
that such systems 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 financial condition and results of
operations could be materially adversely affected. Furthermore, there can be
no assurance that the growth experienced by the Company in the past will
continue.
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 management,
particularly members of its senior management team. 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 identify,
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 identify, hire and retain such personnel could have a material
adverse effect on the Company's financial condition and 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 financial condition and results of operations.
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ORIGINAL ISSUE DISCOUNT; POSSIBLE TAX AND OTHER LEGAL CONSEQUENCES FOR HOLDERS
OF NOTES AND THE COMPANY
The Old Notes were issued at a substantial discount from their principal
amount at maturity. Since the New Notes are treated as a continuation of the
Old Notes for federal income tax purposes, the New Notes will also be
considered to have been issued at a substantial discount. Cash payments of
interest on the Notes will not be paid prior to 2000. However, original issue
discount (i.e., the difference between the "stated redemption price at
maturity" of the Notes and the "issue price" of the Notes) has accrued from
the issue date of the Old Notes and will continue to accrue with respect to
the New Notes from the Issue Date of the Old Notes. Such original issue
discount will be includable as interest income periodically in a holder's
gross income for federal income tax purposes in advance of receipt of the cash
payments to which the income is attributable. See "Certain Federal Income Tax
Considerations--Taxation of the Notes--Original Issue Discount." Similar
results may apply under state tax laws. Furthermore, the Notes are subject to
the applicable high-yield discount obligation rules. Accordingly, the Company
will not be able to deduct the original issue discount attributable to the
Notes until paid in cash or property or, in certain circumstances, at all. In
addition, to the extent the Notes constitute corporate acquisition
indebtedness under Section 279 of the Internal Revenue Code of 1986, as
amended (the "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--Taxation of the Notes--Certain
Potential Federal Income Tax Consequences to the Company and to Corporate
Holders." To the extent the rules applicable to high-yield discount
obligations or corporate acquisition indebtedness apply, the Company's after-
tax cash flow may be less than if such original issue discount were deductible
when accrued or the Notes did not constitute corporate acquisition
indebtedness.
If a bankruptcy case were commenced by or against the Company under the
United States Bankruptcy Code after the issuance of the Notes, the claim of a
holder of the Notes with respect to the principal amount thereof may be
limited to an amount equal to the sum of (i) the initial offering price and
(ii) that portion of the original issue discount that is not deemed to
constitute "unmatured interest" for purposes of the United States Bankruptcy
Code. Any original issue discount that had not amortized as of the date of any
such bankruptcy filing would constitute "unmatured interest."
ABSENCE OF PUBLIC MARKET; EXCHANGE OFFER; VOLATILITY OF NOTE PRICE
The Old Notes are eligible for trading in the Private Offerings, Resale and
Trading through Automated Linkages ("PORTAL") market. The New Notes will be
securities for which there currently is no market. There can be no assurance
as to the liquidity of any markets that may develop for the New Notes, the
ability of the holders of the New Notes to sell their New Notes or the price
at which holders would be able to sell their New Notes. Future trading prices
of the New Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results and the market for
similar securities. Each of the Initial Purchasers has advised the Company
that it currently intends to make a market in the New Notes. However, the
Initial Purchasers are not obligated to do so and any market making may be
discontinued at any time without notice. Therefore, there can be no assurance
that any active market for the New Notes will develop. The Company does not
intend to apply for listing of the New Notes on any securities exchange or to
seek approval for quotation through any automated quotation system.
Holders of Old Notes will be able to sell or transfer such securities only
if a registration statement relating to such securities is then in effect, or
the sale or transfer of such securities is exempt from qualification under the
applicable securities laws of the states in which the various holders thereof
reside. See "Registration Rights."
CONTROL BY EXISTING STOCKHOLDERS; CERTAIN ANTITAKEOVER MATTERS
As of the date of this Prospectus, over 90% of the outstanding Class A
Common Stock is owned by the management of the Company and Chase Venture
Capital Associates, L.P., CIBC Wood Gundy Ventures, Inc., Harbourvest
Partners, LLC, Northwood Capital Partners LLC, Northwood Ventures, BT Capital
Partners, Inc. and Prime New Ventures (collectively, the "Original
Purchasers"). Five of the Original Purchasers have stock
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holdings that exceed five percent ownership of the Class A Common Stock of the
Company. Each of these stockholders has exercised its right to appoint one
director to the Board of Directors of the Company. See "Stock Ownership."
Consequently, management and the Original Purchasers 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, MLAM
holds Convertible Notes which were convertible into 2,892,695 shares of Class
A Common Stock as of September 30, 1997 (representing approximately 14% of the
outstanding Common Stock (on a fully diluted basis) as of such date) and will
be convertible into 3,449,598 shares of Class A Common Stock as of September,
30, 1999, assuming no prior conversion of Convertible Notes and subject to
adjustment as described herein (representing approximately % of the
outstanding Common Stock (on a fully diluted basis) as of the date of this
Prospectus). In addition, MLAM holds warrants which are currently exercisable
for 935,940 shares of Class A Common Stock, and, in certain circumstances,
including the Company's failure to consummate an initial public offering by a
specified date, may be issued additional warrants to purchase Class A Common
Stock. MLAM has also exercised its option to purchase the Consent Convertible
Notes, which will be convertible into shares of Class A Common Stock.
Section 203 ("Section 203") of the Delaware General Corporation Law (the
"DGCL") restricts certain business combinations with any "interested
stockholder," as defined by such statute. The Company has expressly decided
not to be governed by Section 203 but may in the future change such election.
In addition, the Company may adopt certain procedural and other requirements
and/or amend its Certificate of Incorporation and/or By-laws that could
further have the effect of delaying, deterring or preventing a change in
control of the Company and/or make it more difficult for stockholders to
effect certain corporate actions, including the ability to replace incumbent
directors and to accomplish transactions opposed by the incumbent Board of
Directors. See "Description of Capital Stock."
CHANGE OF CONTROL
In the event of a Change of Control, the Company will be required to offer
to repurchase all of the outstanding Notes at 101% of the Accreted Value
thereof, or, in the case of any such repurchase on or after August 15, 2000,
101% of the principal amount at maturity thereof, plus any accrued and unpaid
interest thereon to the date of repurchase. Under the indenture governing the
14% Senior Notes (the "14% Senior Note Indenture") and the Convertible Note
Indenture, the Company has, and under the indenture governing the Consent
Convertible Notes (the "Consent Convertible Note Indenture"), the Company will
have, a similar requirement to repurchase the 14% Senior Notes, the
Convertible Notes and the Consent Convertible Notes upon a Change of Control.
The exercise by the holders of the Notes of their rights to require the
Company to offer to purchase the Notes upon a Change of Control could also
cause a default under other indebtedness of the Company, even if the Change of
Control itself does not, because of the financial effect of such repurchase on
the Company. The Company's ability to pay cash to any of the holders of Notes,
14% Senior Notes, Convertible Notes and, if issued, Consent 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 Notes. See "Description of the Notes."
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any proceeds from the issuance of the New Notes in the Exchange Offer.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on August 18, 1997 to the Initial
Purchasers, who placed the Old Notes with institutional investors. In
connection therewith, the Company and the Initial Purchasers entered into a
registration rights agreement (the "Registration Rights Agreement"), pursuant
to which the Company agreed, for the benefit of the holders of the Old Notes,
that the Company would, at its sole cost, (i) within 60 days following the
original issuance of the Old Notes, file with the Commission the Exchange
Offer Registration Statement (of which this Prospectus is a part) under the
Securities Act with respect to an issue of a series of new notes of the
Company identical in all material respects to the series of Old Notes and (ii)
use its best efforts to cause such Exchange Offer Registration Statement to
become effective under the Securities Act within 120 days following the
original issuance of the Old Notes. Upon the effectiveness of the Exchange
Offer Registration Statement (of which this Prospectus is a part), the Company
will offer to the holders of the Old Notes the opportunity to exchange their
Old Notes for a like principal amount of New Notes, to be issued without a
restrictive legend and which might be reoffered and resold by the holder
without restrictions or limitations under the Securities Act. The term
"Holder" with respect to the Exchange Offer means any person in whose name Old
Notes are registered on the books of the Company or any other person who has
obtained a properly completed bond power from the registered holder.
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, including the Exxon Capital Letter,
the Morgan Stanley Letter and similar letters, the Company believes that New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder of such New
Notes (other than any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes. Any Holder who
tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes cannot rely on the Morgan Stanley Letter or
similar letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
Each Holder of the Old Notes (other than certain specified holders) who
wishes to exchange Old Notes for New Notes in the Exchange Offer will be
required to represent that (i) it is not an affiliate of the Company, (ii) any
New Notes to be received by it were acquired in the ordinary course of its
business and (iii) at the time of commencement of the Exchange Offer, it has
no arrangement with any person to participate in a distribution (within the
meaning of the Securities Act) of the New Notes. In addition, in connection
with any resales of New Notes, any broker-dealer (an "Exchanging Dealer") who
acquired the Old Notes for its own account as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company) must deliver a prospectus meeting the requirements of the
Securities Act. Under the Registration Rights Agreement, the Company has
agreed that for a period of 180 days after the Expiration Date it will make
this Prospectus available to Exchanging Dealers and other persons, if any,
subject to similar prospectus delivery requirements in connection with the
resale of such New Notes. See "Plan of Distribution."
In the event that any changes in law or applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange
Offer, or if for any reason the Exchange Offer Registration Statement is not
declared effective within 120 days following the date of original issuance of
the Old Notes, or upon the request of Merrill Lynch under certain
circumstances, the Company will, in lieu of or in addition to effecting the
registration of the New Notes pursuant to the Exchange Offer Registration
Statement and at its expense, (i) as promptly as practicable, file with the
Commission a shelf registration statement (the "Shelf Registration Statement")
covering resales of the Notes, (ii) cause the Shelf Registration Statement to
be declared effective under the Securities Act by the 180th day after the
original issuance of the Old Notes (or promptly in the event
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of a request by an Initial Purchaser) and (iii) keep effective the Shelf
Registration Statement until two years after its effective date. The Company
will, in the event of the filing of a Shelf Registration Statement, provide to
each holder of Old Notes covered by the Shelf Registration Statement copies of
the prospectus which is a part of the Shelf Registration Statement, notify
each such holder when the Shelf Registration Statement has become effective
and take certain other actions as are required to permit unrestricted resales
of the Old Notes. A holder of Old Notes that sells such Old Notes pursuant to
the Shelf Registration Statement generally will be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus
to the purchaser, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by
the provisions of the Registration Rights Agreement which are applicable to
such holder (including certain indemnification obligations). In addition, each
holder of Old Notes will be required to deliver information to be used in
connection with the Shelf Registration Statement in order to have its Old
Notes included in the Shelf Registration Statement and to benefit from the
provisions regarding Special Interest described in the following paragraph.
If either (i) the Exchange Offer Registration Statement or the Shelf
Registration Statement (either, a "Registration Statement") required to be
filed is not filed with the Commission on or prior to the date specified for
such filing in the Registration Rights Agreement, (ii) any such Registration
Statement has not been declared effective by the Commission on or prior to the
date specified for such effectiveness in the Registration Rights Agreement,
(iii) the Exchange Offer has not been consummated on or prior to the date
specified in the Registration Rights Agreement, or (iv) any Registration
Statement required by the Registration Rights Agreement is filed and declared
effective but shall thereafter cease to be effective or fail to be usable for
its intended purpose without being succeeded immediately by a post-effective
amendment to such Registration Statement that cures such failure and that is
itself declared effective for a period of more than 30 consecutive days (each
such event referred to in clauses (i) through (iv), a "Registration Default"),
then commencing on the day following the date on which such Registration
Default occurs, the Company agrees to pay to each holder of Old Notes during
the first 90-day period immediately following the occurrence of such
Registration Default additional interest at a rate of 0.5% per annum ("Special
Interest"). The amount of Special Interest payable to each holder shall
increase by an additional 0.5% per annum for each subsequent 90-day period up
to a maximum rate of 1.5% per annum. A Registration Default shall cease, and
Special Interest shall cease to be payable with respect to such Registration
Default (1) upon the filing of the applicable Registration Statement in the
case of clause (i) above, (2) upon the effectiveness of the Registration
Statement in the case of clause (ii) above, (3) upon the consummation of the
Exchange Offer in the case of clause (iii) above, and (4) when the
Registration Statement becomes effective or usable in the case of clause (iv)
above. Notwithstanding anything to the contrary, (i) the amount of Special
Interest payable shall not increase because more than one Registration Default
has occurred and is pending, (ii) a holder of Old Notes who is not entitled to
the benefits of the Shelf Registration Statement (i.e., such holder has not
elected to include information) shall not be entitled to Special Interest with
respect to a Registration Default that pertains to the Shelf Registration
Statement and (iii) a holder of Old Notes constituting an unsold allotment
from the original sale of the Old Notes or who otherwise is not entitled to
participate in the Exchange Offer shall not be entitled to Special Interest by
reason of a Registration Default that pertains to the Exchange Offer.
All accrued Special Interest shall be paid to record holders in the same
manner in which payments of interest are made pursuant to the Indenture. See
"Description of the Notes--Principal, Maturity and Interest."
Payment of Special Interest is the sole remedy available to holders of Old
Notes in the event the Company does not comply with the deadlines set forth in
the Registration Rights Agreement with respect to the conduct of an exchange
offer for the Old Notes or the registration of the Old Notes for resale under
a shelf registration statement.
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<PAGE>
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
at maturity of New Notes in exchange for each $1,000 principal amount at
maturity of outstanding Old Notes accepted in the Exchange Offer. Holders may
tender some or all of their Old Notes pursuant to the Exchange Offer. However,
Old Notes may be tendered only in integral multiples of $1,000.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
will have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (ii) the holders of the New Notes
will not be entitled to certain rights under the Registration Rights
Agreement, including the terms providing for an increase in the interest rate
on the Old Notes under certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
consummated. The New Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the Indenture under which the Old Notes
were, and the New Notes will be, issued.
As of the date of this Prospectus, $152,725,000 aggregate principal amount
at maturity of the Old Notes was outstanding. The Company has fixed the close
of business on , 1997 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus, together with the
Letter of Transmittal, will initially be sent. As of such date, there were
registered Holders of the Old Notes.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the DGCL or the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the
Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof prior to 9:00 a.m., New York City time, on the next
business day after each previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or, if any of the
conditions set forth below under the caption "Conditions" shall not have been
satisfied, to terminate the Exchange Offer, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
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<PAGE>
acceptance, extension, termination or amendment will be followed as promptly
as practicable by a public announcement thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure
to the registered Holders, if the Exchange Offer would otherwise expire during
such five to ten business day period.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes offered hereby will accrete interest at a rate of 14 5/8% per
annum from the Issue Date until August 15, 2000. Thereafter, the New Notes
will bear interest at the rate of 14 5/8% per annum which will be payable in
cash semiannually on February 15 and August 15 of each year, commencing
February 15, 2001. Interest on the Old Notes accepted for exchange will cease
to accrete upon issuance of the New Notes.
PROCEDURES FOR TENDERING
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
A Holder who wishes to tender Old Notes for exchange pursuant to the Exchange
Offer must transmit a properly completed and duly executed Letter of
Transmittal, or a facsimile thereof, including any other required documents,
to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date. In addition, either (i) certificates for such Old Notes must
be received by the Exchange Agent along with the Letter of Transmittal or (ii)
the Holder must comply with the guaranteed delivery procedures described
below. To be tendered effectively, the Old Notes, the Letter of Transmittal
and other required documents must be received by the Exchange Agent at the
address set forth below under "Exchange Agent" prior to 5:00 p.m., New York
City time, on the Expiration Date.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set
forth herein and in the Letter of Transmittal.
The method of delivery of the Old Notes and the Letter of Transmittal and
all other required documents to the Exchange Agent is at the election and risk
of the Holder. Instead of delivery by mail, it is recommended that Holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the Expiration Date.
No Letter of Transmittal or Old Notes should be sent to the Company. Holders
may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transactions for such Holders.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering
such owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or obtain a properly completed
bond power from the registered Holder. The transfer of registered ownership
may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined) unless the
Old Notes tendered pursuant thereto are tendered (i) by a registered Holder
who has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed,
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such guarantee must be by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
Holder as such registered Holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined
by the Company in its sole and absolute discretion, which determination will
be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived
will be returned by the Exchange Agent to the tendering Holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
By tendering, each Holder will represent to the Company, among other things,
that (i) the New Notes to be acquired by the Holder and any beneficial owners
of Old Notes pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, (ii) the Holder and
each such beneficial owner are not participating, do not intend to participate
and have no arrangement or understanding with any person to participate in the
distribution of such New Notes and (iii) neither the Holder nor any such other
person is an "affiliate," as defined under Rule 405 of the Securities Act, of
the Company. Each broker or dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such broker
or dealer as a result of market-making activities or other trading activities
(other than Old Notes acquired directly from the Company), must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
New York Stock Exchange trading days after the Expiration Date, the Letter
of
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Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes and any other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer and all other documents required by
the Letter of Transmittal are received by the Exchange Agent within three
New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes), (iii)
be signed by the Holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Old Notes register the
transfer of such Old Notes into the name of the person withdrawing the tender
and (iv) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. If certificates for Old Notes have been
delivered or otherwise identified to the Exchange Agent, then, prior to the
release of such certificates, the withdrawing Holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such Holder is an Eligible Institution. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company in its sole discretion, which determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer
and no New Notes will be issued with respect thereto unless the Old Notes so
withdrawn are validly retendered. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
payment due to withdrawal, rejection of tender or termination of the Exchange
Offer will be returned as soon as practicable to the Holder thereof without
cost to such Holder.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance
of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company, or
any material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred which, in the sole judgment of the Company, might
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<PAGE>
materially impair the ability of the Company to proceed with the Exchange
Offer or materially impair the contemplated benefits of the Exchange Offer
to the Company; or
(c) any law, statute, rule or regulation is proposed, adopted or enacted,
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company; or
(d) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
If the Company determines in its sole and absolute discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering Holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of Holders to withdraw such
Old Notes (see "--Withdrawal of Tenders" above) or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
Holders, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
EXCHANGE AGENT
Harris Trust Company of New York has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
By Registered or By Overnight Courier: By Hand:
Certified Mail: Harris Trust Company of New York
Harris Trust Company of New York
Harris Trust Company of New York
Receive Window
Wall Street Station Wall Street Station
88 Pine Street, 19th Floor
P.O. Box 1010 New York, NY 10005 Wall Street Station
New York, NY 10268-1010 88 Pine Street, 19th
Floor
New York, NY
By Facsimile:
(212) 701-7636
(212) 701-7637
Confirm by telephone:
(212) 701-7618
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
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The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued
in the name of, any person other than the registered Holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax
is imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered Holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value less accrued original issue discount, as reflected in the
Company's accounting records on the date of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. The expenses of the
Exchange Offer and the unamortized expenses related to the issuance of the Old
Notes will be amortized over the term of the New Notes.
OTHER
Participation in the Exchange Offer is voluntary and holders of Old Notes
should carefully consider whether to accept the terms and conditions thereof.
Holders of the Old Notes are urged to consult their financial and tax advisors
in making their own decisions on what action to take with respect to the
Exchange Offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of this Exchange Offer, the
Company will have fulfilled a covenant contained in the terms of the Old Notes
and the Registration Rights Agreement. Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer will continue to hold such Old
Notes and will be entitled to all the rights, and limitations applicable
thereto, under the Indenture, except for any such rights under the
Registration Rights Agreement which by their terms terminate or cease to have
further effect as a result of the making of this Exchange Offer. All
untendered Old Notes will continue to be subject to the restrictions on
transfer set forth in the Indenture. To the extent that Old Notes are tendered
and accepted in the Exchange Offer, the trading market, if any, for any
remaining Old Notes could be adversely affected. See "Risk Factors--
Consequences of Failure to Exchange."
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CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company as of September 30, 1997 and does not give
effect to (i) the sale of Series A Preferred Stock on October 17, 1997 for an
aggregate purchase price of $15.0 million or (ii) the exercise by MLAM of its
option to buy the Consent Convertible Notes. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER
30, 1997
-------------
(UNAUDITED)
(IN THOUSANDS
EXCEPT SHARE
INFORMATION)
-------------
<S> <C>
Cash and cash equivalents........................................ $117,944
========
Long-term debt
14 5/8% Senior Discount Notes due 2004.......................... $101,830
14% Senior Discount Notes due 2003.............................. 34,580
9% Convertible Subordinated Notes due 2004...................... 30,188
Notes payable and capital lease obligations..................... 689
--------
Total long-term debt......................................... 167,287
Redeemable Preferred Stock
9% Preferred Stock, par value $1.00 per share, 30,000 shares
authorized; 10,920 shares issued and outstanding; liquidation
value $1,000 per share......................................... 11
9% Preferred Stock, Series A, par value $1.00 per share, 150,000
shares authorized; 30,209 shares issued and outstanding;
liquidation value $1,000 per share............................. 30
Accumulated unpaid dividends.................................... 317
Additional paid-in capital...................................... 40,691
--------
Total Preferred Stock........................................ 41,049
Common stockholders' deficit
Class A Common Stock, $.01 par value, 30,000,000 shares
authorized, 7,222,511 shares issued and outstanding (1)........ 72
Class A Common Stock held in treasury........................... (1)
Additional paid-in capital...................................... 73,942
Accumulated deficit............................................. (132,441)
--------
Total common stockholders' deficit........................... (58,428)
--------
Total capitalization....................................... $149,908
========
</TABLE>
- --------
(1) Excludes (i) 3,421,160 shares reserved for issuance upon exercise of
options, (ii) 2,989,840 shares reserved for issuance upon exercise of
outstanding warrants, (iii) 738,010 shares reserved for issuance upon
conversion of the 9% Preferred Stock, (iv) 3,432,350 shares reserved for
issuance upon conversion of the Series A Preferred Stock and (v) 2,892,695
shares reserved for issuance upon conversion of the Convertible Notes. No
shares have been reserved for issuance upon conversion of the Consent
Convertible Notes.
33
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 years ended December 31, 1995 and 1996. The data for the
periods ending December 31, 1994, 1995 and 1996 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
ending September 30, 1996 and 1997, 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. In the
opinion of management, such interim financial statements reflect all
adjustments (consisting solely of normal recurring adjustments) necessary to
fairly present the information presented for such periods. The information set
forth below should be read in conjunction with the consolidated financial
statements of the Company and the related notes appearing elsewhere in this
Prospectus. Results of operations for the nine months ended September 30, 1997
are not necessarily indicative of results of operations for a full year or
indicative of future periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30,
INCEPTION TO DECEMBER 31, ----------------------
DECEMBER 31, ---------------------- UNAUDITED
1994 1995 1996 1996 1997
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net service revenue.... $ 1,737 $ 7,884 $ 9,814 $ 7,599 $ 26,998
Cost of services....... 1,455 9,076 9,256 6,587 23,983
---------- ---------- ---------- ---------- ----------
Gross margin........... 282 (1,192) 558 1,012 3,015
Sales and marketing
expense............... 2,869 5,867 12,612 5,837 43,087
General and
administrative
expense............... 4,686 11,100 20,665 10,920 26,882
Interest expense....... 26 734 1,797 46 8,573
Interest and other
income (1)............ 152 646 9,469 8,572 1,889
Minority interest...... -- 150 -- -- --
---------- ---------- ---------- ---------- ----------
Net loss............... $ (7,147) $ (18,097) $ (25,047) $ (7,219) $ (73,638)
========== ========== ========== ========== ==========
Accumulated preferred
dividends............. $ 707 $ 3,103 $ 3,691 $ 3,466 $ 1,012
Net loss to common
shareholders.......... $ (7,854) $ (21,200) $ (28,738) $ (10,685) $ (74,650)
Net loss per common
share................. $ (6.56) $ (7.01) $ (5.63) $ (2.44) $ (10.35)
Weighted average shares
outstanding........... 1,196,780 3,025,200 5,102,330 4,384,993 7,212,511
OTHER DATA:
EBITDA (2)............. $ (7,087) $ (15,901) $ (30,390) $ (14,386) $ (64,429)
Cash flows from
operating activities.. (6,141) (14,308) (24,098) (14,092) (57,822)
Cash flows from
investing activities.. (1,708) (2,556) 7,274 7,647 (10,071)
Cash flows from
financing activities.. 13,828 24,589 63,689 64,157 125,018
Depreciation and
amortization.......... 186 2,258 2,329 1,360 2,525
Capital expenditures... 1,728 1,740 2,259 285 10,071
Ratio of earnings to
fixed charges (3)..... -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- ----------------
UNAUDITED
1994 1995 1996 1996 1997
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 5,979 $ 13,705 $60,569 $71,390 $117,944
Total assets.................... 12,747 20,471 78,052 88,083 179,157
Long-term debt (net of current
maturities).................... 3,176 518 59,864 58,352 167,287
Redeemable preferred stock...... 15,306 44,396 10,045 9,853 41,049
Common stockholders' equity
(deficit)...................... (7,830) (28,768) (3,606) 14,022 (58,428)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1997 1997 1997
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Local access line sold. 4,630 10,283 35,397 79,321 135,172
Local access lines in
service............... 4,356 8,364 18,557 65,142 116,591
Total employees........ 225 464 641 766 868
Direct salesforce...... 81 206 252 325 325
</TABLE>
- -------
(1) Interest and other income for the year ended December 31, 1996 and 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.
(2) EBITDA consists of operating income (loss) before depreciation and
amortization. While EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flow from
operating activities, which are determined in accordance with generally
accepted accounting principles, EBITDA is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operations and as a useful tool for measuring the ability of the
Company to service its debt. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs. See the Consolidated Statements
of Cash Flows of the Company and the related notes to the Consolidated
Financial Statements thereto included herein.
(3) 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, 1995 and 1996 by $7.1 million, $17.4 million and $23.2
million, respectively, and for the nine-month period ended September 30,
1996 and 1997 by $7.2 million and $65.1 million, respectively.
34
<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
Initially, the Company entered the local telecommunications market as a
facilities-based CLEC 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 anticipation of
the impact of the passage of the Telecommunications Act of 1996, the Company
refocused its operations. The Company sold its existing facilities in Ohio and
certain other assets in February 1996, and transferred certain liabilities
with respect to those facilities, to pursue a non-facilities-based approach to
the local telecommunications market. As part of the Company's strategy to
refocus its operations, the Company, through a newly formed wholly owned
acquisition subsidiary, Quest United, Inc. ("Quest"), acquired certain assets
and assumed certain liabilities of Quest America, L.P., a telecommunications
reseller and consulting firm, in October 1995 (the "Quest Acquisition").
The Company negotiated for the first total service resale agreement with
Ameritech for local services, which was signed in November 1995, and
negotiated with NYNEX for a similar comprehensive local resale agreement which
was signed in July 1996. The Company also executed various other agreements in
1996 and 1997 with certain carriers for the resale of long distance and
enhanced and other value-added services. The Company commenced the marketing
and provisioning of services under those agreements during the latter half of
1996. Although management believes that its current strategy will have a
positive effect on the Company's results of operations over the long-term,
through an increase in its customer base and product offerings, 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 capital contributions, sales of
preferred stock and by the proceeds from private placements of its debt
securities.
In connection with the Offering, MLAM, the current beneficial holders of all
of the 14% Senior Notes and Convertible Notes, consented to the amendment of
the 14% Senior Note Indenture and the Convertible Note Indenture to allow the
Company to consummate the Offering. In connection with the Consent, the
Company paid a consent fee to MLAM consisting of warrants to purchase 145,160
shares of Common Stock, at an exercise price of $.01 per share. The Company
also granted to MLAM an option to purchase the Consent Convertible Notes,
which have terms substantially similar to the Convertible Notes, for an
aggregate purchase price of $10.0 million. The option was exercised by MLAM on
October 24, 1997. Additionally, the Company granted to holders of the 14%
Senior Notes an option, for a specified period of time, to exchange all, but
not less than all, of the 14% Senior Notes for 14 5/8% Senior Notes having an
accreted value equal to the accreted value of such 14% Senior Notes at the
time of such exchange.
The Company's net service revenue consists primarily of sales revenue from
telecommunications resale services net of certain adjustments, including
unbillable call records. The Company bills its customers 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.
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 and special regional calling plans.
35
<PAGE>
Sales and marketing expense consists of the costs of providing sales and
other support services for customers including salaries of salesforce
personnel. 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 bad debts, customer allowances and
all amortization expenses. Depreciation is allocated throughout sales,
marketing, general and administrative expense based on asset ownership.
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 added over 250 employees
in 1996 and over 385 employees in the first nine months of 1997. Also, the
Company is implementing new information systems that will provide improved
recordkeeping for customer information and management of uncollectible
accounts and fraud control.
The Company has to date outsourced certain billing services to two outside
vendors. The significant growth experienced by the Company over the past year
has strained the capabilities of the Company's internal billing systems and
those of the billing vendor supporting the sales pursuant to the Ameritech
resale agreements. As a result, the Company has experienced delays in
accurately billing its customers in a timely manner and instances of toll
fraud. Therefore, the Company's revenue assurance and margin utilization
systems and operating controls are being strengthened. Gross margins will be
lower than originally anticipated for 1997 and estimated bad debt provisions
and customer allowances will be higher than expected as a percent of revenue,
since some billings from carriers may not be billed to customers.
As a result of evaluating the capabilities of the Company's two billing
vendors to support the anticipated growth of the Company, a decision was made
to transition to a single vendor that has the strongest current capabilities
and the best potential to support the expansion and related increased number
of customers and access lines of the Company. The Company selected the billing
vendor that has supported its sales pursuant to the NYNEX resale agreement for
the past two years. The transition to a single vendor is expected to be
completed during the fourth quarter of 1997.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Net service revenue increased 255% to $27.0 million for the nine months
ended September 30, 1997 from $7.6 million for the nine months ended September
30, 1996. The number of local access lines sold in the third quarter of 1997
was 55,851 and cumulative access lines sold at September 30, 1997 were
135,172. The number of local access lines provisioned in the third quarter of
1997 was 51,449 and cumulative access lines provisioned as of September 30,
1997 were 116,591. The substantial increases in net service revenue and local
access lines were due primarily to the significant change in the Company's
business strategy and the corresponding deployment of a large direct sales
organization. This business strategy change has resulted in an almost nine-
fold increase in the subscriber base in the Company's geographic markets (from
approximately 1,400 customers at September 30, 1996 to approximately 12,000
customers at September 30, 1997).
Gross profit for the nine months ended September 30, 1997 increased 198% to
$3.0 million compared to $1.0 million for the nine months ended September 30,
1996. Due to the significant change in the Company's business strategy and the
corresponding change in cost structure from the original facilities-based
business, the year to year gross margins are not comparable. As noted above,
consolidated gross margins are expected to continue to improve each quarter
primarily as revenue assurance and margin utilization systems and operating
controls are being strengthened, as described above, and as the mix of
revenues from higher margin products increases and the mix of revenue from the
lower margin legacy products decreases. In addition, the Company has continued
to negotiate price reductions with its carriers, the full impact of which is
not yet fully reflected in the results of operations.
36
<PAGE>
Sales and marketing expenses increased $37.3 million from $5.8 million for
the nine months ended September 30, 1996 to $43.1 million for the nine months
ended September 30, 1997. The increase was due primarily to the substantial
increase in the number of sales and marketing employees from approximately 130
at September 30, 1996 to approximately 530 at September 30, 1997. The higher
headcount resulted in increases to salaries and benefits of approximately
$22.6 million, recruitment, training and travel costs of approximately $5.7
million, and facility and office related expenses of approximately $3.3
million. Additionally, advertising and promotional costs increased
approximately $4.3 million due to product launches in the Company's target
markets.
General and administrative expenses increased $16.0 million to $26.9 million
for the nine months ended September 30, 1997 versus $10.9 million for the nine
months ended September 30, 1996. The increase was due primarily to the
substantial increase in the number of operations and administrative employees
from approximately 90 at September 30, 1996 to over 320 at September 30, 1997.
The higher headcount resulted in increases to salaries and benefits of
approximately $7.3 million, facility and office costs of approximately $1.4
million, and recruitment, training and travel costs of approximately $1.6
million. Professional fees increased approximately $1.2 million, primarily
relating to the development and expansion of the Company's customer service,
billing and administrative information systems and facilities. Billing costs
increased approximately $1.6 million in correlation with increased revenue.
Additionally, as noted above, the Company recorded a charge of $2.8 million in
the third quarter of 1997 for estimated additional provisions for bad debts
and customer allowances to cover instances of toll fraud and other matters.
Interest and other income decreased to $1.9 million for the nine months
ended September 30, 1997 from $8.6 million for the nine months ended September
30, 1996 due primarily to an $8.1 million non-recurring gain on the sale of
the Company's switching facilities in Ohio in February 1996, which was
somewhat offset by the additional interest income earned on the higher average
cash balance.
Interest expense increased to $8.6 million for the nine months ended
September 30, 1997 from $46,000 for the nine months ended September 30, 1996.
This increase was due primarily to interest expense attributable to the 14%
Senior Notes and 9% Convertible Notes issued in September 1996 and 14 5/8%
Senior Notes issued in August 1997.
As a result of the factors described above, the Company had a net loss of
$73.6 million for the nine months ended September 30, 1997 compared to a net
loss of $7.2 million for the nine months ended September 30, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net service revenue increased to $9.8 million for the year ended December
31, 1996 from $7.9 million for the year ended December 31, 1995. The increase
in net service revenue was due primarily to a 36% increase in the customer
base in the Company's geographic markets (from approximately 1,250 customers
at the end of 1995 to approximately 1,700 customers at the end of 1996) and
the revenues attributable to the Quest Acquisition which primarily consisted
of commissions earned from carriers on telecommunications services provided to
their customers. Approximately $1.4 million in increased revenues was
attributable to the addition of new customers, primarily in Ohio, and
approximately $0.5 million was attributable to revenues gained from the Quest
Acquisition.
Gross margin of $0.6 million for the year ended December 31, 1996 improved
from the negative margin of $1.2 million for the year ended December 31, 1995
due primarily to the elimination of fixed costs upon the sale of the switching
facilities in Ohio and a $1.4 million sales and related margin adjustment for
1995 revenue purportedly not billed by NYNEX to the Company's customers under
the billing and collection agreement. In 1996, the Company recovered
approximately $0.9 million from NYNEX and is continuing to pursue additional
amounts.
Sales and marketing expense increased $6.7 million, or 114%, from $5.9
million for the year ended December 31, 1995 to $12.6 million for the year
ended December 31, 1996. The increase was due primarily to an increase in the
number of sales and marketing employees from approximately 115 at the end of
1995 to over
37
<PAGE>
300 at the end of 1996, which resulted in increases to salaries and benefits
of $3.9 million, travel, training and entertainment costs of $1.0 million and
recruitment costs of $0.8 million. Additionally, advertising costs increased
$0.9 million due to product launches in the Company's target markets.
General and administrative expense increased $9.6 million, or 86%, to $20.7
million for the year ended December 31, 1996 versus $11.1 million for the year
ended December 31, 1995. The increase was due primarily to an increase in the
number of operations and administrative employees from approximately 90 at the
end of 1995 to approximately 160 at the end of 1996, which resulted in
increases to salaries and benefits of $2.5 million and facility costs of $1.2
million. Additionally, fees paid to consultants and other professionals
increased over $1.0 million, primarily relating to the development and
expansion of the Company's customer service, billing and information systems
and facilities. Amortization expense increased $0.8 million due primarily to a
full year of amortization expense related to the Quest Acquisition in 1996
versus approximately eight months in 1995. Additionally, $1.7 million of
expense was incurred relating to the settlement of a derivative action filed
by a minority shareholder.
Interest and other income increased to $9.5 million for the year ended
December 31, 1996 from $0.6 million for the year ended December 31, 1995 due
primarily to an $8.1 million non-recurring gain on the sale of the Company's
switching facilities in Ohio in February 1996.
As a result of the factors described above, the Company's net loss increased
to $25.1 million for the year ended December 31, 1996 from $18.1 million for
the year ended December 31, 1995.
Year Ended December 31, 1995 Compared to 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
approximately eight 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
a 34% increase in the customer base (from approximately 930 customers at
December 31, 1994 to approximately 1,250 customers at December 31, 1995).
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 customers.
Sales and marketing expense increased $3.0 million, or 103%, to $5.9 million
in fiscal 1995 from $2.9 million in fiscal 1994. Approximately $1.5 million of
the increase was due to the impact of a full year of operation in 1995 versus
approximately eight months in 1994. The inclusion of expenses related to the
operations of Quest in 1995 contributed an additional $0.8 million to the
increase.
General and administrative expense increased $6.4 million, or 136%, to $11.1
million in fiscal 1995 from $4.7 million in fiscal 1994. Approximately $2.0
million of the increase was due to the impact of a full year of operation in
1995 versus approximately eight months in 1994. An additional $2.0 million was
attributable to depreciation and amortization and other expenses related to
the Quest Acquisition. The remaining increase is a result of increased
personnel and expenses required to build the Company's customer service and
information systems and office facilities.
Interest and other income increased to $0.6 million in fiscal 1995 from $0.2
million in fiscal 1994, due to significantly higher investable cash balances
in fiscal 1995 resulting from the proceeds of the issuance of $26.3 million of
preferred and common stock, as well as fiscal 1995 being a full year.
Interest expense increased to $0.7 million 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.
38
<PAGE>
As a result of the factors described above, the Company's net loss increased
to $18.1 million for fiscal 1995 from $7.1 million for fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
cash from its investors and private placements of debt securities. As of
September 30, 1997, the Company had cash and cash equivalents of $118.0
million and working capital of $104.8 million. The Company's operating
activities utilized cash of approximately $57.8 million for the nine month
period ended September 30, 1997, versus $14.1 million for the nine month
period ended September 30, 1996.
The Company's investing activities in 1997 have consisted primarily of
property and equipment purchases of $10.1 million for the nine month period
ended September 30, 1997, primarily related to sales office expansion in
several of the Company's target markets. In the fourth quarter of 1997, the
Company anticipates spending approximately $5.0 million for capital
expenditures, a substantial portion of which has been allocated to investments
in information technology to support the growth of the customer base with more
robust provisioning, billing and customer care systems. The anticipated
continued high growth in the customer base in 1998 will require a similar
level of investment in information technology. In 1996, the Company's
investing activities consisted of $9.5 million in proceeds received in
February 1996 from the December 1995 sale of facilities in Ohio, partially
offset by a $1.6 million purchase of the remaining minority interest of a
subsidiary in the third quarter 1996 and capital expenditures of $0.3 million
for the nine month period ended September 30, 1996.
The Company's financing activities generated $125.0 million for the nine
months ended September 30, 1997. On August 18, 1997, the Company raised $30.2
million through the sale of 30,000 shares of its Series A Preferred Stock.
Also on August 18, 1997 the Company raised $96.5 million of net proceeds upon
the consummation of the Offering. Additionally on October 17, 1997, the
Company issued and sold Series A Preferred Stock for an aggregate price of
$15.0 million pursuant to agreements contemplated by a letter of intent dated
August 6, 1997.
The Company's financing activities generated $64.1 million for the nine
months ended September 30, 1996. On September 30, 1996, the Company raised
$10.0 million through the sale to the Original Purchasers of its 9% Preferred
Stock. Also on September 30, 1996, the Company raised approximately $55.0
million, net of issuance costs, through the sale to MLGAFI of (i) 48,500 units
consisting of $48.5 million in aggregate principal amount at maturity of the
14% Senior Notes and warrants to purchase 790,780 shares of Class A Common
Stock and (ii) $36.0 million in aggregate principal amount at maturity of the
Convertible Notes. The aggregate purchase price of such units was $30.2
million, and the aggregate purchase price of the Convertible Notes was $27.6
million. In 1995 and 1994, the Company's financing activities consisted
primarily of raising capital in the form of equity investments from venture
capital organizations. During 1995 and 1994, the Company raised $26.3 million
and $14.2 million, respectively, net of issuance costs. In 1995, the Company
also assumed notes payable to investors in the Quest Acquisition.
The Company anticipates that it may require additional capital in future
periods in order to meet planned capital expenditures and anticipated negative
operating cash flow. Sources of funding for the Company's future financing
requirements may include public offerings or private placements of equity
and/or debt securities and additional capital contributions from new or
existing stockholders. An additional source may include bank financing,
although the Company currently does not have available a credit facility.
There can be no assurance that additional financing will be available to the
Company, or, if available, that it can be obtained on a timely basis and on
terms acceptable to the Company and within limitations contained in the
Indenture and the 14% Senior Note Indenture. Failure to obtain such financing
could result in the delay or abandonment of the Company's development and
expansion plans. See "Risk Factors--Additional Capital Requirements."
39
<PAGE>
The Company incurred net losses of $25.1 million, $18.1 million and $7.1
million in 1996, 1995 and 1994, respectively. Accordingly, no provision for
current Federal or state income taxes has been made to the financial
statements. At December 31, 1996, the Company and its subsidiaries had net
operating loss carry-forwards for Federal income tax purposes of approximately
$46.1 million. 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, 1996, $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.).
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share," which
simplifies the method for computing earnings per share. Under the new
requirements, primary earnings per share will be replaced with basic earnings
per share. The statement, which will not impact the results of operations,
financial position or cash flows of the Company and does not have a material
effect on the earnings per share previously presented, is effective for
financial statements issued for periods ending after December 15, 1997 and
will be adopted by the Company in the fourth quarter of 1997.
40
<PAGE>
INDUSTRY OVERVIEW
Prior to 1984, AT&T dominated both the local exchange and long distance
marketplace by owning the operating entities that provided both local exchange
and long distance services to most of the U.S. population. While long distance
competition began to emerge in the late 1970s, the critical event triggering
the growth of long distance competition was the breakup of AT&T and the
separation of its local and long distance businesses as mandated by the
Modified Final Judgment relating to the breakup of AT&T (the "MFJ"). To foster
competition in the long distance market, the MFJ prohibited AT&T's divested
local exchange businesses, the RBOCs, from acting as a single source provider
of telecommunications services.
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 affects 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
ILEC 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
(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 such as the Company, provide expanded
service offerings and increased levels of customer service.
Industry sources estimate that in 1996 the total revenues from local and
long distance telecommunications services were approximately $185 billion, of
which approximately $107 billion were derived from local exchange services and
approximately $78 billion from inter-LATA long distance services. According to
FCC information, aggregate revenues for local and long distance services grew
at a compounded annual rate of approximately 5.5% between 1991 and 1996.
Although the MFJ established the preconditions for competition in the market
for long distance services in 1984, the market for local exchange services has
until recently been virtually closed to competition and has largely been
dominated by regulated monopolies. Efforts to open the local exchange market
began in the late 1980s on a state-by-state basis when competitive access
providers ("CAPs") began offering dedicated private line transmission and
access services. These types of services together currently account for
approximately 12% of the total local exchange revenues. CAPs were restricted,
often by state laws, from providing the other, more frequently used services
such as basic and switched services, which today account for approximately 88%
of local exchange revenues.
The Telecommunications Act further increases the opportunities available to
competitive local providers by requiring the RBOCs and other ILECs to offer
various network elements such as switching, transport and loops (i.e., the
facilities connecting a customer'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
competitive local carriers who develop 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 customer in the United States.
The Company believes that carriers such as the Company providing competitive
local exchange services have the opportunity to gain market share in the local
exchange market just as long distance competitors gained market share from
AT&T in the long distance market. In addition, competitors, including the
Company and major IXCs, will be able to take advantage of the unbundling and
resale requirements imposed on the RBOCs and other ILECs under the
Telecommunications Act, thereby accelerating entry of competitors that
previously have not invested in local distribution facilities.
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BUSINESS
INTRODUCTION
USN is one of the fastest growing CLECs in the United States. The Company
offers a bundled package of telecommunications products, including local and
long distance telephony, voice mail, paging, teleconferencing, Internet access
and other enhanced features, tailored to meet the needs of its customers. The
Company primarily targets small and medium-sized businesses with
telecommunications usage of less than $5,000 per month. The Company's strategy
is to continue to increase its customer base by being more flexible,
innovative and responsive to the needs of its target customers than the RBOCs
and the first-tier IXC's, which have historically concentrated their sales and
marketing efforts on residential and large business customers. The Company
primarily differentiates itself with a value-based marketing strategy by
providing an integrated, customized package of telecommunications services on
a single bill and responsive customer care.
The Company is presently providing service to customers in certain states in
the NYNEX region (New York and Massachusetts) and the Ameritech region
(Illinois, Ohio and Michigan) and is currently in negotiations to expand its
bundled services offering throughout the 14-state Bell Atlantic/NYNEX region
and the 5-state Ameritech region. Management anticipates implementing service
in at least six additional states in 1998. In August 1997, NYNEX merged with
Bell Atlantic. The Company continues to operate in the former NYNEX regions,
which are now a part of the Bell Atlantic territory.
During the first nine months of 1997, the Company increased aggregate local
access lines sold from 10,283 lines to 135,172 lines, a compound growth rate
of more than 33% per month, including the sale of 55,851 lines in the third
quarter alone. As of September 30, 1997, the Company had 116,591 access lines
in service, including 51,449 lines which were provisioned in the third
quarter. Services are primarily marketed through an approximately 325 member
direct salesforce in 27 offices located in five states. As part of its
customer-focused product offering, the Company provides personalized customer
service, 24 hours a day, 365 days per year, through its two regional customer
care center.
COMPETITIVE ADVANTAGES
Providing local exchange services is a highly complex process that requires
overcoming significant barriers to entry. Since inception, the Company has
spent significant time, resources and capital to enter the local market. In
the process, it has gained substantial experience in this complicated market
segment. Consequently, the Company believes it has the following competitive
advantages:
. COMPLEMENTARY RELATIONSHIPS WITH RBOCS. The Company believes that the RBOCs'
networks will continue to be the predominant means for providing local
telecommunications services to the Company's target customers for the
foreseeable future. Accordingly, the Company has positioned itself to take
advantage of the opportunities created by the Telecommunications Act by
leveraging its complementary relationships with the RBOCs. The
Telecommunications Act requires the RBOCs to complete a number of
"checklist" items in order to qualify for long distance entry in their local
service areas. By moving aggressively to enter into resale agreements and to
develop electronic interfaces with the RBOCs, the Company believes it has
positioned itself to play a key role in enabling the RBOCs to meet a number
of those requirements. The Company was the first to enter into comprehensive
resale agreements with Ameritech and NYNEX and served as the systems beta
customer for Ameritech, NYNEX and Bell Atlantic and is currently one of the
largest CLECs in terms of access lines in service in the Ameritech and NYNEX
markets. Consequently, the Company is often requested by state and federal
regulators to provide information on the Company's experiences. The Company
believes its complementary relationships with the RBOCs have facilitated the
Company's rapid growth in its existing markets and enabled it to become a
valuable and viable resale channel partner. The Company further believes,
based on discussions with RBOC officials and industry experts, that the
RBOCs will continue to develop strong resale channel partners in an effort
to mitigate the potential negative effects of facilities-based competition.
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. UNIQUE RESALE AGREEMENTS. The Company has executed comprehensive local
exchange resale agreements with Ameritech for the greater metropolitan
Chicago area, Ohio and Michigan, and with NYNEX for the State of New York.
In addition to the cost advantages associated with the term and volume
commitment contracts, these contracts provide "most favored nation" and
other 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 and NYNEX local services.
In addition, the Company has executed interim resale agreements with
Ameritech for the State of Wisconsin and with NYNEX for the State of
Massachusetts. The Company is currently in negotiations to expand its resale
agreements throughout the 14-state combined Bell Atlantic/NYNEX region and
the 5-state Ameritech region. In advance of completing these negotiations,
the Company plans to enter certain additional states by reselling local
service pursuant to state-mandated wholesale discounts. The Company
estimates, based on data compiled by the FCC, that the regions covered by
the current comprehensive Ameritech and NYNEX resale agreements include
access to over 10 million business access lines. Management believes that
upon expansion into the remaining Bell Atlantic/NYNEX region and the
Ameritech region, the Company will have access to approximately 20 million
business access lines. The Company continuously evaluates opportunities to
enter into agreements with additional RBOCs, other local and long distance
service providers and enhanced and other value-added service providers in
order to aggressively build its customer base as well as to provide
additional services to its existing customers.
. PROPRIETARY ELECTRONIC PROVISIONING AND INTERFACE SYSTEMS. By serving as the
systems beta customer for Ameritech, NYNEX and Bell Atlantic, the Company
was among the first CLECs to develop electronic provisioning systems for
resale of RBOC services. Development of these provisioning systems is
critical for carriers seeking to grow rapidly in the complex, competitive
local telecommunications market. These systems must address the numerous
technical configurations associated with local service, including correctly
coding customers into data bases for 911, 411, white pages and customer
service, as well as provisioning thousands of local services, known as
universal service ordering codes ("USOCs"). Electronic provisioning between
the Company and its RBOC vendors allows the Company to provision a
significantly greater volume of lines than would be possible if transmitting
orders by mail or facsimile. Moreover, because the proprietary systems
developed by the Company lessen manual input and reduce repetitive data
entry, the Company experiences improved efficiency and accuracy in
transmitted orders, thereby reducing costs and increasing customer
satisfaction. The Company believes it has established an industry leadership
position in the deployment of these systems, and it is committed to their
continuous improvement.
. LARGEST DIRECT SALESFORCE AMONG CLECS IN ITS MARKETS. The Company's services
are currently sold through an approximately 325 member direct salesforce,
located in 27 offices in Illinois, Ohio, Michigan, New York and
Massachusetts. Additionally, the Company intends to hire approximately 175
new sales people over the next 12 months to expand service in the Ameritech
and combined Bell Atlantic/NYNEX regions. The Company primarily recruits
salespeople with experience in selling competitive telecommunications
services to businesses in the markets where they are based. The Company's
salesforce is trained in-house with a rigorous customer-focused training
program that promotes activity-based selling. Salespeople are given an
incentive through a commission structure, with a target of 50% of a
salesperson's compensation based on performance. The Company believes its
large, experienced, face-to-face salesforce has been, and will continue to
be, vitally important to expanding its customer base in today's highly
competitive telecommunications industry environment.
. STRATEGIC FLEXIBILITY. The Company believes that its business strategy
affords it more flexibility to take advantage of regulatory and industry
dynamics than its facilities-based competitors. For example, the FCC's
position on unbundled network elements has evolved to the point where
competitors are now able to purchase on an economic basis unbundled network
elements from the RBOCs and rebundle them into an alternative local service
option. The Company expects to exploit this opportunity by rebundling
network elements, thus expanding its products offering and improving its
strategic position. In addition, the increased construction by
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facilities-based CLECs has improved the value of the Company's services by
creating alternative resale partners other than RBOCs. The Company is
currently evaluating proposals from facilities-based CLECs to provison local
service.
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 in its target markets. The Company expects to achieve
this goal through the successful implementation of its growth strategy which
includes the following:
. PROVIDE AN INTEGRATED TELECOMMUNICATIONS SOLUTION. A key element in building
its customer base while minimizing churn has been, and will continue to be,
the implementation of a marketing and operating strategy which emphasizes an
integrated telecommunications solution to its target market. To a large
extent, the Company's target customers have not previously been provided the
opportunity to purchase bundled services. The Company attracts and retains
customers by combining responsive customer care with a pricing package to
provide high-quality service at a cost which is usually afforded to only
large business customers. Specifically, the Company provides a single source
and bill for integrated local and long distance telephony, voicemail,
paging, teleconferencing, Internet access and other enhanced and value-added
telecommunications services, with a single point of contact for customer
service, product inquiries, repairs and billing questions. Based on its
experience, the Company believes that this marketing and customer service
approach has minimized customer acquisition costs and churn.
. FOCUS ON LARGE, UNDERSERVED MARKET. The Company utilizes a direct sales
approach and primarily focuses its marketing efforts on small and medium-
sized businesses with telecommunications usage of less than $5,000 per
month. The Company believes this target market is best served by a direct
sales approach because most of these customers do not employ in-house
telecommunications specialists and in most cases obtain services from
various vendors. The Company's experience indicates that these customers
prefer a single source for all their telecommunications requirements,
including products, billing and service. The Company believes that its gross
margins on services provided to its target market are generally higher than
for larger business customers. Since the RBOCs and the first-tier IXCs
primarily concentrate their sales and marketing efforts on residential and
large business customers, the Company will continue to focus its marketing
on this underserved market to rapidly expand its customer base.
. LEVERAGE UBIQUITOUS NETWORKS. The Company believes that a key factor in its
success has been its ability to provide through the RBOC networks the
complete range of local services currently provided by RBOCs across their
entire service territories. There is currently no competing network with the
product breadth, capacity and geographic reach of the RBOC networks. By
contrast, facilities-based CLECs are currently limited primarily to
servicing customers in areas where they have network facilities.
. RAPID MARKET ENTRY. The Company believes its ability to enter a market early
and provide ubiquitous service will continue to allow it to rapidly build a
customer base across a large geographic area prior to the lifting of
regulatory restrictions on the ability of first-tier IXCs and RBOCs to offer
integrated services. Based on recent public announcements, the Company does
not believe that any RBOC will provide in-region long distance services
prior to 1999. As a non-facilities based provider, the Company believes it
is able to build a customer base quickly and efficiently without incurring
significant costs and the developmental delays inherent in constructing
network and transmission facilities. In addition, the Company's proprietary
software interface systems facilitate its rapid customer acquisition
strategy by allowing it to provision high volumes of access lines.
. EXPAND LOCAL SERVICES. The Company plans to expand its local services
offering, positioning it to offer a full range of local services over a
broad geographic area at a competitive cost, by: (i) entering into term and
volume resale agreements in new territories with RBOCs; (ii) entering into
resale agreements with one or more facilities-based CLECs; (iii) rebundling
network elements from RBOCs; and (iv) reselling local service in new
territories pursuant to state-mandated wholesale discounts prior to entering
into resale agreements with RBOCs and/or facilities-based CLECS in such
territories. The Company believes, based on its experience and industry
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analysts' reports, as well as recent regulatory and industry developments,
that RBOCs have an incentive to continue to negotiate wholesale agreements
with respect to small and medium-sized businesses to stabilize this revenue
base and deter migration of such customers to RBOCs' facilities-based
competitors. The Company also believes that its demonstrated sales and
provisioning expertise is attractive to facilities-based CLECs which may not
be having similar success.
SALES AND MARKETING
The Company's customers include small and medium-sized businesses which
principally have telecommunications usage of less than $5,000 per month. The
Company believes that the RBOCs and large IXCs 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
telecommunications market. Through radio and newspaper advertising, as well as
various marketing programs, the Company has sought to establish itself as a
recognized brand name for its products and services emphasizing responsive
customer support, competitive product and pricing packages and a targeted
sales and marketing strategy. The Company had in excess of 12,000 customers as
of September 30, 1997.
The Company's services are currently sold through an approximately 325
member direct salesforce, located in 27 offices in Illinois, Ohio, Michigan,
New York and Massachusetts. The sales personnel make direct calls to
prospective and existing customers to outline the range of services offered
and discuss the benefits of the Company's integrated service offerings,
enhanced customer care and potential savings. The Company is planning to
supplement its direct sales organization with outbound telemarketing and
indirect sales efforts. The Company believes this marketing approach will
increase market coverage and reduce marketing and customer acquisition costs.
The Company has recruited and continues to recruit a direct salesforce in
each of the markets in which it operates. The Company primarily recruits
salespeople with experience in selling competitive telecommunications services
to businesses in the markets where they are based. The Company's salesforce is
trained in-house with a rigorous customer-focused training program that
promotes activity-based selling. The salesforce makes calls to prospective
customers from potential customer modules created by acquiring business
databases sorted by target characteristics (e.g. size of business and number
of telephone lines). Salespeople are given an incentive through a commission
structure, with a target of 50% of a salesperson's compensation based on such
person's performance.
CUSTOMER CARE
The Company maintains an emphasis on customer care to differentiate itself
from its competitors and reduce churn. By providing each customer with an
account representative, the Company is able to provide ongoing personalized
contact to address the clients' needs. In addition, the Company has
established a 24-hours-per-day, 365-days-per-year, customer care center to
facilitate customer care and customer service requests. At the Company's
customer care centers, customers' calls are answered by experienced customer
care representatives, many of whom are cross-trained in the provisioning
process. The Company believes that the superior customer service, face-to-face
sales process and integrated service offering provide the Company with a
competitive advantage over the existing local service providers.
MANAGEMENT INFORMATION SYSTEMS
The Company is committed to the continued development and successful
implementation of billing and customer care systems that provide accurate and
timely information to both the Company and its customers. The proprietary
electronic interfaces of the Company's management information systems for the
provisioning of services to the Company's customers have been developed in
cooperation with Ameritech and NYNEX. Provisioning of service to customers is
accomplished through the Company's proprietary systems, which ar e
designed to interface with the RBOCs' systems through a variety of delivery
mechanisms. The Company believes
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this method of development has been, and will continue to be a critical
element to successfully providing local telecommunications services and
provides the Company with a competitive advantage, as the RBOCs have an
economic and strategic incentive to work with resellers that have
sophisticated information systems that can electronically interface with the
RBOCs' systems. The Company's experience in developing these systems allows it
to offer services quickly in new markets. The customer care systems have been
developed and continue to be enhanced in a client/server environment allowing
for flexibility to accommodate an expanding customer base, efficient entry
into new markets and rapid development of additional functionality.
The Company's billing systems are designed to provide access to a broad
range of information on individual customers, including their call volume,
patterns of usage and billing history. This same information is used by the
Company to identify customer trends and will allow for proactive support of
the Company's marketing efforts.
The Company currently outsources the rating, printing and mailing of
customer bills. Since these functions require a high volume of processing in a
limited time frame, the Company has determined that currently the most
economical way to process bills is to outsource this function. The customer
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 customer. Standard management reports are generated for every
billing cycle.
VENDOR AGREEMENTS
Introduction
The Company has executed comprehensive local exchange resale agreements with
Ameritech for the greater metropolitan Chicago area, Ohio and Michigan, and
with NYNEX for the State of New York. In addition, the Company has executed
interim resale agreements with Ameritech for the State of Wisconsin and with
NYNEX for the State of Massachusetts. The Company estimates, based on data
compiled by the FCC, that the regions covered by the current comprehensive
Ameritech and NYNEX resale agreements include access to over 10 million
business access lines. Management believes that upon expansion in the
remaining Bell Atlantic/NYNEX region and the Ameritech region, the Company
will have access to approximately 20 million business access lines. The
Company continuously evaluates opportunities to enter into agreements with
additional RBOCs, long distance carriers and enhanced and other value-added
service providers in order to aggressively build its customer base as well as
to provide additional services to its existing customers while reducing costs.
The Company currently has a long distance resale agreement with MCI. Such
agreement allows the Company to offer its customers integrated local and long
distance telecommunications services. In addition, such agreement has 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 related features including call waiting, call 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 customers, including inside wire maintenance.
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The Ameritech resale agreements include a minimum commitment of resold
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 an
18-month "ramp up" period which gives the Company the ability to build its
customer 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 at
discounted rates based on a ten-year term. The New York NYNEX resale agreement
contains pricing protections designed to maintain the competitiveness of
discounted rates provided to the Company. Under the New York 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 New York NYNEX resale agreement contains a minimum
commitment of 100,000 business access lines. In the event the Company does not
satisfy the minimum commitment after a trial period and ramp-up period, the
Company is subject to an underutilization charge. However, the New York NYNEX
resale agreement also contains a carryforward provision designed to minimize
the potential of an underutilization charge. The Company has also executed an
interim resale agreement with NYNEX for Massachusetts. This agreement does not
contain a term and volume commitment, but was designed to allow the Company to
begin reselling services in Massachusetts expeditiously in a manner consistent
with state regulatory developments. Although there can be no assurance, it is
expected that the Company and NYNEX will enter into a long-term resale
agreement for Massachusetts similar to the New York NYNEX resale agreement.
Long Distance Agreements
The Company has an agreement with MCI pursuant to which MCI provides a wide
range of long distance telecommunications services to the Company's customers.
Services offered for resale from MCI include a variety of inbound, outbound,
calling card and international services. In addition, the Company also resells
teleconferencing, debit cards, branded operator services and private line
services.
The Company's long distance carrier agreement with MCI became effective
August 1, 1996 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. The agreement provides for an annual commitment for
each of the remaining two years of the contract term. If the Company does not
meet its annual commitment during any annual period of the term, an
underutilization charge shall apply in an amount equal to 15% of the
difference between the committed amount and the actual usage. However, the
Company may carry forward up to 10% of the initial annual commitment for a
period of up to three months in the following annual period.
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Enhanced and Other Value-Added Telecommunications Services
The Company has agreements to offer on a resale basis enhanced and other
value-added services such as Internet access and paging. In addition, the
Company has entered into an agreement for the exclusive rights in the United
States and Canada to distribute a 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 continue to intensify in the future due to
regulatory changes, including the continued implementation 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.
Additionally, the long distance market is already significantly more
competitive than the local exchange market, because the ILECs, including the
RBOCs have historically had a monopoly position within the local exchange
market.
In the local exchange market, the Company also faces competition or
prospective competition from one or more CLECs, many of which have
significantly greater financial resources than the Company, and from other
competitive providers, including some non-facilities-based providers like the
Company. For example, AT&T, MCI and Sprint, among other carriers, have each
begun to offer local telecommunications services in major U.S. markets using
their own facilities or by resale of the ILECs' or other providers' services.
In fact, certain competitors, including AT&T, MCI and Sprint have entered into
interconnection agreements with Ameritech with respect to the States of
Illinois, Michigan and Ohio. These competitors either have begun or in the
near future likely will begin offering local exchange service in those states,
subject to the joint marketing restrictions under the Telecommunications Act
described below. In addition, some of these competitors have entered into
interconnection agreements with NYNEX and either have begun or in the near
future likely will begin offering local exchange service in New York and
Massachusetts, subject to such joint marketing restrictions. In addition to
these long distance service providers, entities that currently offer or are
potentially capable of offering switched services include CLECs, cable
television companies, electric utilities, other long distance carriers,
microwave carriers, wireless telephone system operators and large customers
who build private networks. Many facilities-based CLECs and long distance
carriers, for example, have committed substantial resources to building their
networks or to purchasing CLECs or IXCs with complementary facilities. By
building or purchasing a network or entering into interconnection agreements
or resale agreements with ILECs, including RBOCs, a facilities-based provider
can offer single source local and long distance services distance services
similar to those offered by the Company. Such additional alternatives may
provide such competitors with greater flexibility and a lower cost structure
than the Company. In addition, some of these CLECs and other facilities-based
providers of local exchange service are acquiring or being acquired by IXCs
that are not subject to joint marketing restrictions. These combined entities
may provide a bundled package of telecommunications products, including local
and long distance telephony, that is in direct competition with the products
offered by the Company.
With respect to wireless telephone system operators, the FCC has authorized
cellular, personal communications service, and other CMRS providers to offer
wireless services to fixed locations, rather than just to mobile customers, 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.
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The Company will also face competition from other fixed wireless services,
including MMDS, LMDS and 38 GHz wireless communications systems, WCS, FCC Part
15 unlicensed wireless radio devices, and other services that use existing
point-to-point wireless channels on other frequencies. The FCC has announced
plans to hold an auction for LMDS licenses in all markets for the provision of
high capacity, wide-area fixed wireless point-to-multipoint systems. In
addition, the FCC has adopted rules to auction geographical area wide licenses
for the operation of fixed wireless point-to-multipoint communications
services in the 38 GHz band, although many 38 GHz licenses have already been
issued nationwide. The LMDS auction is scheduled to begin in February 1998 and
the 38 GHz auction is expected to occur later in 1998. The MMDS service, also
known as "wireless cable," also currently competes for metropolitan wireless
broadband services. At present, wireless cable licenses are used primarily for
the distribution of video programming and have only a limited capability to
provide two-way communications needed for wireless broadband
telecommunications services, but there can be no assurance that this will
continue to be the case. The FCC has initiated a proceeding to determine
whether to provide wireless cable operators with greater technical flexibility
to offer two-way services. Cellular, PCS and other mobile service providers
may also offer fixed services over their licensed frequencies. Finally, the
FCC has allocated a number of spectrum blocks for use by wireless devices that
do not require site or network licensing. A number of vendors have developed
such devices that may provide competition to the Company, in particular for
certain low data-rate transmission services.
Under the Telecommunications Act and related 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.
In August 1997, the FCC denied the application of Ameritech, the RBOC in
three states where the Company operates, for in-region long distance authority
in Michigan. The Company anticipates that a number of RBOCs, including
Ameritech, will file additional applications in 1998. However, based on recent
public announcements, the Company does not believe any RBOC will provide in-
region long distance services prior to 1999. The FCC will have 90 days from
the date such an application is filed to decide whether to grant or deny the
application. 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 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 ILECs
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 ILECs 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 customers, 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.
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Competition for the Company's products and services is based on price,
quality, network reliability, service features and responsiveness to customer
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's provision of
local exchange services is regulated by the states. 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 1997. Various carriers have
filed suit to overturn the FCC regulations, and the U.S. Court of Appeals for
the D.C. Circuit has stayed the regulations pending its decision in that
appeal, which is not expected until the end of 1997. The FCC has recently
ruled 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 indicated that RBOC in-region service, when authorized,
will be subject to 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, ILECs
are now 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 ILECs, including the obligation
to interconnect their networks with the networks of competitors. Each ILEC is
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.
States have begun and, in a number of cases, completed regulatory proceedings
to determine the pricing of these unbundled network elements and services, and
the results of these proceedings will determine whether it is economically
attractive to use these elements.
The RBOCs have an added incentive to open their local exchange networks to
facilities-based competition because Section 271 of 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 one
or more unaffiliated, facilities-based competitors in some portion of the
state pursuant to which such competitors provide 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
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subsidiary for three years, unless extended by the FCC. In August 1997, the
FCC denied the application of Ameritech, the RBOC in three states where the
Company operates, for in-region long distance authority in Michigan. The
Company anticipates that a number of RBOCs, including Ameritech, will file
additional applications in 1998. However, based on recent public
announcements, the Company does not believe any RBOC will provide in-region
long distance services prior to 1999. If the FCC determines that the RBOC's
entry into in-region provision of long distance in that state is in the public
interest and that the RBOC has met the 14-point checklist, it must authorize
the RBOC to provide such services. SBC Communications Inc., the parent of
RBOCs in Oklahoma and other southwestern states, filed a lawsuit in June 1997
challenging the constitutionality of Section 271 and seeking to have it
declared void. The Company cannot predict the outcome of this litigation.
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;
nondiscriminatory access to unbundled network elements at just and reasonable
rates; non-discriminatory access to its poles, ducts, conduits, and rights-of-
way; unbundled local loop transmission, unbundled local transport, and
unbundled local switching; non-discriminatory access to 911 services;
directory assistance, operator call completion services, and white pages
directory listings for competing local carriers' customers; non-discriminatory
access to call routing databases; number portability (i.e., the ability of a
customer to keep the same telephone number when switching local telephone
service providers); dialing parity (i.e., the ability of customers of one
telephone service provider to call customers 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.
The Telecommunications Act is intended to eliminate state and local
statutory and regulatory barriers to entry, thus accelerating the process of
creating a competitive environment in all markets. 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. At the same time, the Telecommunications Act will also
substantially increase the competition the Company will face in its various
markets.
The Telecommunications Act permits the Company, as a telecommunications
carrier with less than 5% of nationwide presubscribed access lines, 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.
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 Company
actively monitors all pertinent FCC proceedings and has participated in some
of these proceedings. The FCC already has completed most of these rulemaking
proceedings. The outcome of these various ongoing FCC rulemaking proceedings
or judicial appeals of such proceedings could materially affect the Company's
operations.
In May 1997, the FCC issued new regulations regarding the implementation of
the universal service program and the assessment of access charges on carriers
retaining access to local exchange networks. 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 universal service funding
mechanism established by the FCC. Both the access charge and universal service
regimes were substantially revised. As a result of these changes, the costs of
business and multiple residential telephone lines are expected to increase. In
addition, the new regulations require a reseller, such as the Company, to
begin contributing to the universal service programs for low-income consumers
and high-cost, rural and insular areas on the basis of the reseller's
interstate and international revenues. Several parties have appealed various
parts of the new FCC rules, including the revenue basis on which contributions
are determined. The Company is unable to predict the final formula for
universal service contribution or its own level of contribution.
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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 customers to whom the
ILEC 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 ILEC may rebut this presumption,
however, by demonstrating that the class restriction is reasonable and
nondiscriminatory. The FCC also rejected claims by several ILECs 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. ILECs 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 ILECs 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
ILEC when it sells at wholesale. In August 1996 the FCC issued detailed
regulations establishing an interim default discount of 17% to 25%. Although
this portion of the FCC's rules has been overturned on appeal (see below), in
practice state commissions have generally adopted discount percentages that
fall within the 17-25% default range.
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 ILEC network elements. These regulations indirectly affect
the price at which the Company's new facilities-based competitors may
ultimately provide service. The Telecommunications Act provides that state
commissions shall determine the rates charged for such unbundled elements on
the basis of cost plus a reasonable profit. 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. At the same time, the FCC imposed minimum obligations
regarding the duty of ILECs to negotiate interconnection or resale
arrangements in good faith.
A number of RBOCs, state regulatory commissions and other parties 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 1997. In addition, many of the same parties and certain other parties filed
court appeals challenging the same FCC rules. In July 1997, the Eighth Circuit
Federal Court of Appeals struck down certain parts of the rules (including the
provisions establishing pricing methodologies and default rates for resold
services and unbundled network elements). In October 1997, the same court
issued an order clarifying that the RBOCs were not required to rebundle
unbundled network elements that competing carriers had purchased separately.
If upheld, this ruling would make it more difficult for competitors, including
the large IXCs, to use rebundled unbundled network elements or the "UNE
Platform" to enter the local exchange market. The FCC, numerous IXCs and
various other parties filed petitions for certiorari with the U.S. Supreme
Court on November 19, 1997. The Company cannot predict at this time the
outcome of the appeals or reconsideration processes.
In August 1997, the FCC issued rules transferring responsibility for
administering and assigning local telephone numbers from the RBOCs and a few
other LECs to a neutral entity in each geographic region in the United States.
In August 1996, the FCC issued new numbering regulations that (a) prohibit
states from creating
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new area codes that could unfairly hinder LEC competitors (including the
Company) by requiring their customers to use 10 digit dialing while existing
ILEC customers use 7 digit dialing, and (b) prohibit ILECs (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"). RBOCs 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, RBOCs must
implement number portability within six months of a request therefore
commencing December 31, 1998. Other LECs are required to implement number
portability by October 31, 1997 only in those of the top 100 markets where the
feature is requested by another LEC. Non-RBOC LECs are not required to
implement number portability in any additional markets until December 31,
1998, and then only in markets where the feature is requested by another LEC.
The Company already offers number portability as it provides local service
obtained from the incumbent RBOCS. This allows customers to switch to the
Company's services and still retain their existing telephone numbers.
In addition, the FCC authorized cellular and other CMRS to provide for other
wireless services to fixed locations (rather than to mobile customers),
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 have been classified as intrastate and therefore
subject to state regulation. As its local service business and product lines
has expanded, the Company has offered more intrastate service and become
increasingly 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 40 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 27 facilities, principally sales facilities, in Boston,
Massachusetts, Chicago, Illinois, Detroit, Michigan, Cleveland and Columbus,
Ohio and New York City, as well as in a number of areas surrounding such
cities and in other significant urban areas in Michigan, New York and Ohio.
The Company maintains its corporate headquarters in Chicago, Illinois.
Although the Company's facilities are adequate at this time, the Company
believes that it will be required to lease additional facilities, particularly
in new metropolitan areas where the Company enters RBOC resale agreements.
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EMPLOYEES
As of September 30, 1997, the Company employed 868 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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides certain information regarding the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
J. Thomas Elliott....... 50 Chairman of the Board, President, Chief Executive Officer and Director
Dennis B. Dundon........ 52 Chief Operating Officer
Ronald W. Gavillet...... 38 Executive Vice President, Strategy & External Affairs
Gerald J. Sweas......... 50 Executive Vice President and Chief Financial Officer
Ryan Mullaney........... 41 Executive Vice President, Sales
Steven J. Parrish....... 41 Executive Vice President, Operations
Thomas A. Monson........ 37 Vice President, General Counsel and Secretary
Thad J. Pellino......... 35 Vice President, Marketing
Neil A. Bethke.......... 37 Vice President, Information Systems
Ellen C. Craig.......... 59 Vice President, Regulatory Affairs
Lane Foster............. 53 Vice President, Human Resources and Organizational Development
Thomas C. Brandenburg... 61 Director
Richard J. Brekka....... 36 Director
Dean M. Greenwood....... 54 Director
Donald J. Hofmann, Jr... 39 Director
William A. Johnston..... 45 Director
Ian Kidson.............. 39 Director
Paul S. Lattanzio....... 34 Director
Eugene A. Sekulow....... 66 Director
</TABLE>
Each director serves until his successor is duly elected and qualified.
Officers serve at the discretion of the Board of Directors.
J. Thomas Elliott, Chairman of the Board, President and Chief Executive
Officer, has been the Chief Executive Officer since April 1996 and Chairman of
the Board since October 1997. Mr. Elliott joined the Company in 1995 as a
result of the Company's acquisition 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. Mr. Elliott holds B.A. and M.A. degrees in economics from the
University of Windsor.
Dennis B. Dundon, Chief Operating Officer, joined the Company in April 1997.
From 1991 to 1996, Mr. Dundon served as President and Chief Executive Officer
of EMI Communications Corp. ("EMI"), a regional telecommunications company,
until EMI was acquired by Intermedia Communications, Inc. From June 1996 to
March 1997, Mr. Dundon served as Senior Vice President of Intermedia, a CLEC.
From 1988 to 1991, Mr. Dundon was President and owner of DBD Associates, Inc.,
a consulting firm providing services to the telecommunications sector. Mr.
Dundon is a past Chairman and Director of the Competitive Telecommunications
Association. Mr. Dundon holds a B.S. degree from Clarkson University and an
M.B.A. degree from the University of Rochester.
Ronald W. Gavillet, Executive Vice President, Strategy & External Affairs,
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. Between these periods at MCI, Mr. Gavillet was in
private law practice representing competitive carriers such as Teleport
Communication Group, Inc., Centex Telemanagement Inc., Centel Corp., Sprint
Corp. and Telesphere Communications Inc. Mr. Gavillet holds B.A. and B.S.
degrees from Southern Illinois University, a J.D. degree 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.
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<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 communication networks company. Mr. Sweas
holds a B.B.A. degree from Loyola University in Chicago, Illinois and an
M.B.A. degree 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. Mr. Mullaney has a B.A. degree from the University of Nevada, Las
Vegas.
Steven J. Parrish, Executive Vice President, Operations, joined the Company
in January 1996 initially as a consultant and later 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 M.B.A. degree from the Illinois Institute of Technology.
Thomas A. Monson, Vice President, General Counsel and Secretary, joined the
Company in January 1997. From 1989 to 1996, Mr. Monson was Associate General
Counsel of Envirodyne Industries, Inc., a $650 million public company, where
he performed various corporate law, securities regulation, litigation and
corporate operations support activities. Mr. Monson holds a B.S. degree from
the University of Illinois and a J.D. degree from Harvard Law School.
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. degree from the University of Wisconsin.
Ellen C. Craig, Vice President, Regulatory Affairs, joined the Company in
April 1997. From 1994 to 1997, Ms. Craig served as a consultant to investment
banking and telecommunications companies on domestic and international
utilities and telecommunications issues. From 1989 to 1994, Ms. Craig served
as Chairman and Commissioner of the Illinois Commerce Commission. She holds a
B.A. degree from Cardinal Cushing College and a J.D. degree from The John
Marshall Law School.
Lane Foster, Vice President, Human Resources and Organizational Development,
joined the Company in May 1997. From 1991 to 1996, Mr. Foster served as
Director of Human Resources and Corporate Real Estate for Nextel
Communications, a telecommunications company. From 1980 to 1991, Mr. Foster
served as Director of Human Resources for MCI Telecommunications. Mr. Foster
attended the University of North Dakota and graduated from the University of
Southern California--Center for Telecommunications Senior Leadership Program.
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<PAGE>
Thomas C. Brandenburg, Director, has been a director of the Company since
founding the Company in 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 holds a B.A. degree from the University of
Notre Dame.
Richard J. Brekka, Director, has been a director of the Company since April
1994. Mr. Brekka served as Chairman of the Board of the Company from December
1996 until October 1997. Mr. Brekka is a Managing Partner of MW&I Partners, a
merchant banking fund, and has formed Dolphin Communications, L.L.C. to make
communications investments in the United States. From 1992 to 1996, he was a
Managing Director of CIBC Wood Gundy Capital ("CIBC"), the merchant banking
division of Canadian Imperial Bank of Commerce, and a director and the
President of CIBC Wood Gundy Ventures, Inc., an indirect wholly owned
subsidiary of Canadian Imperial Bank of Commerce. Mr. Brekka joined CIBC in
February 1992. Currently, Mr. Brekka serves on the board of directors of Orion
Network Systems, Inc. Telesystem International Wireless Inc., and Epoch
Networks, Inc. Mr. Brekka received a B.S. degree in finance from the
University of Southern California, and an M.B.A. degree from the University of
Chicago.
Dean M. Greenwood, Director, was elected as a director of the Company in
February 1997. Mr. Greenwood is Vice President of Prime Management Group and
has been an officer of that company since 1992. Mr. Greenwood is also a
Managing Director of Prime New Ventures. Mr. Greenwood holds a B.B.A. degree
and a J.D. degree from the University of Texas at Austin.
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. Mr. Hofmann holds a
B.B.A. degree from Hofstra University and an M.B.A. degree from Harvard
Business School.
William A. Johnston, Director, was elected a director of the Company in June
1994. Mr. Johnston has been a Managing Director of HarbourVest Partners, LLC
since January 1997. HarbourVest Partners, LLC was formed by the management
team of Hancock Venture Partners, Inc., where Mr. Johnston had served in
various capacities since 1983. 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
Holdings, Inc., Epoch Networks, Inc., Golden Sky Systems, Inc., The Marks
Group, Inc., and Multi Technology Corp. Internationally, he serves on the
board of directors of Esprit Telecom Group plc. Mr. Johnston received a B.A.
degree from Colgate University and an M.A. degree from Syracuse University
School of Management.
Ian M. Kidson, Director, has served as a director of the Company since April
1997. Mr. Kidson is a Managing Director of CIBC Wood Gundy Capital, the
merchant banking division of the Canadian Imperial Bank of Commerce. He joined
CIBC in 1984. Currently, Mr. Kidson serves on the board of directors of
Centennial Security Holdings, Inc. and JBK Arena Co. Mr. Kidson received a
B.S.C. degree and an M.B.A. degree from McMaster University.
Paul S. Lattanzio, Director, was appointed a director of the Company in
August 1995. Mr. Lattanzio served as a Managing Director of BT Capital
Partners, Inc., an affiliate of Bankers Trust New York Corp. until September
1997. He continues to provide consulting services to BT Capital Partners, Inc.
and acts as its representative with respect to its investment in USN. Mr.
Lattanzio was employed by BT Capital Partners, Inc. or an affiliate from 1984.
Currently, Mr. Lattanzio serves on the board of directors of Administaff,
Inc., an employee leasing company, and of Genesis Teleserve, a teleservices
company. Mr. Lattanzio received his B.S. degree in economics from the
University of Pennsylvania's Wharton School of Business.
57
<PAGE>
Eugene A. Sekulow, Director, was elected a director of the Company in August
1995. Mr. Sekulow served as Executive Vice President of NYNEX 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.
Currently, Mr. Sekulow serves on the board of directors of RSL Communications,
Inc. Mr. Sekulow attended the University of Stockholm and the University of
Oslo. He earned an M.A. degree in political science and economics and a Ph.D.
degree from Johns Hopkins University.
Currently, certain non-employee directors are designated by the Original
Purchasers pursuant to existing agreements. See "Certain Relationships and
Related Transactions."
The Company is required by the terms of the 14% Senior Note Indenture to
elect a disinterested director with experience in the telecommunications
industry by each of December 31, 1997 and March 31, 1998. The identity of the
independent directors has not yet been determined.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established an Audit Committee, a Finance Committee and a
Compensation Committee. Each of these committees is responsible to the full
Board of Directors, and their activities are therefore subject to approval of
the Board of Directors. The functions performed by these committees are
summarized below.
The Audit Committee consists of Messrs. Hofmann, Greenwood and Sekulow. The
Audit Committee is responsible for reviewing the internal accounting controls
of the Company, meeting and conferring with the Company's certified public
accountants and reviewing the results of the accountants' auditing engagement.
The Finance Committee consists of Messrs. Brekka, Elliott, Hofmann, Johnston
and Lattanzio. The Finance Committee is responsible for evaluating the
Company's capital requirements and overseeing the Company's efforts at meeting
its financial needs through capital markets transactions.
The Compensation Committee consists of Messrs. Brekka, Johnston and
Lattanzio. The Compensation Committee establishes compensation and benefits
for the Company's senior executives. The Committee also determines the number
and terms of stock options granted to employees, directors and consultants of
the Company under the Company's stock option plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Messrs. Brekka, Johnston
and Lattanzio, none of whom is currently an employee or officer of the
Company. No executive officer of the Company served during fiscal year 1996 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.
DIRECTORS' COMPENSATION
The Company's directors currently do not receive any cash compensation for
service on the Board of Directors or any committees thereof, but non-employee
directors are reimbursed for certain expenses in connection with attendance
for Board and committee meetings.
58
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the cash and
non-cash compensation during fiscal year 1996 earned by or awarded to the
Chief Executive Officer, the former Chief Executive Officer and 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,
1996 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
---------------- ALL OTHER
YEAR SALARY BONUS COMPENSATION
---- -------- ------- ------------
<S> <C> <C> <C> <C>
J. Thomas Elliott..................... 1996 $182,500 $97,500(1) --
President and Chief Executive Officer 1995(2) 139,165 -- $75,000
1994 -- -- --
Ronald W. Gavillet.................... 1996 167,600 92,500(1) --
Executive Vice President, Strategy 1995 135,000 50,000(3) --
& External Affairs 1994(4) 7,788 -- --
Thad J. Pellino....................... 1996 96,700 33,000(1) --
Vice President, Marketing 1995(5) 31,058 33,125(5) --
1994 -- -- --
Neil A. Bethke........................ 1996(6) 69,711 31,250(1) --
Vice President, Information Systems 1995 -- -- --
1994 -- -- --
Thomas C. Brandenburg................. 1996 190,000 -- --
Former Chief Executive Officer 1995 167,692 -- --
1994 174,615 -- --
Robert J. Luth........................ 1996 150,000 -- 50,000(7)
Former Chief Financial Officer 1995 141,635 37,500(3) 69,806(7)
1994 89,170 -- --
Kevin J. Burke........................ 1996 101,000 -- --
Former Vice President, Network
Engineering 1995 123,808 -- --
and Technical Support 1994 -- -- --
</TABLE>
- --------
(1) Represents the bonus that was earned with respect to 1996 and paid in
1997.
(2) Includes Mr. Elliott's compensation as an officer of Quest America, LP
prior to the acquisition of its business by the Company. The $75,000
included as other compensation represents the amount Mr. Elliott received
for consulting service to the Company prior to the Company's acquisition
of the business of Quest America, LP.
(3) Represents amounts paid in 1996 with respect to bonuses earned in prior
periods, primarily in 1995.
(4) Mr. Gavillet commenced employment with the Company in November 1994.
(5) Mr. Pellino commenced employment with the Company in August 1995.
(6) Mr. Bethke commenced employment with the Company in May 1996.
(7) Includes amounts reimbursed by the Company for life and disability
insurance premiums and temporary living expenses.
59
<PAGE>
OPTION GRANTS
The following table sets forth the aggregate number of stock options granted
to each of the Named Executive Officers during the fiscal year ended December
31, 1996. Options are exercisable for Class A Common Stock of the Company.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF STOCK
NUMBER OF PERCENT OF PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM ($) (1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR (%) ($/SHARE) DATE 5% 10%
---- ---------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
J. Thomas Elliott....... 75,000 7.2 0.15 6/28/06 988,500 1,473,750
299,250 28.7 0.15 9/30/06 3,944,115 5,880,263
Ronald W. Gavillet...... 61,500 5.9 0.15 6/28/06 810,570 1,208,475
218,590 20.9 0.15 9/30/06 2,881,016 4,295,294
Thad J. Pellino......... 20,000 1.9 0.15 6/28/06 263,600 393,000
14,940 1.4 0.15 9/30/06 196,909 293,571
Neil A. Bethke.......... 20,000 1.9 0.15 6/28/06 263,600 393,000
14,940 1.4 0.15 9/30/06 196,909 293,571
</TABLE>
- --------
(1) The information disclosed assumes, solely for purposes of demonstrating
potential realizable value of the options, that the per share fair market
value of the Class A Common Stock is $8.80 per share as of August 31, 1997
and increases at the rate indicated, effective as of December 31 of each
subsequent full calendar year during the option term. However, there is no
established trading market for the Class A Common Stock, and no
representation is made that the Class A Common Stock actually has such
value or that the rates of increase in value can or will be achieved.
The following table sets forth certain information concerning the exercise
of stock options by the Named Executive Officers during the fiscal year ended
December 31, 1996 and the December 31, 1996 aggregate value of unexercised
options held by each of the Named Executive Officers.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT AT FISCAL
SHARES FISCAL YEAR-END (#) YEAR-END ($)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
J. Thomas Elliott....... -- -- 18,750/355,500 177,188/3,359,475
Ronald W. Gavillet...... -- -- 53,875/264,715 510,706/2,501,510
Thad J. Pellino......... -- -- 5,000/ 29,940 47,250/ 282,933
Neil A. Bethke.......... -- -- 5,000/ 29,940 47,250/ 282,933
Robert J. Luth.......... 20,000 189,000 18,500/ 0 175,565/ 0
</TABLE>
- --------
(1) The information disclosed assumes, solely for purposes of illustrating the
value of in-the-money options, that the per share fair market value of the
Class A Common Stock is $9.60 as of December 31, 1996. However, there is
no established trading market for the Class A Common stock, and no
representation is made that the Class A Common Stock actually has such
value.
60
<PAGE>
BENEFIT PLANS
1994 Amended and Restated Stock Option Plan
In September 1996, the Board of Directors adopted, and the stockholders
subsequently approved, the Amended and Restated 1994 Stock Option Plan (the
"1994 Plan"), which was originally adopted by the Board of Directors and
subsequently approved by the stockholders in September 1994. A total of
1,004,520 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.
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, except that certain options granted to Messrs.
Sweas, Mullaney and Monson in connection with their employment agreements
become exercisable with respect to 50% on the one-year anniversary of the date
of grant and with respect to 25% on the 18-month and 24-month anniversaries of
the date of grant. 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 optionee's employment terminates for any reason whatsoever. Options are
subject to adjustment under certain circumstances.
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.
1996 Option Grants Outside of the 1994 Stock Option Plan
In connection with the issuance of the 9% Preferred Stock and the
consummation of the 1996 Private Placement, Messrs. Elliott, Gavillet,
Parrish, Pellino and Bethke were granted 182,340, 119,960, 6,000, 3,120 and
3,120 additional options, respectively, and certain other employees were
granted a total of 11,110 additional options, to purchase a corresponding
number of shares of Class A Common Stock at an exercise price of $.15 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.
Omnibus Securities Plan
In August 1997, the Board of Directors adopted and the shareholders approved
the Omnibus Securities Plan of USN Communications, Inc. (the "Omnibus
Securities Plan"). A total of 2,750,000 shares have been reserved for issuance
under the Omnibus Securities Plan. The purpose of the Omnibus Securities Plan
is to benefit the Company's stockholders by encouraging high levels of
performance by individuals whose performance is a key element in achieving the
Company's continued success, and to enable the Company to recruit, reward,
retain and motivate employees for the benefit of the Company and its
stockholders. Under the Omnibus Securities Plan, the Company may grant
incentive or non-qualified stock options, stock appreciation rights,
restricted stock awards, performance awards and other stock based awards.
Employees of the Company and its subsidiaries and non-employee directors of
the Company are eligible to participate in the Omnibus Securities Plan. The
Omnibus Securities Plan is administered by the Compensation Committee, which
determines, among other things, the terms and recipients of the awards. The
Omnibus Securities Plan may be amended by the Board of Directors,
61
<PAGE>
although certain amendments require the consent of the participants. The
Omnibus Securities Plan will terminate in 2007 unless earlier terminated by
the Board of Directors.
In September 1997, the Compensation Committee authorized the grant of stock
options to substantially all non-executive officer employees of the Company or
its subsidiaries. These options have an exercise price of $8.80 per share,
with one-third of the options vesting on the earlier of the completion of a
qualified public offering of the Company's Class A Common Stock or the first
anniversary of the date of grant, and with an additional one-third of the
options vesting on each of the two anniversaries following the initial vesting
date. These options cover a total of 958,500 shares. In addition, in September
1997, the Compensation Committee authorized the grant of options for a total
of 1,137,000 shares of Class A Common Stock to the Company's 11 executive
officers and a grant of options for a total of 75,000 shares of Class A Common
Stock to the Company's then Chairman. These options also have an exercise
price of $8.80 per share.
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 Internal Revenue Code of
1986, as amended, 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
All of the Company's executive officers have entered into employment
agreements with the Company. Each agreement provides for an initial term of
two or three years and automatic one-year renewals, and sets forth a base
salary and target annual bonus. The annual base salaries for Messrs. Elliott,
Dundon, Gavillet, Sweas, Mullaney and Parrish are $195,000, $185,000,
$185,000, $150,000, $125,000 and $140,000, respectively. Each agreement
provides that the executive shall receive certain payments in the event his or
her employment is terminated other than for cause, including but not limited
to all amounts earned, accrued and owing to the executive and certain
severance payments. In addition, each agreement contains noncompetition and
nonsolicitation provisions.
The employment agreements also provide that, in the event of a Change of
Control, the options held by the executive shall become exercisable and any
restrictions on such options shall lapse. 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.
Mr. Elliott's and Mr. Gavillet's agreements provide for certain anti-
dilution rights with respect to their ownership of common stock, including the
right, in the event the Company sells shares of any class of stock, 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 being sold. In
addition, their agreements provide that if the current stockholders sell any
of their shares of capital stock of the Company to a third party under certain
circumstances, each of Messrs. Elliott and Gavillet has a right to sell the
same percentage of his shares of capital stock as the percentage of shares
that the current stockholders are selling, on the same terms and for the same
consideration.
62
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Offering, the Company issued and sold 302,090 shares
of Series A Preferred Stock for an aggregate purchase price of $30.2 million.
This new equity was purchased by existing Company stockholders and affiliates
of certain existing stockholders.
The Original Purchasers, by requisite vote, waived certain preemptive rights
and registration rights in connection with the Offering and the Consent.
On September 30, 1996, BT Securities Corporation, Chase Securities Inc. and
CIBC Wood Gundy Securities Corp. purchased a portion of the 14% Senior Notes,
the related warrants and the Convertible Notes from the Company pursuant to
the 1996 Private Placement. All of the 14% Senior Notes, the related warrants
and the Convertible Notes were immediately resold to MLGAFI, an affiliate of
Merrill Lynch, Pierce, Fenner & Smith Incorporated, one of the Initial
Purchasers. BT Securities Corporation, Chase Securities Inc. and CIBC Wood
Gundy Securities Corp. are affiliates of BT Capital Partners, Inc., Chase
Venture Capital Associates, L.P. and CIBC Wood Gundy Ventures, Inc.,
respectively, which are stockholders of the Company. See "Stock Ownership." BT
Securities Corporation, Chase Securities Inc. and CIBC Wood Gundy Securities
Corp., each received commissions of approximately $188,000 of the $1.9 million
in connection with the 1996 Private Placement.
In September 1996, in connection with the 1996 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. The rights of such classes are identical, except that the 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. Each
outstanding share of Common Stock of the Company existing on the date of the
1996 Private Placement was converted into one share of Class A Common Stock.
In connection with the 1996 Private Placement, by requisite vote, the
Original Purchasers waived certain preemptive rights and registration rights
held by them pursuant to agreements entered into with respect to earlier
investments in the Company. The Original Purchasers also approved, and the
Company took all necessary action to effect prior to the consummation of the
1996 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 1996 Private Placement, the Original Purchasers
purchased from the Company shares of its 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."
In March 1996, the Company effected a recapitalization pursuant to which the
Company issued an aggregate of 1,101,570 shares of Common Stock (which was
converted to Class A Common Stock in September 1996) 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 for Common
Stock purchased in 1995. The dispute stemmed from, in part, the Company's
operating performance as compared with the operating performance projected by
the Company at the time of such investment. As part of the recapitalization,
the Company also caused its then-existing 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 above.
In December 1995, Mr. J. Thomas Elliott, President and Chief Executive
Officer of the Company, executed an interest-free promissory note in favor of
the Company in the principal amount of $75,000. Such promissory note was
originally payable by January 2, 1997, but such date has been extended to a
date as yet undetermined.
63
<PAGE>
STOCK OWNERSHIP
The following table sets forth as of October 17, 1997 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
---------------------
NUMBER OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OWNED OF CLASS
- --------------------------------------- ------------ --------
<S> <C> <C>
Merrill Lynch Global Allocation Fund, Inc. (2)........... 3,841,230 34.75
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Harbourvest Partners, LLC................................ 3,442,373 37.82
One Financial Center, 44th Floor
New York, New York 10017-3903
Chase Venture Capital Associates, L.P. (3)............... 2,309,717 29.05
380 Madison Ave., 12th Floor
New York, New York 10017-2070
CIBC Wood Gundy Ventures, Inc. (3)....................... 2,309,717 29.05
425 Lexington Avenue
New York, New York 10017-3903
BT Capital Partners, Inc. (3)............................ 1,710,566 22.04
130 Liberty Street
New York, New York 10017-2070
Prime New Ventures....................................... 596,680 8.07
600 Congress Suite 3000
One American Center
Austin, Texas 78701
J. Thomas Elliott (4).................................... 205,955 2.82
Ronald W. Gavillet (4)................................... 118,565 1.62
Thomas C. Brandenburg.................................... 109,082 1.51
Richard J. Brekka........................................ 75,000 1.03
Dean M. Greenwood (5).................................... 596,680 8.07
Donald J. Hofmann, Jr. (5)............................... 2,309,717 29.05
William A. Johnston (5).................................. 3,442,373 37.82
Ian M. Kidson(5)......................................... 2,309,717 29.05
Paul S. Lattanzio........................................ -- *
Robert J. Luth........................................... 38,500 *
Eugene A. Sekulow........................................ -- *
All directors and executive officers of the Company as a
group (19 persons)...................................... 19,296,034 83.19
</TABLE>
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and includes voting and investment power with respect to the
shares. As to each stockholder, the percentage ownership is calculated by
dividing (i) the sum of the number of shares of Class A Common Stock owned
by such stockholder plus the number of shares of Class A Common Stock that
such stockholder would receive upon the exercise of currently exercisable
options and warrants or the conversion of convertible securities held by
such stockholder (the "Conversion Shares") by (ii) the sum of the total
number of outstanding shares of Class A Common Stock plus the total number
of such stockholder's Conversion Shares. See also "Risk Factors--Control
by Existing Stockholders; Certain Antitakeover Matters" for a description
of certain circumstances under which MLGAFI may receive additional equity
and equity-related securities of the Company.
(2) Represents Conversion Shares but does not represent shares that may be
issued upon conversion of the Consent Convertible Notes. Also, Merrill
Lynch Global Allocation Fund, Inc. is entitled to receive additional
warrants to purchase common stock under certain circumstances pursuant to
the 14% Senior Note Indenture and the Convertible Note Indenture.
(3) Chase Venture Capital Associates, L.P., CIBC Wood Gundy Ventures, Inc.,
and BT Capital Partners, Inc. are affiliates of Chase Manhattan
Corporation, Canadian Imperial Bank of Commerce, and Bankers Trust New
York Corporation, respectively.
(4) These shares include exercisable options.
(5) Each director disclaims beneficial ownership of any shares of Class A
Common Stock or Preferred Stock which he does not directly own.
64
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were and the New Notes will be issued under the Indenture. For
purposes of this Description of the Notes, the term "Company" refers to USN
Communications, Inc. and does not include its subsidiaries except for purposes
of financial data determined on a consolidated basis.
The terms of the Notes include those stated in the Indenture and those made
a part of the 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 Indenture do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Indenture. The Notes are subject to all such terms, and
holders of the Notes are referred to the Indenture and the Trust Indenture Act
for a complete statement of such terms. Copies of the Indenture are available
from the Company on request. The statements and definitions of terms under
this caption relating to the Notes and the Indenture are summaries and do not
purport to be complete. Such summaries make use of certain terms defined in
the Indenture and are qualified in their entirety by express reference to the
Indenture. Certain terms used herein are defined below under "--Certain
Definitions."
The Old Notes are and the New Notes will be senior unsecured obligations of
the Company, limited in aggregate principal amount at Stated Maturity to
$152,725,000. In addition, the Indenture permits the issuance of the
Additional Notes in connection with the exercise of the Consent Exchange
Option. Under no circumstances will the aggregate principal amount of Notes
that may be issued under the Indenture be increased. The Notes will rank pari
passu in right of payment with all existing and future senior unsecured
indebtedness of the Company, including the 14% Senior Notes, and will be
senior in right of payment to all existing and future subordinated
indebtedness of the Company, including the Convertible Notes and, if issued,
the Consent Convertible Notes. The Notes are effectively subordinated to all
secured indebtedness of the Company to the extent of the assets securing such
indebtedness (including up to $30 million of indebtedness under a Credit
Facility permitted by the Indenture and the 14% Senior Note Indenture). The
Company's Subsidiaries have no direct obligation to pay amounts due on the
Notes and did not and will not guarantee the Notes on their Issue Dates;
however, if a Restricted Subsidiary guarantees any Indebtedness of the
Company, such Restricted Subsidiary will be obligated to guarantee the Notes
on a senior basis. See "--Certain Covenants--Limitation on Issuances of
Guarantees by Restricted Subsidiaries." As a result, the Notes effectively are
subordinated to all existing and future third-party indebtedness and other
liabilities of the Company's Subsidiaries (including trade payables). As of
August 31, 1997, the total outstanding indebtedness and other liabilities
(including trade payables and other non-debt obligations) of the Company that
ranked pari passu in right of payment with the Notes was approximately $34.2
million. As of August 31, 1997, the total 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) were approximately $21.1 million. Of that amount, approximately
$0.7 million in long-term indebtedness was secured by Liens on the assets of
the borrowing Subsidiaries.
The operations of the Company are conducted in large part 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 Notes, to participate in the
distribution of the assets of any of the Company's Subsidiaries upon any
liquidation or reorganization of any such Subsidiary will be subject to the
prior claims of that Subsidiary's creditors (including trade creditors).
Accordingly, the Company anticipates that the primary source of cash to pay
the Company's obligations under the Notes will be derived from the operations
of the Restricted Subsidiaries. The Indenture permits under limited
circumstances the creation of, or the designation of existing Restricted
Subsidiaries as, Unrestricted Subsidiaries. Such Unrestricted Subsidiaries
will not generally
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be subject to the covenants applicable to the Company and the Restricted
Subsidiaries. See "Risk Factors--Substantial Leverage," "--Future Cash
Obligations" and "--Holding Company Structure; Source of Repayment of Notes;
Effective Subordination of Notes to Indebtedness of Subsidiaries."
The Old Notes have been designated for trading in the PORTAL Market.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount at Stated Maturity to
$152,725,000 and will mature on August 15, 2004. The Notes will accrete
interest at the rate of 14 5/8% per annum, compounded semiannually, to an
aggregate principal amount of $152,725,000 by August 15, 2000. Although for
U.S. federal income tax purposes, a significant amount of original issue
discount, taxable as ordinary income, will be recognized by a holder as such
discount accrues from the Issue Date of the Old Notes, no interest will be
payable on the Notes prior to February 15, 2001. See "Certain Federal Income
Tax Considerations--Taxation of the Notes--Original Issue Discount." From and
after August 15, 2000, interest on the Notes will accrue at the rate of 14
5/8% per annum which will be payable in cash semiannually on February 15 and
August 15, commencing February 15, 2001, to the holders of record of Notes at
the close of business on the January 31 and July 31 immediately preceding such
interest payment date. Interest on the Notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from
August 15, 2000. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
If the Company does not comply with certain deadlines set forth in the
Registration Rights Agreement with respect to the conduct of the Exchange
Offer or the registration of the Notes for resale under a shelf registration
statement, holders of the Notes will be entitled to Special Interest. See
"Registration Rights."
Principal of, premium, if any, and interest and Special Interest, if any, on
the Notes will be payable, and the Notes may be presented for registration of
transfer or exchange, at the office or agency of the Company maintained for
such purpose, which office shall be maintained in the Borough of Manhattan,
The City of New York. At the option of the Company, interest and Special
Interest may be paid by check mailed to the registered holders at their
registered addresses. The Old Notes were and the New Notes will be issued
without coupons and in fully registered form only, in denominations of $1,000
aggregate principal amount at Stated Maturity and integral multiples thereof.
OPTIONAL REDEMPTION
The Old Notes are not and the New Notes will not be redeemable at the option
of the Company prior to August 15, 2002, subject to the provisions of the
following paragraph. Thereafter, the Notes will be subject to redemption at
the option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount at Stated Maturity thereof) set forth below, plus accrued and
unpaid interest (if any) and Special Interest (if any), if redeemed during the
twelve months beginning August 15 of each year indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................... 107.313%
2003........................................................... 103.656%
</TABLE>
Notwithstanding the foregoing, in the event that on or prior to August 15,
2000, the Company consummates one or more Public Equity Offerings of its
Common Stock in an aggregate amount equal to or exceeding $40 million, up to a
maximum of 35% of the aggregate principal amount at Stated Maturity of the
Notes will be redeemable at the option of the Company out of the net proceeds
thereof to the extent that such proceeds consist of cash or cash equivalents.
Such Notes will be redeemable on not less than 30 nor more than 60 days' prior
notice at a redemption price equal to 114.63% of the Accreted Value of the
Notes to be redeemed on the redemption date plus accrued and unpaid interest,
if any, and Special Interest, if any, to the redemption date. Any such
redemption shall occur within 90 days after (but not before) such sale or last
such sale in the case of a series of related transactions; provided, that
immediately after giving effect to such redemption, not less than 65% of the
aggregate principal amount at Stated Maturity of the Notes originally issued
remain outstanding.
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MANDATORY REDEMPTION
Except as set forth under "--Repurchase at the Option of Holders upon a
Change of Control,"
and "--Asset Sales," the Company is not required to make mandatory redemption
payments or sinking fund payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes shall have
the right to require the Company to repurchase all or any part (equal to
$1,000 principal amount at Stated Maturity or an integral multiple thereof) of
such holder's Notes pursuant to an irrevocable and unconditional offer
described below (the "Change of Control Offer") at a purchase price (the
"Change of Control Purchase Price") equal to 101% of the Accreted Value
thereof or 101% of the principal amount thereof, as the case may be, on any
Change of Control Payment Date (as defined), 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 Indenture entitled "Repurchase at the Option of Holders
upon a Change of Control" and that all Notes properly tendered will be
accepted for payment; (2) the Change of Control Purchase Price and the
purchase date (the "Change of Control Payment Date"), which shall be no
earlier than 30 days nor later than 60 days from the date such notice is
mailed; (3) that any Notes or portions thereof not properly tendered will
continue to accrete in value or accrue interest, as the case may be, and
accrue Special Interest, if applicable; (4) that, unless the Company defaults
in the payment of the Change of Control Purchase Price, all Notes or portions
thereof accepted for payment pursuant to the Change of Control Offer shall
cease to accrete in value or accrue interest, as the case may be, and accrue
Special Interest, if applicable, from and after the Change of Control Payment
Date; (5) that holders electing to have any Notes or portions thereof
purchased pursuant to a Change of Control Offer will be required to surrender
the Notes, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Notes completed, to the Paying Agent at the address specified
in the notice prior to the close of business on the third Business Day
preceding the Change of Control Payment Date; (6) that holders will be
entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the second Business Day preceding the Change of
Control Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount of Notes delivered
for purchase, and a statement that such holder is withdrawing his election to
have such Notes or portions thereof purchased; (7) that holders whose Notes
are being purchased only in part will be issued new Notes equal in principal
amount to the unpurchased portion of the Note or Notes surrendered, which
unpurchased portion must be equal to $1,000 in principal amount at Stated
Maturity or an integral multiple thereof; and (8) the instructions and any
other information necessary to enable holders to accept a Change of Control
Offer or effect withdrawal of such acceptance.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of
Notes pursuant to a Change of Control Offer.
On the Change of Control Payment Date, the Company will (1) accept for
payment Notes or portions thereof properly tendered pursuant to the Change of
Control Offer, (2) irrevocably deposit with the Paying Agent in immediately
available funds an amount equal to the Change of Control Purchase Price in
respect of all Notes or portions thereof so tendered, including accrued and
unpaid interest, if any, and Special Interest, if any, thereon and (3)
deliver, or cause to be delivered, to the Trustee the Notes so accepted
together with an Officers' Certificate listing the Notes or portions thereof
tendered to the Company and accepted for payment. The Paying Agent shall
promptly mail to each holder of Notes so accepted payment in an amount equal
to the Change of Control Purchase Price, including interest and Special
Interest, if applicable, for such Notes and the Trustee shall promptly
authenticate and mail to each holder a new Note equal in principal amount at
Stated Maturity to any
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unpurchased portion of the Notes surrendered, if any; provided, that each such
new Note shall be in a principal amount at Stated Maturity of $1,000 or any
integral multiple thereof. The Company will announce publicly the results of a
Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase Notes upon a Change of Control may deter
a third party from acquiring the Company in a transaction that constitutes a
Change of Control. If a Change of Control Offer is made, there can be no
assurance that the Company will have sufficient funds to pay the Change of
Control Purchase Price for all Notes tendered by holders seeking to accept the
Change of Control Offer. Both the 14% Senior Note Indenture and the
Convertible Note Indenture contain, and if Consent Convertible Notes are
issued, the Consent Convertible Note Indenture would contain, substantially
identical "Change of Control" covenants. In addition, instruments governing
other Indebtedness of the Company may prohibit the Company from purchasing any
Notes prior to their Stated Maturity, including pursuant to a Change of
Control Offer. In the event that a Change of Control Offer occurs at a time
when the Company does not have sufficient available funds to (i) pay the
Change of Control Purchase Price for all Notes tendered pursuant to such
offer, (ii) purchase all validly tendered 14% Senior Notes upon a "Change of
Control" (as defined in the 14% Senior Note Indenture), (iii) purchase all
validly tendered Convertible Notes upon a "Change of Control" (as defined in
the Convertible Note Indenture) and (iv) if Consent Convertible Notes are
issued, purchase all validly tendered Consent Convertible Notes upon a "Change
of Control" (as such would be defined in the Consent Convertible Note
Indenture, if applicable) or at a time when the Company is prohibited from
purchasing the Notes (and the Company is unable either to obtain the consent
of the holders of the relevant Indebtedness or to repay such Indebtedness), an
Event of Default would occur under the Indenture. In addition, one of the
events that constitutes a Change of Control under the 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 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, the
Indenture does not contain any other provisions that permit holders of Notes
to require that the Company repurchase or redeem Notes in the event of a
takeover, recapitalization or similar restructuring. The foregoing provisions
may not necessarily afford the holders of the Notes protection in the event of
a highly leveraged transaction, including a reorganization, restructuring,
merger or other similar transaction involving the Company, that may adversely
affect the holders because (i) such transactions may not involve a shift in
voting power or beneficial ownership or, even if they do, may not involve a
shift of the magnitude required under the definition of Change of Control to
require the Company to make a Change of Control Offer or (ii) such
transactions may include an actual shift in voting power or beneficial
ownership to a 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 unless (i) no Event of Default under the 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.
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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 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 owing to a Restricted
Subsidiary) that is pari passu in right of payment with the Notes, the 14%
Senior Notes, the Convertible Notes and, if issued, the Consent 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 Guarantee, Old Senior Note Guarantee, Convertible Note Guarantee
and any guarantee of the Consent Convertible Notes, 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, within 30 days of the date on
which such Excess Proceeds exceed $5 million, use such Excess Proceeds to make
offers to purchase (each an "Asset Sale Offer") on a pro rata basis from all
holders of Notes and 14% Senior Notes, in an aggregate principal amount equal
to the maximum principal amount that may be purchased out of Excess Proceeds,
at a purchase price (the "Asset Sale Purchase Price") in cash equal to 100% of
the Accreted Value or 100% of the principal amount at Stated Maturity thereof,
as the case may be, in the case of the Notes, or 100% of the "Accreted Value"
(as defined in the 14% Senior Note Indenture) or 100% of the principal amount
at Stated Maturity thereof, as the case may be, in the case of the 14% Senior
Notes, on any purchase date, plus accrued and unpaid interest, if any, and
Special Interest, if any, to such purchase date, in accordance with the
procedures set forth in the applicable indenture and to the substantially
concurrent repayment or repurchase 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). 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, including the making of an "Asset Sale
Offer," as defined in and required by the Convertible Note Indenture and, if
Consent Convertible Notes are issued, in the Consent Convertible Note
Indenture, for the Convertible Notes and, if issued, the Consent Convertible
Notes, respectively.
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.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
Limitation on Indebtedness
The Company will not, and will not permit its Restricted Subsidiaries to,
directly or indirectly, incur any Indebtedness (including Acquired
Indebtedness) and the Company will not issue any Disqualified Stock or permit
any of its Restricted Subsidiaries to issue any Disqualified Stock; provided,
that the Company may incur Indebtedness or issue Disqualified Stock (i) if,
after giving effect to such issuance or incurrence on a pro forma basis, the
Indebtedness to Operating Cash Flow Ratio of the Company does not exceed 5 to
1.0 or (ii) in an amount not to exceed 200% of the aggregate Net Cash Proceeds
received by the Company subsequent to the Issue Date from the issuance or sale
(other than to a Subsidiary) of shares of its Qualified Stock, including
Qualified Stock issued upon the conversion of convertible debt (other than any
conversions of Convertible Notes and, if issued, the Consent Convertible
Notes) or the exercise of options, warrants or rights to purchase Qualified
Stock; provided, that such Net Cash Proceeds shall not be utilized to increase
the amounts available for Restricted Payments pursuant to clause (B) of the
first paragraph of the covenant described under "--Certain Covenants--
Restricted Payments."
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The foregoing limitation will not apply to: (a) Indebtedness existing under
the Credit Facility; provided, that the aggregate principal amount of all such
Indebtedness under the Credit Facility, when taken together with all
Indebtedness of the Company then outstanding which was permitted to have been
incurred under clause (j) below, shall not exceed $45 million at any one time
outstanding, up to $30 million of which may be secured; (b) the Existing
Indebtedness; (c) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness owing to any of its respective
Wholly-Owned Restricted Subsidiaries; provided, that any such Indebtedness is
junior and subordinate to the Notes and Guarantees, if any, and the 14% Senior
Notes and Old Senior Note Guarantees, if any, and such Indebtedness is held at
all times by the Company or a Wholly-Owned Restricted Subsidiary of the
Company; (d) Indebtedness of any Restricted Subsidiary to the Company or a
Wholly-Owned Restricted Subsidiary of the Company; (e) the incurrence by the
Company or any of its Restricted Subsidiaries of Interest Hedging Obligations
with respect to any floating rate Indebtedness that is permitted by the
covenant described in this paragraph; (f) the incurrence by the Company or any
of its Restricted Subsidiaries of Indebtedness evidenced by the Notes or
Guarantees, if any, pursuant to the Indenture, the 14% Senior Notes and the
Old Senior Note Guarantees, if any, as required by the terms of the 14% Senior
Note Indenture, the Convertible Notes and the Convertible Note Guarantees, if
any, as required by the terms of the Convertible Note Indenture and, if
issued, the Consent Convertible Notes and guarantees of Consent Convertible
Notes, if any, as required by the terms of the Consent Convertible Note
Indenture; (g) Indebtedness in respect of performance, surety or appeal bonds
provided by the Company in the ordinary course of business; (h) Vendor
Financing not to exceed an aggregate principal amount of $5 million at any one
time outstanding; (i) the incurrence by the Company or any of its Restricted
Subsidiaries of Refinancing Indebtedness issued in exchange for, or the
proceeds of which are used to refinance, repurchase, replace, refund or
defease ("Refinance" and correlatively, "Refinanced" and "Refinancing")
Indebtedness permitted pursuant to clause (b) or (f) of this paragraph;
provided, that (i) the amount of such Refinancing Indebtedness shall not
exceed the principal amount of, premium, if any, and accrued interest (and
Special Interest, if any, on the Notes) on the Indebtedness so Refinanced (or
if such Indebtedness was issued with original issue discount, the original
issue price plus amortization of the original issue discount at the time of
the repayment of such Indebtedness) plus the fees, expenses and costs of such
Refinancing and reasonable prepayment premiums, if any, in connection
therewith, (ii) such Refinancing Indebtedness shall have a Stated Maturity no
earlier than the Stated Maturity of Indebtedness being Refinanced, (iii) such
Refinancing Indebtedness shall have an Average Life equal to or greater than
the Average Life of the Indebtedness being Refinanced, (iv) if the
Indebtedness being Refinanced is subordinated in right of payment to the
Notes, such Refinancing Indebtedness shall be subordinated in right of payment
to the Notes on terms at least as favorable to the holders of Notes as those
contained in the documentation governing the Indebtedness being so Refinanced,
and (v) no Restricted Subsidiary shall incur Refinancing Indebtedness to
Refinance Indebtedness of the Company or another Subsidiary; and (j)
Indebtedness of the Company not otherwise permitted to be incurred pursuant to
the covenant described in this paragraph in an amount which shall not exceed
$25 million at any one time outstanding and which amount shall reduce the
amount permitted to be incurred under clause (a) above.
In the event that the Company or any Restricted Subsidiary has incurred
Indebtedness pursuant to clause (c) of the second paragraph of this covenant
owing to a Restricted Subsidiary and that Restricted Subsidiary thereafter
does not remain a "Restricted Subsidiary" as defined in the Indenture, the
aggregate principal amount of such Indebtedness of the Company or a Restricted
Subsidiary, as applicable, owing to such Person at the time of such a change
in Restricted Subsidiary status that was at any time incurred pursuant to
clause (c) of the second paragraph of this covenant, shall be deemed to be
Indebtedness incurred by the Company or a Restricted Subsidiary, as the case
may be, at the time of such change in Restricted Subsidiary status.
Indebtedness incurred by any Person that is not a Restricted Subsidiary of
the Company, which Indebtedness is outstanding at the time such Person becomes
a Restricted Subsidiary of the Company, or is merged into or consolidated
with, the Company or a Restricted Subsidiary, shall be deemed to have been
incurred, at the time such Person becomes a Restricted Subsidiary, or is
merged into or consolidated with the Company or a Restricted Subsidiary. A
guarantee permitted by this covenant to be incurred by the Company or a
Restricted Subsidiary of Indebtedness otherwise permitted to be incurred
pursuant to this covenant is not considered a separate incurrence for purposes
of this covenant.
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Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Indenture provides 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 Indenture
providing for a Guarantee of payment of the Notes by such Restricted
Subsidiary (a "Guarantee") and (ii) such Restricted Subsidiary waives and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Guarantee, provided, that any Restricted
Subsidiary may guarantee any Credit Facility so long as such Restricted
Subsidiary enters into a Guarantee ranking pari passu with its guarantee under
such Credit Facility. If the Guaranteed Indebtedness is pari passu with the
Notes, then the guarantee of such Guaranteed Indebtedness shall be pari passu
with or subordinated to the Guarantee; and if the Guaranteed Indebtedness is
subordinated to the Notes, then the guarantee of such Guaranteed Indebtedness
shall be subordinated to the Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary
shall provide by its terms that it shall be automatically and unconditional
released and discharged upon the release or discharge of the guarantee which
resulted in the creation of such Restricted Subsidiary's Guarantee, except a
discharge or release by, or as a result of, payment under such guarantee.
Limitation on Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, create, incur, assume or suffer to
exist any Liens of any kind other than Permitted Liens on or with respect to
any of its Property or assets now owned or hereafter acquired, or any interest
therein or any income or profits therefrom, without effectively providing that
the Notes shall be secured equally and ratably with (and provided that the
Notes shall be secured prior to any secured obligation that is subordinated in
right of payment to the Notes) the obligations so secured for so long as such
obligations are so secured.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, assume, guarantee or otherwise become
liable with respect to any Sale and Leaseback Transaction, unless (i) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale and Leaseback Transaction at least
equal to the Fair Market Value (as evidenced by a Board Resolution delivered
to the Trustee) of the Property or assets subject to such transaction; (ii)
the Attributable Indebtedness of the Company or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted by the
covenant described under "--Limitation on Indebtedness" and any Liens granted
thereby would be permitted by the covenant described under "--Limitation on
Liens;" and (iii) the Net Cash Proceeds from such transaction are applied in
accordance with the provisions described under "--Asset Sales."
Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, make any Restricted Payment unless, at the time of
and after giving effect to such proposed Restricted Payment (i) no Default or
Event of Default under the Indenture shall have occurred and be continuing or
shall occur as a consequence thereof; (ii) after giving effect, on a pro forma
basis, to such Restricted Payment and the incurrence of any Indebtedness, the
net proceeds of which are used to finance such Restricted Payment, the Company
could incur at least $1.00 of additional Indebtedness pursuant to clause (i)
of the first paragraph of the covenant described under "--Limitation on
Indebtedness"; and (iii) after giving effect to such Restricted Payment on a
pro forma basis, the aggregate amount expended or declared for all Restricted
Payments after the Issue Date does not exceed the sum of (A) 50% of the
Consolidated Net Income of the Company (or, if Consolidated Net
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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 Restricted Payment, plus (B)
100% of the aggregate Net Cash Proceeds received by the Company subsequent to
the Issue Date from the issuance or sale (other than to a Subsidiary) of
shares of its Qualified Stock, including Qualified Stock issued upon the
conversion of convertible debt (other than the conversion of the Convertible
Notes and, if issued, the Consent Convertible Notes) or the exercise of
options, warrants or rights to purchase Qualified Stock, plus (C) 100% of the
amount of any Indebtedness of the Company or any of its Restricted
Subsidiaries (as expressed on the face of a balance sheet in accordance with
GAAP), or the carrying value of any Disqualified Stock, which has been
converted into, exchanged for or satisfied by the issuance of shares of
Qualified Stock of the Company subsequent to the Issue Date, less the amount
of any cash or the value of any other Property distributed by the Company or
its Restricted Subsidiaries upon such conversion, exchange or satisfaction,
plus (D) 100% of the net reduction in Investments, subsequent to the Issue
Date, in any Person, resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of Property
(but only to the extent such interest, dividends, repayments or other
transfers of Property are not included in the calculation of Consolidated Net
Income), in each case to the Company or any Restricted Subsidiary from any
Person (including, without limitation, from Unrestricted Subsidiaries) or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed in
the case of any Person the amount of Investments previously made by the
Company or any Restricted Subsidiary in such Person and in each such case
which was treated as a Restricted Payment, minus (E) 100% of the amount of
Investments made pursuant to clauses (v), (vi) and (vii) of the following
paragraph subsequent to the Issue Date.
The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the Indenture; (ii) retiring (A) any Capital Stock of the
Company or any Restricted Subsidiary of the Company or (B) Indebtedness of the
Company that is subordinated to the Notes or (C) Indebtedness of a Restricted
Subsidiary of the Company, in exchange for, or out of the proceeds of the
substantially concurrent sale of Qualified Stock of the Company; (iii) so long
as no Default or Event of Default under the Indenture shall have occurred and
be continuing or shall occur as a consequence thereof, retiring any
Indebtedness of the Company subordinated in right of payment to the Notes, the
14% Senior Notes, the Convertible Notes and, if issued, the Consent
Convertible Notes, if any, in exchange for, or out of the proceeds of, the
substantially concurrent incurrence of Indebtedness of the Company (other than
Indebtedness to a Subsidiary of the Company); provided, that such new
Indebtedness (A) is subordinated in right of payment to the Notes, the 14%
Senior Notes, the Convertible Notes and, if issued, the Consent Convertible
Notes, if any, at least to the same extent as, (B) has an Average Life at
least as long as, and (C) has no scheduled principal payments due in any
amount earlier than, any equivalent amount of principal under the Indebtedness
so retired; (iv) so long as no Default or Event of Default under the Indenture
shall have occurred and be continuing or shall occur as a consequence thereof,
retiring any Indebtedness of a Restricted Subsidiary of the Company in
exchange for, or out of the proceeds of, the substantially concurrent
incurrence of Indebtedness of the Company or any Restricted Subsidiary that is
permitted under the covenant described under "--Limitation on Indebtedness"
and that (A) is not secured by any assets of the Company or any Restricted
Subsidiary to a greater extent than the retired Indebtedness was so secured,
(B) has an Average Life at least as long as the retired Indebtedness and (C)
is subordinated in right of payment to the Notes, the 14% Senior Notes, the
Convertible Notes and, if issued, the Consent Convertible Notes, or the
Guarantees, the Old Senior Note Guarantees, the Convertible Note Guarantees,
and any guarantees on the Consent Convertible Notes, as applicable, at least
to the same extent as the retired Indebtedness; (v) so long as no Default or
Event of Default under the Indenture shall have occurred and be continuing or
shall result as a consequence thereof, purchasing, redeeming, retiring or
acquiring any Common Stock of the Company or any Restricted Subsidiary of the
Company held by any member or former member of the Company's (or any of its
Subsidiaries') management pursuant to any management agreement or stock option
plan if in effect as of September 30, 1996 or upon the death, disability,
retirement or termination of employment of such members; provided, that the
aggregate price paid for all such retired Common Stock shall not exceed, in
the aggregate, the sum of $1 million plus the aggregate Cash Proceeds received
by the Company from any
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reissuance of such Common Stock by the Company to members of management of the
Company and its Subsidiaries; (vi) so long as no Default or Event of Default
under the Indenture shall have occurred and be continuing or shall occur as a
consequence thereof, making loans to members of management of the Company as
required pursuant to employment agreements with such members, in an aggregate
principal amount not to exceed $1 million; provided, that any repayment of
such loans (but only to the extent such payments are not included in the
calculation of Consolidated Net Income of the Company) shall reduce the amount
of such Investments; (vii) so long as no Default or Event of Default under the
Indenture shall have occurred and be continuing or shall occur as a
consequence thereof, making Investments in Joint Ventures in an aggregate
amount not to exceed $10 million; provided, that any repayment of loans or
advances, return of capital or other transfer of Property (but only to the
extent such distributions are not included in the calculation of Consolidated
Net Income of the Company) shall reduce the amount of such Investments; and
(viii) so long as no Default or Event of Default under the Indenture shall
have occurred and be continuing, the Company may redeem Convertible Notes
and/or, if issued, Consent Convertible Notes, pursuant to the terms of the
Convertible Note Indenture and/or the Consent Convertible Note Indenture,
respectively, or repurchase Convertible Notes and/or, if issued, Consent
Convertible Notes, pursuant to a "Change of Control Offer," an "Asset Sale
Offer" or a repurchase offer upon a "Termination of Trading" (each as defined
therein) of the Common Stock pursuant to the terms of the Convertible Note
Indenture and/or the Consent Convertible Note Indenture, respectively.
Not later than the date of making of any Restricted Payment or any
Investment made pursuant to clause (vii) of the previous paragraph, the
Company shall deliver to the Trustee an Officers' Certificate stating that
such Restricted Payment or Investment is permitted and setting forth the basis
upon which the required calculations were computed, which calculations may be
based upon the Company's latest available financial statements.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective or enter
into an encumbrance or restriction (other than pursuant to law or regulation)
on the ability of any Restricted Subsidiary (i) to pay dividends or make any
other distributions in respect of its Capital Stock or pay any Indebtedness or
other obligation owed to the Company or any Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any Restricted
Subsidiary of the Company; or (iii) to transfer any of its Property or assets
to the Company or any other Restricted Subsidiary of the Company, except: (a)
any encumbrance or restriction existing as of the Issue Date pursuant to the
Indenture, the Existing Indebtedness, the 14% Senior Note Indenture and the
Convertible Note Indenture or as of the date of issuance of the Consent
Convertible Notes pursuant to the Consent Convertible Note Indenture if
substantially identical to the Convertible Note Indenture; (b) any encumbrance
or restriction pursuant to an agreement relating to an acquisition of assets
or Property, so long as the encumbrances or restrictions in any such agreement
relate solely to the assets or Property so acquired (and are not or were not
created in anticipation of or in connection with the acquisition thereof); (c)
any encumbrance or restriction relating to any Indebtedness of any Restricted
Subsidiary existing on the date on which such Restricted Subsidiary is
acquired by the Company or any Restricted Subsidiary (other than Indebtedness
incurred by such Restricted Subsidiary in connection with or in anticipation
of its acquisition), (d) customary provisions restricting subletting or
assignment of any lease of the Company or any Restricted Subsidiary or
customary provisions in any telecommunications resale agreements (including
without limitation the existing Ameritech resale agreements, the NYNEX resale
agreement and the long distance agreements of the Company), license agreements
or similar agreements that restrict the assignment of such agreement or any
rights thereunder; (e) any temporary encumbrance or restriction with respect
to a Restricted Subsidiary pursuant to an agreement that has been entered into
for the sale or disposition of all or substantially all of the Capital Stock
of, or Property and assets of, such Restricted Subsidiary; (f) any restriction
on the sale or other disposition of assets or Property securing Indebtedness
as a result of a Permitted Lien on such assets or Property permitted by the
covenant described under "--Limitation on Liens;" and (g) any encumbrance or
restriction that amends, extends, refinances, refunds, renews or replaces any
agreement described in clauses (a) through (c) whether or not among the same
parties, provided, that the terms and conditions of any such encumbrance or
restriction are no less favorable to the holders of the Notes than those under
or pursuant to the agreement amended, extended, refinanced, refunded, renewed
or replaced.
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Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Company (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Restricted Subsidiary and (ii)
shall not permit any Person other than the Company or a Restricted Subsidiary
to own any Capital Stock of any Restricted Subsidiary other than directors
qualifying shares, except for (a) a sale of 100% of the Capital Stock of a
Restricted Subsidiary sold in a transaction not prohibited by the covenant
described under "--Asset Sales"; (b) Capital Stock of a Restricted Subsidiary
issued and outstanding on the Issue Date and held by Persons other than the
Company or any Restricted Subsidiary; (c) Capital Stock of a Restricted
Subsidiary issued and outstanding prior to the time that such Person becomes a
Restricted Subsidiary so long as such Capital Stock was not issued in
contemplation of such Person's becoming a Restricted Subsidiary or otherwise
being acquired by the Company; (d) not more than 10 percent of the Common
Stock of USN Solutions, Inc. on a fully diluted basis issued pursuant to the
exercise of the option (the "USN Solutions Option") contemplated by that
certain Memorandum of Understanding, dated July 3, 1996, by and between USN
Solutions, Inc. and Genesys S.A.; and (e) any Disqualified Stock permitted to
be issued under the covenant described under "--Limitation on Indebtedness."
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, sell, lease, transfer, or otherwise dispose of,
any of its Property or assets to, or purchase any Property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that would have been obtained in a comparable arm's-length transaction
by the Company or such Restricted Subsidiary with a Person that is not an
Affiliate and (b) the Company delivers to the Trustee (i) with respect to any
Affiliate Transaction involving aggregate payments in excess of $1 million, a
Board Resolution certifying that such Affiliate Transaction complies with
clause (a) above and that such Affiliate Transaction has been approved by a
majority of the disinterested directors who have determined that such
Affiliate Transaction is in the best interests of the Company or such
Restricted Subsidiary and (ii) with respect to any Affiliate Transaction
involving aggregate payments in excess of $5 million, an opinion as to the
fairness from a financial point of view to the Company or such Restricted
Subsidiary issued by an investment banking firm of national standing, or in
the case of a transaction involving a sale or transfer of assets subject to
valuation such as real estate, an appraisal issued by a nationally recognized
appraisal firm, together with an Officers' Certificate to the effect that such
opinion complies with this clause (ii); provided, that the following shall not
be deemed Affiliate Transactions: (i) any employment agreement or consulting
agreement (including stock options) entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
industry practice; (ii) any agreement or arrangement with respect to the
compensation of a director of the Company or any Restricted Subsidiary
approved by the Board of Directors and consistent with industry practice;
(iii) transactions between or among the Company, its Wholly-Owned Restricted
Subsidiaries or a majority-owned Restricted Subsidiary (so long as no minority
interest is owned by a Person which is otherwise an Affiliate); (iv)
transactions constituting Restricted Payments permitted by the covenant
described under "--Restricted Payments"; (v) transactions pursuant to
contracts existing on the Issue Date and disclosed in a schedule attached to
the Indenture; (vi) transactions between the Company or its Restricted
Subsidiaries on the one hand, and Merrill Lynch or its Affiliates on the other
hand, involving the provision of financial or consulting services by Merrill
Lynch or its Affiliates; (vii) making loans or advances to officers, employees
or consultants of the Company and its Subsidiaries (including travel and
moving expenses) in the ordinary course of business not to exceed $1 million;
and (viii) the issuance of stock options for Common Stock of the Company
pursuant to any plan approved by the Board of Directors.
Restricted and Unrestricted Subsidiaries
The 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;
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provided, that so long as the Notes remain outstanding and the Indenture has
not been satisfied or discharged, (i) immediately after giving effect to the
transaction, the Company could incur $1.00 of additional Indebtedness pursuant
to clause (i) of the first paragraph of "--Limitation on Indebtedness" and
(ii) such designation is at the time permitted under "--Restricted Payments."
Notwithstanding any provisions of this covenant all Subsidiaries of an
Unrestricted Subsidiary will be Unrestricted Subsidiaries.
The Indenture further provides that the Company will not designate an
Unrestricted Subsidiary as a Restricted Subsidiary unless, after giving effect
to such designation on a pro forma basis, (i) the Company could incur at least
$1.00 of additional Indebtedness pursuant to clause (i) of the first paragraph
of the covenant described under "--Limitation on Indebtedness" and (ii) no
Default or Event of Default would occur.
Subject to the preceding paragraph, an Unrestricted Subsidiary may be
redesignated as a Restricted Subsidiary. The designation of a Subsidiary as an
Unrestricted Subsidiary or the designation of an Unrestricted Subsidiary as a
Restricted Subsidiary in compliance with the preceding paragraph shall be made
by the Board of Directors pursuant to a Board Resolution delivered to the
Trustee and shall be effective as of the date specified in such Board
Resolution, which shall not be prior to the date such Board Resolution is
delivered to the Trustee.
Limitations on Line of Business
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries will directly or indirectly engage to any substantial extent in
any line or lines of business activity other than the Telecommunications
Business.
Issuance of Contingent Warrants
The Indenture provides that the Company will be obligated to issue to
holders of the Notes Contingent Warrants, exercisable for Class A Common Stock
representing up to 5% 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 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 Indenture) after giving effect to the issuance of
such Contingent Warrants, in the event that, on or prior to September 30,
1998, the Company does not effect a Qualified Equity Offering. All Contingent
Warrants will be issued pursuant to the Warrant Agreement with the same rights
thereunder as the Initial Warrants, and holders will have the benefit of the
Registration Rights Agreement.
Waiver of Certain Covenants
The Company may omit in respect of any Notes, in any particular instance, to
comply with the provisions of any covenant or condition described under "--
Certain Covenants," if before or after the time for such compliance the
holders of at least a majority in principal amount at Stated Maturity of the
outstanding Notes (75% in principal amount at Stated Maturity for the covenant
described under "--Issuance of Contingent Warrants") either waive such
compliance in such instance or generally waive compliance with such covenant
or condition, but no such waiver shall extend to or affect such covenant or
condition except to the extent so expressly waived and, until such waiver
shall become effective, the obligations of the Company and the duties of the
Trustee in respect of any such covenant or condition shall remain in full
force and effect.
Reports
The 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
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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 Trustee, copies of the annual
reports, quarterly reports and other documents (without exhibits) which the
Company has filed or would have filed with the Commission pursuant to Section
13(a) or 15(d) of the Exchange Act, any successor provisions thereto or this
covenant. The Company shall not be required to file any report with the
Commission if the Commission does not permit such filing.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The 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 Notes and the performance of the Company's covenants and
obligations under the 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 Indenture 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 (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions) the Company (or
the Surviving Entity, if the Company is not continuing) would be permitted
to incur $1.00 of additional Indebtedness pursuant to clause (i) of the
first paragraph of the covenant described under "--Limitation on
Indebtedness"; and
(iv) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, the Company (or the Surviving Entity, if
the Company is not continuing) shall have a Consolidated Net Worth equal to
or greater than the Consolidated Net Worth of the Company immediately prior
to such transaction.
The provision of clause (iii) shall not apply to any merger or consolidation
into or with, or any such transfer of all of the Property and assets of the
Company and the Restricted Subsidiaries into, the Company.
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 Indenture and that all conditions precedent
in the Indenture relating to such transactions have been complied with.
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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 Indenture and the
Notes with the same effect as if such Surviving Entity had been named as the
Company in the Indenture; and when a Surviving Person duly assumes all of the
obligations and covenants of the Company pursuant to the Indenture and the
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 Indenture (except
where otherwise expressly indicated):
(a) default in the payment of interest (or Special Interest, if any) on
any Note issued pursuant to the Indenture when the same becomes due and
payable, and the continuance of such default for a period of 30 days;
(b) default in the payment of the principal of (or premium, if any, on)
any Note issued pursuant to the Indenture at its Stated Maturity, upon
optional redemption, required repurchase (including pursuant to a Change of
Control Offer or an Asset Sale Offer) or otherwise or the failure to make
an offer to purchase any Note as required;
(c) the Company fails to comply with any of its covenants or agreements
contained in "--Limitation on Indebtedness," "--Limitation on Sale and
Leaseback Transactions," "--Restricted Payments," "--Repurchase at the
Option of the Holders upon a Change of Control," "--Asset Sales," "--
Issuance of Contingent Warrants" or "--Consolidation, Merger, Conveyance,
Lease or Transfer";
(d) default in the performance, or breach, of any covenant or warranty of
the Company in the 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 Notes;
(e) Indebtedness of the Company or any Restricted Subsidiary is not paid
when due within the applicable grace period, if any, or is accelerated by
the holders thereof and, in either case, the principal amount of such
unpaid or accelerated Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more final
judgments against the Company or any Restricted Subsidiary in an uninsured
or unindemnified aggregate amount in excess of $10 million which is not
discharged, waived, appealed, stayed, bonded or satisfied for a period of
60 consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
federal, state, or foreign bankruptcy, insolvency, or other similar law or
(ii) a decree or order adjudging the Company or any 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; or
(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
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Subsidiary in an involuntary case or proceeding under U.S. bankruptcy laws,
as now or hereafter constituted, or any other applicable federal, state, or
foreign bankruptcy, insolvency or other similar law or to the commencement
of any bankruptcy or insolvency case or proceeding against the Company or
any Significant Restricted Subsidiary; or (iii) the filing by the Company
or any Significant Restricted Subsidiary of a petition or answer or consent
seeking reorganization or relief under U.S. bankruptcy laws, as now or
hereafter constituted, or any other applicable federal, state or foreign
bankruptcy, insolvency or other similar law; or (iv) the consent by the
Company or any Significant Restricted Subsidiary to the filing of such
petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or similar official
of the Company or any Significant Restricted Subsidiary or of any
substantial part of the Property or assets of the Company or any
Significant Restricted Subsidiary, or the making by the Company or any
Significant Restricted Subsidiary of an assignment for the benefit of
creditors; or (v) the admission by the Company or any Significant
Restricted Subsidiary in writing of its inability to pay its debts
generally as they become due; or (vi) the taking of corporate action by the
Company or any Significant Restricted Subsidiary in furtherance of any such
action.
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 Notes may declare the Default
Amount, premium, if any, and any accrued and unpaid interest (and Special
Interest, if any) on all such Notes then outstanding to be immediately due and
payable by a notice in writing to the Company (and to the Trustee if given by
holders of such Notes), and upon any such declaration, all amounts payable in
respect of the 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 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 Notes. In the event of a declaration of acceleration
because an Event of Default set forth in clause (e) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the event of default triggering such Event of Default pursuant
to clause (e) shall be remedied, or cured or waived by the holders of the
relevant Indebtedness within 60 days after such event of default; provided,
that no judgment or decree for the payment of the money due on the Notes has
been obtained by the Trustee as provided in the Indenture. Under certain
circumstances, the holders of a majority in principal amount at Stated
Maturity of the outstanding Notes, by notice to the Company and the Trustee,
may rescind an acceleration and its consequences. Until August 15, 2000, the
Default Amount shall equal the Accreted Value of the Notes. Thereafter, the
Default Amount shall equal 100% of the principal amount at Stated Maturity of
the Notes. Subject to all provisions of the Indenture and applicable law, the
holders of a majority in aggregate principal amount at Stated Maturity of the
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 Notes then outstanding by notice to the Trustee may on behalf of the
holders of all such Notes waive any existing Default or Event of Default and
its consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest (and Special Interest, if any) on, premium,
if any on or the principal of, such Notes. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the 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 Indenture and applicable law, the holders of a majority in
aggregate principal amount at Stated Maturity of the 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.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required within 5
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.
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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 Notes enter into one or more indentures
supplemental to the 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 Indenture and the 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 Indenture; (iii) to add any
additional Events of Default; (iv) to provide for uncertificated Notes in
addition to or in place of certificated Notes; (v) to evidence and provide for
the acceptance of appointment under the Indenture of a successor Trustee; (vi)
to cure any ambiguity in the Indenture, to correct or supplement any provision
in the 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 Notes;
(viii) to provide for Guarantees as required under the Indenture; or (ix) to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the 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 Notes, the Company and
the Trustee may enter into one or more indentures supplemental to the
Indenture for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the 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 Note:
(i) change the Stated Maturity of the principal of, or any installment of
interest (including Special Interest, if any) on, any Note, or reduce the
Accreted Value or the 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 principal amount at Stated Maturity thereof
that would be due and payable upon acceleration of Maturity thereof, or change
the place of payment where, or the coin or currency in which, any 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 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 Indenture or any Guarantees or
certain Defaults thereunder; (iii) subordinate in right of payment, or
otherwise subordinate, the Notes or any Guarantees to any other Indebtedness;
(iv) modify the obligations of the Company to make offers to purchase Notes
upon a Change of Control or from the proceeds of Asset Sales; or (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 Notes may, on behalf of the holders of all
such Notes, waive any past Default under the Indenture and its consequences,
except Default in the payment of the principal of (or premium, if any) or
interest on any Note, or in respect of a covenant or provision hereof which
under the proviso to the prior paragraph cannot be modified or amended without
the consent of the holder of each outstanding Note affected.
The holders of not less than 75% in aggregate principal amount at Stated
Maturity of the outstanding Notes may, on behalf of the holders of all such
Notes, waive any right to require the Company to issue to the holders of the
Notes Contingent Warrants.
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
The Company may terminate its obligations under the Notes and the Indenture
when (i) either (A) all outstanding Notes have been delivered to the Trustee
for cancellation or (B) all such Notes not theretofore delivered to the
Trustee for cancellation have become due and payable, will become due and
payable within one year or are to be called for redemption within one year
under irrevocable arrangements satisfactory to the Trustee for the giving of
notice of redemption by the Trustee in the name and at the expense of the
Company, and the Company has irrevocably deposited or caused to be deposited
with the Trustee funds or U.S. Government
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Obligations in an amount sufficient to pay and discharge the entire
indebtedness on the Notes not theretofore delivered to the 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 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 Indenture.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Notes, and the Indenture shall cease to be of
further effect as to all outstanding Notes (except as to (i) rights of
registration of transfer, substitution and exchange of 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 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 Indenture, and (iv) certain other specified provisions in
the 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
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 Notes, money in an amount,
or (C) a combination thereof sufficient to pay and discharge the principal of,
and interest (including Special Interest, if applicable) on, such Notes then
outstanding on the dates on which any such payments are due in accordance with
the terms of the Indenture and of such Notes. Such defeasance or covenant
defeasance shall be deemed to occur only if certain conditions are satisfied,
including, among other things, delivery by the Company to the 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 such 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 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 Notes will 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 Indenture, the Trustee will
perform only such duties as are specifically set forth in the Indenture. The
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 of its
rights and powers under the 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 Indenture at the request of any of the holders of
the Notes, 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
Notes or the 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 Note each holder waives and releases all such liability (but only
such liability). The waiver and release are part of the consideration for
issuance of the Notes. Nonetheless, such waiver may not be effective to waive
liabilities under the federal securities laws and it has been the view of the
Commission that such a waiver is against public policy and is therefore
unenforceable.
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GOVERNING LAW
The Indenture and the Notes are governed by the laws of the State of New
York, without regard to principles of conflicts of law.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Company, the Registrar 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 Indenture.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such other Person merging with or into or becoming a
Subsidiary of such specified Person.
"Accreted Value" means, with respect to the Notes, for any Specified Date,
the amount provided below for each $1,000 principal amount at Stated Maturity
of the Notes:
(a) If the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
ACCRETED
SEMI-ANNUAL ACCRUAL DATE VALUE
------------------------ --------
<S> <C>
February 15, 1998.............................................. $ 702.67
August 15, 1998................................................ 754.05
February 15, 1999.............................................. 809.19
August 15, 1999................................................ 868.36
February 15, 2000.............................................. 931.86
August 15, 2000................................................ 1,000.00
</TABLE>
(b) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (i) $654.78 and (ii) an
amount equal to the product of (y) the Accreted Value of the first 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 Semi-Annual Accrual Date, using a 360-day year of twelve 30-
day months.
(c) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the Accreted Value will equal the sum of (i) the Accreted Value for the
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 Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (z) a
fraction, the numerator of which is the number of days from the immediately
preceding 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 Semi-Annual Accrual Date,
the Accreted Value will equal $1,000.
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"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by,
such Person; provided that each Unrestricted Subsidiary shall be deemed to be
an Affiliate of the Company and of each other Subsidiary of the Company;
provided that any lender under a Credit Facility shall not be deemed to be an
Affiliate solely as the result of the Credit Facility; and provided, further,
that neither the Company nor any of its Wholly-Owned Restricted Subsidiaries
shall be deemed to be Affiliates of each other; provided, further, that
Merrill Lynch and its Affiliates shall not be deemed to be Affiliates of the
Company solely as a result of such entities holding the Notes, the Old Senior
Notes, the Convertible Notes, the Consent Convertible Notes, the Warrants, the
Consent Warrants or the warrants issued pursuant to the 1996 Private
Placement. 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 its 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 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) a contribution of assets to any Unrestricted Subsidiary
constituting an Investment permitted by the Indenture.
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present
value (discounted at a rate consistent with accounting guidelines, as
determined in good faith by such Person) of the payments during the remaining
term of the lease (including any period for which such lease has been extended
or may, at the option of the lessor, be extended) or until the earliest date
on which the lessee may terminate such lease without penalty or upon payment
of a penalty (in which case the rental payments shall include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund
or mandatory redemption payment requirements) of such debt security or
Disqualified Stock multiplied in each case by (y) the amount of such principal
or redemption payment, by (ii) the sum of all such principal or redemption
payments.
"Board of Directors" means, with respect to any Person, the Board of
Directors (or similar governing body) of such Person or any committee of the
Board of Directors (or similar governing body) duly authorized to act on
behalf of such Board (or similar governing body).
"Board Resolution" means a duly adopted resolution of the Board of Directors
of a Person in full force and effect at the time of determination and
certified as such by the Secretary or Assistant Secretary of such Person.
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"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, or the Old Senior Notes or the Old Senior Note Guarantees,
if any) which are assumed by the transferee of any such assets and from which
the Company and such Restricted Subsidiary are completely released shall be
deemed Cash Proceeds.
"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer, or lease (other than to the Company or any Wholly-Owned Restricted
Subsidiary of the Company), whether direct or indirect, of all or
substantially all of the assets of the Company or of the Company and its
Restricted Subsidiaries taken as a whole to any "person" or "group" (within
the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any
successor provision to either of the foregoing, including any group acting for
the purpose of acquiring, holding or disposing of securities within the
meaning of Rule 13d-5(b)(i) under the Exchange Act) shall have occurred; (ii)
any "person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2)
of the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing
of securities within the meaning of Rule 13d-5(b)(i) under the Exchange Act),
other than any Permitted Holder or Permitted Holders, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of
the total voting power of all classes of the Voting Stock of the Company
(including any warrants or options or rights to acquire such Voting Stock),
calculated on a fully diluted basis, and such voting power percentage is
greater than or equal to the total voting power percentage then beneficially
owned by the Permitted Holders in the aggregate; or (iii) during any period of
two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election or appointment by such board or whose nomination for
election by the stockholders of the Company was approved by a vote of a
majority of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office.
"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to vote in the election of directors of such Person and any
rights (other than Indebtedness convertible into such Capital Stock), warrants
or options to acquire such Capital Stock of such Person.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication (A) the sum of (i) the aggregate amount of cash
and non-cash interest expense (including capitalized interest) of such Person
and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP in respect of Indebtedness
(including, without limitation, (v) any amortization of debt discount, (w) net
costs associated with Interest Hedging Obligations (including any amortization
of discounts), (x) the interest portion of any deferred payment obligation
calculated in accordance with the effective interest method, (y) all accrued
interest and (z) all commissions, discounts and other fees and charges owed
with respect to letters of credit, bankers' acceptances or similar facilities)
paid or accrued, or scheduled to be paid or accrued, during such period; (ii)
dividends or distributions with respect to Preferred Stock or Disqualified
Stock of such Person (and
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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 Sale and
Leaseback Transaction 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 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.
"Convertible Note Guarantees" means the guarantees, if any, of "Restricted
Subsidiaries" (as defined in the Convertible Note Indenture) contained in the
Convertible Note Indenture.
"Convertible Note Indenture" means the indenture, dated as of September 30,
1996, between the Company and Harris Trust and Savings Bank, as trustee
thereunder, relating to the Convertible Notes, as amended and supplemented
from time to time.
"Convertible Notes" means up to $39,100,000 aggregate principal amount at
Stated Maturity of the Company's 9% Convertible Subordinated Discount Notes
due 2004 (of which $36,000,000 aggregate principal amount at Stated Maturity
is outstanding as of the date of this Offering Memorandum).
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"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 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 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 payment 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 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 this "Description of the
Notes" and the 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 90 days after the date of acquisition thereof and, at
the time of acquisition, having a rating of A or better from Standard & Poor's
or A-2 or better from Moody's, (v) commercial paper issued by the parent
corporation of any commercial bank organized in the United States having
capital and surplus in excess of $500 million and commercial paper issued by
others having one of the two highest ratings obtainable from either of
Standard & Poor's or Moody's and in each case maturing within 270 days after
the date of acquisition, (vi) overnight bank deposits and bankers' acceptances
at any commercial bank organized in the United States having capital and
surplus in excess of $500 million, (vii) deposits available for withdrawal on
demand with a commercial bank organized in the United States having capital
and surplus in excess of $500 million and (viii) investments in money market
funds substantially all of whose assets comprise securities of the types
described in clauses (i) through (vi).
"Exchange Rate Obligation" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
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"Existing Indebtedness" means Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date.
"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 Indenture 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 Notes, as executed and
delivered by a Restricted Subsidiary as required by the covenant described
under "--Limitation on Issuances of Guarantees by Restricted Subsidiaries."
"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 the acquisition of Property,
assets or businesses, excluding trade accounts payable made in the ordinary
course of business which are not more than 90 days overdue or which are being
contested in good faith and by appropriate proceedings, (iii) any
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (iv) any obligation of such Person issued or assumed as the deferred
purchase price of Property, assets or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business,
which in either case are not more than 90 days overdue or which are being
contested in good faith and by appropriate proceedings, and for which adequate
reserves are being maintained on the books of the Company in accordance with
GAAP), (v) any Capital Lease Obligation of such Person, (vi) the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person and, to
the extent held by other Persons, the maximum fixed redemption or repurchase
price of Disqualified Stock of such Person's Restricted Subsidiaries, at the
time of determination, (vii) the notional amount of any Interest Hedging
Obligations or Exchange Rate Obligations of such Person at the time of
determination, (viii) any Attributable Indebtedness with respect to any Sale
and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition
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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 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, 14% Senior Notes, Convertible Notes, or, if
issued, the Consent Convertible Notes, as the case may be, outstanding at any
date, the amount of Notes shall be the Accreted Value thereof as of such date,
the amount of 14% Senior Notes shall be the "Accreted Value" (as defined in,
and determined pursuant to, the 14% Senior Note Indenture), the amount of the
Convertible Notes shall be the "Accreted Value" (as defined in, and determined
pursuant to, the Convertible Note Indenture) and the amount of the Consent
Convertible Notes, if issued, shall be the "Accreted Value" (as such would be
defined in and determined pursuant to the Consent Convertible Note Indenture),
unless cash interest has commenced to accrue pursuant to the terms of the
Notes and the Indenture, the 14% Senior Notes and the 14% Senior Note
Indenture, the Convertible Notes and the Convertible Note Indenture or the
Consent Convertible Notes and the Consent Convertible Note Indenture, as the
case may be, in which case the amount of such 14% Senior Notes, Convertible
Notes or, if issued, Consent Convertible Notes, as the case may be,
outstanding at such date shall be the aggregate principal amount thereof at
Stated Maturity; and provided, that for purposes of calculating the amount of
any non-interest bearing or other discount security (other than the Notes, the
14% Senior Notes, the Convertible Notes or, if issued, Consent Convertible
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 Notes are first authenticated and
delivered under the 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
Indenture, whether at Stated Maturity, on the Change of Control Payment Date
or purchase date established pursuant to the terms of the Indenture with
regard to a Change of Control Offer or an Asset Sale Offer, as applicable, or
by declaration of acceleration, call for redemption or otherwise.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or
such Restricted Subsidiary incurred in connection with such sale, including,
without limitation, all legal, title and recording tax expenses, commissions
and other fees and expenses incurred (but excluding any finder's fee or
broker's fee payable to any Affiliate of such Person) and all federal, state,
foreign and local taxes arising in connection with such sale that are paid or
required to be accrued as liability under GAAP by such Person or its
Restricted Subsidiaries, (ii) all payments made or required to be made by such
Person or its Restricted Subsidiaries on any Indebtedness which is secured by
such Properties or other assets in accordance with the terms of any Lien upon
or with respect to such Properties or other assets or which must, by the terms
of such Lien, or in order to obtain a necessary consent to such transaction or
by applicable law, be repaid in connection with such sale and (iii) all
contractually required distributions and other payments made to minority
interest holders (but excluding distributions and payments to Affiliates of
such Person) in Restricted Subsidiaries of such Person as a result of such
transaction; provided that, in the event that any consideration for a
transaction (which would otherwise constitute Net Cash Proceeds) is required
to be held in escrow pending determination of whether a purchase price
adjustment will be made, such consideration (or any portion thereof) shall
become Net Cash Proceeds only at such time as it is released to such Person or
its Restricted Subsidiaries from escrow; provided, further, that any non-cash
consideration received in connection with any transaction, which is
subsequently converted to cash, shall be deemed to be Net Cash Proceeds at
such time, and shall thereafter be applied in accordance with the Indenture.
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"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 Indenture.
"Old Senior Note Guarantees" means the guarantees, if any, of "Restricted
Subsidiaries" (as defined in the 14% Senior Note Indenture) contained in the
14% Senior Note 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 Notes or the Old Senior Notes, or the Guarantees or the Old Senior Note
Guarantees, as applicable.
"Permitted Holders" means J. Thomas Elliott and Ronald W. Gavillet and Chase
Venture Capital Associates, L.P., CIBC Wood Gundy Ventures, Inc., Hancock
Venture Partners IV-Direct Fund, L.P. (currently known as Harbourvest
Partners, LLC), Northwood Capital Partners, LLC, Northwood Ventures, BT
Capital Partners, Inc., Enterprises & Transcommunications, L.P. (currently
known as Prime New Ventures), 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 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, to the extent and in the manner existing on the Issue
Date; (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 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 Indenture or that otherwise
secure the payment of the Notes or the 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 as
in effect on the Issue Date (vii) any Lien on Property of the Company in favor
of the United States of America or any state thereof, or any instrumentality
of either, to secure certain payments pursuant to any contract or statute;
(viii) any Lien for taxes or assessments or other governmental charges or
levies not then due and payable (or which, if due and payable, are being
contested in good faith and for which adequate reserves are being maintained,
to the extent required by GAAP); (ix) easements, rights-of-way, licenses and
other similar restrictions on the use of Properties or minor imperfections of
title that, in the aggregate, are not material in
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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 other than the Property and assets which were secured
by the Liens referred to in the foregoing clauses (ii), (iii), and (xiv) 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 or similar person.
"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 Equity Offering" means one or more Public Equity Offerings, or
other issuance of additional equity securities of the Company, resulting in
net proceeds to the Company of at least $50 million in the aggregate based on
an equity valuation of the Company of at least $160 million.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Refinancing Indebtedness" means any Indebtedness incurred in connection
with the Refinancing of other Indebtedness.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than to the
Company or any Restricted Subsidiary of the Company on the Capital Stock of
any Restricted Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or
such Restricted Subsidiary (and other than pro rata dividends, distributions
or payments declared or paid on the Common Stock of USN Solutions, Inc. to any
Person not otherwise an Affiliate of the Company holding such Common Stock as
a result of the exercise of the USN Solutions Option; provided, that the
Company shall receive pro rata dividends, distributions or payments at the
same time and in the same form and composition of consideration as the
dividends, distributions or payments paid to such minority stockholders), (ii)
a payment made by the Company or any of its Restricted Subsidiaries (other
than to the Company or any Restricted Subsidiary of the Company) to purchase,
redeem, acquire or retire any Capital Stock of the Company or of a Restricted
Subsidiary of the Company, (iii) a payment made by the Company or any of
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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, the 14% Senior Notes, the Convertible Notes and, if issued, the Consent
Convertible Notes, or any Guarantees, Old Senior Note Guarantees, and
Convertible Note Guarantees and any guarantee of the Consent Convertible
Notes, 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 dated 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, 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 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 Trustee.
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"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
Indenture.
"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 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.
BOOK-ENTRY; DELIVERY AND FORM
The Old Notes are and the New Notes will be represented by one or more
permanent global Old Notes or New Notes, as applicable, in fully registered
form without coupons (each a "Global Note"). The Global Note representing the
New Notes will be deposited with the Trustee, as custodian for The Depository
Trust Company (the "Depositary"), and registered in the name of the Depositary
or of a nominee of the Depositary.
Upon issuance of the Global Note, the Depositary will credit, on its
internal system, the respective amount of the individual beneficial interests
in the Global Note, to persons who have accounts with the Depositary
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("Participants"). Ownership of beneficial interests in the Global Note will be
shown on, and the transfer of such beneficial interests will be effected only
through, records maintained by the Depositary or its nominee (with respect to
interests of Participants) and the records of Participants (with respect to
interests of persons other than Participants). Qualified institutional buyers
may hold their interests in the Global Note directly through the Depositary if
they are Participants, or indirectly through organizations which are
Participants.
So long as the Depositary or its nominee is the registered owner of the
Global Note, the Depositary or such nominee, as the case may be, will be
considered the sole owner of the Notes represented by the Global Note for all
purposes under the Indenture and such Notes. Accordingly, beneficial owners of
an interest in the Global Note must rely on the procedures of the Depositary
and, if such person is not a Participant, on the procedures of the Participant
through which such person owns its interest, to exercise any rights and
fulfill any obligations of a holder under the Indenture. No beneficial owner
of an interest in the Global Note will be able to transfer that interest
except in accordance with the Depositary's applicable procedures, in addition
to those provided for in the Indenture.
Payments of the principal of, premium, if any, and interest, including
Special Interest, if any, on, the Global Note will be made to the Depositary
or its nominee, as the case may be, as the registered owner thereof. Neither
the Company, the Trustee, nor any paying agent (a "Paying Agent") will have
any responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial interests in the Global Note or for
maintaining, supervising or reviewing any records relating to such beneficial
interests.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal, premium or interest (including Special Interest, if any)
in respect of the Global Note will credit Participants' accounts with payments
in amounts proportionate to such Participants' respective beneficial interests
in the principal amount of such Global Note as shown on the records of the
Depositary or its nominee. The Company also expects that payments by
Participants to owners of beneficial interests in the Global Note held through
such Participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such Participants.
The Depositary has advised the Company that it will take any action
permitted to be taken by a holder of Notes (including the presentation of
Notes for exchange as described below) only at the direction of one or more
Participants to whose accounts interests in the Global Note is credited and
only in respect of such portion of the aggregate principal amount of Notes, as
to which such Participant or Participants has or have given such direction.
The Depositary has advised the Company as follows: The Depositary is a
limited purpose trust company organized under the laws of the State of New
York, a "banking organization" within the meaning of New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "Clearing Agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. The Depositary
was created to hold securities for its Participants and facilitate the
clearance and settlement of securities transactions between Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Indirect access to
the Depositary system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a Participant ("Indirect Participants").
Although the Depositary and its Participants are expected to follow the
foregoing procedures in order to facilitate transfers of interests in the
Global Note among participants, they are under no obligation to perform or
continue to perform such procedures, and such procedures may be discontinued
at any time. Neither the Company, the Trustee, nor any Paying Agent will have
any responsibility for the performance by the Depositary, Participants or
Indirect Participants of their respective obligations under the rules and
procedures governing their operations.
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Owners of beneficial interests in the Global Note will be entitled to
receive Notes in definitive form ("Definitive Notes") if the Depositary is at
any time unwilling or unable to continue as, or ceases to be, a "Clearing
Agency" registered under Section 17A of the Exchange Act, and a successor to
the Depositary registered as a "Clearing Agency" under Section 17A of the
Exchange Act is not appointed by the Company within 90 days. Any Definitive
Notes issued in exchange for beneficial interests in the Global Note will be
registered in such name or names as the Depositary shall instruct the Trustee.
It is expected that such instructions will be based upon directions received
by the Depositary from Participants with respect to ownership of beneficial
interests in the Global Note.
In addition to the foregoing, on or after the occurrence of an Event of
Default under the Indenture, owners of beneficial interests in the Global Note
will be entitled to request and receive Definitive Notes. Such Definitive
Notes will be registered in such name or names as the Depositary shall
instruct the Trustee.
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DESCRIPTION OF THE WARRANTS
In connection with the Offering, the Company issued Initial Warrants to
purchase 2,053,900 shares of Class A Common Stock and undertook to issue,
under certain circumstances, to holders of the Notes Contingent Warrants. The
following is a description of such Warrants.
GENERAL
On August 18, 1997, the Company issued an aggregate of 1,527,250 Initial
Warrants to the purchasers of the Units. The Warrants were issued pursuant to
a Warrant Agreement, dated as of August 15, 1997 (the "Warrant Agreement"),
between the Company and Harris Trust and Savings Bank, as Warrant Agent (the
"Warrant Agent"). The Warrants are subject to all terms in the Warrant
Agreement and holders of Warrants are referred to the Warrant Agreement, a
copy of which is available from the Company on request, for a complete
statement of such terms. The statements and definitions of terms under this
caption relating to the Warrants are summaries and do not purport to be
complete. Such summaries make use of certain terms defined in the Warrant
Agreement and are qualified in their entirety by express reference to the
Warrant Agreement.
Each Warrant is evidenced by a Warrant Certificate and entitles the holder
thereof to purchase 1.34484 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
Warrants may be exercised at any time on or after the date of the occurrence
of an Exercise Event (as defined in the Warrant Agreement) and on or prior to
the close of business on a date seven years following the Issue Date (the
"Expiration Date"). 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 Warrants.
The aggregate number of Warrant Shares issuable upon exercise of the Initial
Warrants was equal to approximately 11.1% of the outstanding shares of Class A
Common Stock, on a fully-diluted basis, as of the date of the Offering.
In addition, the Company is obligated pursuant to the Indenture to issue to
holders of the Notes Contingent Warrants, exercisable for Class A Common Stock
representing 5.0% of the Common Stock on a fully-diluted basis as of the date
of such issuance (subject to certain exceptions) after giving effect to the
issuance of such Contingent Warrants, in the event that, on or prior to
September 30, 1998, the Company does not effect a Qualified Equity Offering.
All Contingent Warrants will be issued pursuant to the Warrant Agreement with
the same rights thereunder as the Initial Warrants, and holders will have the
benefit of the Registration Rights Agreement. See "Description of the Notes--
Certain Covenants--Issuance of Contingent Warrants."
CERTAIN TERMS
Exercise
In order to exercise all or any of the Warrants represented by a Warrant
Certificate, the holder thereof is required to surrender to the Warrant Agent
the Warrant Certificate, a duly executed copy of the subscription form set
forth in the Warrant Certificate and payment in full of the Exercise Price for
each Warrant Share or other security as to which a Warrant is being exercised.
Payment for securities upon exercise of a Warrant may be made in cash or by
certified check, official bank check or bank cashier's check payable to the
order of the Company. Upon the exercise of any Warrant in accordance with the
Warrant Agreement, the Warrant Agent shall instruct the Company to transfer
promptly to, or upon the written order of, the holder of such Warrant
appropriate evidence of ownership of any Warrant Share or other securities or
property to which such holder is entitled, registered or otherwise placed in
such name or names as such holder may direct in writing, and the Company shall
deliver such evidence of ownership to the person or persons entitled to
receive the same, including, without limitation, any cash payable to adjust
for fractional interests in Warrant Shares issuable upon such exercise. If
less than all of the Warrants evidenced by a Warrant Certificate are to be
exercised, a new Warrant Certificate will be issued for the remaining number
of Warrants. All Warrant Shares or other securities issuable by the Company
upon the exercise of the Warrants shall be validly issued, fully paid and
nonassessable.
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No fractional Warrant Shares will be issued upon exercise of the Warrants.
If any fraction of a Warrant Share would, except for the foregoing provision,
be issuable upon the exercise of any Warrants (or specified portion thereof),
the Company will pay an amount in cash equal to the Current Market Price (as
defined in the Warrant Agreement) per share of Class A Common Stock, as
determined on the trading day immediately preceding the date the Warrant is
presented for exercise, multiplied by such fraction, computed to the nearest
whole cent.
Certificates for Warrants will be issued in global form or registered form
as definitive warrant certificates and no service charge will be made for
registration of transfer or exchange upon surrender of any Warrant Certificate
at the office of the Warrant Agent maintained for that purpose. See "Book-
Entry; Delivery and Form." The Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in
connection with any registration or transfer or exchange of Warrant
Certificates.
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares is then effective under,
or the exercise of such Warrants is exempt from the registration requirements
of, the Securities Act. See "Registration Rights."
Adjustments
Subject to certain exceptions, including the issuance of the Contingent
Warrants, the Consent Convertible Notes and the issuance of warrants to
purchase up to 5% of the Common Stock (on a fully-diluted basis) in connection
with future issuances of debt securities, the Exercise Price and the number of
Warrant Shares issuable upon exercise of the Warrants will be subject to
adjustment on the occurrence of certain events including: (i) the payment by
the Company of dividends (or the making of other distributions) with respect
to Common Stock payable in Common Stock or other shares of the Company's
capital stock, (ii) subdivisions, combinations and reclassifications of Common
Stock, (iii) the issuance to all holders of Common Stock of rights, options or
warrants entitling them to subscribe for Common Stock, or of securities
convertible into or exchangeable for shares of Common Stock, in either case
for consideration per share of Common Stock which is less than the Current
Market Price per share of Common Stock, (iv) the issuance or sale of shares of
Common Stock for consideration per share of Common Stock which is less than
the Current Market Price per share of Common Stock, (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) the
issuance of any equity securities of the Company after the Issue Date and on
or prior to September 15, 1997 resulting in net proceeds to the Company of up
to $20 million.
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least 1.0% in the Exercise Price;
provided, that any adjustment which is not made will be carried forward and
taken into account in any subsequent adjustment.
Mergers, Consolidations and Certain Other Transactions
Except as otherwise provided herein, in the event the Company consolidates
with, merges with or into, or sells all or substantially all of its property
and assets to another Person, each Warrant thereafter shall entitle the holder
thereof to receive upon exercise thereof the number of shares of capital stock
or other securities or property which the holder of a share of Common Stock is
entitled to receive upon completion of such consolidation, merger or sale of
assets. If the Company merges or consolidates with, or sells all or
substantially all of its property and assets to, another Person and, in
connection therewith, consideration to the holders of Common Stock in exchange
for their shares is payable solely in cash, or in the event of the
dissolution, liquidation or winding-up of the Company, then the holders of the
Warrants will be entitled to receive distributions on an equal basis with the
holders of Common Stock or other securities issuable upon exercise of the
Warrants, as if the Warrants had been exercised immediately prior to such
event, less the Exercise Price. Upon receipt of such payment, if any, the
Warrants will expire and the rights of the holders thereof will cease.
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In case of any such merger, consolidation or sale of assets, the surviving
or acquiring Person and, in the event of any dissolution, liquidation or
winding-up of the Company, the Company, shall deposit promptly with the
Warrant Agent the funds or other consideration, if any, necessary to pay the
holders of the Warrants. After such funds and the surrendered Warrant
Certificate are received, the Warrant Agent shall make payment by delivering a
check in such amount as is appropriate (or, in the case of consideration other
than cash, shall transfer such other consideration as is appropriate) to such
Person or Persons as it may be directed in writing by the holders surrendering
such Warrants.
No Rights as Stockholders
The holders of unexercised Warrants are not entitled, as such, to receive
dividends or other distributions with respect to the Class A 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 Class A Common Stock as shall be issuable upon the exercise of all
outstanding warrants. Such shares of Class A Common Stock, when paid for and
issued, will be duly and validly issued, fully paid and non-assessable, free
of preemptive rights and free from all taxes, liens, charges and security
interests with respect to the issue thereof.
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including, without limitation, curing defects or
inconsistencies or making any change that does not materially adversely affect
the rights of any holder. Any amendment or supplement to the Warrant Agreement
that has a material adverse effect on the interests of the holders of the
Warrants shall require the written consent of the holders of a majority of the
then outstanding Warrants. The consent of each holder of the Warrants affected
shall be required for any amendment pursuant to which the Exercise Price would
be increased or the number of Warrant Shares purchasable upon exercise of
Warrants would be decreased (other than pursuant to adjustments provided in
the Warrant Agreement).
REGISTRATION RIGHTS
Registration of the Warrants. The Company is required, under the terms of
the Registration Rights Agreement, to (i) file a shelf registration statement
with respect to resale of the Initial Warrants by the holders thereof (the
"Warrant Shelf Registration Statement") with the Commission within 60 days
after the date of original issuance of the Initial Warrants; (ii) cause the
Warrant Shelf Registration Statement to be declared effective under the
Securities Act within 120 days after the date of original issuance of the
Initial Warrants; and (iii) keep effective the Warrant Shelf Registration
Statement until the earlier of (A) such time as all Initial Warrants have been
sold thereunder or otherwise or exercised and (B) two years after its
effective date; provided, however, that in the event the Company is required
to issue Contingent Warrants, the Company shall amend the Warrant Shelf
Registration Statement to include the Contingent Warrants and the time period
shall be two years after the issuance of the Contingent Warrants.
The Company will, upon the filing of the Warrant Shelf Registration
Statement, provide to each holder of Warrants copies of the prospectus which
is a part of the Warrant Shelf Registration Statement, notify each such holder
when the Warrant Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the
Warrants.
Each holder of Warrants that sells such Warrants pursuant to the Warrant
Shelf Registration Statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus
to the purchaser, will be subject to certain of the civil liability provisions
under the Securities Act in
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connection with such sales and will be bound by certain provisions of the
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations). In addition, each holder of Warrants
will be required to deliver information to be used in connection with the
Warrant Shelf Registration Statement in order to have its Warrants included in
the Warrant Shelf Registration Statement.
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares is then effective under,
or the exercise of such Warrants is exempt from the registration requirement
of, the Securities Act.
Registration of the Warrant Shares. The Company also is required, under the
terms of the Registration Agreement, to (i) file a shelf registration
statement with respect to the Company's issuance of the Warrant Shares to
holders upon exercise of the Warrants (the "Warrant Shares Shelf Registration
Statement") with the Commission within 270 days after the date of original
issuance of the Initial Warrants, (ii) cause the Warrant Shares Shelf
Registration Statement to be declared effective under the Securities Act
within 360 days after the date of original issuance of the Initial Warrants
and (iii) keep effective the Warrant Shares Shelf Registration Statement (or a
successor registration statement thereto) until seven years after the date of
original issuance of the Initial Warrants or such shorter period that will
terminate when all the Warrant Shares covered by such Warrant Shares Shelf
Registration Statement have been sold pursuant to such Warrant Shares Shelf
Registration Statement or otherwise.
The Company will, upon the filing of the Warrant Shares Shelf Registration
Statement, provide to each holder of Warrant Shares copies of the prospectus
which is a part of the Warrant Shares Shelf Registration Statement, notify
each such holder when the Warrant Shares Shelf Registration Statement has
become effective and take certain other actions, subject to compliance by such
holder with certain conditions in the Registration Rights Agreement, as are
required to permit unrestricted resales of the Warrant Shares.
Each holder of Warrant Shares that sells such Warrant Shares pursuant to the
Warrant Shares Shelf Registration Statement generally will be required to be
named as a selling securityholder in the related prospectus and to deliver a
prospectus to the purchaser, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such shares and will be
bound by certain provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations). In
addition, each holder of Warrant Shares will be required to deliver
information to be used in connection with the Warrant Shares Shelf
Registration Statement in order to have its Warrant Shares included in the
Warrant Shares Shelf Registration Statement.
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 DGCL or (iv) for any transaction from which the
director derived an improper personal benefit.
This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of
care by a director. As a result of the inclusion of such a provision,
stockholders may be unable to recover monetary damages against directors for
actions taken by them that constitute negligence or gross negligence or that
are otherwise in violation of their fiduciary duty of care, although it may be
possible to obtain injunctive or other equitable relief with respect to such
actions. If equitable remedies are found not to be available to stockholders
in any particular situation, stockholders may not have an effective remedy
against a director in connection with such conduct.
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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 or will enter 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 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.
CERTAIN OTHER INDEBTEDNESS
On September 30, 1996, the Company issued in the 1996 Private Placement
48,500 units consisting of (i) $48.5 million in aggregate principal amount at
stated maturity of the 14% Senior Notes and warrants to purchase shares of
Class A Common Stock, and (ii) $36.0 million in aggregate principal amount at
stated maturity of the Convertible Notes.
The 14% Senior Notes are general, unsecured obligations of the Company and
rank pari passu in right of payment with all existing and future senior
unsecured indebtedness of the Company, including the Notes, and will be senior
in right of payment to all existing and future subordinated indebtedness of
the Company. The 14% Senior Notes were issued with original issue discount
and, until March 30, 2000, accrete interest at a rate of 14% per annum,
compounded semiannually, to an aggregate principal amount of $48.5 million.
Thereafter, cash
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interest will accrue on the 14% Senior Notes and will be payable semiannually
on March 30 and September 30 of each year, commencing September 30, 2000. The
14% Senior Note Indenture contains certain covenants which, among other
things, restrict the ability of the Company and certain subsidiaries to incur
additional indebtedness, pay dividends or make distributions in respect of the
Company's capital stock or make certain other restricted payments, make
investments, create restrictions on the ability of certain subsidiaries to
make distributions on their capital stock or to issue capital stock, create
liens, enter into transactions with affiliates or related persons, sell assets
or consolidate, merge or sell all or substantially all of their assets and
engage in businesses other than the telecommunications business.
The Convertible Notes are senior unsecured obligations of the Company which
are subordinated in right of payment to the 14% Senior Notes and the Notes.
Otherwise, the Convertible Notes rank pari passu in right of payment to all
existing and future senior indebtedness of the Company. The Convertible Notes
were issued with original issue discount and, until September 30, 1999,
accrete interest at a rate of 9% per annum, compounded semiannually, to an
aggregate principal amount of $36.0 million. Thereafter, cash interest will
accrue on the Convertible Notes and will be payable semiannually on March 30
and September 30 of each year, commencing March 30, 2000. The Convertible Note
Indenture provides that an "Event of Default" (as defined in the Old Senior
Note Indenture) under the Old Senior Note Indenture shall constitute an "Event
of Default" (as defined in the Convertible Note Indenture) under the
Convertible Note Indenture.
From September 30, 2001 to September 30, 2003, the 14% Senior Notes will be
redeemable at the Company's option, in whole or in part, at the prices set
forth in the 14% Senior Note Indenture plus accrued and unpaid interest, if
any, to the redemption date. In the event the Company elects, on or prior to
September 30, 1999, to redeem Notes out of the proceeds of any Public Equity
Offering, the holders of the 14% Senior Notes shall have the right, but not
the obligation, to cause the Company to offer to repurchase the 14% Senior
Notes on a pro rata basis together with the Notes and to receive the same
redemption premium as the holders of the Notes. From September 30, 2000 until
September 30, 2002, all but not less than all of the Convertible Notes may be
redeemed if the closing price per share of the Common Stock over a consecutive
30-day period is at least 150% of the Conversion Price at a redemption price
equal to 100% of the principal amount thereof plus accrued but unpaid
interest, if any, to the redemption date. On or after September 30, 2002, the
Convertible Notes will be redeemable at the Company's option, in whole or in
part, at a redemption price equal to 100% of the principal amount plus accrued
and unpaid interest, if any, to the redemption date.
In connection with the Consent, the Company granted MLAM an option to
purchase Consent Convertible Notes for an aggregate purchase price of $10
million with terms substantially similar to the Convertible Notes. The option
was exercised by MLAM on October 24, 1997.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material United States federal income
tax consequences of an exchange of Old Notes for New Notes and the ownership
of New Notes, as well as certain potential federal income tax consequences to
the Company with respect to the Notes. Except where noted, it deals only with
Old Notes and New Notes held as capital assets by initial purchasers of Old
Notes that are United States Holders (as defined) and does not deal with
special situations, such as those of foreign persons, dealers in securities,
financial institutions, life insurance companies, holders whose "functional
currency" is not the U.S. dollar, or special rules with respect to integrated
transactions of which the ownership of common stock is a part (such as certain
hedging transactions), or certain "straddle" transactions. Furthermore, the
discussion below is based upon the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed,
revoked or modified so as to result in federal income tax consequences
different from those discussed below. HOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSIDERATIONS THAT MAY BE SPECIFIC
TO THEM OF THE EXCHANGE OF OLD NOTES FOR NEW NOTES AND THE OWNERSHIP OF THE
NEW NOTES, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER
TAXING JURISDICTION.
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Holders should recognize that the present U.S. federal income tax treatment
of an investment in Notes may be modified by legislative, judicial or
administrative action at any time and that such action may affect investments
previously made. In addition, the recently enacted Taxpayer Relief Act of 1997
could affect an investment in Notes in that, among other things, it reduces
the rate of federal income tax imposed on capital gains of individual
taxpayers for capital assets held more than eighteen months (and reduces such
rate even further for capital assets acquired after the year 2000 and held
more than five years). Holders should consult their own tax advisors
concerning the effect on them of such new legislation.
UNITED STATES HOLDERS
As used herein, "United States Holder" means a beneficial owner of a Note
who or which is (i) a citizen or resident of the United States, (ii) a
corporation organized in or under the laws of the United States or any state
thereof or the District of Columbia, or (iii) a person otherwise subject to
United States federal income taxation on a net income basis in respect of a
Note.
EXCHANGE OF SENIOR NOTES
There should be no federal income tax consequences to holders exchanging Old
Notes for New Notes pursuant to the Exchange Offer since the Exchange Offer
will be by operation of the original terms of the Old Notes, pursuant to a
unilateral act by the Company and will not result in any material alteration
in the terms of the Old Notes. Each exchanging holder will have the same
adjusted tax basis and holding period in the New Notes as it had in the Old
Notes immediately before the exchange.
TAXATION OF THE NOTES
Original Issue Discount. Because the Old Notes were issued with original
issue discount ("OID"), the New Notes will also bear OID that holders
generally will be required to include in income as it accrues on a yield-to-
maturity basis over the term of the New Notes in advance of cash payments
attributable to such income (regardless of whether the holder is a cash or
accrual basis taxpayer). The amount of OID with respect to a New Note will be
the excess of the stated redemption price at maturity of such Note over its
issue price. The stated redemption price at maturity of a Note generally will
include all payments required to be made on the Notes, whether denominated as
principal or interest (other than payments subject to remote or incidental
contingencies).
The issue price of the New Notes is equal to the issue price of the Old
Notes. The issue price of the Old Notes, which is the same as the issue price
of the New Notes, was determined by allocating the issue price of the Units
between the Old Notes and the Initial Warrants based on their relative fair
market values. For this purpose, the issue price of a Unit was the initial
price at which a substantial portion of the Units were sold (not including
sales to bond houses, brokers or similar persons or organizations acting in
the capacity of underwriters or wholesalers). With respect to the
approximately $100 million in aggregate proceeds received from the offering of
the Units, the Company allocated approximately $81.9 million to the Old Notes
and approximately $18.1 million to the Initial Warrants. This allocation
reflected the Company's judgment as to the relative values of those
instruments at the time of issuance. The allocation is binding on a holder
unless such holder explicitly discloses on its tax return for the taxable year
that includes the acquisition date of the Unit that its allocation is
different from that of the Company. The allocation is not, however, binding on
the Internal Revenue Service (the "IRS").
A holder of a debt instrument that bears OID is required to include in gross
income an amount equal to the sum of the daily portions of OID for each day
during the taxable year in which the debt instrument is held. The daily
portions of OID are determined by allocating to each day in an accrual period
the pro rata portion of the OID that is allocable to the accrual period. The
amount of OID that is allocable to an accrual period generally is equal to the
product of the adjusted issue price of the Notes at the beginning of the
accrual period (the issue price of the Notes determined as described above,
generally increased by all prior accruals of OID and decreased by the amount
of payments made on the Notes) and the Notes' yield to maturity (the discount
rate, which, when applied to all payments under the Notes, results in a
present value equal to the issue price of the Notes). In the
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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. All payments on a Note generally will
be viewed first as a payment of previously accrued OID (to the extent
thereof), with payments considered made from the earliest accrual period, and
then as a payment of principal.
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 Notes were held by the
holders.
Premium. If a holder purchased an Old Note for an amount that is greater
than the Note's stated redemption price at maturity, such holder will be
considered to have purchased such Note with "amortizable bond premium" equal
in amount to such excess, and generally will not be required to include OID in
income. A holder may elect to amortize such premium, using a constant yield
method, over the remaining term of the Note with reference to either the
amount payable on maturity or, if it results in a smaller premium attributable
to the period through the earlier call date, with reference to the amount
payable on the earlier call date. An election to amortize bond premium applies
to all taxable debt obligations then owned and thereafter acquired by the
holder and may be revoked only with the consent of the IRS.
If a holder of a New Note (including an original purchaser) purchased the
Old Note exchanged therefor for an amount greater than the Old Note's adjusted
issue price but less than such Note's stated redemption price at maturity,
then the holder will be required to include annual accruals of OID in gross
income in accordance with the rules described above; however, the amount of
OID includable in income will be reduced to reflect such acquisition premium.
The includable OID (as otherwise determined) will be reduced by an amount
equal to the OID multiplied by a fraction, the numerator of which is such
excess and the denominator of which is the OID for the period from the date of
acquisition until the maturity date.
Contingent Warrants; Registration of the Notes. In the event that, on or
prior to September 30, 1998, the Company does not consummate one or more
Public Equity Offerings, or otherwise issue in one or more transactions
additional equity securities of the Company, resulting in net proceeds to the
Company of at least $50 million in the aggregate based on an equity valuation
of the Company of at least $160 million, the Indenture will require the
Company to issue Contingent Warrants to the holders of the Notes. The issuance
of the Contingent Warrants should not result in a deemed taxable exchange of
the 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.
In the event of a Registration Default, the Company must pay Special
Interest to holders of Notes. See "The Exchange Offer--Purpose and Effect of
the Exchange Offer." This rate increase should not result in a deemed
reissuance or taxable exchange of the Notes.
Although the characterization of such additional interest is uncertain,
Special Interest probably would constitute contingent interest, which
generally is not includable in income before it is fixed or paid. In general,
the Company will not include Special Interest in calculating the amount of OID
that accrues on the Notes before the Special Interest becomes fixed and paid.
However, if the Special Interest becomes fixed or paid, it should be included
in the U.S. Holder's gross income.
Disposition of New Notes. A holder will generally recognize gain or loss
upon the sale, exchange, retirement or other disposition of New Notes equal to
the difference between the amount realized on the disposition and the holder's
adjusted tax basis in the New Notes. A holder's adjusted tax basis in a New
Note will generally be the cost of the Old Note, increased by any OID
previously included in income by such holder and decreased by the amount of
any deductions for amortizable bond premium. Such gain or loss generally would
be capital gain or loss and would be long-term if the holding period for the
New Notes (which includes the holding period of the Old Notes) is more than
one year.
102
<PAGE>
Backup Withholding. Under certain circumstances, a holder may be subject to
backup withholding at a 31% rate on payments received with respect to the New
Notes. This withholding generally applies only if the holder (i) fails to
furnish his or her social security or other taxpayer identification number
("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he
or she has failed to report payment of interest and dividends properly and the
IRS has notified the Company that he or she is subject to backup withholding
or (iv) fails, under certain circumstances, to provide a certified statement,
signed under penalty of perjury, that the TIN provided is his or her correct
number and that he or she is not subject to backup withholding. Any amount
withheld from a payment to a holder under the backup withholding rules is
allowable as a credit against such holder's federal income tax liability,
provided that the required information is furnished to the IRS. Certain
holders (including, among others, corporations and foreign individuals who
comply with certain certification requirements) are not subject to backup
withholding. Holders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
Certain Potential Federal Income Tax Consequences to the Company and to
Corporate Holders. The Notes will constitute applicable high yield debt
obligations ("AHYDOs") if their yield to maturity is equal to or greater than
the sum of the relevant applicable federal rate (the "AFR") plus five
percentage points, and the Notes are issued with significant OID. Since the
yield to maturity on the Notes exceeds the sum of the AFR plus five percentage
points and the Notes were issued with significant OID, the Notes constitute
AHYDOs. Accordingly, the Company will not be entitled to deduct OID that
accrues with respect to such Notes until amounts attributable to such OID are
paid. In addition, since the Notes constitute AHYDOs and the yield-to-maturity
of the Notes exceeds the sum of the relevant AFR plus six percentage points
(the "Excess Yield"), the Company's deduction for the "disqualified portion"
of the OID accruing on the Notes will be disallowed. In general, the
"disqualified portion" of the OID for any accrual period will be equal to the
product of (i) the Excess Yield divided by the yield-to-maturity on the Notes,
and (ii) the OID for the accrual period. Subject to otherwise applicable
limitations, holders that are U.S. corporations will be entitled to a
dividends-received deduction (generally at a current rate of 70%) with respect
to any disqualified portion of the accrued OID to the extent that the Company
has sufficient current or accumulated earnings and profits. If the
disqualified portion exceeds the Company's current and accumulated earnings
and profits, the excess will continue to be taxed as ordinary OID income in
accordance with the rules described above in "Original Issue Discount."
It is also possible that some or all of the Notes may constitute "corporate
acquisition indebtedness" if, among other things, the proceeds of the Notes
are used to pay for the purchase of stock or at least two-thirds of the
operating assets of another corporation. To the extent the Notes constitute
corporate acquisition indebtedness, under Section 279 of the Code the maximum
amount of interest or OID 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 assets but which does not qualify as corporate acquisition
indebtedness.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, including the Exxon Capital Letter,
the Morgan Stanley Letter and similar letters, the Company believes that the
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may
be offered for resale, resold and otherwise transferred by any Holder thereof
(other than any such Holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
Holder's business and such Holder has no arrangement with any person to
participate in the distribution of such New Notes. Accordingly, any Holder
using the Exchange Offer to participate in a distribution of the New Notes
will not be able to rely on such no-action letters. Notwithstanding the
foregoing, each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with
103
<PAGE>
any resale of New Notes received in exchange for Old Notes where such Old
Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that for a period of 180 days from the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver, and by delivering, a prospectus as required, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days from the Expiration Date, the Company will send a
reasonable number of additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company will pay all the expenses
incident to the Exchange Offer (which shall not include the expenses of any
Holder in connection with resales of the New Notes). The Company has agreed to
indemnify the Initial Purchasers and any broker-dealers participating in the
Exchange Offer against certain liabilities, including liabilities under the
Securities Act.
This Prospectus has been prepared for use by the Initial Purchasers in
connection with offers and sales of the Notes, in market-making transactions
at negotiated prices related to prevailing market prices at the time of sale.
The Initial Purchasers may act as principal or agent in such transactions. The
Initial Purchasers have advised the Company that they currently intend to make
a market in the Notes, but they are not obligated to do so and may discontinue
any such market-making at any time without notice. Accordingly, no assurance
can be given that an active trading market will develop for or as to the
liquidity of the Notes.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Skadden, Arps, Slate, Meagher & Flom (Illinois).
INDEPENDENT AUDITORS
The consolidated financial statements of the Company included in this
Prospectus as of December 31, 1994, 1995 and 1996, and for the fiscal years
then ended have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their reports included herein.
104
<PAGE>
GLOSSARY
ACCESS CHARGES--The fees paid by IXCs to LECs for originating and
terminating long distance calls on their local networks.
CLEC (Competitive Local Exchange Carrier)--A company that provides its
customers with an alternative to the local telephone company for local
transport of private line, special access and interstate transport of switched
access telecommunications services.
CENTRAL OFFICES--The switching centers or central switching facilities of
the LECs.
CENTREX--Centrex is a service that offers features similar to those of what
is known as a private branch exchange (PBX), except the equipment is located
at the carrier's premises and not at the premises of the customer. These
features include direct dialing within a given phone system, 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 customers who
do not have the size or the funds to support their own on-site PBX.
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 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 customers 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.
FRAME RELAY--Frame Relay is a high-speed data packet switching service used
to transmit data between computers. Frame Relay supports data units of
variable lengths at access speeds ranging from 56kbs to 1.5 mbs. This service
is ideal for connecting LANS, but is not appropriate for voice and video
applications due to the variable delays that can occur. Frame Relay was
designed to operate at higher speeds on modern fiber optic networks.
ILECS (Incumbent Local Exchange Carriers)--Companies providing local
telephone services.
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.
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.
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.
105
<PAGE>
POP (POINT OF PRESENCE)--Location 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 customer.
SPECIAL ACCESS SERVICES--The lease of private, dedicated telecommunications
lines or "circuits" along the network of a LEC or a CLEC, which lines or
circuits run to or from the long distance carrier POPs. Examples of special
access services are telecommunications lines running between POPs of a single
long distance carrier, from one long distance carrier POP to the POP of
another long distance carrier or from a subscriber to its long distance
carrier POP. Special access services do not require the use of switches.
SWITCH--A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits
or selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
SWITCHED ACCESS SERVICES--The origination or termination of long distance
traffic between a customer premise and an IXC POP via shared local trunks
using a local switch.
SWITCHED TRANSPORT SERVICES--Transportation of switched traffic along
dedicated lines between the LEC central offices and interexchange POPs.
SWITCHED TRAFFIC--Telecommunications traffic along a switched network.
USOC (UNIVERSAL SERVICE ORDERING CODE)--Identifies a particular service or
equipment under tariff (not necessarily universal any longer).
106
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 AND AS OF DECEMBER 31, 1996 AND
SEPTEMBER 30, 1997....................................................... F-2
INDEPENDENT AUDITORS' REPORT.............................................. F-8
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets............................................. F-9
Consolidated Statements of Operations................................... F-10
Consolidated Statements of Redeemable Preferred Stock................... F-11
Consolidated Statements of Common Stockholders' Deficit................. F-12
Consolidated Statements of Cash Flows................................... F-13
Notes to Consolidated Financial Statements.............................. F-14
</TABLE>
F-1
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
30, DECEMBER
ASSETS 1997 31, 1996
------ ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $117,943,711 $60,818,478
Accounts receivable, net.......................... 15,445,860 3,004,408
Prepaid expenses.................................. 271,430 187,051
Other receivables................................. 338,502 172,567
------------ -----------
Total current assets............................ 133,999,503 64,182,504
Property and Equipment--Net......................... 12,604,307 3,507,350
Other Assets........................................ 32,553,221 10,362,438
------------ -----------
Total Assets.................................... $179,157,031 $78,052,292
============ ===========
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND COMMON STOCKHOLDERS' DEFICIT
----------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................. $ 17,268,085 $ 7,907,654
Accrued expenses and other liabilities............ 11,315,296 3,176,762
Capital lease obligations--current................ 544,213 277,844
Current maturities on notes payable............... 121,874 386,522
------------ -----------
Total current liabilities....................... 29,249,468 11,748,782
14 5/8% Senior Discount Notes, net of Original Issue
Discount........................................... 101,830,062 --
14% Senior Discount Notes, net of Original Issue
Discount........................................... 34,579,844 31,242,614
9% Convertible Subordinated Discount Notes, net of
Original Issue Discount............................ 30,188,376 28,259,555
Capital Lease Obligations--Noncurrent............... 664,421 312,280
Notes Payable....................................... 24,547 49,727
------------ -----------
Total liabilities............................... 196,536,718 71,612,958
Redeemable Preferred Stock:
9% Cumulative Convertible Pay-In-Kind Preferred
stock: par value, $1; 30,000 shares authorized;
10,920 and 10,000 shares outstanding at 1997 and
1996............................................. 10,920 10,000
9% Cumulative Convertible Pay-In-Kind Preferred
stock, Series A: par value $1; 150,000 shares
authorized; 30,209 shares outstanding at 1997.... 30,209 --
Accumulated unpaid dividends...................... 317,195 225,000
Additional paid-in capital........................ 40,690,299 9,810,185
------------ -----------
Total redeemable preferred stock................ 41,048,623 10,045,185
Common Stockholders' Deficit:
Common stock: par value, $.01; 30,000,000 shares
authorized; 7,222,511 and 7,185,260 shares issued
at 1997 and 1996................................. 72,226 71,853
Additional paid-in capital........................ 73,941,796 54,114,755
Accumulated deficit............................... (132,441,255) (57,791,382)
Common stock held in Treasury: 1997 and 1996--
10,000 shares.................................... (1,077) (1,077)
------------ -----------
Total common stockholders' deficit.............. (58,428,310) (3,605,851)
------------ -----------
Total Liabilities, Redeemable Preferred Stock, and
Common Stockholders' Deficit....................... $179,157,031 $78,052,292
============ ===========
</TABLE>
See notes to Condensed Consolidated Financial Statements.
F-2
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net service revenue................................ $ 26,998,315 $ 7,598,705
Cost of services................................... 23,983,125 6,587,126
------------ ------------
Gross profit................................... 3,015,190 1,011,579
Expenses:
Sales and marketing.............................. 43,087,112 5,837,437
General and administrative....................... 26,881,801 10,919,589
------------ ------------
Operating loss..................................... (66,953,723) (15,745,447)
Other income (expense):
Interest income.................................. 1,883,861 472,667
Interest expense................................. (8,572,952) (45,957)
Other income..................................... 5,386 8,099,593
------------ ------------
Other income (expense)--net.................... (6,683,705) 8,526,303
------------ ------------
Net loss........................................... $(73,637,428) $ (7,219,144)
============ ============
Accumulated preferred dividends.................... $ 1,012,445 $ 3,465,976
============ ============
Net loss to common shareholders.................... $(74,649,873) $(10,685,120)
============ ============
Net loss per common share.......................... $ (10.35) $ (2.44)
============ ============
Weighted average common and common equivalent
shares outstanding................................ 7,212,511 4,384,993
============ ============
</TABLE>
See notes to Condensed Consolidated Financial Statements.
F-3
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES A
9% PIK 9% PIK SERIES A-2 SERIES A ACCUMULATED ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED UNPAID PAID-IN
STOCK STOCK STOCK STOCK DIVIDENDS CAPITAL TOTAL
--------- --------- ---------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1996................... $26,235 $16,200 $ 3,810,000 $ 40,543,605 $ 44,396,040
Accumulated dividends
on Series A and A-2
Preferred Stock....... 3,465,976 3,465,976
Conversion of Series A
and
A-2 Preferred Stock to
Class A Common Stock.. (26,235) (16,200) (7,275,976) (40,543,605) (47,862,016)
Issuance of 10,000
shares of 9% PIK
preferred stock....... $10,000 9,990,000 10,000,000
Costs incurred related
to issuance of 9% PIK
preferred stock....... (179,815) (179,815)
Accumulated dividends
on 9% PIK preferred
stock................. 225,000 225,000
------- ------- ------- ------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1996................... 10,000 225,000 9,810,185 10,045,185
Issuance of 30,209
shares of Series A 9%
PIK preferred stock... $30,209 30,178,863 30,209,072
Costs incurred related
to issuance of Series
A 9% PIK preferred
stock................. (218,079) (218,079)
Accumulated dividends
on 9% PIK preferred
stock................. 695,250 695,250
Accumulated dividends
on Series A 9% PIK
preferred stock....... 317,195 317,195
Payment of dividends on
9% PIK preferred
stock................. 920 (920,250) 919,330
------- ------- ------- ------- ----------- ------------ ------------
BALANCE, SEPTEMBER 30,
1997 (UNAUDITED)....... $10,920 $30,209 $ -- $ -- $ 317,195 $ 40,690,299 $ 41,048,623
======= ======= ======= ======= =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK
COMMON PAID-IN ACCUMULATED HELD IN
STOCK CAPITAL DEFICIT TREASURY TOTAL
------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1996................... $31,374 $ 254,718 $ (29,053,815) $(28,767,723)
Conversion of Series A
and A-2 Preferred
Stock to Class A
Common Stock......... 26,763 47,835,253 47,862,016
Issuance of 50,000
shares of common
stock................ 500 5,000 5,500
Compensation grants of
220,000 shares of
common stock......... 2,200 30,800 33,000
Repricing of common
stock................ 11,016 (11,016)
Repurchase of 10,000
shares of common
stock................ $(1,077) (1,077)
Issuance of stock
warrants............. 6,000,000 6,000,000
Accumulated dividends
on 9% PIK preferred
stock................ (3,690,976) (3,690,976)
Net loss.............. (25,046,591) (25,046,591)
------- ----------- ------------- ------- ------------
BALANCE, DECEMBER 31,
1996................... 71,853 54,114,755 (57,791,382) (1,077) (3,605,851)
Issuance of 37,251
shares of common
stock................ 373 3,723 4,096
Issuance of stock
warrants............. 19,351,727 19,351,727
Compensation expense
on stock options..... 471,591 471,591
Accumulated dividends
on 9% PIK preferred
stock................ (695,250) (695,250)
Accumulated dividends
on Series A 9% PIK
preferred stock...... (317,195) (317,195)
Net loss.............. (73,637,428) (73,637,428)
------- ----------- ------------- ------- ------------
BALANCE, SEPTEMBER 30,
1997 (UNAUDITED)....... $72,226 $73,941,796 $(132,441,255) $(1,077) $(58,428,310)
======= =========== ============= ======= ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(73,637,428) $(7,219,144)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization................... 1,902,049 254,049
Amortization of organization costs and
intangibles.................................... 622,884 1,105,748
Non-cash interest on debt obligation............ 8,456,677 --
Stock compensation award expense................ 471,591 33,000
Gain on disposal of assets...................... -- (8,078,901)
Changes in:
Accounts receivable, net...................... (12,441,452) (1,469,127)
Prepaid expenses.............................. (84,379) 109,434
Other receivables............................. (165,935) (229,940)
Other assets.................................. (444,960) (18,205)
Accounts payable.............................. 9,360,431 1,440,563
Accrued expenses and other liabilities........ 8,138,534 (19,641)
------------ -----------
Net cash flows from operating activities.... (57,821,988) (14,092,164)
Cash flows from investing activities:
Purchase of property and equipment................ (10,071,051) (284,774)
Proceeds from sale of assets...................... -- 9,532,600
Purchase of Minority Interest..................... -- (1,601,207)
------------ -----------
Net cash flows from investing activities.... (10,071,051) 7,646,619
Cash flows from financing activities:
Issuance of common stock.......................... 4,096 3,300
Issuance of preferred stock....................... 30,209,072 10,000,000
Financing costs................................... (218,079) (147,389)
Repurchase of common stock........................ -- (1,077)
Proceeds from Senior Notes........................ 100,001,276 30,203,375
Proceeds from Convertible Notes................... -- 27,644,400
Debt acquisition costs............................ (4,436,579) (2,732,664)
Deposits.......................................... 57,758 (393,884)
Repayment of notes payable........................ (289,828) (335,442)
Repayment of capital lease obligations............ (309,445) (83,774)
------------ -----------
Net cash flows from financing activities.... 125,018,271 64,156,845
------------ -----------
Net increase in cash................................ 57,125,232 57,711,300
Cash and cash equivalents--Beginning of period...... 60,818,479 13,766,040
------------ -----------
Cash and cash equivalents--End of period............ $117,943,711 $71,477,340
============ ===========
Supplemental cash flow information:
Dividends Paid in Kind............................ $ 920,250 --
============ ===========
Declared Dividends................................ $ 1,012,445 $ 3,465,976
============ ===========
Issuance of Stock Warrants........................ $ 19,351,727 $ 6,000,000
============ ===========
Conversion of Series A and A-2 Preferred Stock to
Class A Common Stock............................. -- $47,862,016
============ ===========
Capital Lease Obligations Incurred................ $ 927,955 $ 537,478
============ ===========
Cash Paid for Interest............................ $ 91,993 $ 68,000
============ ===========
Cash Paid for Income Taxes........................ -- --
============ ===========
</TABLE>
See notes to Condensed Consolidated Financial Statements.
F-6
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIOD ENDING SEPTEMBER 30, 1997
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited, condensed consolidated financial statements of USN
Communications, Inc. (the "Company") included herein have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. The interim financial statements reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation 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 Company's latest annual
report on Form 10-K. The results of operations for the interim periods should
not be considered indicative of results to be expected for the full year.
2. PRIVATE PLACEMENT OFFERING
On August 18, 1997, the Company received approximately $96.5 million in
cash, net of commissions paid, in exchange for the issuance of 152,725 units
consisting of $152.7 million aggregate principal amount at maturity of 14 5/8%
Senior Discount Notes due 2004 ("14 5/8% Senior Notes") and warrants to
purchase 2,053,900 shares of Class A Common Stock. In connection with this
offering, the Company paid a consent fee to the holders of the outstanding 14%
Senior Discount Notes due 2003 ("14% Senior Notes") and 9% Convertible
Subordinated Notes due 2004 ("9% Convertible Notes") consisting of warrants to
purchase 145,160 shares of Class A Common Stock. The Company also granted
those holders an option, which was exercised on October 24, 1997, to purchase
up to $10.0 million in aggregate proceeds to the Company of convertible notes
of the Company on terms substantially similar to the existing 9% Convertible
Notes. Additionally, the Company granted to holders of the 14% Senior Notes an
option, for a specified period of time, to exchange all of the 14% Senior
Notes for 14 5/8% Senior Notes having an accreted value equal to the accreted
value of such 14% Senior Notes at the time of such exchange.
The Senior Notes were sold at a unit price, before commissions, of $654.78
per $1,000 face amount. These notes will accrete interest at an annual rate of
14 5/8% from August 18, 1997 to August 15, 2000. Thereafter, the notes will
bear interest at an annual rate of 14 5/8% payable semiannually in arrears in
cash.
3. CHANGES IN EQUITY
In August 1997, the Board of Directors authorized the issuance of up to
150,000 shares of a series of $1 par value preferred stock designated as 9%
Cumulative Convertible Pay-in-Kind Preferred Stock, Series A ("Series A
Preferred Stock"). In connection with the private placement offering described
in Note 2, the Company issued 30,209 shares of its Series A Preferred Stock to
certain of its existing stockholders and their affiliates for an aggregate
purchase price of $30.2 million.
In September 1997, the Board of Directors approved a nine-for-one stock
dividend on the Class A Common Stock. Share and per share data have been
retroactively adjusted to reflect this stock dividend.
4. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
USN Communications, Inc.
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of USN
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1996
and 1995, the related consolidated statements of operations, redeemable
preferred stock, common stockholders' deficit and cash flows for the years
ended December 31, 1996 and 1995 and for the period from April 20, 1994
(Inception) to December 31, 1994. 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, 1996 and 1995, and the results of its operations
and its cash flows for the years ended December 31, 1996 and 1995 and for the
period from April 20, 1994 (Inception) to December 31, 1994, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 20 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern.
Management's plans concerning this matter are also described in Note 20. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 14, 1997 (September 4, 1997 as to Note 22)
F-8
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $60,569,365 $ 13,705,025
Accounts receivable, net of allowances for doubtful
accounts of $223,000 (1996) and $193,000 (1995).... 3,004,408 1,184,453
Interest receivable................................. 249,113 61,015
Prepaid expenses.................................... 187,051 171,111
Notes receivable.................................... 150,000
Other receivables................................... 22,567
Net assets held for sale............................ 1,453,699
----------- ------------
Total current assets.............................. 64,182,504 16,575,303
Property and Equipment--net........................... 3,507,350 1,214,647
Other Assets.......................................... 10,362,438 2,681,255
----------- ------------
Total Assets...................................... $78,052,292 $ 20,471,205
=========== ============
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON
STOCKHOLDERS' DEFICIT
--------------------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 7,907,654 $ 2,734,122
Accrued expenses and other liabilities.............. 3,176,762 1,106,010
Current maturities on notes payable................. 386,522 409,348
Capital lease obligations--current.................. 277,844 75,192
----------- ------------
Total current liabilities......................... 11,748,782 4,324,672
Capital Lease Obligations--Noncurrent................. 312,280 81,391
Notes Payable......................................... 49,727 436,825
14% Senior Discount Notes, net of Original Issue
Discount............................................. 31,242,614
9% Convertible Subordinated Discount Notes, net of
Original Issue Discount.............................. 28,259,555
----------- ------------
Total liabilities................................. 71,612,958 4,842,888
Redeemable Preferred Stock:
9% Cumulative Convertible Pay-In-Kind Preferred
Stock.............................................. 10,000
Series A 10% Senior Cumulative Preferred Stock...... 16,200
Series A-2 10% Senior Cumulative Preferred Stock.... 26,235
Accumulated unpaid dividends........................ 225,000 3,810,000
Additional paid-in capital.......................... 9,810,185 40,543,605
----------- ------------
Total redeemable preferred stock.................. 10,045,185 44,396,040
Common Stockholders' Deficit:
Common stock: $.01 par value;
25,000,000 and 5,000,000 authorized at 1996 and
1995;
7,185,260 and 3,137,290 shares issued at 1996 and
1995 .............................................. 71,853 31,374
Additional paid-in capital.......................... 54,114,755 254,718
Accumulated deficit................................. (57,791,382) (29,053,815)
Treasury stock, 10,000 shares at 1996............... (1,077)
----------- ------------
Total common stockholders' deficit................ (3,605,851) (28,767,723)
----------- ------------
Total Liabilities, Redeemable Preferred Stock and
Common Stockholders' Deficit..................... $78,052,292 $ 20,471,205
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Net service revenue................... $ 9,814,479 $ 7,883,890 $ 1,737,461
Cost of services...................... 9,256,472 9,075,749 1,454,882
------------ ------------ -----------
Gross margin...................... 558,007 (1,191,859) 282,579
------------ ------------ -----------
Expenses:
Sales and marketing................. 12,612,172 5,867,200 2,869,463
General and administrative.......... 20,664,612 11,100,661 4,685,894
------------ ------------ -----------
Operating loss........................ (32,718,777) (18,159,720) (7,272,778)
------------ ------------ -----------
Other income (expense):
Interest income..................... 1,376,429 586,946 152,099
Interest expense.................... (1,797,112) (733,566) (26,110)
Gain on sale of switch-based
facilities......................... 8,078,901
Other income........................ 13,968 59,314
------------ ------------ -----------
Other income (expense)--net....... 7,672,186 (87,306) 125,989
------------ ------------ -----------
Net loss before minority interest..... (25,046,591) (18,247,026) (7,146,789)
Minority interest share in loss of
USNCN................................ 150,000
------------ ------------ -----------
Net loss.............................. $(25,046,591) $(18,097,026) $(7,146,789)
============ ============ ===========
Accumulated preferred dividends....... $ 3,690,976 $ 3,103,000 $ 707,000
============ ============ ===========
Net loss per common share............. $ (5.63) $ (7.01) $ (6.56)
============ ============ ===========
Weighted average common and common
equivalent shares outstanding........ 5,102,330 3,025,200 1,196,780
============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
SERIES
9% PIK SERIES A A-2 ACCUMULATED ADDITIONAL
PREFERRED PREFERRED PREFERRED UNPAID PAID-IN-
STOCK STOCK STOCK DIVIDENDS CAPITAL TOTAL
--------- --------- --------- ----------- ----------- -----------
<S> <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 $15,229,024
Costs incurred related
to issuance of stock. (630,474) (630,474)
Accumulated unpaid
preferred dividends.. $ 707,000 707,000
------- ---------- ----------- -----------
Balance, December 31,
1994................... 16,200 707,000 14,582,350 15,305,550
Issuance of 26,235
shares of Series A-2
10% Senior Cumulative
preferred stock...... $26,235 26,208,765 26,235,000
Costs incurred related
to issuance of stock. (247,510) (247,510)
Accumulated unpaid
preferred dividends.. 3,103,000 3,103,000
------- ------- ---------- ----------- -----------
Balance, December 31,
1995................... 16,200 26,235 3,810,000 40,543,605 44,396,040
Accumulated unpaid
preferred dividends.. 3,465,976 3,465,976
Conversion of Series A
and A-2 Preferred
Stock to Class A
Common Stock......... (16,200) (26,235) (7,275,976) (40,543,605) (47,862,016)
Issuance of 10,000
shares of 9% PIK
preferred stock...... $10,000 9,990,000 10,000,000
Costs incurred related
to issuance of 9% PIK
preferred stock...... (179,815) (179,815)
Accumulated unpaid
preferred dividends
on 9% PIK preferred
stock................ 225,000 225,000
------- ------- ------- ---------- ----------- -----------
Balance, December 31,
1996................... $10,000 $ 225,000 $ 9,810,185 $10,045,185
======= ======= ======= ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD FROM APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON PAID-IN ACCUMULATED STOCK HELD
STOCK CAPITAL DEFICIT IN TREASURY TOTAL
------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, April 20, 1994.
Issuance of 1,778,400
shares of common
stock................ $17,784 $ 220,655 $ $238,439
Costs incurred related
to issuance of stock. (214,860) (214,860)
Accumulated unpaid
preferred dividends.. $ (707,000) (707,000)
Net loss.............. (7,146,789) (7,146,789)
------- ----------- ------------ ------------
Balance, December 31,
1994................... 17,784 5,795 (7,853,789) (7,830,210)
Issuance of 1,358,590
shares of common
stock................ 13,590 251,413 265,003
Costs incurred related
to issuance of stock. (2,490) (2,490)
Accumulated unpaid
preferred dividends.. (3,103,000) (3,103,000)
Net loss.............. (18,097,026) (18,097,026)
------- ----------- ------------ ------------
Balance, December 31,
1995................... 31,374 254,718 (29,053,815) (28,767,723)
Conversion of Series A
and A-2 Preferred
Stock to Class A
Common Stock......... 26,763 47,835,253 47,862,016
Issuance of 50,000
shares of common
stock................ 500 5,000 5,500
Compensation grants of
220,000 shares of
common stock......... 2,200 30,800 33,000
Repricing of common
stock................ 11,016 (11,016)
Repurchase of 10,000
shares of common
stock................ $(1,077) (1,077)
Issuance of stock
warrants............. 6,000,000 6,000,000
Accumulated unpaid
preferred dividends.. (3,690,976) (3,690,976)
Net loss.............. (25,046,591) (25,046,591)
------- ----------- ------------ ------- ------------
Balance, December 31,
1996................... $71,853 $54,114,755 $(57,791,382) $(1,077) $ (3,605,851)
======= =========== ============ ======= ============
</TABLE>
F-12
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(25,046,591) $(18,097,026) $(7,146,789)
Adjustments to reconcile net loss to
net cash flows from operating
activities:
Depreciation and amortization..... 558,236 1,288,991 159,685
Amortization of organization costs
and intangibles.................. 1,770,936 969,271 26,376
Interest accreted on debt
obligation....................... 1,654,394
Stock compensation award expense.. 33,000
Gain on disposal of assets........ (8,078,901) (16,274)
Changes in:
Accounts receivable............. (1,819,956) (322,245) (862,208)
Interest receivable............. (188,098) (61,015)
Prepaid expenses................ (38,468) 13,082 (37,624)
Other receivables............... (172,567)
Other assets.................... (14,948)
Account payable................. 4,819,840 1,578,757 953,465
Accrued expenses and other
liabilities.................... 2,424,642 338,412 766,532
------------ ------------ -----------
Net cash flows from operating
activities................... (24,098,481) (14,308,047) (6,140,563)
------------ ------------ -----------
Cash flows from investing activities:
Purchase of property and equipment.. (2,258,969) (1,739,542) (1,728,327)
Proceeds from sale of assets........ 9,532,600
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................... 7,273,631 (2,555,625) (1,708,054)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from Senior Notes.......... 30,203,375
Proceeds from Convertible Notes..... 27,644,400
Debt acquisition costs.............. (2,920,239)
Issuance of preferred stock......... 10,000,000 26,235,000 14,850,000
Issuance of common stock............ 5,500 265,003 150,000
Costs incurred related to issuance
of stock........................... (179,815) (250,000) (845,334)
Repurchase of common stock.......... (1,077)
Deposits............................ (494,603) (20,855) (555,270)
Proceeds from borrowings............ 180,000
Payments on assumed indebtedness.... (350,412) (1,459,458)
Proceeds from notes payable......... 46,645 73,504
Repayment of notes payable.......... (59,512) (71,588) (8,330)
Repayment of capital lease
obligation......................... (158,427) (155,272) (16,731)
------------ ------------ -----------
Net cash flows from financing
activities................... 63,689,190 24,589,475 13,827,839
------------ ------------ -----------
Net increase in cash.................. 46,864,340 7,725,803 5,979,222
Cash and cash equivalents--Beginning
of year.............................. 13,705,025 5,979,222
------------ ------------ -----------
Cash and cash equivalents--End of
year................................. $ 60,569,365 $ 13,705,025 $ 5,979,222
============ ============ ===========
Supplemental cash flow information--
See Note 3
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
1. ORGANIZATION AND ACQUISITIONS
USN Communications, Inc., formerly United USN, Inc. ("USN") 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 and September 1996, USN received
additional capital contributions of approximately $26 million and $10 million,
respectively. USN holds controlling investments in three companies: US Network
Corporation, USN Communications Northeast, Inc. (formerly United
Telemanagement Services, Inc.), and USN Communications Midwest, Inc. USN and
its subsidiaries operate in a single business segment, primarily as a reseller
of a broad range of telecommunications services in various cities in the
Midwest and the Northeast regions of the U.S.
On April 20, 1994, USN purchased US Network Corporation ("US Network") and
its 100% subsidiary, FoneNet/Ohio, Inc., in exchange for 1,350 shares of USN's
preferred stock and 315,000 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. The consolidated financial statements include the
results of operations of US Network since April 20, 1994.
In July 1994, USN purchased a 50.1% ownership interest in USN Communications
Northeast, Inc. ("USNCN") for approximately $2 million. USNCN provides
telecommunications services to business customers in New York and
Massachusetts. USN 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. In December
1995, USN's ownership in USNCN increased to 83.9% as a result of additional
investments approximating $9.4 million. In July 1996, USN's ownership in USNCN
increased to 100% as a result of an additional investment of $150,000.
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, 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). The consolidated statement of operations for the year ended
December 31, 1996 and 1995 include Quest's revenues and expenses from the
Acquisition date forward.
In January 1995, USN Communications Midwest, Inc. ("USNCM") was incorporated
as a wholly owned subsidiary of USN. USNCM began operations in July 1996 and
provides telecommunication services to business customers in Illinois, Ohio
and Michigan.
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.
F-14
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of USN Communications, 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. For the operating unit which the Company has
operated as a commission agent only, revenues are recorded at the net
commissions earned.
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.
Recourse Provisions--Until June 1996, USNCN utilized a third-party billing
and collection agency (the "Agency") to process and factor its accounts
receivable, yet retained the risk of loss on amounts that were deemed to be
uncollectible in the normal course of business. The Agency charged USNCN an
allowance for estimated bad debts on factored accounts receivable, subject to
the recourse provisions, using prior collection experience and industry
statistics. Adjustments were made between actual loss experience and estimated
bad debt expenses on a periodic basis by the Agency. At December 31, 1996,
there were no factored receivables subject to such adjustment. At December 31,
1995, factored receivables of approximately $828,000 were subject to such
adjustment.
Fair Value of Financial Instruments--The carrying values of financial
instruments included in current assets and liabilities approximate fair values
due to the short-term maturities of these instruments. The carrying values of
long-term debt and notes payable are reasonable estimates of their fair values
as the interest rates approximate rates currently available to the Company for
instruments with similar terms and remaining maturities.
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. Computer equipment is depreciated
over three 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 on a straight-line basis over five years. The intangible assets
associated with the acquisition of Quest are being amortized on a straight-
line basis over two years. Debt acquisition costs are being amortized over the
life of the related debt. The value of the warrants issued with the Senior
Notes are being amortized over the life of those notes.
Stock-based Compensation--During 1996, the Company implemented Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" ("SFAS No. 123"). SFAS No. 123 allows the Company to recognize
compensation under the "intrinsic value" method prescribed by Accounting
Principles Board Opinion No. 25, and requires the pro forma disclosure of net
income and earnings per share as if the fair value method had been applied.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation.
F-15
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
Capital lease obligations incurred (Notes
5
and 9).................................. $591,967 $3,398,105 $3,137,119
======== ========== ==========
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 1)................. 3,104,588
----------
Liabilities assumed...................... $2,689,862
==========
Note payable incurred to finance
insurance policies (Note 11)............ $ 58,650 $ 72,000
========== ==========
Fair value of US Network's noncash assets
acquired................................ $ 623,659
Common and preferred stock issued in
connection with the acquisition (Note
1)...................................... 467,463
----------
Liabilities assumed...................... $ 156,196
==========
Note payable to UTS minority shareholder. $ 149,708
Proceeds received upon issuance of note
payable................................. (73,504)
----------
Note receivable from UTS minority
shareholder............................. $ 76,204
==========
</TABLE>
Cash paid for interest in 1996 and 1995 was approximately $32,000 and
$613,000, respectively. No cash was paid in 1994 for interest and in 1996,
1995 and 1994 for income taxes.
4. RELATED PARTY TRANSACTIONS
Notes receivable at December 31, 1996 includes a $75,000 non-interest
bearing note due to the Company from a corporate officer.
F-16
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. 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 transaction closed on February 29, 1996
and a gain of approximately $8.1 million was realized and recorded at that
time. The Company will continue to serve its Ohio customer base as a reseller
of telecommunication services.
The net assets held at December 31, 1995 in conjunction with this sale were
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 were assumed by
the buyer. The Company remains contingently liable on capital and operating
leases assumed by the buyer until expiration.
6. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Furniture and equipment........................... $3,940,719 $1,364,479
Leasehold improvements............................ 392,601 117,902
---------- ----------
4,333,320 1,482,381
Less accumulated depreciation..................... (825,970) (267,734)
---------- ----------
Total......................................... $3,507,350 $1,214,647
========== ==========
</TABLE>
F-17
<PAGE>
USN COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. OTHER ASSETS
Other assets at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Stock warrants (net of accumulated amortization:
1996--$214,286).................................. $ 5,785,714
Debt acquisition costs (net of accumulated
amortization: 1996--$98,064)..................... 2,822,175
Deposits.......................................... 1,044,098 $ 426,902
Goodwill (net of accumulated amortization:
1996--$2,337,015; 1995--$923,850) ............... 588,819 2,001,985
Organization costs (net of accumulated
amortization:
1996--$118,853; 1995--$73,432)................... 108,257 153,677
Other............................................. 13,375 98,691
----------- ----------
Total............................................. $10,362,438 $2,681,255
=========== ==========
</TABLE>
8. ACCRUED EXPENSES
Accrued expenses at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Payroll and benefits................................ $1,515,197 $ 548,775
Professional services............................... 814,388 163,540
Excise taxes........................................ 575,790 117,812
Rent................................................ 6,600 4,380
Interest payable.................................... 21,764
Other............................................... 264,787 249,739
---------- ----------
Total............................................... $3,176,762 $1,106,010
========== ==========
</TABLE>
9. CAPITAL LEASE OBLIGATIONS
The Company leases certain furniture and equipment under capital leases at
December 31 as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Furniture and equipment............................... $841,359 $221,855
Less accumulated amortization......................... (261,905) (73,003)
-------- --------
Total................................................. $579,454 $148,852
======== ========
</TABLE>
Future minimum lease payments at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.......................... $ 341,883
1998.......................... 288,865
1999.......................... 54,422
---------
Total minimum lease payments.. 685,170
Less imputed interest......... (95,046)
---------
Present value of minimum lease
payments..................... 590,124
Less current portion.......... (277,844)
---------
Long-term lease obligations... $ 312,280
=========
</TABLE>
F-18
<PAGE>
USN COMMUNICATIONS, 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, 1996 are as follows:
<TABLE>
<S> <C>
1997......................... $ 2,113,254
1998......................... 2,206,947
1999......................... 1,737,457
2000......................... 1,530,196
Thereafter................... 2,531,822
-----------
Total.................... $10,119,676
===========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 and the period
from April 20, 1994 to December 31, 1994 was approximately $1,024,000,
$867,000 and $214,000, respectively.
11. NOTES PAYABLE
The Company issued a note payable of $58,650 in 1995 to finance an insurance
policy. The note was payable in nine monthly installments through August 1996.
Interest was payable at 6.45%. The principal balance was paid in full at
December 31, 1996.
In 1995, the Company issued an additional 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, 1996 and
1995, the outstanding principal balances were $37,573 and $44,777,
reepectively.
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, 1996 and 1995 total $398,676 and $749,088, respectively. The
notes require quarterly principal and interest payments in 1996 and 1997 and
in the first quarter of 1998.
Maturities on notes payable are as follows:
<TABLE>
<S> <C>
1997............................ $386,522
1998............................ 27,204
1999............................ 8,474
2000............................ 9,178
2001............................ 4,871
--------
Total....................... $436,249
========
</TABLE>
12. 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 ("Senior Notes") due 2003 and warrants to purchase 615,500 shares of
Class A Common Stock, and 36,000 units consisting of $36 million aggregate
principal amount at maturity of 9% Convertible Subordinated Notes
("Convertible Notes") due 2004.
The Senior Notes were sold at a unit price, before commissions, of $622.75
per $1,000 face amount. 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.
F-19
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Convertible Notes were sold at a unit price, before commissions, of
$767.90 per $1,000 face amount. 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.
13. REDEEMABLE PREFERRED STOCK
The Board of Directors authorized 20,000 shares of Series A 10% Senior
Cumulative Preferred Stock ("Series A") and 30,000 shares of Series A-2 10%
Senior Cumulative Preferred Stock ("Series A-2"), with par values of $1 in
1994 and 1995, respectively. On December 31, 1995, 16,200 shares of Series A
and 26,235 shares of Series A-2 were outstanding.
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 shares of Class A Common Stock. The conversion was consummated on
September 30, 1996 and 2,676,300 shares of Class A Common Stock were issued in
exchange for the outstanding Series A and Series A-2 Preferred Stock,
including dividends accrued through the conversion date.
In September 1996, the Board of Directors authorized the issuance of up to
30,000 shares of $1 par value preferred stock designated as 9% Cumulative
Convertible Pay-in-Kind Preferred Stock ("9% Preferred Stock"). In connection
with the Private Placement Offering (Note 12), the Company issued 10,000
shares of its 9% Preferred Stock to its existing shareholders, for an
aggregate purchase price of $10.0 million.
Dividends--Dividends on the 9% Preferred Stock accrue semiannually at a rate
of 9% per annum, are fully cumulative and are payable through the issuance of
additional shares of 9% Preferred Stock. No dividends have been declared or
paid on the preferred stock.
Liquidation--Upon any liquidation, dissolution or winding up of the Company,
holders of the 9% Preferred Stock will be entitled to receive their full
liquidation preference and stated value of $1,000 per share, together with
accrued and unpaid dividends, prior to the distribution of any assets of the
Company to the holders of Class A Common Stock.
Redemption--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.
Conversion--Each share of 9% Preferred Stock is convertible into 7.0623
shares of Class A Common Stock, at any time, in whole or in part, at the
option of the holders thereof.
14. COMMON STOCK
In 1996, a 1995 transaction in which Class A Common Stock was issued was
repriced, whereby the number of shares issued increased from 1,358,990 to
2,460,560 and the purchase price decreased from $0.195 to $0.1077 per share.
Dividends--The holders of Class A Common Stock are entitled to receive
dividends 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
Class A Common Stock or other distributions may be subject to the declaration
and payment of full cumulative dividends on outstanding shares of Preferred
Stock.
F-20
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Liquidation--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.
15. STOCK OPTION PLAN
The Company has granted options to acquire shares of common stock to certain
officers and other employees under the 1994 Stock Option Plan. These options
generally become exercisable at a rate of 25% every six months over a period
of two years after the date of grant, although with respect to certain grants
no vesting occurs until twelve months after the grant date.
In connection with the financing described in Note 12 and the issuance of
the 9% Preferred Stock described in Note 13, the Company granted 319,610
options to purchase Class A Common Stock at an exercise price of $0.15 per
share. These options were not issued under the 1994 Stock Option Plan, but
rather were issued pursuant to separate stock option agreements between the
Company and the option holders. 66,370 of these options become exercisable as
the Convertible Notes are converted to Class A Common Stock, and 253,240 of
these options become exercisable as shares of 9% Preferred Stock are converted
to Class A Common Stock.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
PRICE PER PRICE PER PRICE PER
1996 SHARE 1995 SHARE 1994 SHARE
--------- ---------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January
1...................... 190,500 $ 0.11 213,000 $0.11
Granted................. 1,033,240 0.11-9.60 213,000 $0.11
Exercised............... (50,000) 0.11
Cancelled............... (64,750) 0.11 (22,500) 0.11
--------- ------- -------
Outstanding at December
31..................... 1,108,990 0.11-9.60 190,500 0.11 213,000 0.11
========= ======= =======
Options exercisable at
December 31............ 106,620 0.11-0.15 100,240 0.11 --
========= ======= =======
</TABLE>
For pro forma information regarding net loss and loss per common share, the
fair value for the options awarded in 1996 and 1994 was estimated as of the
date of the grant using a Black-Scholes option valuation model with the
following weighted average assumptions for 1996 and 1994, respectively: risk-
free interest rates of 4.95% and 4.97%; dividend yields of 0%; volatility of
0%; and an expected life of the option of ten years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Therefore, in the year
of adoption and subsequently affected years, the effect of applying SFAS 123
for providing pro forma net loss and loss per common share are not likely to
be representative of the effects on reported income in future years. The
effect on the Company's reported net loss, on a pro forma basis, was not
material for 1996, 1995 and 1994.
The Black-Scholes option valuation model used by the Company was developed
for use in estimating the fair value of fully tradable options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. It is management's opinion that the Company's
stock options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
F-21
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1996 or 1995.
17. INCOME TAXES
The Company incurred net losses of $25,046,591, $18,097,026 and $7,146,789
in 1996, 1995 and 1994, respectively. Accordingly, no provision for current
Federal or state income taxes has been made to the financial statements.
The Company's deferred tax asset components are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Net operating loss carry-forwards............. $ 18,285,000 $ 9,121,000
Accrued liabilities and asset valuation
reserves..................................... 172,000 195,000
Amortization of intangibles................... 790,000 309,000
------------ -----------
Subtotal.................................. 19,247,000 9,625,000
Valuation allowance........................... (19,247,000) (9,625,000)
------------ -----------
Total..................................... $ -- $ --
============ ===========
</TABLE>
As of December 31, 1996 and 1995 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.
At December 31, 1996, the Company had net operating loss carry-forwards for
income tax purposes of approximately $46,120,000. The expiration periods for
utilizing these operating losses begin in 2009 for Federal tax purposes. Of
the net operating loss carry-forwards available at December 31, 1996,
$12,286,000 can be applied only against future taxable income of USNCN. In
addition, if the Company or the Company's subsidiaries experience an
"ownership change" within the meaning of Section 382 of the Internal Revenue
Code of 1986, as amended (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.
F-22
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. MINORITY INTEREST IN USNCN
In September 1996, all minority shareholders interests' in USNCN were
repurchased, increasing the Company's ownership of USNCN's outstanding common
stock to 100%. Prior to this transaction , no minority interest in USNCN had
been recorded, as losses applicable to the minority interest in USNCN exceeded
the minority interest in the equity capital of USNCN, and there was no
obligation of the minority interest to make good on such losses.
19. COMMITMENTS
In 1995 and 1996 the Company entered into agreements with two independent
telecommunications companies ("TelCos") to allow the Company to resell the
TelCos local telephone service in various regional markets. The agreements
have terms of up to ten years and contain minimum purchase commitments of
local access lines, ranging from zero to 150,000 lines. These commitments are
measured by the number of lines in place on the last day of each 12-month
period. The agreements allow for ramp-up periods before any commitment levels
are required to be met. So long as the Company maintains cumulative net
shortfalls lower than established caps, no payments will be due to the TelCos
other than for normal usage. Even if no lines were sold by the Company, the
earliest required payment for any shortfall amount is in 1999.
In July 1996, the Company entered into an agreement with a third
telecommunications company to allow the Company to resell long distance
telephone service. The agreement is for a term of 33 months and contains an
annual purchase commitment of $12 million, with a minimum monthly commitment
of $600,000 to qualify for the contract rates. The agreement allows for a
ramp-up period before commitment levels are required to be met.
In 1994, USNCN executed an exclusive agreement with an independent
telecommunications company ("TelCo One"), whereby TelCo One allows USNCN to
establish a local private network on its infrastructure in which to provide
service to customers. The majority 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 and access to telephone
switches. The initial term of the agreement expires in 2004.
20. FUTURE OPERATING PLANS
Although the Company had working capital of approximately $52.4 million and
total redeemable preferred stock and common stockholders' deficit of
approximately $6.4 million, projected cash usage in 1997 combined with an
anticipated net loss in 1997, absent the infusion of additional capital
resources, is anticipated to fully deplete the Company's working capital prior
to December 31, 1997. Such events would raise substantial doubt about the
Company's ability to continue as a going concern. Although the Company's
management believes that the Company will be able to raise sufficient funds,
through capital contributions or additional equity or debt financings, to meet
its operating expenses and other cash requirements, there can be no assurance
that the Company would be able to complete such contributions or financing, or
that any such contributions or financing would be completed on terms
satisfactory to the Company.
21. CONTINGENCIES
Loss Contingency--In April 1995, a derivative action was filed by a minority
interest owner of USNCN against the Company and specific officers and
directors. In July 1996, the Company settled the dispute for $1.7 million.
F-23
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gain Contingency--In 1995, USNCN 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. During 1996, USNCN has
recorded $867,000 of this claim as revenue. TelCo One is in the process of
reviewing USNCN's remaining 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.
22. SUBSEQUENT EVENT
On September 4, 1997, the Board of Directors approved a nine-for-one stock
dividend on the Class A Common Stock. Average shares outstanding and all per
share amounts included in the accompanying financial statements and notes are
based on the increased number of shares giving retroactive effect to the stock
dividend.
* * * * *
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED HEREIN OTHER THAN THOSE CON-
TAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESEN-
TATION 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 SO-
LICITATION IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AU-
THORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUAL-
IFIED 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 HEREUN-
DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
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...................................................... 3
Disclosure Regarding Forward-Looking Statements............................ 3
Prospectus Summary......................................................... 4
Recent Developments........................................................ 7
Risk Factors............................................................... 14
Use of Proceeds............................................................ 24
The Exchange Offer......................................................... 25
Capitalization............................................................. 33
Selected Historical Consolidated Financial and Operating Data.............. 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................. 35
Industry Overview: The Local Telecommunications Service Industry........... 41
Business................................................................... 42
Management................................................................. 55
Certain Relationships and Related Transactions............................. 63
Stock Ownership............................................................ 64
Description of the Notes................................................... 65
Description of the Warrants................................................ 95
Certain Other Indebtedness................................................. 99
Certain Federal Income Tax Considerations.................................. 100
Plan of Distribution....................................................... 103
Legal Matters.............................................................. 104
Independent Auditors....................................................... 104
Glossary................................................................... 105
Index to Consolidated Financial Statements................................. F-1
</TABLE>
------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
----------------
PROSPECTUS
----------------
LOGO
USN COMMUNICATIONS,INC.
$152,725,000
14 5/8% SERIES B
SENIOR DISCOUNT NOTES
DUE 2004
NOVEMBER , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
corporation, subject to certain limitations, to indemnify its directors and
officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection
with any suit or proceeding to which they are a party so long as they acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct
to have been unlawful. The Registrant's Certificate of Incorporation and By-
laws provide that the Registrant shall indemnify its directors and such
officers, employees and agents as the Board of Directors may determine from
time to time, to the fullest extent permitted by Section 145 of the DGCL. The
Registrant has entered into indemnification agreements with its directors and
certain of its officers, employees and agents, which provide that the
Registrant shall indemnify such parties pursuant to Section 145 of the DGCL.
Section 102 of the DGCL permits a Delaware corporation to include in its
certificate of incorporation a provision eliminating or limiting a director's
liability to a corporation or its stockholders for monetary damages for
breaches of fiduciary duty. The enabling statute provides, however, that
liability for breaches of the duty of loyalty, acts or omissions not in good
faith or involving intentional misconduct, or knowing violation of the law,
and the unlawful purchase or redemption of stock or payment of unlawful
dividends or the receipt of improper personal benefits cannot be eliminated or
limited in this manner. The Registrant's Certificate of Incorporation and By-
laws include a provision which eliminates, to the fullest extent permitted,
director liability for monetary damages for breaches of fiduciary duty.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
3.2** Amended 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.
3.4** Certificate of Designations, Powers, Rights and Preferences of 9%
Cumulative Convertible Pay-In-Kind Preferred Stock, Series A, of the
Registrant.
4.1 Indenture, dated as of August 15, 1997, by and between the Registrant
and Harris Trust and Savings Bank, as Trustee, for the Registrant's 14
5/8% Senior Discount Notes due 2004.
4.2 Form of the Registrant's 14 5/8% Series B Senior Discount Notes due
2004.
4.3+ 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 Discount Notes due 2004 (the
"Convertible Note Indenture").
4.4 Supplemental Indenture No. 1, dated as of August 12, 1997, by and
between the Registrant and the Trustee, to the Convertible Note
Indenture.
4.5+ Indenture, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Trustee, for the
Registrant's 14% Senior Discount Notes due 2003 (the "14% Senior Note
Indenture").
4.6++ Supplemental Indenture, dated as of March 17, 1997, by and between the
Company and the Trustee to the 14% Senior Note Indenture.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.7 Supplemental Indenture No. 2, dated as of August 18, 1997, by and
between the Company and the Trustee, to the 14% Senior Note
Indenture.
5.1 Legal Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois).
10.1+ Employment Agreement, dated as of July 18, 1996, by and between the
Registrant and J. Thomas Elliott.
10.2+ Employment Agreement, dated as of July 18, 1996, by and between the
Registrant and Ronald W. Gavillet.
10.3++ Employment Agreement, dated as November 18, 1996, by and between the
Company and Gerald J. Sweas.
10.4++ Employment Agreement, dated as of October 21, 1996, by and between
the Company and Ryan Mullaney.
10.5+ Form of Employment Agreement between the Registrant and certain
officers of the Registrant.
10.6 Amended and Restated 1994 Stock Option Plan of the Registrant.
10.7 1997 Omnibus Securities Plan.
10.8+ Consulting Agreement, dated January 24, 1995, by and between the
Registrant and Eugene A. Sekulow.
10.9+ Form of Indemnification Agreement between the Registrant and certain
directors and officers of the Registrant.
10.10+ Promissory Note, dated December 15, 1995, between the Registrant and
J. Thomas Elliott.
10.11+ Purchase Agreement, dated as of April 20, 1994, by and among the
Registrant, CIBC Wood Gundy Ventures, Inc. ("CIBC") and Chemical
Venture Capital Associates ("Chemical").
10.12+ First Amendment to Purchase Agreement, dated as of June 10, 1994, by
and among the Registrant, CIBC, Chemical and Hancock Venture
Partners IV--Direct Fund, L.P. ("Hancock," and together with CIBC
and Chemical, the "Initial Investors").
10.13 Second Amendment to Purchase Agreement, dated as of April 20, 1994,
by and among the Registrant and the Investors.
10.14+ Third Amendment to Purchase Agreement, dated as of November 1, 1994,
by and among the Registrant and the Initial Investors.
10.15+ Fourth Amendment to Purchase Agreement, dated as of June 22, 1995,
by and among the Registrant and the Initial Investors.
10.16+ Stockholders Agreement, dated as of April 20, 1994, by and among the
Registrant, CIBC, Chemical and the stockholders of the Registrant
listed on a schedule attached thereto (the "Stockholders").
10.17+ First Amendment to Stockholders Agreement, dated as of June 10,
1994, by and among the Registrant, the Initial Investors and the
Stockholders.
10.18+ Registration Rights Agreement, dated as of April 20, 1994, by and
among the Registrant, CIBC and Chemical.
10.19+ First Amendment to Registration Rights Agreement, dated as of June
10, 1994, by and among the Registrant and the Initial Investors.
10.20+ Amended and Restated Registration Agreement, dated as of June 22,
1995, by and among the Registrant and the Investors.
10.21 First Amendment to Amended and Restated Registration Agreement,
dated as of October 17, 1997, by and among the Registrant and the
Investors.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.22+ Purchase Agreement, dated as of June 22, 1995, by and among the
Registrant, CIBC, Chemical, Hancock, BT Capital Partners, Inc.,
Northwood Capital Partners LLC and Northwood Ventures (collectively,
the "Investors").
10.23+ First Amendment to Purchase Agreement, dated as of July 21, 1995, by
and among the Registrant, the Investors and Enterprises &
Transcommunications, L.P. (collectively, the "Original Purchasers").
10.24+ Second Amendment to Purchase Agreement, dated as of March 5, 1996,
by and among the Registrant and the Original Purchasers.
10.25 Third Amendment to Purchase Agreement, dated as of October 17, 1997,
by and among the Registrant and the Initial Investors.
10.26+ Amended and Restated Stockholders Agreement, dated as of June 22,
1995, by and among the Registrant and the Investors.
10.27+ Amended and Restated Stockholders Agreement, dated as of July 21,
1995, by and among the Registrant, the Original Purchasers and the
Stockholders.
10.28 Purchase Agreement, dated as of October 17, 1997, by and among the
Registrant, Fidelity International, Inc. and Fidelity Investors
Limited Partners.
10.29+ Purchase Agreement, dated as of September 25, 1996, by and among the
Registrant and the purchasers named therein, relating to the 9%
Preferred Stock.
10.30+ Asset Purchase Agreement, dated as of June 13, 1995, by and among
United Telemanagement Services, Inc. ("UTS"), Quest United, Inc.
("Quest United"), Quest America Management, Inc. ("QAM"'), Edward H.
Lavin, Jr. ("Lavin"), J. Thomas Elliott ("Elliott") and Quest
America, LP ("Quest").
10.31+ Amendment No. 1 to Asset Purchase Agreement, dated as of October 27,
1995, by and among UTS, Quest United, QAM, Lavin, Elliott, and
Quest.
10.32+ Resale Local Exchange Service Agreement, dated July 8, 1996, by and
between New York Telephone Company and UTS.
10.33+ Resale Local Exchange Service Confirmation of Service Order, dated
October 31, 1995, by and between the Registrant and Ameritech
Information Industry Services ("Ameritech") on behalf of Illinois
Bell Telephone Company.
10.34+ Agreement for Resale Services, dated as of April 26, 1996, by and
between the Registrant and Ameritech on behalf of Ameritech
Michigan.
10.35+ Local Exchange Telecommunications Services Resale Agreement, dated
May 21, 1996, by and between the Registrant and Ameritech on behalf
of The Ohio Bell Telephone Company.
10.36+ Registration Rights Agreement, dated as of September 30, 1996, by
and among the Registrant and the initial purchasers named therein.
10.37+ Warrant Agreement, dated as of September 30, 1996, by and between
the Registrant and Harris Trust and Savings Bank, as warrant agent,
and Amendment 1 thereto.
10.38 Consent Warrant Agreement, dated as of August 25, 1997, by and
between the Registrant and Harris Trust and Savings Bank, as Warrant
Agent.
10.39 Registration Rights Agreement dated as of August 15, 1997, by and
among the Registrant and the Initial Purchasers named therein.
10.40 Warrant Agreement, dated as of August 15, 1997, by and between the
Registrant and Harris Trust and Savings Bank, as Warrant Agent.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 Indenture.
25.2** Powers of Attorney (included on signature page).
99.1** Form of Letter of Transmittal.
99.2** Form of Notice of Guaranteed Delivery.
99.3** Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.4** Form of Letter to Clients.
99.5** Guidelines for Certification of Taxpayer Identification Number on
Form W-9.
</TABLE>
- --------
**Previously filed.
+Incorporated by reference to the Registrant's Registration Statement on
Form S-4, file number 333-16265.
++Incorporated by reference to the Registrant's Form 10-K, file number 333-
16265, filed on March 31, 1997.
(b) Financial Data Schedules
None.
All schedules are omitted because the required information is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the financial statements or notes thereto.
ITEM 22. UNDERTAKINGS
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
change 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;
II-4
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at 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 insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
II-5
<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 21, 1997.
USN COMMUNICATIONS, INC.
/s/ J. Thomas Elliott
By: _________________________________
J. Thomas Elliott
Chairman of the Board,
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 IN THE
CAPACITIES INDICATED ON NOVEMBER 21, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ J. Thomas Elliott Chairman of the Board, November 21, 1997
____________________________________ President and Chief
J. Thomas Elliott Executive Officer
(Principal Executive
Officer)
Richard J. Brekka* Director November 21, 1997
____________________________________
Richard J. Brekka
Donald J. Hofmann, Jr.* Director November 21, 1997
____________________________________
Donald J. Hofmann, Jr.
Paul S. Lattanzio* Director November 21, 1997
____________________________________
Paul S. Lattanzio
Thomas C. Brandenburg* Director November 21, 1997
____________________________________
Thomas C. Brandenburg
William A. Johnston* Director November 21, 1997
____________________________________
William A. Johnston
Eugene A. Sekulow* Director November 21, 1997
____________________________________
Eugene A. Sekulow
Dean M. Greenwood* Director November 21, 1997
____________________________________
Dean M. Greenwood
Ian Kidson* Director November 21, 1997
____________________________________
Ian Kidson
/s/ Gerald J. Sweas Executive Vice President and November 21, 1997
____________________________________ Chief Financial Officer
Gerald J. Sweas (Principal Financial
Officer and Principal
Accounting Officer)
</TABLE>
/s/ Thomas A. Monson November 21, 1997
*By ______________________
Thomas A. Monson
Attorney-in-fact
II-6
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
TO THE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
UNITED USN, INC.
--------------------------------
Pursuant to Sections 228 and 242
of the General Corporation Law
of the State of Delaware
--------------------------------
UNITED USN, INC., a Delaware corporation (hereinafter the "Corporation"),
does hereby certify as follows:
FIRST: Article One of the Corporation's Amended and Restated Certificate
of Incorporation is hereby amended to read in its entirety as set forth below:
ARTICLE ONE
-----------
The name of the corporation is USN Communications, Inc. (the
"Corporation").
SECOND: The foregoing amendment was duly adopted in accordance with
Sections 228 and 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, United USN, Inc. has caused this Certificate of
Amendment to be executed in its corporate name this 19th day of March, 1997.
UNITED USN, INC.
By /s/ J. Thomas Elliott
-------------------------------------
J. Thomas Elliott
President and Chief Executive Officer
ATTEST:
By /s/ Thomas A. Monson
------------------------
Thomas A. Monson
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
USN COMMUNICATIONS, INC.
----------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
----------------------------------------
USN COMMUNICATIONS, INC., a Delaware corporation (hereinafter called
the "Corporation"), does hereby certify as follows:
FIRST: The first sentence of ARTICLE FOUR of the Corporation's
Amended and Restated Certificate of Incorporation is hereby amended to read in
its entirety as set forth below:
"The total number of shares of stock which the Corporation has
authority to issue is 5,300,000 shares, 5,000,000 of which shall be Class A
Common Stock, with a par value of $.01 per share, with one vote per share,
50,000 of which shall be Class B Common Stock, with a par value of $.01 per
share, with no voting rights except when required by law, and 250,000 of
which shall be Preferred Stock, with a par value of $1.00 per share."
SECOND: The foregoing amendment was duly adopted in accordance with
Section 242 of the General Corporation Law of the State of Delaware.
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:15 PM 08/13/1997
971271641 - 2392470
<PAGE>
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
UNITED USN, INC.
ARTICLE ONE
-----------
The name of the corporation is United USN, Inc. (the "Corporation").
The address of the Corporation's registered office in the State of Delaware
is 11th floor, Rodney Square North, 11th and Market Streets, County of New
Castle, Wilmington, Delaware 19801. The name of its registered agent at such
address is Corporation Guarantee and Trust Company.
ARTICLE THREE
-------------
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
------------
The total number of shares of stock which the Corporation has authority to
issue is 2,650,000 shares, 2,500,000 of which shall be Class A Common Stock,
with a par value of $.01 per share, with one vote per share, 50,000 of which
shall be Class B Common Stock with a par value of $.01 per share, with no voting
rights except when required by law, and 100,000 of which shall be Preferred
Stock, with a par value of $1.00 per share. Except as to voting rights, the
rights of the Class A Common Stock and the Class B Common Stock, including
without limitation rights regarding payment of dividends, distributions and
liquidations, will be identical in all respects. The holders of the Class A
Common Stock shall have the right, upon 5 days written notice to the
Corporation, to convert their shares of Class A Common Stock into shares of
Class B Common Stock on a one-for-one conversion basis.
The board of directors of the Corporation (the "Board of Directors") is
expressly authorized, at any time and from time to time, to provide for the
issuance of shares of Preferred Stock in one or more series with such
designations, preferences and relative, participating, optional or other special
rights, and
<PAGE>
such qualifications, limitations or restrictions thereof, as shall be expressed
in the resolution or resolutions providing for the issuance thereof adopted by
the Board of Directors (a "Preferred Stock Designation") and as are not
inconsistent with this Certificate of Incorporation or any amendment hereto, and
as may be permitted by the General Corporation Law of Delaware. Except as
otherwise expressly required by law and except for such voting powers as may be
stated in a Certificate of Designations with respect to any series of Preferred
Stock of the Corporation, the holders of any such series shall have no voting
power whatsoever.
ARTICLE FIVE
------------
The Corporation is to have perpetual existence.
ARTICLE SIX
-----------
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter or repeal the
By-laws of the Corporation.
ARTICLE SEVEN
-------------
Meetings of stockholders of the Corporation may be held within or without
the State of Delaware, as the Bylaws of the Corporation may provide. The books
of the Corporation may be kept outside the State of Delaware at such place or
places as may be designated from time to time by the Board of Directors or in
the By-laws of the Corporation. Election of directors need not be by written
ballot unless the By-laws of the Corporation so provide.
ARTICLE EIGHT
-------------
The Corporation shall indemnify, to the fullest extent permitted by Section
145 of the General Corporation Law of Delaware, as amended from time to time,
all persons whom it may indemnify pursuant thereto. The personal liability of a
director of the Corporation to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director shall be limited to the
fullest extent permitted by the General Corporation Law of the State of
Delaware, as it now exists or may hereafter be amended. Any repeal or
modification of this paragraph by the stockholders of the Corporation shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
ARTICLE NINE
------------
The Corporation expressly elects not to be governed by Section 203 of the
General Corporation Law of the State of Delaware.
2
<PAGE>
ARTICLE TEN
-----------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation in the manner now or
hereafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
3
<PAGE>
EXHIBIT 4.1
- --------------------------------------------------------------------------------
USN COMMUNICATIONS, INC.
$204,725,000
14 5/8% SENIOR DISCOUNT NOTES DUE 2004
INDENTURE
Dated as of August 15, 1997
HARRIS TRUST AND SAVINGS BANK,
Trustee
- --------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE TABLE
Reconciliation and tie between the Trust Indenture Act of 1939, as amended,
and the Indenture, dated as of August 15, 1997.
<TABLE>
<CAPTION>
Trust
Indenture
Act Indenture
Section Section
--------- ---------
<S> <C>
(S)310 (a)(1).......................................... 7.10
(a)(2).......................................... 7.10
(a)(3).......................................... N.A.
(a)(4).......................................... N.A.
(a)(5).......................................... 7.10
(b)............................................. 7.08; 7.10
(c)............................................. N.A.
(S)311 (a)............................................. 7.11
(b)............................................. 7.11
(c)............................................. N.A.
(S)312 (a)............................................. 7.06(a);
7.06(b)
(b)............................................. 7.06(c)
(c)............................................. 7.06(d)
(S)313 (a)............................................. 7.06(e)
(b)............................................. N.A.
(c)............................................. 7.06(e);
7.06(f)
(d)............................................. 7.06
(S)314 (a)............................................. 4.18; 4.19
(b)............................................. N.A.
(c)(1).......................................... 1.04; 12.03;
12.03
(c)(2).......................................... 1.04; 2.02;
12.03
(c)(3).......................................... N.A.
(d)............................................. N.A.
(e)............................................. 12.04
(f)............................................. N.A.
(S)315 (a)............................................. 7.01(b)
(b)............................................. 7.05(a)
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(c)............................................. 7.01(a)
(d)............................................. 7.01(c)
(e)............................................. 6.10
(S)316 (a) (last sentence)............................. 2.08
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Trust
Indenture
Act Indenture
Section Section
------- ---------
<S> <C>
(a)(1)(A)............................................. 6.05
(a)(1)(B)............................................. 6.04
(a)(2)................................................ N.A.
(b)................................................... 6.07
(c)................................................... 9.05
(S)317 (a)(1)................................................ 6.03
(a)(2)................................................ 6.08
(b)................................................... 2.04
(S)318 (a)................................................... 12.01
</TABLE>
Note: This reconciliation and tie shall not, for any purpose, be deemed to
be part of the Indenture.
(iii)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION................................ 1
SECTION 1.01. Definitions...................................................................... 1
SECTION 1.02. Incorporation by Reference of Trust Indenture Act................................ 24
SECTION 1.03. Rules of Construction............................................................ 25
SECTION 1.04. Form of Documents Delivered to Trustee........................................... 26
SECTION 1.05. Acts of Holders.................................................................. 26
ARTICLE II - THE SENIOR NOTES...................................................................... 28
SECTION 2.01. Form and Dating.................................................................. 28
SECTION 2.02. Execution and Authentication..................................................... 32
SECTION 2.03. Registrar and Paying Agent....................................................... 33
SECTION 2.04. Paying Agent to Hold Money in Trust.............................................. 34
SECTION 2.05. Global Notes..................................................................... 35
SECTION 2.06. Transfer and Exchange............................................................ 35
SECTION 2.07. Replacement Notes................................................................ 39
SECTION 2.08. Outstanding Notes................................................................ 40
SECTION 2.09. Temporary Notes.................................................................. 40
SECTION 2.10. Cancellation..................................................................... 40
SECTION 2.11. Payment of Interest; Interest Rights Preserved................................... 41
SECTION 2.12. Authorized Denominations......................................................... 42
SECTION 2.13. Computationof Interest, etc...................................................... 42
SECTION 2.14. Persons Deemed Owners............................................................ 42
SECTION 2.15. CUSIP Numbers.................................................................... 42
ARTICLE III - REDEMPTION........................................................................... 42
SECTION 3.01. Notice to Trustee................................................................ 42
SECTION 3.02. Selection of Notes to be Redeemed................................................ 43
SECTION 3.03. Notice of Redemption............................................................. 43
SECTION 3.04. Effect of Notice of Redemption................................................... 44
SECTION 3.05. Deposit of Redemption Price...................................................... 44
SECTION 3.06. Notes Redeemed in Part........................................................... 45
SECTION 3.07. Optional Redemption.............................................................. 45
</TABLE>
(iv)
<PAGE>
<TABLE>
<S> <C>
ARTICLE IV - COVENANTS............................................................................ 46
SECTION 4.01. Payment of Notes................................................................ 46
SECTION 4.02. Maintenance of Office or Agency................................................. 46
SECTION 4.03. Money for the Note Payments to be Held in Trust................................. 47
SECTION 4.04. Corporate Existence............................................................. 47
SECTION 4.05. Maintenance of Property......................................................... 47
SECTION 4.06. Payment of Taxes and Other Claims............................................... 47
SECTION 4.07. Repurchase at the Option of Holders upon a Change of Control.................... 48
SECTION 4.08. Limitation on Asset Sales....................................................... 50
SECTION 4.09. Limitation on Indebtedness...................................................... 55
SECTION 4.10. Limitation on Issuance of Guarantees by Restricted Subsidiaries................. 57
SECTION 4.11. Limitation on Liens............................................................. 57
SECTION 4.12. Limitation on Sale and Leaseback Transactions................................... 58
SECTION 4.13. Restricted Payments............................................................. 58
SECTION 4.14. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries... 61
SECTION 4.15. Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries..... 62
SECTION 4.16. Transactions with Affiliates.................................................... 63
SECTION 4.17. Restricted and Unrestricted Subsidiaries........................................ 64
SECTION 4.18. Reports......................................................................... 65
SECTION 4.19. Compliance Certificate; Notice of Default or Event of Default................... 65
SECTION 4.20. Issuance of Contingent Warrants................................................. 66
SECTION 4.21. Limitations on Line of Business................................................. 66
SECTION 4.22. [INTENTIONALLY OMITTED]......................................................... 66
SECTION 4.23. Waiver of Certain Covenants..................................................... 66
ARTICLE V - CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER.................................. 66
SECTION 5.01. Merger, Consolidation or Sale of Assets......................................... 66
SECTION 5.02. Successor Corporation Substituted............................................... 68
ARTICLE VI - DEFAULTS AND REMEDIES................................................................ 68
SECTION 6.01. Events of Default............................................................... 70
SECTION 6.02. Acceleration.................................................................... 70
SECTION 6.03. Other Remedies.................................................................. 71
SECTION 6.04. Waiver of Existing Defaults..................................................... 72
SECTION 6.05. Control by Majority............................................................. 72
SECTION 6.06. Limitation on Suits............................................................. 72
</TABLE>
(v)
<PAGE>
<TABLE>
<S> <C>
SECTION 6.07. Rights of Holders to Receive Payment............................................. 73
SECTION 6.08. Trustee May File Proofs of Claim................................................. 73
SECTION 6.09. Priorities....................................................................... 74
SECTION 6.10. Undertaking for Costs............................................................ 75
SECTION 6.11. Waiver of Usury, Stay or Extension Laws.......................................... 75
SECTION 6.12. Trustee May Enforce Claims Without Possession of the Notes....................... 75
SECTION 6.13. Restoration of Rights and Remedies............................................... 75
SECTION 6.14. Rights and Remedies Cumulative................................................... 75
SECTION 6.15. Delay or Omission Not Waiver..................................................... 76
ARTICLE VII - TRUSTEE.............................................................................. 76
SECTION 7.01. Duties of Trustee................................................................ 76
SECTION 7.02. Rights of Trustee................................................................ 77
SECTION 7.03. Individual Rights of Trustee..................................................... 78
SECTION 7.04. Trustee's Disclaimer............................................................. 78
SECTION 7.05. Notice of Defaults............................................................... 78
SECTION 7.06. Preservation of Information; Reports by Trustee to Holders....................... 78
SECTION 7.07. Compensation and Indemnity....................................................... 79
SECTION 7.08. Replacement of Trustee........................................................... 80
SECTION 7.09. Successor Trustee by Merger...................................................... 82
SECTION 7.10. Eligibility; Disqualification.................................................... 83
SECTION 7.11. Preferential Collection of Claims Against Company................................ 83
ARTICLE VIII - DEFEASANCE........................................................................... 84
SECTION 8.01. Company's Option to Effect Legal Defeasance or Covenant Defeasance............... 84
SECTION 8.02. Legal Defeasance and Discharge................................................... 84
SECTION 8.03. Covenant Defeasance.............................................................. 84
SECTION 8.04. Conditions to Defeasance or Covenant Defeasance.................................. 85
SECTION 8.05. Deposited Money and U.S. Government Obligations to be Held in Trust;
Miscellaneous Provisions......................................................... 86
SECTION 8.06. Reinstatement.................................................................... 87
ARTICLE IX - AMENDMENTS............................................................................. 87
SECTION 9.01. Without Consent of Holders....................................................... 87
SECTION 9.02. With Consent of Holders.......................................................... 88
SECTION 9.03. Effect of Supplemental Indentures................................................ 89
SECTION 9.04. Compliance with Trust Indenture Act.............................................. 89
SECTION 9.05. Revocation and Effect of Consents and Waivers.................................... 89
SECTION 9.06. Notation on or Exchange of Notes................................................. 89
SECTION 9.07. Trustee to Execute Supplemental Indentures....................................... 89
</TABLE>
(vi)
<PAGE>
SECTION 9.08. Solicitation of Consents................................ 90
ARTICLE X - SENIOR NOTE GUARANTEES........................................ 91
SECTION 10.01. Guarantees............................................. 91
SECTION 10.02. Limitation of Guarantor's Liability.................... 93
SECTION 10.03. Execution and Delivery of Guarantees................... 93
SECTION 10.04. When a Guarantor May Merge, etc........................ 94
SECTION 10.05. Release of a Guarantor................................. 94
ARTICLE XI - SATISFACTION AND DISCHARGE................................... 94
SECTION 11.01. Satisfaction and Discharge............................. 94
SECTION 11.02. Application of Trust Money............................. 96
SECTION 11.03. Repayment to the Company............................... 96
SECTION 11.04. Reinstatement.......................................... 96
ARTICLE XII - MISCELLANEOUS............................................... 97
SECTION 12.01. Trust Indenture Act Controls........................... 97
SECTION 12.02. Notices................................................ 97
SECTION 12.03. Certificate and Opinion as to Conditions Precedent..... 97
SECTION 12.04. Statements Required in Certificate or Opinion.......... 97
SECTION 12.05. Communications by Holders with Other Holders........... 98
SECTION 12.06. Rules by Trustee, Paying Agent and Registrar........... 98
SECTION 12.07. Payments on Business Days.............................. 98
SECTION 12.08 Governing Law.......................................... 98
SECTION 12.09. No Recourse Against Others............................. 98
SECTION 12.10. Successors............................................. 98
SECTION 12.11. Counterparts........................................... 98
SECTION 12.12. Table of Contents; Headings............................ 99
SECTION 12.13. Severability........................................... 99
SECTION 12.14. Further Instruments and Acts........................... 99
SECTION 12.15. Independent Covenants.................................. 99
(vii)
<PAGE>
EXHIBIT A FORM OF INITIAL GLOBAL NOTE
EXHIBIT B FORM OF INITIAL CERTIFICATED NOTE
EXHIBIT C FORM OF EXCHANGE GLOBAL NOTE
EXHIBIT D FORM OF EXCHANGE CERTIFICATED NOTE
EXHIBIT E REGISTRATION RIGHTS AGREEMENT
EXHIBIT F WARRANT AGREEMENT
SCHEDULE A EXISTING INDEBTEDNESS
SCHEDULE B [INTENTIONALLY OMITTED]
SCHEDULE C REQUIRED INVESTMENTS
SCHEDULE D EXISTING LIENS
SCHEDULE E EXISTING CONTRACTS WITH AFFILIATES
SCHEDULE F EXISTING AGREEMENTS OR STOCK OPTIONS INVOLVING COMMON STOCK
(viii)
<PAGE>
INDENTURE, dated as of August 15, 1997, between USN COMMUNICATIONS, INC., a
Delaware corporation (the "Company"), having its principal office at 10 South
Riverside Plaza, Suite 401, Chicago, Illinois 60606-3709, and HARRIS TRUST AND
SAVINGS BANK, as trustee hereunder (the "Trustee"), having its Corporate Trust
Office at 311 West Monroe, Chicago, Illinois 60606.
RECITALS OF THE COMPANY
The Company has duly authorized the creation and issue of its 14 5/8%
Senior Discount Notes due 2004 (the "Initial Notes") of substantially the tenor
and amount hereinafter set forth, and to provide therefor and for, if and when
issued in exchange for the Initial Notes pursuant to this Indenture and the
Registration Rights Agreement, the Company's 14 5/8% Senior Discount Notes due
2004 (the "Exchange Notes," and together with the Initial Notes, the "Notes"),
the Company has duly authorized the execution and delivery of this Indenture.
All things necessary to make the Notes, when executed by the Company and
authenticated and delivered by the Trustee hereunder and duly issued by the
Company, the valid obligations of the Company and to make this Indenture a valid
instrument of the Company, in accordance with their respective terms, have been
done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that, for and in consideration
of the premises and the purchase of the Initial Notes by the Holders thereof, it
is mutually covenanted and agreed, for the equal and proportionate benefit of
all Holders of the Notes, as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.
SECTION 1.011. Definitions. For all purposes of this Indenture, except
as otherwise expressly provided or unless the context otherwise requires:
"Accreted Value" means, for any Specified Date, the amount provided
below for each $1,000 principal amount at Stated Maturity of the Notes:
(a) if the Specified Date occurs on one of the following dates (each
a "Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
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<TABLE>
<CAPTION>
Semi-Annual Accrual Date Accreted Value
------------------------ --------------
<S> <C>
February 15, 1998............... $ 702.67
August 15, 1998................. 754.05
February 15, 1999............... 809.19
August 15, 1999................. 868.36
February 15, 2000............... 931.86
August 15, 2000................. 1,000.00
</TABLE>
(b) if the Specified Date occurs before the first Semi-Annual
Accrual Date, the Accreted Value will equal the sum of (i) $654.78 and
(ii) an amount equal to the product of (A) the Accreted Value for the
first Semi-Annual Accrual Date less the original issue price
multiplied by (B) 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 Semi-Annual Accrual
Date, using a 360-day year of twelve 30-day months;
(c) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (i) the Accreted Value
for the Semi-Annual Accrual Date immediately preceding such Specified
Date and (ii) an amount equal to the product of (A) the Accreted Value
for the immediately following Semi-Annual Accrual Date less the
Accreted Value of the immediately preceding Semi-Annual Accrual Date
multiplied by (B) a fraction, the numerator of which is the number of
days from the immediately preceding 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 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 Person merging with or into or becoming a Subsidiary of
such specified Person.
"Act" when used with respect to any Holder, has the meaning set forth in
Section 1.05 hereof.
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"Additional Notes" means up to $52,000,000 of additional Notes that may be
issued pursuant to this Indenture upon the exchange of Old Senior Notes by
holders thereof for Notes pursuant to the Consent Agreement, substantially in
the forms of Exhibits A, B, C or D hereto, as appropriate.
"Adjusted Net Assets" of a Guarantor at any date means the amount by which
the fair value of the assets and Property of such Guarantor exceeds the total
amount of liabilities, including without limitation, contingent liabilities
(after giving effect to all other fixed and contingent liabilities incurred or
assumed on such date), but excluding liabilities under the Guarantee of such
Guarantor at such date.
"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; and provided, further, that Merrill Lynch and
its Affiliates shall not be deemed to be Affiliates of the Company solely as a
result of such entities holding the Notes, the Old Senior Notes, the Convertible
Notes, the New Convertible Notes, the Warrants, the warrants to be issued
pursuant to the Consent Agreement or the warrants issued in connection with the
sale of the Old Senior Notes and the Convertible Notes. 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.
"Affiliate Transaction" has the meaning set forth in Section 4.16 hereof.
"Agent Member" has the meaning set forth in Section 2.05(a) hereof.
"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 its 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
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<PAGE>
consistent with industry practice, (ii) a Disposition of Eligible Cash
Equivalents, (iii) a Disposition of an Investment that constitutes a Restricted
Payment permitted under Section 4.13(a) hereof, (iv) a Disposition of no more
than 10 percent of the Common Stock of USN Solutions 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 Article V hereof and
(vi) a contribution of assets to any Unrestricted Subsidiary constituting an
Investment otherwise permitted hereunder.
"Asset Sale Offer" has the meaning set forth in Section 4.08(c) hereof.
"Asset Sale Payment Date" has the meaning set forth in Section 4.08(d)(ii)
hereof.
"Asset Sale Purchase Price" has the meaning set forth in Section 4.08(c)
hereof.
"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 of Directors (or similar governing body).
"Board Resolution" means a duly adopted resolution of the Board of
Directors of a Person in full force and effect at the time of determination and
certified as such by the Secretary or an Assistant Secretary of such Person.
"BT" means BT Capital Partners, Inc.
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<PAGE>
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York or the
City of Chicago are authorized or obligated by law, executive order or
regulation to close.
"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 prepared 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 and 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, or the Old Senior Notes or Old Senior Note 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.
"Certificated Notes" means Initial Certificated Notes and Exchange
Certificated Notes.
"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; or (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 percent of the
total voting power of all classes of the Voting Stock of the Company (including
any warrants, options or rights to acquire such Voting Stock), calculated on a
fully
5
<PAGE>
diluted basis, and such voting power percentage is greater than or equal
to the total voting power percentage then beneficially owned by the Permitted
Holders in the aggregate; or (iii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election or
appointment by such board or whose nomination for election by the stockholders
of the Company was approved by a vote of a majority of the directors then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the Company then in
office.
"Change of Control Offer" has the meaning set forth in Section 4.07(a)
hereof.
"Change of Control Payment Date" has the meaning set forth in Section
4.07(b)(ii) hereof.
"Change of Control Purchase Price" has the meaning set forth in Section
4.07(a) hereof.
"Chase" means Chase Venture Capital Associates, L.P.
"CIBC" means CIBC Wood Gundy Ventures, Inc.
"clearing agency" has the meaning set forth in Section 3(a)(23) of the
Exchange Act.
"Commission" means the United States Securities and Exchange Commission, as
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this Indenture such commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, the body
performing such duties at such time.
"Common Stock" means, with respect to any Person, 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.
"Company" means the party named as such in the preamble to this Indenture
until a successor replaces it pursuant to the applicable provisions hereof and,
thereafter, means such successor.
"Company Order" means a written order signed in the name of the Company by
(i) its Chairman of the Board, its President, its Chief Executive Officer, its
Chief Operating Officer, a Vice Chairman or a Vice President, and (ii) its Chief
Financial Officer, its Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary.
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<PAGE>
"Consent Agreement" means the Consent Agreement, dated as of August 12,
1997, by and among the Company, Merrill Lynch Global Allocation Fund, Inc. and
Merrill Lynch Equity/Convertible Series (Global Allocation Portfolio).
"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 Sale and Leaseback
Transaction 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
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<PAGE>
equity method of accounting, which shall be included only to the extent of the
amount of dividends or distributions paid to such Person or its Restricted
Subsidiaries, (iii) the net income of any Person acquired by such Person or any
of its Restricted Subsidiaries in a pooling-of-interests transaction for any
period prior to the date of the related acquisition, (iv) any gain or loss, net
of taxes, realized on the termination of any employee pension benefit plan, (v)
net gains (but not net losses) in respect of Asset Sales by such Person or its
Restricted Subsidiaries, (vi) the net income (but not net loss) of any
Restricted Subsidiary of such Person to the extent that the payment of dividends
or other distributions to such Person is restricted by the terms of its charter
or any agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or distributions
actually paid by such Restricted Subsidiary to such Person and (vii) with regard
to a non-Wholly-Owned Restricted Subsidiary, any aggregate net income (or loss)
in excess of such Person's or such Restricted Subsidiary's pro rata share of
such non-Wholly Owned Restricted Subsidiary's net income (or loss).
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person and its Restricted Subsidiaries, as determined on a
consolidated basis in accordance with GAAP, less amounts attributable to
Disqualified Stock of such Person.
"Contingent Warrants" means the Warrants to be issued by the Company to
Holders of Notes pursuant to the Warrant Agreement in the event that, on or
prior to September 30, 1998, the Company has not consummated a Qualified Equity
Offering.
"Convertible Note Asset Sale Offer" means an "Asset Sale Offer" as defined
in and made pursuant to the provisions of the Convertible Note Indenture.
"Convertible Note Indenture" means the Indenture, dated as of September 30,
1996, between the Company and Harris Trust and Savings Bank, as trustee
thereunder, relating to the Convertible Notes, as amended and supplemented from
time to time.
"Convertible Note Trustee" means Harris Trust and Savings Bank, as trustee
under the Convertible Note Indenture and any successor appointed in accordance
with the terms thereof.
"Convertible Notes" means up to $39,100,000 aggregate principal amount at
Stated Maturity of the Company's 9% Convertible Subordinated Notes due 2004.
"Corporate Trust Office" means the principal office of the Trustee at
which at any particular time its corporate trust business shall be principally
administered, which office is, at the date of execution of this Indenture,
located at 311 West Monroe, Chicago, Illinois 60606.
"Covenant Defeasance" has the meaning set forth in Section 8.03 hereof.
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<PAGE>
"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 this 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 the aggregate principal amount of
Indebtedness under the Credit Facility shall not exceed $45,000,000 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.
"Default Amount" has the meaning set forth in Section 6.02 hereof.
"Defaulted Interest" has the meaning set forth in Section 2.11 hereof.
"Defeasance" has the meaning set forth in Section 8.02 hereof.
"Depositary" means The Depository Trust Company, its nominees, and their
respective successors.
"Disposition" has the meaning set forth in the definition of "Asset Sale"
in this Section 1.01.
"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 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.
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"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 $500,000,000, 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 90 calendar 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
$500,000,000 and commercial paper issued by others having one of the two highest
ratings obtainable from either of Standard & Poor's or Moody's and in each case
maturing within 270 days after the date of acquisition; (vi) overnight bank
deposits and bankers' acceptances at any commercial bank organized in the United
States having capital and surplus in excess of $500,000,000; (vii) deposits
available for withdrawal on demand with a commercial bank organized in the
United States having capital and surplus in excess of $500,000,000, and (viii)
investments in money market funds substantially all of whose assets comprise
securities of the types described in clauses (i) through (vi).
"Enterprises" means Enterprises & Transcommunications, L.P.
"Event of Default" has the meaning set forth in Section 6.01 hereof.
"Excess Proceeds" has the meaning set forth in Section 4.08 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Exchange Certificated Notes" means Notes issued in definitive, fully
registered form to beneficial owners of interests in the Exchange Global Note
pursuant to Section 2.06(c) hereof.
"Exchange Global Note" has the meaning set forth in Section 2.01(d) hereof.
"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 or other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
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"Exchange Notes" has the meaning set forth in the Recitals of the Company,
including Additional Notes, if any, and more particularly means any of the
Notes, substantially in the forms of Exhibits C and D hereto, authenticated and
delivered under this Indenture pursuant to the Exchange Offer.
"Exchange Offer" has the meaning set forth in the Registration Rights
Agreement.
"Existing Indebtedness" means the Indebtedness of the Company and its
Restricted Subsidiaries outstanding on the date of this Indenture and specified
in Schedule A attached hereto.
"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.
"Final Memorandum" means the final Offering Memorandum, dated August 13,
1997, used in connection with the Initial Placement.
"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 circumstance as of the date of determination;
provided that, except as otherwise specifically provided herein, all
calculations made for purposes of determining compliance with this Indenture
shall utilize GAAP as in effect on the Issue Date.
"Global Notes" means any Initial Global Note and any Exchange Global Note.
"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. The terms
"guaranteed," "guaranteeing" and guarantor" shall have correlative meanings.
"Guarantee" means a guarantee of the payment of the Notes in the form of a
supplemental indenture to this Indenture to be executed and delivered by a
Restricted Subsidiary, if and as required by and pursuant to Section 4.10
hereof.
"Guaranteed Indebtedness" has the meaning set forth in Section 4.10(a)
hereof.
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"Guarantor" means a Restricted Subsidiary that hereafter becomes a
Guarantor pursuant to Section 4.10 hereof and executes and delivers a
supplemental indenture to this Indenture relating to its Guarantee.
"Hancock" means Hancock Venture Partners IV-Direct Fund, L.P.
"Holder" means (i) in the case of any Certificated Note, the Person in
whose name such Certificated Note is registered in the Security Register and
(ii) in the case of any Global Note, the Depositary.
"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; 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 such Person becomes a Restricted Subsidiary of the Company.
The terms "incurrence," "incurred," "incurring" and "incurrable" shall have
correlative meanings.
"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 the acquisition of Property,
assets or businesses, excluding trade accounts payable made in the ordinary
course of business which are not more than 90 days overdue or which are being
contested in good faith and by appropriate proceedings, (iii) any reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person, (iv)
any obligation of such Person issued or assumed as the deferred purchase price
of Property, assets or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business, which in either case are
not more than 90 days overdue or which are being contested in good faith and by
appropriate proceedings, and for which adequate reserves are being maintained on
the books of the Company in accordance with GAAP), (v) any Capital Lease
Obligation of such Person, (vi) the maximum fixed redemption or repurchase price
of Disqualified Stock of such Person and, to the extent held by other Persons,
the maximum fixed redemption or repurchase price of Disqualified Stock of such
Person's Restricted Subsidiaries, at the time of determination, (vii) the
notional amount of any Interest Hedging Obligations or Exchange Rate Obligations
of such Person at the time of determination, (viii) any Attributable
Indebtedness with respect to any Sale and Leaseback Transaction to which such
Person is a party and (ix) any obligation of the type referred to in clauses (i)
through (viii) of this definition of another Person and all dividends and
distributions of another Person the payment of which, in
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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
this 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 the Notes, Old Senior
Notes, Convertible Notes or New Convertible Notes, if any, as the case may be,
outstanding at any date, the amount of Notes shall be the Accreted Value thereof
as of such date, the amount of such Old Senior Notes shall be the "Accreted
Value" thereof (as defined in, and determined pursuant to, the Old Senior Note
Indenture), the amount of such Convertible Notes shall be the "Accreted Value"
thereof (as defined in, and determined pursuant to, the Convertible Note
Indenture), and the amount of such New Convertible Notes shall be the "Accreted
Value" thereof (as defined in, and determined pursuant to, the New Convertible
Note Indenture), unless cash interest has commenced to accrue pursuant to the
terms of the Notes and this Indenture, the Old Senior Notes and the Old Senior
Note Indenture, the Convertible Notes and the Convertible Note Indenture or the
New Convertible Notes and the New Convertible Note Indenture, as the case may
be, in which case the amount of the Notes, the Old Senior Notes, the Convertible
Notes or the New Convertible Notes, as the case may be, outstanding will be the
aggregate principal amount thereof at Stated Maturity; provided, further, that
for purposes of calculating the amount of any non-interest bearing or other
discount security (other than the Notes, the Old Senior Notes, the Convertible
Notes or the New Convertible 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,
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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.
"Indenture" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including, for
all purposes of this instrument and any such supplemental indenture, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this instrument, and any such supplemental indenture, respectively.
"Initial Certificated Notes" means Notes issued in definitive, fully
registered form to beneficial owners of interests in the Initial Global Notes
pursuant to Section 2.06(c) hereof.
"Initial Global Note" has the meaning set forth in Section 2.01(c) hereof.
"Initial Notes" has the meaning set forth in the Recitals of the Company,
including the Additional Notes, if any, and more particularly, means any of the
Notes, substantially in the forms of Exhibits A and B hereto, or with respect to
the Additional Notes, substantially in the forms of Exhibits A, B, C or D
hereto, authenticated and delivered under this Indenture other than pursuant to
the Exchange Offer.
"Initial Placement" means the initial sales of the Units by the Initial
Purchasers.
"Initial Purchasers" means the Initial Purchasers, as such term is defined
in the Purchase Agreement.
"Initial Warrants" means Warrants of the Company originally issued as part
of the Units.
"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.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Notes.
"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
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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 other assets other
than cash, such Property or other 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 net assets of a
Subsidiary at the time that such Subsidiary is designated as an Unrestricted
Subsidiary.
"Issue Date" means the date on which the Notes are first authenticated and
delivered under this 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 this
Indenture, whether on the date specified in such Note as the fixed date on which
the principal of such Note is due and payable, on the Change of Control Payment
Date or Asset Sale Payment Date, as applicable, or by declaration of
acceleration, call for redemption or otherwise.
"Merrill Lynch" means Merrill Lynch, Pierce, Fenner & Smith Incorporated.
"Moody's" means Moody's Investors Service, Inc., or, if Moody's Investors
Service, Inc. shall cease rating the specified debt securities and such ratings
business with respect thereto shall have been transferred to a successor Person,
such successor Person; provided that if Moody's Investors Service, Inc. ceases
rating the specified debt securities and its rating business with respect
thereto shall not have been transferred to any successor Person or such
successor Person
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is Standard & Poor's, then "Moody's" shall mean any other nationally recognized
rating agency (other than Standard & Poor's) that rates the specified debt
securities selected by the Trustee.
"NASD" means the National Association of Securities Dealers, Inc.
"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 a 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 a 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 assets
in accordance with the terms of any Lien upon or with respect to such Properties
or assets or which must, by the terms of such Lien, or in order to obtain a
necessary consent to such transaction or by applicable law, be repaid in
connection with such sale and (iii) all contractually required distributions and
other payments made to minority interest holders (but excluding distributions
and payments to Affiliates of such Person) in Restricted Subsidiaries of such
Person as a result of such transaction; provided that, in the event that any
consideration for a transaction (which would otherwise constitute Net Cash
Proceeds) is required to be held in escrow pending determination of whether a
purchase price adjustment will be made, such consideration (or any portion
thereof) shall become Net Cash Proceeds only at such time as it is released to
such Person or its Restricted Subsidiaries from escrow; provided, further, that
any non-cash consideration received in connection with any transaction, which is
subsequently converted to cash, shall be deemed to be Net Cash Proceeds at such
time, and shall thereafter be applied in accordance with the applicable
provisions of this Indenture.
"New Convertible Note Asset Sale Offer" means an "Asset Sale Offer" as
defined in and made pursuant to the provisions of the New Convertible Note
Indenture, if applicable.
"New Convertible Note Indenture" means the Indenture, to be dated the date
of issuance of the New Convertible Notes, if issued, between the Company and the
New Convertible Note Trustee, as amended and supplemented from time to time
provided that such indenture on the date of original issuance of the New
Convertible Notes is substantially identical to the Convertible Note Indenture
as in effect on such date.
"New Convertible Note Trustee" means the trustee to be appointed, if
applicable, under the New Convertible Note Indenture and any successor appointed
in accordance with the terms thereof.
"New Convertible Notes" means a new issue of 9% convertible subordinated
notes in an amount yielding $10 million in proceeds to the Company to be issued
by the Company pursuant
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to the New Convertible Note Indenture, if applicable, pursuant to the exercise
by certain Persons of an option to purchase such notes pursuant to the Consent
Agreement.
"Northwood Entities" means Northwood Capital Partners, LLC and Northwood
Ventures.
"Notes" has the meaning set forth in the Recitals of the Company, which
includes the Additional Notes, if any, and more particularly means any of the
Notes authenticated and delivered under this Indenture.
"Officer" means the Chairman of the Board of Directors, a Vice Chairman of
the Board of Directors, the President, the Chief Executive Officer, the Chief
Operating Officer, a Vice President, the Chief Financial Officer, the Chief
Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary.
"Officers' Certificate" means a certificate signed by (i) the Chairman of
the Board of Directors, a Vice Chairman of the Board of Directors, the
President, the Chief Executive Officer, the Chief Operating Officer or a Vice
President, and (ii) 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
certificate shall comply with the provisions of Sections 1.04, 12.03 and 12.04
hereof.
"Old Senior Note Asset Sale Offer" means an "Asset Sale Offer" as defined
in and made pursuant to the provisions of the Old Senior Note Indenture.
"Old Senior Note Guarantees" means the guarantees, if any, of "Restricted
Subsidiaries" (as defined in the Old Senior Note Indenture) contained in the Old
Senior Note Indenture.
"Old Senior Note Indenture" means the Indenture, dated as of September 30,
1996, between the Company and Harris Trust and Savings Bank, as trustee
thereunder, relating to the Old Senior Notes, as amended and supplemented from
time to time.
"Old Senior Note Trustee" means Harris Trust and Savings Bank, as trustee
under the Old Senior Note Indenture and any successor appointed in accordance
with the terms thereof.
"Old Senior Notes" means up to $120,500,000 aggregate principal amount at
Stated Maturity of the Company's 14% Senior Discount Notes due 2003.
"Opinion of Counsel" means a written opinion from legal counsel (who may be
counsel to the Company or the Trustee) who is acceptable to the Trustee, which
opinion shall comply with the provisions of Sections 1.04, 12.03 and 12.04
hereof; provided that any Opinion of Counsel delivered pursuant to Section 8.04
hereof shall not be rendered by an employee of the Company or any of its
Subsidiaries.
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"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
Notes or the Old Senior Notes or the Guarantees and the Old Senior Note
Guarantees, as applicable.
"Paying Agent" means any Person authorized by the Company to make payments
of principal, premium or interest (including Special Interest, if any) with
respect to the Notes on behalf of the Company.
"Permitted Holders" means J. Thomas Elliott and Ronald W. Gavillet and
Chase, CIBC, Hancock, the Northwood Entities, BT, Enterprises, 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
of the Company in compliance with the terms of this Indenture;
(iv) Investments pursuant to certain agreements or obligations of
the Company or a Restricted Subsidiary of the Company, in effect on the
Issue Date, to make such Investments, which agreements and obligations are
specified in Schedule C attached hereto;
(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 under Section 4.09 hereof to be outstanding;
(vii) bonds, notes, debentures or other debt securities received as
a result of Asset Sales permitted under Section 4.08 hereof;
(viii) Investments in existence at 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
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(i) Liens created hereby or that otherwise secure the payment of
the Notes or the Guarantees, if any;
(ii) Liens on Property or assets of a Person existing at the time
such Person is merged with or 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 Schedule
D attached hereto;
(vii) any Lien on Property of the Company in favor of the United
States of America or any state thereof, or any instrumentality of either,
to secure certain payments pursuant to any contract or statute;
(viii) any Lien for taxes or assessments or other governmental
charges or levies not then due and payable (or which, if due and payable,
are being contested in good faith and for which adequate reserves are being
maintained, to the extent required by GAAP);
(ix) easements, rights-of-way, licenses and other similar
restrictions on the use of Properties or minor imperfections of title that,
in the aggregate, are not material in amount and do not in any case
materially detract from the Properties subject thereto or
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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 $30,000,000 aggregate principal amount at any one time outstanding of
Indebtedness permitted to be incurred under Section 4.09(b)(i) hereof;
(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 Property or assets other than the Property
and assets which were secured by the Liens referred to in the foregoing
clauses (ii), (iii) and (xiv) and the principal amount of the Indebtedness
secured by such Liens is not increased.
"Permitted Merger" has the meaning set forth in Section 5.01 hereof.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, trust, unincorporated organization or government or
any agency or political subdivision thereof or any other entity or similar
person.
"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.
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"Private Placement Legend" means the legend in the form set forth in
Section 2.01(e)(i) hereof.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, 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.
"Purchase Agreement" means the Purchase Agreement relating to the Units,
dated August 13, 1997, among the Company and the Initial Purchasers.
"Qualified Equity Offering" means one or more Public Equity Offerings, or
other issuance of additional equity securities of the Company, resulting in net
proceeds to the Company of at least $50 million in the aggregate based on an
equity valuation of the Company of at least $160,000,000.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Record Date" means, for the interest payable on any Interest Payment Date,
the date specified in Section 2.11 hereof.
"Record Expiration Date" has the meaning set forth in Section 1.05 hereof.
"Redemption Date" means, when used with respect to any Note or part thereof
to be redeemed hereunder, the date fixed for redemption of such Notes pursuant
to the terms of the Notes and this Indenture.
"Redemption Price" means, when used with respect to any Note or part
thereof to be redeemed hereunder, the price fixed for redemption of such Note
pursuant to the terms of the Notes and this Indenture, plus accrued and unpaid
interest thereon, if any, (including Special Interest, if any) to the Redemption
Date.
"Refinance" has the meaning set forth in Section 4.09(b)(ix) hereof. The
terms "Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means any Indebtedness incurred in connection
with the Refinancing of other Indebtedness.
"Registrar" has the meaning set forth in Section 2.03 hereof.
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"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of August 15, 1997, among the Company and the Initial Purchasers, and
attached hereto as Exhibit E, and any other Registration Rights Agreement
related to the Notes.
"Required Filing Date" has the meaning set forth in Section 4.18 hereof.
"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 to any Person not
otherwise an Affiliate of the Company holding such Common Stock as a result of
the exercise of the USN Solutions Option; provided that the Company shall
receive pro rata dividends, distributions or payments at the same time and in
the same form and composition of consideration as the dividends, distributions
or payments paid to such minority stockholders), (ii) a payment made by the
Company or any of its Restricted Subsidiaries (other than to the Company or any
Restricted Subsidiary of the Company) to purchase, redeem, acquire or retire any
Capital Stock of the Company or of a Restricted Subsidiary of the Company, (iii)
a payment made by the Company or any of its Restricted Subsidiaries (other than
a payment made solely in Qualified Stock of the Company) to redeem, repurchase,
defease (including an in-substance or legal defeasance) or otherwise acquire or
retire for value (including pursuant to mandatory repurchase covenants), prior
to any scheduled maturity, scheduled sinking fund or mandatory redemption
payment, Indebtedness of the Company or such Restricted Subsidiary which is
subordinate (whether pursuant to its terms or by operation of law) in right of
payment to the Notes or any Guarantees, as applicable, the Old Senior Notes or
Old Senior Note Guarantees, as applicable, or the Convertible Notes or the New
Convertible Notes or any guarantees contained in the Convertible Note Indenture
or the New Convertible Note Indenture, 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 pursuant to Section 4.17 hereof.
"Rule 144" means Rule 144 under the Securities Act (including any successor
regulation thereto), as it may be amended from time to time.
"Rule 144A" means Rule 144A under the Securities Act (including any
successor regulation thereto), as it may be amended from time to time.
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"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.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Security Register" has the meaning set forth in Section 2.03 hereof.
"Separability Date" has the meaning set forth in the Warrant Agreement.
"Shelf Registration Statement" has the meaning set forth in the
Registration Rights Agreement.
"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.
"Special Interest" shall have the meaning ascribed to such term in
paragraph 3 of each Initial Note and in the Registration Rights Agreement.
"Special Record Date" means a date fixed by the Trustee pursuant to Section
2.11 for the payment of Defaulted Interest.
"Standard & Poor's" means Standard & Poor's Ratings Group, a division of
McGraw-Hill, Inc., or, if Standard & Poor's Ratings Group shall cease rating the
specified debt securities and such ratings business with respect thereto shall
have been transferred to a successor Person, such successor Person; provided
that if Standard & Poor's Ratings Group ceases rating the specified debt
securities and its ratings business with respect thereto shall not have been
transferred to any successor Person or such successor Person is Moody's, then
"Standard & Poor's" shall mean any other nationally recognized rating agency
(other than Moody's) that rates the specified debt securities selected by the
Trustee.
"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
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of the closing of such transaction and the Business Day immediately after the
day of the closing of such transaction, has, or whose parent has, an equity
market capitalization, a net asset value or annual revenues of at least
$2,000,000,000 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 percent of the outstanding shares of Voting Stock of which is owned,
directly or indirectly, by such Person, or by one of 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 percent 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.
"Surviving Entity" has the meaning set forth in Section 5.01(a) hereof.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses to use
copyrighted material) that are utilized by such Person, directly or indirectly,
for the design, development, construction, installation, integration, operation,
management or provision of telecommunications systems and/or services, including
without limitation, any businesses or services in which the Company is currently
engaged and including any computer systems used in a Telecommunications
Business. Telecommunications Assets shall also include stock, joint venture or
partnership interests in another Person, provided that substantially all of the
assets of such other Person consist of Telecommunications Assets, and provided,
further, that if such stock, joint venture or partnership interests are held by
the Company or a Restricted Subsidiary, such other Person either is, or
immediately following the relevant transaction shall become, a Restricted
Subsidiary of the Company 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 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 on the Issue Date.
"Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.
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"Temporary Notes" has the meaning set forth in Section 2.09 hereof.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
(S)(S) 77aaa-77bbbb) as in effect on the date of this Indenture except as
required by Section 9.04 hereof, provided that in the event the Trust Indenture
Act of 1939 is amended after such date, "Trust Indenture Act" means, to the
extent required by any such amendment, the Trust Indenture Act of 1939, as so
amended.
"Trust Officer" means any officer or assistant officer of the Trustee
assigned by the Trustee to administer this Indenture.
"Trustee" means the party named as such in this Indenture until a successor
replaces it in accordance with the provisions of this Indenture and, thereafter,
means such successor.
"U.S. Government Obligations" means (i) securities that are (a) 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 (b) 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 (ii) 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 (i) 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.
"Unit" means a Unit consisting of one Note, in principal amount at Stated
Maturity of $1,000, and ten Initial Warrants, each Initial Warrant entitling the
holder thereof to purchase 0.134484 shares of the Company's Class A Common
Stock, as described in the Purchase Agreement.
"Unit Legend" means the legend in the form set forth in Section
2.01(e)(iii) hereof.
"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 Section 4.17 hereof.
"USN Solutions" means USN Solutions, Inc., a Delaware corporation and a
Restricted Subsidiary of the Company.
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"USN Solutions Option" means that certain option relating to the Common
Stock of USN Solutions contemplated by that certain Memorandum of Understanding,
dated July 3, 1996, by and between USN Solutions and Genesys S.A.
"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.
"Warrant" means a Warrant issued by the Company pursuant to the Warrant
Agreement.
"Warrant Agent" means the Warrant Agent, as such term is defined in the
Warrant Agreement.
"Warrant Agreement" means the Warrant Agreement, dated as of August 15,
1997, between the Company and Harris Trust and Savings Bank, as Warrant Agent
thereunder, and attached hereto as Exhibit F.
"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 this Indenture, other than for purposes of the definition of
"Consolidated Net Income" contained in this Section 1.01, USN Solutions shall
not cease to be a Wholly-Owned Restricted Subsidiary merely as a result of the
exercise of the USN Solutions Option.
SECTION 1.001. Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the Trust Indenture Act,
the provision is incorporated by reference in and made a part of this Indenture.
The following Trust Indenture Act terms incorporated by reference in this
Indenture have the following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
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"obligor" on the indenture securities means the Company or other
obligor on the Notes, if any.
All other Trust Indenture Act terms used or incorporated by reference in
this Indenture that are defined by the Trust Indenture Act, defined by Trust
Indenture Act reference to another statute or defined by Commission rule have
the meanings assigned to them therein.
SECTION 1.03. Rules of Construction. Unless the context otherwise
requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP;
(c) the words "herein," "hereof" and hereunder," and other words of
similar import, refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;
(d) "or" is not exclusive;
(e) "including" means including without limitation;
(f) words in the singular include the plural, and words in the plural
include the singular;
(g) when used with respect to the Notes, the Old Senior Notes, the
Convertible Notes or the New Convertible Notes, if any, the term "principal
amount" shall mean the principal amount thereof at the Stated Maturity of
such principal amount; and
(h) unless otherwise expressly provided herein, the principal amount
of any Preferred Stock shall be the greater of (i) the maximum liquidation
value of such Preferred Stock or (ii) the maximum mandatory redemption or
mandatory repurchase price with respect to such Preferred Stock.
SECTION 1.04. Form of Documents Delivered to Trustee. In any case
where several matters are required to be certified by, or covered by an
opinion of, any specified Person, it is not necessary that all such matters
be certified by, or covered by the opinion of, only one such Person or that
they be so certified or covered by only one document, but one such Person
may certify or give an opinion with respect to some
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matters and one or more other such Persons as to other matters, and any
such Person may certify or give an opinion as to such matters in one or
several documents.
Any certificate or opinion of an officer of the Company or a Guarantor may
be based, insofar as it relates to legal matters, upon a certificate or opinion
of, or representations by, counsel, unless such officer knows, or in the
exercise of reasonable care should know, that the certificate or opinion or
representations with respect to the matters, upon which his certificate or
opinion is based are erroneous. Any such certificate or opinion of counsel may
be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of the Company or a
Guarantor stating that the information with respect to such factual matters is
in the possession of the Company or such Guarantor, unless such counsel knows,
or in the exercise of reasonable care should know, that the certificate or
opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.004. Acts of Holders. Any request, demand,
authorization, direction, notice, consent, waiver or other action provided
by this Indenture to be given or taken by Holders may be embodied in and
evidenced by one or more instruments, of substantially similar tenor signed
by such Holders in person or by an agent duly appointed in writing; and,
except as herein otherwise expressly provided, such action shall become
effective when such instrument or instruments are received by the Trustee
and, where it is hereby expressly required, to the Company and the
Guarantors, if any. Such instrument or instruments (and the action embodied
therein and evidenced thereby) are herein sometimes referred to as the
"Act" of the Holders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent
shall be sufficient for any purpose of this Indenture and (subject to
Section 7.01) conclusive in favor of the Trustee and the Company and the
Guarantors, if any, if made in the manner provided in this Section.
The fact and date of the execution by any Person of any such instrument or
writing may be proved by the affidavit of a witness of such execution or by an
acknowledgment of notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is by
a signer acting in a capacity other than such signer's individual capacity, such
certificate or affidavit shall also constitute sufficient proof of the signer's
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the person executing the same, may also be proved in any
other manner which the Trustee deems sufficient.
The ownership of Notes shall be proved by the Security Register.
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Any request, demand, authorization, direction, notice, consent, waiver or
other Act of the Holder shall bind every future Holder of the same Note and the
Holder of every Note issued upon the registration of transfer thereof or in
exchange therefor or in lieu thereof in respect of anything done, omitted or
suffered to be done by the Trustee or the Company or the Guarantors, if any, in
reliance thereon, whether or not notation of such action is made upon such Note.
The Company may set any day as a record date for the purpose of determining
the Holders of outstanding Notes entitled to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action provided or
permitted by this Indenture to be given or taken by Holders of Notes, provided
that the Company may not set a record date for, and the provisions of this
paragraph shall not apply with respect to, the giving or making of any notice,
declaration, request or direction referred to in the next paragraph. If any
record date is set pursuant to this paragraph, the Holders of outstanding Notes
on such record date, and no other Holders, shall be entitled to take the
relevant actions whether or not such Holders remain Holders after such record
date; provided that no such action shall be effective hereunder unless taken on
or prior to the applicable Record Expiration Date by Holders of the requisite
principal amount of outstanding Notes on such record date; and provided,
further, that for the purpose of determining whether Holders of the requisite
principal amount of such Notes have taken such action, no Note shall be deemed
to have been outstanding on such record date unless it is also outstanding on
the date such action is to become effective. Nothing in this paragraph shall
prevent the Company from setting a new record date for any action for which a
record date has previously been set pursuant to this paragraph (whereupon the
record date previously set shall automatically and with no action by any Person
be canceled and of no effect), nor shall anything in this paragraph be construed
to render ineffective any action taken by Holders of the requisite principal
amount of outstanding Notes on the date such action is taken. Promptly after any
record date is set pursuant to this paragraph, the Company at its own expense,
shall cause notice of such record date, the proposed action by Holders and the
applicable Record Expiration Date to be given to the Trustee in writing and to
each Holder of Notes in the manner set forth in Section 12.02 hereof.
The Trustee may set any day as a record date for the purpose of determining
the Holders of outstanding Notes entitled to join in the giving or making of (i)
any notice of Default under Section 6.01(d) hereof, (ii) any declaration of
acceleration referred to in Section 6.02 hereof, (iii) any request to institute
proceedings referred to in Section 6.06 hereof or (iv) any direction referred to
in Section 6.05 hereof. If any record date is set pursuant to this paragraph,
the Holders of outstanding Notes on such record date, and no other Holders,
shall be entitled to join in such notice, declaration, request or direction,
whether or not such Holders remain Holders after such record date; provided that
no such action shall be effective hereunder unless taken on or prior to the
applicable Record Expiration Date by Holders of the requisite principal amount
of outstanding Notes on such record date; and provided, further, that for the
purpose of determining whether Holders of the requisite principal amount of such
Notes have taken such action, no Note shall be deemed to have been outstanding
on such record date unless it is also outstanding on the date such action is to
become effective. Nothing in this paragraph shall be construed to prevent the
Trustee from setting a new record date for any action (whereupon the record date
previously
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set shall automatically and without any action by any Person be canceled and of
no effect), nor shall anything in this paragraph be construed to render
ineffective any action taken by Holders of the requisite principal amount of
outstanding Notes on the date such action is taken. Promptly after any record
date is set pursuant to this paragraph, the Trustee, at the Company's expense,
shall cause notice of such record date, the matter(s) to be submitted for
potential action by Holders and the applicable Record Expiration Date to be
given to the Company in writing and to each Holder of Notes in the manner set
forth in Section 12.02 hereof.
With respect to any record date set pursuant to this Section 1.05, the
party hereto that sets such record date may designate any day as the "Record
Expiration Date" and from time to time may change the Record Expiration Date to
any earlier or later day, provided that no such change shall be effective unless
notice of the proposed new Record Expiration Date is given to the other party
hereto in writing, and to each Holder of Notes in the manner set forth in
Section 12.02 hereof, on or before the existing Record Expiration Date. If a
Record Expiration Date is not designated with respect to any record date set
pursuant to this Section 1.05, the party hereto that set such record date shall
be deemed to have initially designated the 180th day after such record date as
the Record Expiration Date with respect thereto, subject to its right to change
the Record Expiration Date as provided in this paragraph. Notwithstanding the
foregoing, no Record Expiration Date shall be later than the 180th day after the
applicable record date.
Without limiting the foregoing, a Holder entitled hereunder to take any
action hereunder with regard to any particular Note may do so with regard to all
or any part of the principal amount of such Note or by one or more duly
appointed agents each of which may do so pursuant to such appointment with
regard to all or any part of such principal amount.
ARTICLE II
THE NOTES
SECTION 1.
SECTION 1.011. Form and Dating.
(a) The Initial Notes and the certificate of authentication of
the Trustee thereon shall be substantially in the form of Exhibit A or
Exhibit B hereto, as applicable, or, with respect to the Additional Notes,
in the form of Exhibit A, B, C or D hereto, as applicable, which are hereby
incorporated in and expressly made a part of this Indenture. The Exchange
Notes and the certificate of authentication of the Trustee thereon shall be
substantially in the form of Exhibit C or Exhibit D hereto, as applicable,
which are hereby incorporated in and expressly made a part of this
Indenture.
(b) The Notes may have such letters, numbers or other marks of
identification and such legends and endorsements, stamped, printed,
lithographed or engraved thereto, (i) as the Company may deem appropriate
and as are not inconsistent with the provisions of this Indenture, (ii)
such as may be required to comply with this
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Indenture, any law or any rule of any securities exchange on which the
Notes may be listed and (iii) such as may be necessary to conform to
customary usage. Each Note shall be dated the date of its authentication by
the Trustee.
(c) Initial Notes shall be issued initially in the form of one or
more permanent, global notes in definitive, fully registered form, without
coupons, substantially in the form of Exhibit A hereto (each an "Initial
Global Note"). Upon issuance, each such Initial Global Note shall be duly
executed by the Company and authenticated by the Trustee as hereinafter
provided and deposited with the Trustee as custodian for the Depositary.
Any Initial Certificated Note that may be issued pursuant to Section
2.06(c) hereof shall be issued in the form of a note in definitive, fully
registered form, without coupons, substantially in the form set forth in
Exhibit B hereto. Upon issuance, any such Initial Certificated Note shall
be duly executed by the Company and authenticated by the Trustee as
hereinafter provided.
(d) In the event Exchange Notes are issued pursuant to an
Exchange Offer in exchange for Initial Notes held in the form of Initial
Global Notes, such Exchange Notes shall be issued initially in the form of
a permanent global note in definitive, fully registered form, without
coupons, substantially in the form set forth in Exhibit C hereto (the
"Exchange Global Note"). Upon issuance, such Exchange Global Note shall be
duly executed by the Company and authenticated by the Trustee as
hereinafter provided and deposited with the Trustee as custodian for the
Depositary. Any Exchange Certificated Note that may be issued pursuant to
Section 2.06(c) hereof or in exchange for Initial Certificated Notes
pursuant to an Exchange Offer shall be, and any Additional Notes that may
be issued as Certificated Notes without a Private Placement Legend pursuant
to Section 2.06(a)(iii) hereof may be, issued in the form of a note in
definitive fully registered form, without coupons, substantially in the
form set forth in Exhibit D hereto. Upon issuance, any such Exchange
Certificated Note shall be duly executed by the Company and authenticated
by the Trustee as hereinafter provided.
(e) The following legends shall appear on each Global Note and
each Certificated Note as indicated below:
(i) Except as provided in Section 2.06(a)(iii) hereof, each
Initial Global Note and Initial Certificated Note shall bear
the following legend on the face thereof:
THE NOTE EVIDENCED HEREBY (THE "SECURITY") HAS NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES
LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
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HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, (1)
REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), (2)
AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS
(OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER
THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER
THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY
PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH THE
COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS
SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER
DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE
RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER
THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY
THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS
THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO
A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL
BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT
OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM
NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, OR PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES
THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO
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THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE
REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION
DATE.
(ii) Each Global Note shall bear the following legend on the face
thereof:
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY (THE "DEPOSITARY") TO USN
COMMUNICATIONS, INC. OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, OR PAYMENT AND ANY NOTE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY OR SUCH OTHER
REPRESENTATIVE OF THE DEPOSITARY OR SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND
ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE
OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS
IN WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITARY OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF
PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE
IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.06 OF
THE INDENTURE, DATED AS OF AUGUST 15, 1997, BETWEEN USN
COMMUNICATIONS, INC. AND THE TRUSTEE NAMED THEREIN, PURSUANT TO
WHICH THIS NOTE WAS ISSUED.
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(iii) Except as provided in Section 2.06(k) hereof, each Initial
Global Note relating to an Initial Note that is not an
Additional Note and Initial Certificated Note relating to
an Initial Note that is not an Additional Note shall bear
the following legend on the face thereof:
UNTIL THE EARLIEST TO OCCUR OF (I) FEBRUARY 15, 1998, (II)
THE OCCURRENCE OF AN EXERCISE EVENT (AS DEFINED IN THE WARRANT
AGREEMENT, DATED AS OF AUGUST 15, 1997, BETWEEN USN
COMMUNICATIONS, INC. (THE "COMPANY") AND HARRIS TRUST AND SAVINGS
BANK, AS WARRANT AGENT (THE "WARRANT AGREEMENT")), (III) THE
OCCURRENCE OF AN EVENT OF DEFAULT (AS DEFINED IN THE INDENTURE
RELATING TO 14 5/8% SENIOR DISCOUNT NOTES DUE 2004 (THE "NOTES")
OF THE COMPANY), (IV) THE DATE ON WHICH A REGISTRATION STATEMENT
WITH RESPECT TO THE NOTES OR AN EXCHANGE OFFER RELATING TO THE
NOTES IS DECLARED EFFECTIVE, OR (V) SUCH EARLIER DATE AS
DETERMINED BY MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
IN ITS SOLE DISCRETION, THE NOTES EVIDENCED HEREBY MAY NOT BE
SOLD, ASSIGNED OR OTHERWISE TRANSFERRED TO ANY PERSON UNLESS,
SIMULTANEOUSLY WITH SUCH TRANSFER, THE HOLDER HEREOF TRANSFERS TO
SUCH TRANSFEREE $1,000 PRINCIPAL AMOUNT AT STATED MATURITY OF
NOTES AND TEN WARRANTS, EACH WARRANT ENTITLING THE HOLDER THEREOF
TO PURCHASE 0.134484 SHARES OF CLASS A COMMON STOCK OF THE
COMPANY (SUBJECT TO ADJUSTMENT UNDER SECTION 15 OF THE WARRANT
AGREEMENT) SO TRANSFERRED.
(f) Definitive Notes shall be typed, printed, lithographed or
engraved or produced by any combination of such methods or produced in any
other manner permitted by the rules of any securities exchange on which
such Notes may be listed, all as determined by the Officers of the Company
executing such Notes, as evidenced by their execution of such Notes.
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SECTION 1.012. Execution and Authentication. The Notes may be
issued in two series, a series of Initial Notes and a series of Exchange
Notes. The aggregate principal amount at Stated Maturity of Notes
outstanding at any time shall not exceed $204,725,000 except as provided in
Section 2.07 hereof. The Notes shall be executed on behalf of the Company
by its Chief Executive Officer, its Chief Operating Officer, its President
or any Vice President, under its corporate seal reproduced or imprinted on
the Notes by facsimile or otherwise, and shall be attested by the Company's
Secretary or one of its Assistant Secretaries, in each case by manual or
facsimile signature.
In case any Officer of the Company whose signature shall have been placed
upon any of the Notes shall cease to be such Officer of the Company before
authentication of such Notes by the Trustee and the issuance and delivery
thereof, such Notes may, nevertheless, be authenticated by the Trustee and
issued and delivered with the same force and effect as though such Person had
not ceased to be such Officer of the Company.
Notwithstanding any other provision hereof, the Trustee shall authenticate
and deliver Notes only upon receipt by the Trustee of an Officers' Certificate
and Opinion of Counsel complying with Section 12.04 hereof with respect to
satisfaction of all conditions precedent contained in this Indenture to
authentication and delivery of such Notes.
Upon compliance by the Company with the provisions of the previous
paragraph, the Trustee shall, upon receipt of a Company Order requesting such
action, authenticate (a) (i) Initial Notes (not including Additional Notes) for
original issuance in an aggregate principal amount at Stated Maturity not to
exceed $152,725,0000, or (ii) Exchange Notes for issuance pursuant to an
Exchange Offer for Initial Notes in a principal amount at Stated Maturity equal
to the principal amount at Stated Maturity of Initial Notes exchanged in such
Exchange Offer and (b) Additional Notes for original issuance in an aggregate
principal amount at Stated Maturity not to exceed $52,000,000, in the form of
one or more Global Notes.
Such Company Order shall specify the amount of Notes to be authenticated
and the date on which, in the case of clause (a) above, the Initial Notes or, in
the case of clause (b) above, the Exchange Notes, are to be authenticated and
shall further provide instructions concerning registration, amounts for each
Holder and delivery.
Upon the occurrence of any event specified in Section 2.06(c) hereof and
compliance by the Company with the provisions of the paragraph preceding the
immediately preceding paragraph, the Company shall execute and the Trustee shall
authenticate and deliver to each beneficial owner identified by the Depositary,
in exchange for such beneficial owner's interest in an Initial Global Note or
Exchange Global Note, as the case may be, Initial Certificated Notes or Exchange
Certificated Notes, as the case may be, representing Notes theretofore
represented by the Initial Global Note or Exchange Global Note, as the case may
be.
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A Note shall not be valid or entitled to any benefit under this Indenture
or obligatory for any purpose unless executed by the Company and authenticated
by the manual signature of the Trustee as provided herein. The signature of an
authorized officer of the Trustee shall be conclusive evidence, and the only
evidence, that such Note has been authenticated and delivered under this
Indenture.
The Trustee may appoint an authenticating agent reasonably acceptable to
the Company to authenticate the Notes. Unless limited by the status of such
appointment, an authenticating agent may authenticate Notes whenever the Trustee
may do so. Each reference in this Indenture to authentication by the Trustee
includes authentication by such agent. Any authenticating agent of the Trustee
shall have the same rights hereunder as any Registrar or Paying Agent.
SECTION 1.013. Registrar and Paying Agent. The Company shall
maintain, pursuant to Section 4.02 hereof, an office or agency where the
Notes may be presented for registration of transfer or for exchange. The
Company shall cause to be kept at such office a register (the register
maintained in such office being herein sometimes referred to as the
"Security Register") in which, subject to such reasonable regulations as it
may prescribe, the Company shall provide for the registration of Notes and
of transfers of Notes entitled to be registered or transferred as provided
herein. The Trustee, at its Corporate Trust Office, is initially appointed
"Registrar" for the purpose of registering Notes and transfers of Notes as
herein provided and as "Paying Agent" for the payment of principal of (and
premium, if any), and interest (including Special Interest, if any) on, the
Notes. The Company may, upon written notice to the Trustee, change the
designation of the Trustee as Registrar or Paying Agent and appoint another
Person to act as Registrar or Paying Agent for purposes of this Indenture,
except that for the purposes of Article III, Article XI and Sections 4.07
and 4.08, none of the Company, any Guarantor, any Restricted Subsidiary and
any Affiliate shall act as Paying Agent. If any Person other than the
Trustee acts as Registrar, the Trustee shall have the right at any time,
upon reasonable notice, to inspect or examine the Security Register and to
make such inquiries of the Registrar as the Trustee shall in its discretion
deem necessary or desirable in performing its duties hereunder.
The Company shall enter into an appropriate agency agreement with any
Person designated by the Company as Registrar or Paying Agent that is not a
party to this Indenture, which agreement shall incorporate the provisions of the
Trust Indenture Act and shall implement the provisions of this Indenture that
relate to such Registrar or Paying Agent. Prior to the designation of any such
Person, the Company shall, by written notice (which notice shall include the
name and address of such Person), inform the Trustee of such designation. If
the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act
as such.
Upon surrender for registration of transfer of any Note at an office or
agency of the Company designated for such purpose, the Company shall execute,
and the Trustee shall authenticate and deliver, in the name of the designated
transferee or transferees, one or more new Initial Notes or
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Exchange Notes, as the case may be, of any authorized denomination or
denominations, of like tenor and aggregate principal amount at Stated Maturity,
all as requested by the transferor.
Every Note presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company, the Trustee or the Registrar) be
duly endorsed, or be accompanied by a duly executed instrument of transfer in
form satisfactory to the Company, the Trustee and the Registrar, by the Holder
thereof or such Holder's attorney duly authorized in writing.
SECTION 1.014. Paying Agent to Hold Money in Trust. On or prior
to each due date of the principal, premium, or any payment of interest with
respect to any Note, the Company shall deposit with the Paying Agent a sum
sufficient to pay such principal, premium or interest (including Special
Interest, if any) when so becoming due.
The Company shall require each Paying Agent (other than the Trustee) to
agree in writing that such Paying Agent shall hold in trust for the benefit of
Holders or the Trustee all money held by such Paying Agent for the payment of
principal, premium, and interest (including Special Interest, if any) with
respect to the Notes, shall notify the Trustee of any default by the Company in
making any such payment and at any time during the continuance of any such
default, upon the written request of the Trustee, shall forthwith pay to the
Trustee sums held in trust by such Paying Agent.
The Company at any time may require a Paying Agent to pay all money held by
it to the Trustee and to account for any funds disbursed by such Paying Agent.
Upon complying with this Section 2.04, the Paying Agent shall have no further
liability for the money delivered to the Trustee.
SECTION 1.015. Global Notes.
(a) So long as a Global Note is registered in the name of the
Depositary or its nominee, members of, or participants in, the Depositary
("Agent Members") shall have no rights under this Indenture with respect to
the Global Note held on their behalf by the Depositary or the Trustee as
its custodian, and the Depositary may be treated by the Company, the
Trustee and any agent of the Company or the Trustee as the absolute owner
of such Global Note for all purposes. Notwithstanding the foregoing,
nothing herein shall (i) prevent the Company, the Trustee or any agent of
the Company or the Trustee, from giving effect to any written
certification, proxy or other authorization furnished by the Depositary or
(ii) impair, as between the Depositary and its Agent Members, the operation
of customary practices governing the exercise of the rights of a Holder of
Notes.
(b) The Holder of a Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests in such Global Note through Agent Members, to take any action
which a Holder of Notes is entitled to take under this Indenture or the
Notes.
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(c) Whenever, as a result of an optional redemption of Notes by
the Company, a Change of Control Offer, an Asset Sale Offer, an Exchange
Offer or an exchange pursuant to the second sentence of Section 2.06(c)
hereof, a Global Note is redeemed, repurchased or exchanged in part, such
Global Note shall be surrendered by the Holder thereof to the Trustee who
shall cause an adjustment to be made to Schedule A thereof so that the
principal amount of such Global Note will be equal to the portion of such
Global Note not redeemed, repurchased or exchanged and shall thereafter
return such Global Note to such Holder, provided that each such Global Note
shall be in a principal amount at Stated Maturity of $1,000 or an integral
multiple thereof.
SECTION 1.016. Transfer and Exchange.
(a) The following provisions of this paragraph (a) are applicable
only to Initial Notes:
(i) By its acceptance of any Initial Note represented by a
certificate bearing the Private Placement Legend, each
Holder of, and each beneficial owner of an interest in,
such Initial Note acknowledges the restrictions on transfer
of such Initial Note set forth in the Private Placement
Legend and under the heading "Notice to Investors" in the
Final Memorandum and agrees that it will transfer such
Initial Note only in accordance with the Private Placement
Legend and the restrictions set forth under the heading
"Notice to Investors" in the Final Memorandum.
(ii) In connection with any transfer of an Initial Note bearing
the Private Placement Legend, each Holder agrees to deliver
to the Company, such satisfactory evidence, which may
include an opinion of independent counsel licensed to
practice law in the State of New York, as reasonably may be
requested by the Company to confirm that such transfer is
being made in accordance with the limitations set forth in
the Private Placement Legend. In the event the Company
determines that any such transfer is not in accordance with
the Private Placement Legend, the Company shall so inform
the Registrar who shall not register such transfer;
provided that the Registrar shall not be required to
determine (but may rely on a determination made by the
Company with respect to) the sufficiency of any such
evidence.
(iii) Upon the registration of transfer, exchange or replacement
of an Initial Note not bearing the Private Placement
Legend, the Trustee shall deliver an Initial Note or
Initial Notes that do not bear the Private Placement
Legend. Upon the transfer, exchange or
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replacement of an Initial Note bearing the Private Placement
Legend, the Trustee shall deliver an Initial Note or Initial
Notes bearing the Private Placement Legend, unless such
legend may be removed from such Note as provided in the next
sentence. The Private Placement Legend may be removed from
an Initial Note if there is delivered to the Company such
satisfactory evidence, which may include an opinion of
independent counsel licensed to practice law in the State of
New York, as reasonably may be requested by the Company to
confirm that neither such legend nor the restrictions on
transfer set forth therein are required to ensure that
transfers of such Initial Note will not violate the
registration and prospectus delivery requirements of the
Securities Act; provided that the Trustee shall not be
required to determine (but may rely on a determination made
by the Company with respect to) the sufficiency of any such
evidence. Upon provision of such evidence, the Trustee shall
authenticate and deliver in exchange for such Initial Note,
an Initial Note or Initial Notes (representing the same
aggregate principal amount at Stated Maturity of the Initial
Note being exchanged) without such legend. If the Private
Placement Legend has been removed from an Initial Note, as
provided above, no other Initial Note issued in exchange for
all or any part of such Initial Note shall bear such legend
unless the Company has reasonable cause to believe that such
other Initial Note represents a "restricted security" within
the meaning of Rule 144 and instructs the Trustee in writing
to cause a legend to appear thereon.
(iv) The Company shall deliver to the Trustee, and the Trustee
shall retain for two years, copies of all documents receive
pursuant to this Section 2.06(a). The Company shall have the
right to inspect and make copies of all such documents at
any reasonable time upon the giving of reasonable written
notice to the Trustee.
(b) Any Initial Notes which are presented to the Registrar for
exchange pursuant to an Exchange Offer shall be exchanged for Exchange
Notes of equal principal amount at Stated Maturity upon surrender to the
Registrar of the Initial Notes to be exchanged in accordance with the terms
of the Exchange Offer; provided that the Initial Notes so surrendered for
exchange are duly endorsed and accompanied by a letter of transmittal or
written instrument of transfer in form satisfactory to the Company, the
Trustee and the Registrar and duly executed by the Holder thereof or such
Holder's attorney who shall be duly authorized in writing to execute such
document on the behalf of such Holder. Whenever any Initial Notes are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver to the surrendering
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Holder thereof, Exchange Notes in the same aggregate principal amount at
Stated Maturity as the Initial Notes so surrendered.
(c) Any Initial Global Note or the Exchange Global Note, as the
case may be, shall be exchanged by the Company for one or more Initial
Certificated Notes or Exchange Certificated Notes, as the case may be, if
(a) the Depositary (i) has notified the Company that it is unwilling or
unable to continue as, or ceases to be, a clearing agency registered under
Section 17A of the Exchange Act and (ii) a successor to the Depositary
registered as a clearing agency under Section 17A of the Exchange Act is
not able to be appointed by the Company within 90 days or (b) the
Depositary is at any time unwilling or unable to continue as Depositary and
a successor to the Depositary is not able to be appointed by the Company
within 90 days. If an Event of Default occurs and is continuing, the
Company shall, at the request of the Holder thereof, exchange all or part
of an Initial Global Note or the Exchange Global Note, as the case may be,
for one or more Initial Certificated Notes or Exchange Certificated Notes,
as the case may be; provided that the principal amount at Stated Maturity
of each such Global Note, after such exchange, shall be $1,000 or an
integral multiple thereof. Whenever a Global Note is exchanged as a whole
for one or more Initial Certificated Notes or Exchange Certificated Notes,
as the case may be, it shall be surrendered by the Holder thereof to the
Trustee for cancellation. Whenever a Global Note is exchanged in part for
one or more Initial Certificated Notes or Exchange Certificated Notes, as
the case may be, it shall be surrendered by the Holder thereof to the
Trustee and the Trustee shall make the appropriate notations thereon
pursuant to Section 2.05(c) hereof. All Initial Certificated Notes or
Exchange Certificated Notes, as the case may be, issued in exchange for a
Global Note or any portion thereof shall be registered in such names, and
delivered, as the Depositary shall instruct the Trustee. Any Initial
Certificated Notes issued pursuant to this Section 2.06(c) shall include
(i) the Private Placement Legend, except as set forth in Section
2.06(a)(iii) hereof, and (ii) other than Additional Notes, the Unit Legend,
except as set forth in Section 2.06(k) hereof. Interests in a Global Note
may not be exchanged for Certificated Notes other than as provided in this
Section 2.06(c).
(d) A Holder may transfer a Note only upon the surrender of such
Note for registration of transfer. No such transfer shall be effected
until, and the transferee shall succeed to the rights of a Holder only
upon, final acceptance and registration of the transfer in the Security
Register by the Registrar. When Notes are presented to the Registrar with a
request to register the transfer of, or to exchange, such Notes, the
Registrar shall register the transfer or make such exchange as requested if
its requirements for such transactions and any applicable requirements
hereunder are satisfied. To permit registrations of transfers and
exchanges, the Company shall execute and the Trustee shall authenticate
Certificated Notes at the Registrar's request.
(e) The Company shall not be required to make and the Registrar
need not register transfers or exchanges of Certificated Notes selected for
redemption (except,
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in the case of Certificated Notes to be redeemed in part, the portion
thereof not to be redeemed) for a period of 15 days before a selection of
Certificated Notes to be redeemed.
(f) No service charge shall be made for any registration of
transfer or exchange of Notes, but 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 of transfer of Notes (other
than in respect of a Registered Exchange Offer, except as provided in the
Registration Rights Agreement, and in respect of exchanges and transfers
pursuant to Sections 2.09, 3.06, 4.07, 4.08 and 9.06 hereof).
(g) All Notes issued upon any registration of transfer or
exchange pursuant to the terms of this Indenture will evidence the same
debt and will be entitled to the same benefits under this Indenture as the
Notes surrendered for such registration of transfer or exchange.
(h) Prior to the effectiveness under the Securities Act of a
Shelf Registration Statement, or at any time during the suspension or
following the termination thereof, Holders of Initial Notes (or holders of
interests therein) and prospective purchasers designated by such Holders of
Initial Notes (or such holders of interests therein) shall have the right
to obtain from the Company upon request by such Holders (or such holders of
interests) or prospective purchasers, during any period in which the
Company is not subject to Section 13 or Section 15(d) of the Exchange Act,
or is exempt from reporting pursuant to 12g3-2(b) under the Exchange Act,
the information required by paragraph (d)(4)(i) of Rule 144A in connection
with any transfer or proposed transfer of such Notes or interests.
(i) Any Holder of a Global Note shall, by acceptance of such
Global Note, agrees that transfers of beneficial interests in such Global
Note may be effected only through a book-entry system maintained by the
Holder of such Global Note (or its agent), and that ownership of a
beneficial interest in the Notes represented thereby shall be required to
be reflected in book-entry form. Transfers of a Global Note shall be
limited to transfers in whole and not in part, to the Depositary, its
successors, and their respective nominees. Interests of beneficial owners
in Global Note may be transferred in accordance with the rules and
procedures of the Depositary (or its successors).
(j) By its acceptance of any Initial Note represented by a
certificate bearing the Unit Legend, each Holder of, and each beneficial
owner of an interest in, such Initial Note acknowledges that the Notes
shall initially be issued as part of the issuance of the Units and agrees
to the restrictions on transfer of Units set forth in the Final Memorandum
and the Unit Legend and agrees that it will not transfer such Initial Notes
separately, but only with the Initial Warrants as part of a transfer of a
Unit or Units, until the Separability Date. The Registrar shall not
register the transfer of any Note (other than an Additional Note) prior to
the Separability Date unless the Company receives evidence
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reasonably satisfactory to it that such transfer is part of a transfer of a
Unit or Units, provided that the Registrar shall not be required to
determine (but may rely on the determination made by the Company with
respect to) the sufficiency of any such evidence. Notice from the Warrant
Agent of a proposed transfer of Initial Warrants (in a number that together
with the principal amount of the Notes proposed to be transferred will
constitute a Unit or Units) by the same Holder requesting transfer of such
Notes to the same proposed transferee to which such Notes are to be
transferred, shall constitute satisfactory evidence for the purposes of the
second sentence of this subsection (j).
(k) The Company shall notify the Trustee and the Depositary in
writing of the occurrence of the Separability Date on such Separability
Date. Any Notes issued after the Separability Date shall not include the
Unit Legend.
SECTION 1.017. Replacement Notes. If any mutilated Note is
surrendered to the Trustee, the Company shall execute and upon its written
request the Trustee shall authenticate and deliver, in exchange for any
such mutilated Note, a new Note containing identical provisions and of like
principal amount, bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Note and (ii) such
security or indemnity as may be required by them to save either of them and any
agent of each of them harmless, then, in the absence of notice to the Company or
the Trustee that such Note has been acquired by a bona fide purchaser, the
Company shall execute and upon its request the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Note, a new Note
containing identical provisions and of like principal amount, bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Note has become or is
about to become due and payable, the Company in its discretion may, instead of
issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section 2.07, the Company may
require the payment by the Holder of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Note issued pursuant to this Section 2.07 in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all the benefits of this Indenture equally and proportionately with any and all
other Notes duly issued hereunder.
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The provisions of this Section 2.07 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 1.018. Outstanding Notes. Notes outstanding at any time
are all Notes authenticated by the Trustee except for those canceled by it,
those delivered to it for cancellation and those described in this Section
2.08 as not outstanding. A Note does not cease to be outstanding because
the Company or an Affiliate of the Company holds such Note.
If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that such replaced Note is held by a bona fide purchaser.
If the Paying Agent (other than the Company, a Guarantor or an Affiliate of
the Company or a Guarantor) segregates and holds in trust, in accordance with
this Indenture, on a Redemption Date or Maturity date money sufficient to pay
all principal, premium, if any, and interest (including Special Interest, if
any) payable on that date with respect to the Notes (or portions thereof) to be
redeemed or maturing, as the case may be, then on and after that date such Notes
(or such portions thereof) shall cease to be outstanding and interest on them
shall cease to cease to accrete in value or accrue interest, as the case may be.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent or any amendment,
modification or other change to this Indenture, Notes held or beneficially owned
by the Company or a Restricted Subsidiary of the Company or by an Affiliate of
the Company or a Restricted Subsidiary of the Company or by agents of any of the
foregoing shall be disregarded, except that for the purposes of determining
whether the Trustee shall be protected in relying on any such direction, waiver
or consent or any amendment, modification or other change to this Indenture,
only Notes which a Trust Officer has actual knowledge to be so owned shall be so
disregarded. Notes so owned which have been pledged in good faith shall not be
disregarded if the pledgee establishes to the satisfaction of the Trustee such
pledgee's right so to act with respect to the Notes and that the pledgee is not
the Company or an Affiliate of the Company or any of their agents.
SECTION 1.019. Temporary Notes. Pending the preparation of
definitive Notes, the Company may execute, and the Trustee shall
authenticate, temporary notes ("Temporary Notes") which are printed,
lithographed, or otherwise produced, substantially of the tenor of the
definitive Notes in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other variations.
If Temporary Notes are issued, the Company shall cause definitive Notes to
be prepared without unreasonable delay. After the preparation of definitive
Notes, the Temporary Notes shall be exchangeable for definitive Notes upon
surrender of the Temporary Notes to the Trustee,
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without charge to the Holder. Until so exchanged, Temporary Notes will evidence
the same debt and will be entitled to the same benefits under this Indenture as
the definitive Notes in lieu of which they have been issued.
SECTION 2.10. Cancellation. The Company at any time may deliver Notes
to the Trustee for cancellation. The Registrar and the Paying Agent shall
forward to the Trustee any Notes surrendered to them for registration of
transfer, exchange, purchase or payment. The Trustee shall cancel all Notes
surrendered for registration of transfer, exchange, purchase, payment or
cancellation and shall destroy such canceled Notes unless the Company shall
by Company Order otherwise direct. The Company may not issue new Notes to
replace Notes it has redeemed or paid or that have been delivered to the
Trustee for cancellation.
SECTION 2.11. Payment of Interest; Interest Rights Preserved. Interest
(including Special Interest, if any) on any Note which is payable, and is
punctually paid or duly provided for, on any Interest Payment Date, which
shall be February 15 or August 15, commencing February 15, 2001 for
interest other than Special Interest, if any, shall be paid to the Person
in whose name such Note is registered at the close of business on the
Record Date for such interest payment, which shall be the January 31 or
July 31 (whether or not a Business Day) immediately preceding such
Interest Payment Date.
Any interest on any Note which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date (herein called
"Defaulted Interest") shall forthwith cease to be payable to the registered
Holder on the relevant Record Date, and, except as hereafter provided, such
Defaulted Interest, and any interest payable on such Defaulted Interest,
may be paid by the Company, at its election, as provided in clause (a) or
(b) below:
(a) The Company may elect to make payment of any Defaulted
Interest, and any interest payable on such Defaulted Interest, to the
Persons in whose names the Notes are registered at the close of business on
a Special Record Date for the payment of such Defaulted Interest, which
shall be fixed in the following manner. The Company shall notify the
Trustee in writing of the amount of Defaulted Interest proposed to be paid
on the Notes and the date of the proposed payment, and at the same time the
Company shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such Defaulted Interest
or shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed payment, such money when deposited to be
held in trust for the benefit of the Persons entitled to such Defaulted
Interest as provided in this Clause. Thereupon the Trustee shall fix a
Special Record Date for the payment of such Defaulted Interest which shall
be not more than 15 days and not less than 10 days prior to the date of the
proposed payment
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and not less than 10 days after the receipt by the Trustee of the notice of
the proposed payment. The Trustee shall promptly notify the Company of such
Special Record Date and, in the name and at the expense of the Company,
shall cause notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor to be sent, first class mail, postage
prepaid, to each Holder at such Holder's address as it appears in the
Security Register, not less than 10 days prior to such Special Record Date.
Notice of the proposed payment of such Defaulted Interest and the Special
Record Date therefor having been mailed as aforesaid, such Defaulted
Interest shall be paid to the Persons in whose names the Notes are
registered at the close of business on such Special Record Date and shall
no longer be payable pursuant to the following clause (b).
(b) The Company may make payment of any Defaulted Interest, and
any interest payable on such Defaulted Interest, on the Notes in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed, and upon such notice as may be
required by such exchange, if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this clause, such manner of
payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section 2.11, each
Note delivered under this Indenture upon registration of transfer of, or in
exchange for, or in lieu of, any other Note, shall carry the rights to
interest accrued and unpaid, and to accrue, which were carried by such
other Note.
SECTION 2.12. Authorized Denominations. The Notes shall be issuable in
denominations of $1,000 and any integral multiple thereof.
SECTION 2.13. Computation of Interest, etc. The Notes that will be
issued on the Issue Date will be issued at a discounted aggregate principal
amount of $100,001,276. Such Notes will accrete in value from the date of
original issuance thereof, whether on the Issue Date or otherwise, at a
rate of 14 5/8% per annum, compounded semi-annually in the manner specified
in the definition of "Accreted Value" contained in Section 1.01 hereof, up
to an aggregate principal amount of $152,725,000 by August 15, 2000
(assuming all of the Initial Senior Notes issuable under clause (i) of the
third paragraph of Section 2.02 of this Indenture are so issued). The
Additional Notes, if any, will accrete in value from the dates of original
issuance thereof at a rate of 14 5/8% per annum, compounded semi-annually
in the manner specified in the definition of "Accreted Value" contained in
Section 1.01 hereof until August 15, 2000. Thereafter interest on the Notes
will accrue at a rate of 14 5/8% per annum. Interest on the Notes shall be
computed on the basis of a 360-day year of twelve 30-day months.
Notwithstanding any other term of this Indenture, the Company shall not be
obliged to pay any interest or other amounts
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under or in connection with this Indenture in excess of the amount or rate
permitted under or consistent with applicable law.
SECTION 2.14. Persons Deemed Owners. Prior to the due presentation for
registration of transfer of any Note, the Company, the Trustee, the Paying
Agent, the Registrar or any co-Registrar may deem and treat the person in
whose name a Note is registered as the absolute owner of such Note for the
purpose of receiving payment of principal of, premium, if any, and interest
(including Special Interest, if any) on such Note and for all other
purposes whatsoever, whether or not such Note is overdue, and none of the
Company, the Trustee, the Paying Agent, the Registrar or any co-Registrar
shall be affected by notice to the contrary.
SECTION 2.15. CUSIP Numbers. The Company, in issuing the Notes, may
use a "CUSIP" number for each series of Notes and may use another such
"CUSIP" number for the Additional Notes and, if so, the Trustee shall use
the relevant CUSIP number in any notices to Holders as a convenience to
such Holders; provided that any such notice may state that no
representation is made as to the correctness or accuracy of the CUSIP
number printed in the notice or on the Notes and that reliance may be
placed only on the other identification numbers printed on the Notes. The
Company shall promptly notify the Trustee of any change in any CUSIP number
used.
ARTICLE III
REDEMPTION
SECTION 2.
SECTION 1.021. Notice to Trustee. If the Company elects to redeem
Notes pursuant to the optional redemption provisions of Section 3.07 and
the Notes, it shall furnish an Officers' Certificate to the Trustee setting
forth the Redemption Date, the principal amount of Notes to be redeemed and
the Redemption Price. The Company shall give each such notice to the
Trustee at least 60 days prior to the Redemption Date unless the Trustee
consents to a shorter period. Such notice shall be accompanied by an
Officers' Certificate and an Opinion of Counsel from the Company to the
effect that such redemption will comply with any conditions to such
redemption set forth herein and in the Notes.
SECTION 1.022. Selection of Notes to be Redeemed. If less than
all the Notes are to be redeemed at any time, the Trustee shall select the
Notes to be redeemed on a pro rata basis, or by any other method which the
Trustee deems to be fair and appropriate and which complies with any
securities exchange or other applicable requirements, provided that the
Trustee may select for redemption in part only Notes in denominations
larger than $1,000. In selecting Notes to be redeemed pursuant to this
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Section 3.02, the Trustee shall make such adjustments, reallocations and
eliminations as it shall deem proper so that the principal amount of each
Note to be redeemed shall be $1,000 or an integral multiple thereof, by
increasing, decreasing or eliminating any amount less than $1,000 which
would be allocable to any Holder. If the Notes to be redeemed are
Certificated Notes, the Certificated Notes to be redeemed shall be selected
by the Trustee by prorating, as nearly as may be, or by any other method
which the Trustee deems to be fair and appropriate and which complies with
any securities exchange or other applicable requirements the principal
amount of Certificated Notes to be redeemed among the Holders of
Certificated Notes registered in their respective names. The Trustee in its
discretion may determine the particular Notes (if there are more than one)
registered in the name of any Holder which are to be redeemed, in whole or
in part. Provisions of this Indenture that apply to Notes called for
redemption also apply to portions of Notes called for redemption. The
Trustee shall notify the Company promptly of the Notes or portions of Notes
to be redeemed. Each redemption of Notes shall be pro rata as between
Initial Notes and Exchange Notes.
SECTION 1.023. Notice of Redemption. At least 30 days but not
more than 60 days before a Redemption Date, the Company shall send a notice
of redemption, first class mail, postage prepaid, to Holders of Notes to be
redeemed at the addresses of such Holders as they appear in the Security
Register.
The notice shall identify the Notes to be redeemed and shall state:
(a) the Redemption Date;
(b) the Redemption Price (and shall specify the portion of such
Redemption Price that constitutes the amount of accrued and unpaid interest
to be paid, if any);
(c) the name and address of the Paying Agent;
(d) that the Notes called for redemption must be surrendered to
the Paying Agent to collect the Redemption Price;
(e) if any Global Note is being redeemed in part, the portion of
the principal amount of such Note to be redeemed and that, after the
Redemption Date, the Global Note, with a notation on Schedule A thereof
adjusting the principal amount thereof to be equal to the unredeemed
portion, will be returned to the Holder thereof;
(f) if any Certificated Note is being redeemed in part, the
portion of the principal amount of such Note to be redeemed and that, after
the Redemption Date, a new Certificated Note or Certificated Notes in
principal amount at Stated Maturity equal to the unredeemed portion will be
issued;
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(g) if fewer than all the outstanding Notes are to be redeemed,
the identification and principal amounts at Stated Maturity of the
particular Notes to be redeemed;
(h) that, unless the Company defaults in making the redemption
payment, payment of interest (including Special Interest, if any) on, or
the accretion of the value of, the Notes (or portions thereof) called for
redemption shall cease and such Notes (or portions thereof) shall cease to
accrete in value or cease to accrue interest, as the case may be, and cease
to accrue Special Interest, if applicable on and after the Redemption Date;
(i) the paragraph of the Notes and the Section of this Indenture
pursuant to which the Notes are being called for redemption; and
(j) any other information necessary to enable Holders to comply
with the notice of redemption.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such
event, the Company shall provide the Trustee with the information required
by this Section 3.03 in a timely manner; provided that the Company shall
give the Trustee not less than 60 days' notice unless the Trustee consents
to a shorter period.
SECTION 1.024. Effect of Notice of Redemption. Once notice of
redemption is mailed, Notes called for redemption shall become due and
payable on the Redemption Date and at the Redemption Price stated in such
notice, plus interest and Special Interest, if any, accrued and unpaid on
the Redemption Date; provided that if the Redemption Date is after a
regular Record Date and on or prior to the Interest Payment Date, the
accrued interest (including Special Interest, if any) shall be payable to
the Holder of the redeemed Note on the relevant Record Date; and provided,
further, that if a Redemption Date is not a Business Day, payment shall be
made on that next succeeding Business Day and no interest shall accrue for
the period from such Redemption Date to such succeeding Business Day. Upon
surrender to the Paying Agent, such Notes shall be paid at the Redemption
Price stated in such notice. Failure to give notice or any defect in the
notice to any Holder shall not affect the validity of the notice to any
other Holder.
SECTION 1.025. Deposit of Redemption Price. On or prior to 10:00
a.m., New York City time, on each Redemption Date, the Company shall
deposit with the Paying Agent (or, if the Company, one of its Subsidiaries
or any of their Affiliates is the Paying Agent, the Paying Agent shall
segregate and hold in trust for the benefit of the Holders) money, in
federal or other immediately available funds, sufficient to pay the
Redemption Price on all Notes to be redeemed on that date other than Notes
or portions
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of Notes called for redemption on such date which have been delivered by
the Company to the Trustee for cancellation.
So long as the Company complies with the preceding paragraph and the
other provisions of this Article III, interest (and Special Interest, if
any) on the Notes to be redeemed on the applicable Redemption Date shall
cease to accrue or such Notes shall cease to accrete in value, as the case
may be, from and after such date and such Notes or portions thereof shall
be deemed not to be entitled to any benefit under this Indenture except to
receive payment on the Redemption Date of the Redemption Price plus
interest and Special Interest, if any, accrued and unpaid on the Redemption
Date. If any Note called for redemption shall not be so paid upon surrender
for redemption, then, from the Redemption Date until such principal is
paid, interest shall be paid on the unpaid principal and, to the extent
permitted by law, on any accrued but unpaid interest (including Special
Interest, if any) thereon, in each case at the rate prescribed therefor by
such Notes.
SECTION 1.026. Notes Redeemed in Part. Upon surrender and
cancellation of a Certificated Note that is redeemed in part, the Company
shall issue and the Trustee shall authenticate and deliver to the
surrendering Holder (at the Company's expense) a new Certificated Note
equal in principal amount to the unredeemed portion of the Certificated
Note surrendered and canceled, provided that each such Certificated Note
shall be in a principal amount at Stated Maturity of $1,000 or an integral
multiple thereof.
Upon surrender of a Global Note that is redeemed in part, the Paying
Agent shall forward such Global Note to the Trustee who shall make a
notation on Schedule A thereof to reduce the principal amount at Stated
Maturity of such Global Note to an amount equal to the unredeemed portion
of such Global Note, as provided in Section 2.05(c) hereof.
SECTION 1.027. Optional Redemption. The Notes will not be
redeemable at the option of the Company prior to August 15, 2002, subject
to provisions of the following paragraph. Thereafter, the Notes will be
subject to redemption at the option of the Company, in whole or in part,
upon not less than 30 nor more than 60 days' notice, at the Redemption
Prices (expressed as percentages of principal amount at Stated Maturity
thereof) set forth below, plus accrued and unpaid interest (if any) and
Special Interest (if any), if redeemed during the twelve months beginning
August 15 of each year indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002
107.313%
</TABLE>
49
<PAGE>
<TABLE>
<S> <C>
2003 103.656%
</TABLE>
Notwithstanding the foregoing, in the event that on or prior to August
15, 2000, the Company consummates one or more Public Equity Offerings of
its Common Stock, in an aggregate amount equal to or exceeding $40,000,000,
up to a maximum of 35 percent of the aggregate principal amount at Stated
Maturity of the Notes will be redeemable at the option of the Company out
of the net proceeds of such sale or sales to the extent that such proceeds
consist of cash or cash equivalents. Such Notes will be redeemable on not
less than 30 nor more than 60 days' prior notice at a Redemption Price
equal to 114.63 percent of the Accreted Value of the Notes to be redeemed
on the Redemption Date plus accrued and unpaid interest, if any, and
Special Interest, if any, to the Redemption Date. Any such redemption shall
occur within 90 days after (but not before) such sale or last such sale in
the case of a series of related transactions; provided that immediately
after giving effect to such redemption not less than 65 percent of the
aggregate principal amount at Stated Maturity of the Notes originally
issued remain outstanding.
ARTICLE IV
COVENANTS
SECTION 3.
SECTION 1.031. Payment of Notes. The Company shall promptly pay
the principal of, premium, if any, and interest (including Special
Interest, if any), on, the Notes on the dates and in the manner provided in
the Notes and in this Indenture. Principal, premium and interest shall be
considered paid on the date due if, on such date, the Trustee or the Paying
Agent holds in accordance with this Indenture money sufficient to pay all
principal, premium and interest (including Special Interest, if any) then
due.
To the extent lawful, the Company shall pay interest on (i) any
overdue principal of (and premium, if any, on) the Notes, at the interest
rate borne on the Notes, plus 1% per annum, and (ii) Defaulted Interest
(without regard to any applicable grace period), at the same rate. The
Company's obligation pursuant to the previous sentence shall apply whether
such overdue amount is due at its Stated Maturity, as a result of the
Company's obligations pursuant to Section 3.05, Section 4.07 or Section
4.08 hereof, or otherwise.
SECTION 4.02. Maintenance of Office or Agency. The Company shall
maintain in the Borough of Manhattan, The City of New York, an office or
agency where Notes may be presented or surrendered for payment, where Notes
may be surrendered for registration of transfer or exchange and where
notices and demands to or upon the Company in respect of the Notes and this
Indenture may be served. The Company shall give prompt written notice to
the Trustee of the location, and any change in the location, of such office
or agency. As of the date hereof, the address of such agency is: Harris
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Trust and Savings Bank, c/o Harris Trust Company of New York, 77 Water
Street, 4th Floor, New York, New York 10005. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate
Trust Office of the Trustee, and the Company hereby appoints the Trustee
its agent to receive all presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York) where the Notes
may be presented or surrendered for any or all of such purposes, and may
from time to time rescind such designations; provided that no such
designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in The City of New York, for
such purposes. The Company shall give prompt written notice to the Trustee
of any such designation and any change in the location of any such other
office or agency.
SECTION 1.033. Money for the Note Payments to be Held in
Trust. If the Company, any Restricted Subsidiary of the Company or any of
their respective Affiliates shall at any time act as Paying Agent with
respect to the Notes, such Paying Agent shall, on or before each due date
of the principal of (and premium, if any) or interest on any of the Notes,
segregate and hold in trust for the benefit of the Persons entitled thereto
money sufficient to pay the principal (and premium, if any) and interest
(including Special Interest, if any), so becoming due until such money
shall be paid to such Persons or otherwise disposed of as herein provided,
and shall promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents with respect
to the Notes, it shall, prior to or on each due date of the principal of
(and premium, if any) or interest (including Special Interest, if any) on
any of the Notes, deposit with a Paying Agent a sum sufficient to pay the
principal (and premium, if any) and interest (including Special Interest,
if any), so becoming due, such sum to be held in trust for the benefit of
the Persons entitled to such principal, premium and interest (including
Special Interest, if any), and (unless such Paying Agent is the Trustee)
the Paying Agent shall promptly notify the Trustee of the Company's action
or failure so to act.
SECTION 1.034. Corporate Existence. Subject to the
provisions of Article V hereof, the Company shall do or cause to be done
all things necessary to preserve and keep in full force and effect the
corporate existence, rights (charter and statutory) and franchises of the
Company and each of its Restricted Subsidiaries; provided that the Company
and any such Restricted Subsidiary shall not be required to preserve the
corporate existence of any such Restricted Subsidiary or any such right or
franchise if the Board of Directors shall determine that the preservation
thereof is no longer desirable in the conduct of the business of the
Company and that the loss thereof is not disadvantageous in any material
respect to the Holders of Notes.
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SECTION 1.035 Maintenance of Property. The Company shall
cause all Property used or useful in the conduct of its business or the
business of any of its Restricted Subsidiaries to be maintained and kept in
good condition, repair and working order and supplied with all necessary
equipment and shall cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as, in the judgment
of the Company, may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all
times; provided that nothing in this Section 4.05 shall prevent the Company
from discontinuing the operation or maintenance of any of such Property if
such discontinuance is, in the judgment of the Company, desirable in the
conduct of its business or the business of any of its Restricted
Subsidiaries and not disadvantageous in any material respect to the Holders
of Notes.
SECTION 1.036 Payment of Taxes and Other Claims. The
Company shall pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (a) all taxes, assessments and
governmental charges levied or imposed upon the Company or any of its
Restricted Subsidiaries or upon the income, profits or Property of the
Company or any of its Restricted Subsidiaries and (b) all lawful claims for
labor, material and supplies which, if unpaid, might by law become a Lien
upon the Property of the Company or any of its Restricted Subsidiaries;
provided that the Company shall not be required to pay or discharge or
cause to be paid or discharged any such tax, assessment, charge or claim
whose amount, applicability or validity is being contested in good faith by
appropriate proceedings upon stay of execution or the enforcement thereof
and for which adequate reserves in accordance with GAAP or other
appropriate provision has been made.
SECTION 1.037 Repurchase at the Option of Holders upon a
Change of Control.
(a) Upon the occurrence of a Change of Control, each
Holder of Notes shall have the right to require the Company to purchase
such Holder's Notes, in whole or in part, in a principal amount at Stated
Maturity that is an integral multiple of $1,000, pursuant to the offer
described in Section 4.07(b) hereof (the "Change of Control Offer"), at a
purchase price (the "Change of Control Purchase Price") in cash equal to
101 percent of the Accreted Value of such Notes (or portions thereof) on
any Change of Control Payment Date occurring prior to August 15, 2000, plus
accrued and unpaid interest, if any, and Special Interest, if any, thereon
to such Change of Control Payment Date, or 101 percent of the principal
amount at Stated Maturity of such Notes (or portions thereof) on any Change
of Control Payment Date occurring on or after August 15, 2000, plus accrued
and unpaid interest, if any, and Special Interest, if any, to such Change
of Control Payment Date.
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(b) Within 30 days of the date of any Change of Control,
the Company, or the Trustee at the request and expense of the Company,
shall send to each Holder by first class mail, postage prepaid, a notice
prepared by the Company stating:
(i) that a Change of Control has occurred and a Change of
Control Offer is being made pursuant to this Section
4.07, and that all Notes that are properly tendered
will be accepted for payment;
(ii) the Change of Control Purchase Price, and the date
Notes are to be purchased pursuant to the Change of
Control Offer (the "Change of Control Payment Date"),
which date shall be a date occurring no earlier than
30 days nor later than 60 days subsequent to the date
such notice is mailed;
(iii) that any Notes or portions thereof not properly
tendered will continue to accrete in value or accrue
interest, as the case may be, and accrue Special
Interest, if applicable;
(iv) that, unless the Company defaults in the payment of
the Change of Control Purchase Price with respect
thereto, all Notes or portions thereof accepted for
payment pursuant to the Change of Control Offer shall
cease to accrete in value or accrue interest, as the
case may be, and accrue Special Interest, if
applicable, from and after the Change of Control
Payment Date;
(v) that Holders electing to have any Notes or portions
thereof purchased pursuant to a Change of Control
Offer will be required to surrender such Notes, with
the form entitled "Option of Holder to Elect
Purchase" on the reverse of such Notes completed, to
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;
(vi) that Holders shall be entitled to withdraw such
election if the Paying Agent receives, not later than
the close of business on the second Business Day
preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal
amount of Notes delivered for purchase, and a
statement that such Holder is withdrawing such
Holder's election to have such Notes or portions
thereof purchased pursuant to the Change of Control
Offer;
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<PAGE>
(vii) that Holders electing to have Notes purchased
pursuant to the Change of Control Offer must specify
the principal amount that is being tendered for
purchase, which principal amount at Stated Maturity
must be $1,000 or an integral multiple thereof;
(viii) if Certificated Notes have been issued pursuant to
Section 2.06(c), that any Holder of Certificated
Notes whose Certificated Notes are being purchased
only in part will be issued new Certificated Notes
equal in principal amount at Stated Maturity to the
unpurchased portion of the Certificated Note or
Notes surrendered, which unpurchased portion will be
equal in principal amount at Stated Maturity to
$1,000 or an integral multiple thereof;
(ix) that the Trustee will return to the Holder of a
Global Note that is being purchased in part, such
Global Note with a notation on Schedule A thereof
adjusting the principal amount at Stated Maturity
thereof to be equal to the unpurchased portion of
such Global Note; and
(x) the instructions and any other information necessary
to enable any Holder to accept a Change of Control
Offer or effect withdrawal of such acceptance.
(c) On the Change of Control Payment Date, the Company
shall (i) accept for payment any Notes or portions thereof properly
tendered pursuant to the Change of Control Offer; (ii) irrevocably deposit
with the Paying Agent, by 10:00 a.m., New York City time, on such date, in
immediately available funds, an amount equal to the Change of Control
Purchase Price in respect of all Notes or portions thereof so tendered,
including accrued and unpaid interest and Special Interest, if applicable,
to such Change of Control Payment Date; and (iii) deliver, or cause to be
delivered, to the Trustee the Notes so tendered together with an Officers'
Certificate listing the Notes or portions thereof tendered to the Company
and accepted for payment. The Paying Agent shall promptly send by first
class mail, postage prepaid, to each Holder of Notes or portions thereof so
accepted for payment, payment in an amount equal to the Change of Control
Purchase Price for such Notes or portions thereof, including accrued and
unpaid interest and Special Interest, if applicable, to such Change of
Control Payment Date. The Company shall publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change
of Control Payment Date. For purposes of this Section 4.07, the Trustee
shall act as the Paying Agent.
(d) Upon surrender and cancellation of a Certificated Note
that is purchased in part pursuant to the Change of Control Offer, the
Company shall promptly issue and the Trustee shall authenticate and deliver
to the surrendering Holder of such
54
<PAGE>
Certificated Note, a new Certificated Note equal in principal amount at
Stated Maturity to the unpurchased portion of such surrendered Certificated
Note; provided that each such new Certificated Note shall be in a principal
amount at Stated Maturity of $1,000 or an integral multiple thereof.
Upon surrender of a Global Note that is purchased in part pursuant to
a Change of Control Offer, the Paying Agent shall forward such Global Note
to the Trustee who shall make a notation on Schedule A thereof to reduce
the principal amount at Stated Maturity of such Global Note to an amount
equal to the unpurchased portion of such Global Note, as provided in
Section 2.05(c) hereof.
(e) The Company shall comply with the requirements of
Section 14(e) under the Exchange Act and any other securities laws or
regulations, to the extent such laws and regulations are applicable, in
connection with the repurchase of Notes pursuant to a Change of Control
Offer.
SECTION 1.038. Limitation on Asset Sales.
-------------------------
(a) The Company shall not, and shall not permit any of its
Restricted Subsidiaries, directly or indirectly, to, consummate an Asset
Sale, unless:
(i) no Event of Default 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 percent of the consideration received in
respect of such Asset Sale by the Company or such
Restricted Subsidiary, as the case may be, for such
Property or assets consists of Cash Proceeds;
provided, however, that in connection with an Asset
Sale of receivables, 100 percent of the consideration
received in respect of such Asset Sale by the Company
or such Restricted Subsidiary, as the case may be,
for such receivables shall consist 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 in Section 4.08(b)
hereof.
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(b) Within 270 days after the closing of any Asset Sale,
the Company or such Restricted Subsidiary, as the case may be, may, at its
option:
(i) 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 owing to a Restricted Subsidiary of the
Company) that is pari passu in right of payment with
the Notes, the Old Senior Notes, the Convertible
Notes, and, if issued, the New Convertible Notes or
to the permanent reduction of Indebtedness of any
Restricted Subsidiary that is pari passu with such
Restricted Subsidiary's Guarantee, Old Senior Note
Guarantee, any guarantee of the Convertible Notes and
any guarantee of the New Convertible Notes (other
than Indebtedness to the Company or another
Restricted Subsidiary) (which repayment, in the case
of a revolving credit arrangement or multiple advance
arrangement, reduces the commitment thereunder).
Net Cash Proceeds from any Asset Sale that are not applied pursuant to
clause (i) or (ii) above shall constitute "Excess Proceeds."
(c) If at any time the aggregate amount of Excess
Proceeds calculated as of such date exceeds $5,000,000, the Company shall,
within 30 days of the date on which such Excess Proceeds exceed $5,000,000,
use such Excess Proceeds to make offers (each, an "Asset Sale Offer"), (A)
to purchase on a pro rata basis from all Holders of the Notes and the Old
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 percent of the Accreted Value of such Notes on an Asset Sale
Payment Date occurring prior to August 15, 2000, plus accrued and unpaid
interest, if any, and Special Interest, if any, to the Asset Sale Payment
Date or 100 percent of the principal amount at Stated Maturity of such
Notes on any Asset Sale Payment Date occurring on or after August 15, 2000,
plus accrued and unpaid interest, if any, to such Asset Sale Payment Date,
with respect to Notes, and 100 percent of the "Accreted Value" (as defined
in the Old Senior Note Indenture) of such Old Senior Notes on any Asset
Sale Payment Date occurring prior to March 30, 2000, plus accrued and
unpaid interest, if any, to the Asset Sale Payment Date, or 100 percent of
the principal amount at Stated Maturity of such Old Senior Notes on any
Asset Sale Payment Date occurring on or after March 30, 2000, plus accrued
and unpaid interest, if any, to such Asset Sale Payment Date, with respect
to Old Senior
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Notes, 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 Notes and the Old Senior Notes then outstanding plus (ii) the aggregate
principal amount (as determined pursuant to Section 1.03 (g) hereof) 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.
(d) Within 30 days of the date the amount of Excess
Proceeds exceeds $5,000,000, the Company, or the Trustee at the request and
expense of the Company, shall send to each Holder by first class mail,
postage prepaid, a notice prepared by the Company stating:
(i) that an Asset Sale Offer is being made pursuant to
this Section 4.08 and Section 4.08 of the Old Senior
Note Indenture, if applicable, and that all Notes and
Old Senior Notes that are properly tendered will be
accepted for payment, subject to proration in the
event the amount of Excess Proceeds is less than the
aggregate Asset Sale Purchase Price of all Notes and
Old Senior Notes promptly tendered pursuant to the
Asset Sale Offer (or in the case of a repurchase
concurrently with the repayment or redemption of Pari
Passu Indebtedness, such amount as is determined
pursuant to Section 4.08(c) hereof);
(ii) the Asset Sale Purchase Price, the amount of Excess
Proceeds that are available to be applied to purchase
tendered Notes, the amount of Excess Proceeds to be
utilized for a repayment or redemption of Pari Passu
Indebtedness, and the date Notes are to be purchased
pursuant to the Asset Sale Offer (the "Asset Sale
Payment Date"), which date shall be a date no earlier
than 30 days nor later than 40 days subsequent to the
date such notice is mailed;
(iii) that any Notes or portions thereof not properly
tendered will continue to accrete in value or accrue
interest, as the case may be, and accrue Special
Interest, if applicable;
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(iv) that, unless the Company defaults in the payment of
the Asset Sale Purchase Price with respect thereto,
all Notes or portions thereof accepted for payment
pursuant to the Asset Sale 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 Asset Sale Payment Date;
(v) that any Holder electing to have any Notes or
portions thereof purchased pursuant to the Asset Sale
Offer will be required to surrender such Notes, with
the form entitled "Option of Holder to Elect
Purchase" on the reverse of such Notes completed, to
the Paying Agent at the address specified in the
notice, prior to the close of business on the third
Business Day preceding the Asset Sale Payment Date;
(vi) that any Holder shall be entitled to withdraw such
election if the Paying Agent receives, not later than
the close of business on the second Business Day
preceding the Asset Sale Payment Date, a telegram,
telex, facsimile transmission or letter, setting
forth the name of the Holder, the principal amount of
Notes delivered for purchase, and a statement that
such Holder is withdrawing such Holder's election to
have such Notes or portions thereof purchased
pursuant to the Asset Sale Offer;
(vii) that any Holder electing to have Notes purchased
pursuant to the Asset Sale Offer must specify the
principal amount at Stated Maturity that is being
tendered for purchase, which principal amount at
Stated Maturity must be $1,000 or an integral
multiple thereof;
(viii) if Certificated Notes have been issued pursuant to
Section 2.06(c), that any Holder of Certificated
Notes whose Certificated Notes are being purchased
only in part will be issued new Certificated Notes
equal in principal amount to the unpurchased portion
of the Certificated Note or Notes surrendered, which
unpurchased portion will be equal in principal amount
at Stated Maturity to $1,000 or an integral multiple
thereof;
(ix) that the Trustee will return to the Holder of a
Global Note that is being purchased in part, such
Global Note with a notation on Schedule A thereof
adjusting the principal amount at Stated Maturity
thereof to be equal to the unpurchased portion of
such Global Note; and
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(x) the instructions and any other information necessary to
enable any Holder to accept an Asset Sale Offer, to
tender Notes and to have such Notes purchased, or to
effect withdrawal of such acceptance, pursuant to this
Section 4.08.
(e) If the aggregate Asset Sale Purchase Price of the Notes
surrendered by Holders exceeds the amount of applicable Excess Proceeds
(determined as provided by Section 4.08(c) hereof), as indicated in the
notice required by Section 4.08(d) hereof, the Trustee shall select the
Notes to be purchased on a pro rata basis based on the Accreted Value, as
of the Asset Sale Payment Date if such Asset Sale Payment Date is prior to
August 15, 2000 or the principal amount at Stated Maturity, if such Asset
Sale Payment Date is on or after August 15, 2000 of the Notes tendered,
with such adjustments as may be deemed appropriate by the Trustee and may
be needed to comply with any securities exchange and other applicable
requirements, so that only Notes in denominations of $1,000 or integral
multiples thereof shall be purchased.
(f) On or before the Asset Sale Payment Date, the Company
shall (i) accept for payment any Notes or portions thereof properly
tendered and selected for purchase pursuant to the Asset Sale Offer and
Section 4.08(e) hereof; (ii) irrevocably deposit with the Paying Agent, by
10:00 a.m., New York City time, on such date, in immediately available
funds, an amount equal to the Asset Sale Purchase Price in respect of all
Notes or portions thereof so accepted; and (iii) deliver, or cause to be
delivered, to the Trustee the Notes so accepted together with an Officers'
Certificate listing the Notes or portions thereof tendered to the Company
and accepted for payment. The Paying Agent shall promptly send by first
class mail, postage prepaid, to each Holder of Notes or portions thereof so
accepted for payment, payment in an amount equal to the Asset Sale Purchase
Price for such Notes or portions thereof. The Company shall publicly
announce the results of the Asset Sale Offer on or as soon as practicable
after the Asset Sale Payment Date. For purposes of this Section 4.08, the
Trustee shall act as the Paying Agent.
(g) Upon surrender and cancellation of a Certificated Note
that is purchased in part, the Company shall promptly issue and the Trustee
shall authenticate and deliver to the surrendering Holder of such
Certificated Note a new Certificated Note equal in principal amount at
Stated Maturity to the unpurchased portion of such surrendered Certificated
Note; provided that each such new Certificated Note shall be in a principal
amount at Stated Maturity of $1,000 or an integral multiple thereof.
Upon surrender of a Global Note that is purchased in part pursuant to
an Asset Sale Offer, the Paying Agent shall forward such Global Note to the
Trustee who shall make a notation on Schedule A thereof to reduce the
principal amount at Stated Maturity of such Global Note to an amount equal
to the unpurchased portion of such Global Note, as provided in Section
2.05(c) hereof.
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(h) Upon completion of an Asset Sale Offer (including
payment of the Asset Sale Purchase Price for accepted Notes), 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, including making a Convertible Note Asset Sale Offer
and a New Convertible Note Asset Sale Offer.
(i) The Company shall comply with the requirements of
Section 14(e) under the Exchange Act and any other securities laws or
regulations, to the extent such laws and regulations are applicable, in
connection with the repurchase of Notes pursuant to an Asset Sale Offer.
SECTION 1.039. Limitation on Indebtedness.
(a) The Company shall not, and shall not permit its
Restricted Subsidiaries to, directly or indirectly, incur any Indebtedness
(including Acquired Indebtedness), and the Company shall not issue any
Disqualified Stock or permit any of its Restricted Subsidiaries to issue
any Disqualified Stock; provided that the Company may incur Indebtedness or
issue Disqualified Stock if, (i) after giving effect to such issuance or
incurrence on a pro forma basis, the Indebtedness to Operating Cash Flow
Ratio of the Company does not exceed 5 to 1.0, or (ii) in an amount not to
exceed 200 percent of the aggregate Net Cash Proceeds received by the
Company subsequent to the Issue Date from the issuance or sale (other than
to a Subsidiary) of shares of its Qualified Stock, including Qualified
Stock issued upon the conversion of convertible debt (other than any
conversions of the Convertible Notes or the New Convertible Notes) or the
exercise of options, warrants or rights to purchase Qualified Stock;
provided that such Net Cash Proceeds shall not be utilized to increase the
amounts available for Restricted Payments pursuant to Section
4.13(a)(iii)(b) hereof.
(b) The provisions of Section 4.09(a) hereof shall not
apply to:
(i) Indebtedness existing under the Credit Facility;
provided that the aggregate principal amount of all
such Indebtedness under the Credit Facility, when
taken together with all Indebtedness of the Company
then outstanding which was permitted to have been
incurred under clause (x) below, shall not exceed
$45,000,000 at any one time outstanding, up to
$30,000,000 of aggregate principal amount of which may
be secured;
(ii) the Existing Indebtedness;
(iii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness owing to any
of its respective Wholly-Owned Restricted
Subsidiaries; provided that
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any such Indebtedness is junior and subordinate to
the Notes and Guarantees, if any, and the Old Senior
Notes and Old Senior Note Guarantees, if any, and
such Indebtedness is held at all times by the
Company or a Wholly-Owned Restricted Subsidiary of
the Company;
(iv) Indebtedness of any Restricted Subsidiary to the
Company or a Wholly-Owned Restricted Subsidiary of
the Company;
(v) the incurrence by the Company or any of its
Restricted Subsidiaries of Interest Hedging
Obligations with respect to any floating rate
Indebtedness that is permitted by this Section
4.09(b);
(vi) the incurrence by the Company or any of its
Restricted Subsidiaries of Indebtedness evidenced by
the Notes or Guarantees, if any, pursuant to this
Indenture, the Old Senior Notes or Old Senior Note
Guarantees, if any, issued pursuant to the Old
Senior Note Indenture, by the Convertible Notes or
the New Convertible Notes or the guarantees of the
Convertible Notes or the New Convertible Notes, if
any, issued pursuant to the Convertible Note
Indenture or the New Convertible Note Indenture, as
applicable;
(vii) Indebtedness in respect of performance, surety or
appeal bonds provided by the Company in the ordinary
course of business;
(viii) Vendor Financing not to exceed an aggregate
principal amount of $5,000,000 at any one time
outstanding;
(ix) the incurrence by the Company or any of its
Restricted Subsidiaries of Refinancing Indebtedness
issued in exchange for, or the proceeds of which are
used to refinance, repurchase, replace, refund or
defease ("Refinance" and correlatively, "Refinanced"
and "Refinancing") Indebtedness permitted pursuant
to clauses (ii) or (vi) of this Section 4.09(b);
provided that (1) the amount of such Refinancing
Indebtedness shall not exceed the principal amount
of, premium, if any, and accrued interest (and
Special Interest, if any, on the Notes) on the
Indebtedness so Refinanced (or if such Indebtedness
was issued with original issue discount, the
original issue price plus amortization of the
original issue discount at the time of the repayment
of such Indebtedness) plus the fees, expenses and
costs of such Refinancing and reasonable prepayment
premiums, if any, in connection therewith; (2) such
Refinancing
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Indebtedness shall have a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being
Refinanced; (3) such Refinancing Indebtedness shall
have an Average Life equal to or greater than the
Average Life of the Indebtedness being Refinanced; (4)
if the Indebtedness being Refinanced is subordinated in
right of payment to the Notes, such Refinancing
Indebtedness shall be subordinate in right of payment
to the Notes on terms at least as favorable to the
Holders of Notes as those contained in the
documentation governing the Indebtedness being so
Refinanced; and (5) no Restricted Subsidiary shall
incur Refinancing Indebtedness to Refinance
Indebtedness of the Company or another Subsidiary; and
(x) Indebtedness of the Company not otherwise permitted to
be incurred pursuant to this Section 4.09(b) in an
aggregate amount not to exceed $25,000,000 at any one
time outstanding and which amount shall reduce the
amount permitted to be incurred under Section
4.09(b)(i) above.
(c) In the event that the Company or any Restricted Subsidiary has incurred
Indebtedness pursuant to Section 4.09(b)(iii) above owing to a Restricted
Subsidiary and that Restricted Subsidiary thereafter does not remain a
Restricted Subsidiary of the Company, the aggregate principal amount of such
Indebtedness of the Company or a Restricted Subsidiary, as applicable, owing to
such Person at the time of such a change in Restricted Subsidiary status that
was at any time incurred pursuant to Section 4.09(b)(iii), shall be deemed to be
Indebtedness incurred by the Company or a Restricted Subsidiary, as the case may
be, at the time of such change in Restricted Subsidiary status.
(d) Indebtedness incurred by any Person that is not a Restricted Subsidiary
of the Company, which Indebtedness is outstanding at the time such Person
becomes a Restricted Subsidiary of the Company, or is merged into or
consolidated with, the Company or a Restricted Subsidiary shall be deemed to
have been incurred at the time such Person becomes a Restricted Subsidiary, or
is merged into or consolidated with the Company or a Restricted Subsidiary. A
guarantee permitted by this Section 4.09 to be incurred by the Company or a
Restricted Subsidiary of Indebtedness otherwise permitted to be incurred
pursuant to this Section 4.09 is not considered a separate incurrence for
purposes of this Section 4.09.
SECTION 1.0310.
SECTION 4.10. Limitation on Issuance of Guarantees by Restricted
Subsidiaries.
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(a) The Company shall not permit any of its Restricted
Subsidiaries, directly or indirectly, to guarantee any Indebtedness of the
Company ("Guaranteed Indebtedness") other than the Notes, unless (i) such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to this Indenture providing for a Guarantee (a "Guarantee") of
payment of the Notes by such Restricted Subsidiary and (ii) such Restricted
Subsidiary waives and will not in any manner whatsoever claim or take the
benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Restricted
Subsidiary of the Company as a result of any payment by such Restricted
Subsidiary under its Guarantee, provided that any Restricted Subsidiary may
guarantee any Credit Facility so long as such Restricted Subsidiary enters
into a Guarantee ranking pari passu with its guarantee under such Credit
Facility. If the Guaranteed Indebtedness is pari passu with the Notes, then
the guarantee of such Guaranteed Indebtedness shall be pari passu with or
subordinated to the Guarantee; and if the Guaranteed Indebtedness is
subordinated to the Notes, then the guarantee of such Guaranteed
Indebtedness shall be subordinated to the Guarantee at least to the extent
that the Guaranteed Indebtedness is subordinated to the Notes.
(b) Notwithstanding the provisions of Section 4.10(a)
hereof, 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.
SECTION 1.0311.
SECTION 4.11. Limitation on Liens. The Company shall not, and
shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into, create, incur, assume or suffer to exist any Liens
of any kind, other than Permitted Liens, on or with respect to any of its
Property or assets now owned or hereafter acquired, or any interest therein
or any income or profits therefrom, without effectively providing that the
Notes shall be secured equally and ratably with or prior to (and provided
that the Notes shall be secured prior to any secured obligation that is
subordinated in right of payment to the Notes) the obligations so secured
for so long as such obligations are so secured.
SECTION 1.0311.
SECTION 4.12. Limitation on Sale and Leaseback Transactions. The
Company shall not, and shall not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, assume, guarantee or otherwise
become liable with respect to, any Sale and Leaseback Transaction, unless
(i) the Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale and Leaseback Transaction at least
equal to the Fair Market Value (as evidenced by a Board Resolution
delivered to the Trustee) of the Property or assets subject to such
transaction; (ii) the Attributable Indebtedness of the Company or such
Restricted Subsidiary with respect thereto is included as Indebtedness and
would be permitted to be incurred under Section 4.09
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hereof and any Liens granted thereby would be permitted under Section 4.11
hereof; and (iii) the Net Cash Proceeds from such transaction are applied
in accordance with Section 4.08 hereof as if such proceeds resulted from an
Asset Sale.
SECTION 4.13. Restricted Payments. (a) The Company shall not, and
shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Restricted Payment unless, at the time of and after
giving effect to such proposed Restricted Payment:
(i) no Default or Event of Default shall have occurred
and be continuing or shall occur as a consequence
thereof;
(ii) after giving effect, on a pro forma basis, to such
Restricted Payment and the incurrence of any
Indebtedness the net proceeds of which are used to
finance such Restricted Payment, the Company could
incur at least $1.00 of additional Indebtedness
pursuant to Section 4.09(a)(i) hereof; and
(iii) after giving effect to such Restricted Payment on a
pro forma basis, the aggregate amount expended or
declared for all Restricted Payments after the Issue
Date does not exceed the sum of (A) 50 percent of the
Consolidated Net Income of the Company (or, if
Consolidated Net Income shall be a deficit, minus 100
percent 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 Restricted
Payment, plus (B) 100 percent of the aggregate Net
Cash Proceeds received by the Company subsequent to
the Issue Date from the issuance or sale (other than
to a Subsidiary) of shares of its Qualified Stock,
including Qualified Stock issued upon the conversion
of convertible debt (other than any conversions of
the Convertible Notes or the New Convertible Notes)
or the exercise of options, warrants or rights to
purchase Qualified Stock, plus (C) 100 percent 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
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satisfaction, plus (D) 100 percent 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 of the Company from any Person
(including, without limitation, from Unrestricted
Subsidiaries) or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries of the
Company (valued in each case as provided in the
definition of "Investments"), not to exceed in the
case of any Person the amount of Investments
previously made by the Company or any Restricted
Subsidiary in such Person and in each such case which
was treated as a Restricted Payment, minus (E) 100%
of the amount of Investments made pursuant to
Sections 4.13(b)(v), (vi) and (vii) hereof subsequent
to the Issue Date.
(a) The provisions of Section 4.13(a) hereof shall not
prevent the Company from:
(i) paying a dividend on its Capital Stock at any time
within 60 days after the declaration thereof if, on
the date of declaration thereof, the Company could
have paid such dividend in compliance with this
Section 4.13 and the other provisions of this
Indenture;
(ii) retiring (A) any Capital Stock of the Company or any
Restricted Subsidiary of the Company, or (B)
Indebtedness of the Company that is subordinated in
right of payment to the Notes or (C) Indebtedness of
a Restricted Subsidiary of the Company, in exchange
for, or out of the proceeds of the substantially
concurrent sale of Qualified Stock of the Company;
(iii) so long as no Default or Event of Default shall have
occurred and be continuing or shall occur as a
consequence thereof, retiring any Indebtedness of the
Company subordinated in right of payment to the
Notes, the Old Senior Notes, the Convertible Notes
and the New Convertible Notes, if any, in exchange
for, or out of the proceeds of, the substantially
concurrent incurrence of Indebtedness of the Company
(other than Indebtedness to a Subsidiary of the
Company), provided that such new Indebtedness (A) is
subordinated in right of payment to the Notes, the
Old Senior Notes, the Convertible Notes and the New
Convertible
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Notes, if any, at least to the same extent as, (B)
has an Average Life at least as long as, and (C) has
no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal
under the Indebtedness so retired;
(iv) so long as no Default or Event of Default shall have
occurred and be continuing or shall occur as a
consequence thereof, retiring any Indebtedness of a
Restricted Subsidiary of the Company in exchange for,
or out of the proceeds of, the substantially
concurrent incurrence of Indebtedness of the Company
or any Restricted Subsidiary of the Company that is
permitted under Section 4.09 hereof and that (A) is
not secured by any assets of the Company or any
Restricted Subsidiary of the Company to a greater
extent than the retired Indebtedness was so secured,
(B) has an Average Life at least as long as the
retired, purchased, redeemed or acquired Indebtedness
and (C) is subordinated in right of payment to the
Notes, the Old Senior Notes, the Convertible Notes
and the New Convertible Notes or the Guarantees, the
Old Senior Note Guarantees, the guarantees contained
in the Convertible Note Indenture and the New
Convertible Note Indenture, as applicable, at least
to the same extent as the retired Indebtedness;
(v) so long as no Default or Event of Default shall have
occurred and be continuing or shall occur as a
consequence thereof, purchasing, redeeming, retiring
or acquiring any Common Stock of the Company or any
Restricted Subsidiary of the Company held by any
member or former member of the Company's (or any of
its Subsidiaries') management pursuant to any
management agreement or stock option plan if in
effect as of September 30, 1996 or upon the death,
disability, retirement or termination of employment
of such members, provided that the aggregate price
paid for all such retired Common Stock shall not
exceed, in the aggregate, the sum of $1,000,000 plus
the aggregate Cash Proceeds received by the Company
from any reissuance of such Common Stock by the
Company to members of management of the Company and
its Subsidiaries;
(vi) so long as no Default or Event of Default shall have
occurred and be continuing or shall occur as a
consequence thereof, making loans to members of
management of the Company as required pursuant to
employment agreements with such members, in an
aggregate principal amount not to exceed $1,000,000,
provided that any repayment of such loans (but only
to the extent such
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payments are not included in the calculation of
Consolidated Net Income of the Company) shall reduce
the amount of such Investments;
(vii) so long as no Default or Event of Default shall have
occurred and be continuing or shall occur as a
consequence thereof, making Investments in Joint
Ventures in an aggregate amount not to exceed
$10,000,000, provided that any repayment of loans or
advances, return of capital or other transfer of
Property (but only to the extent such distributions
are not included in the calculation of Consolidated
Net Income of the Company) shall reduce the amount of
such Investments; and
(viii) so long as no Default or Event of Default shall have
occurred and be continuing, the Company may redeem
Convertible Notes and/or New Convertible Notes
pursuant to the terms of the Convertible Note
Indenture and/or the New Convertible Note Indenture,
respectively, or repurchase Convertible Notes and/or
New Convertible Notes pursuant to a "Change of
Control Offer" under the Convertible Note Indenture
and/or the New Convertible Note Indenture,
respectively, pursuant to a Convertible Note Asset
Sale Offer or a New Convertible Note Asset Sale Offer
or a repurchase offer upon a "Termination of Trading"
(as defined therein) of the Common Stock of the
Company pursuant to the terms of the Convertible Note
Indenture and/or the New Convertible Note Indenture,
respectively.
(b) Not later than the date of making of any Restricted
Payment or any Investment made pursuant to Section 4.13(b)(vii) above, the
Company shall deliver to the Trustee an Officers' Certificate stating that
such Restricted Payment or Investment is permitted and setting forth the
basis upon which the required calculations were computed, which
calculations may be based upon the Company's latest available financial
statements.
SECTION 4.14. Limitation on Dividends and Other Payment Restrictions
Affecting Subsidiaries. The Company shall not, and shall not permit any of
its Restricted Subsidiaries to, directly or indirectly cause or suffer to
exist or become effective or enter into an encumbrance or restriction
(other than pursuant to law or regulation) on the ability of any Restricted
Subsidiary (i) to pay dividends or make any other distributions in respect
of its Capital Stock or pay any Indebtedness or other obligation owed to
the Company or any Restricted Subsidiary of the Company; (ii) to make loans
or advances to
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the Company or any Restricted Subsidiary of the Company; or (iii) to
transfer any of its Property or assets to the Company or any Restricted
Subsidiary of the Company, except:
(a) any encumbrance or restriction existing (i) as of the
Issue Date pursuant to this Indenture, the Existing Indebtedness, the Old
Senior Note Indenture and the Convertible Note Indenture, or (ii) as of the
date of original issuance of the New Convertible Notes pursuant to the New
Convertible Note Indenture if substantially identical to the Convertible
Note Indenture;
(b) any encumbrance or restriction pursuant to an agreement
relating to an acquisition of assets or Property, so long as the
encumbrances or restrictions in any such agreement relate solely to the
assets or Property so acquired (and are not or were not created in
anticipation of or in connection with the acquisition thereof);
(c) any encumbrance or restriction relating to any
Indebtedness of any Restricted Subsidiary of the Company existing on the
date on which such Restricted Subsidiary is acquired by the Company or any
Restricted Subsidiary of the Company (other than Indebtedness incurred by
such Restricted Subsidiary in connection with or in anticipation of its
acquisition);
(d) customary provisions restricting subletting or
assignment of any lease governing a leasehold interest of the Company or
any Restricted Subsidiary of the Company or customary provisions in any
telecommunications resale agreements (including, without limitation, the
existing resale agreements with Ameritech and NYNEX and the long distance
agreements of the Company), license agreements or other similar agreements
that restrict the assignment of any such agreement or any rights
thereunder;
(e) any temporary encumbrance or restriction with respect
to a Restricted Subsidiary of the Company pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all
of the Capital Stock of, or Property and assets of, such Restricted
Subsidiary;
(f) any restriction on the sale or other disposition of
Property or assets securing Indebtedness as a result of a Permitted Lien on
such Property or assets permitted pursuant to Section 4.11 hereof; and
(g) any encumbrance or restriction that amends, extends,
refinances, refunds, renews or replaces any agreement described in clauses
(a) through (c) of this Section 4.14 whether or not among the same parties,
provided that the terms and conditions of any such encumbrance or
restriction are no less favorable to the Holders of the Notes than those
under or pursuant to the agreement amended, extended, refinanced, refunded,
renewed or replaced.
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SECTION 1.0315.
SECTION 4.15. Limitation on Issuance and Sale of Capital Stock of
Restricted Subsidiaries. The Company (i) shall not permit any of its
Restricted Subsidiaries to issue any Capital Stock other than to the
Company or a Restricted Subsidiary of the Company and (ii) shall not permit
any Person other than the Company or a Restricted Subsidiary of the Company
to own any Capital Stock of any of its Restricted Subsidiaries (other than
directors' qualifying shares), except for:
(a) a sale of 100 percent of the Capital Stock of a Restricted
Subsidiary sold in a transaction not prohibited by Section 4.08 hereof;
(b) Capital Stock of a Restricted Subsidiary issued and outstanding
prior to the time that such Person becomes a Restricted Subsidiary so long
as such Capital Stock was not issued in contemplation of such Person's
becoming a Restricted Subsidiary or otherwise being acquired by the
Company;
(c) Capital Stock of a Restricted Subsidiary issued and outstanding on
the Issue Date and held by Persons other than the Company or any Restricted
Subsidiary;
(d) not more than 10 percent of the Common Stock of USN Solutions on a
fully diluted basis issued pursuant to the exercise of the USN Solutions
Option; and
(e) any Disqualified Stock permitted to be issued under Section 4.09
hereof.
SECTION 1.0316.
SECTION 4.16. Transactions with Affiliates. The Company shall not,
and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, sell, lease, transfer, or otherwise dispose of, any of its
Property or assets to, or purchase any Property or assets from, or enter
into any contract, agreement, understanding, loan, advance or guarantee
with or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary
than those that would have been obtained in a comparable arm's-length
transaction by the Company or such Restricted Subsidiary with a Person that
is not an Affiliate and (b) the Company delivers to the Trustee (i) with
respect to any Affiliate Transaction involving aggregate payments in excess
of $1,000,000, a Board Resolution certifying that such Affiliate
Transaction complies with clause (a) above and that such Affiliate
Transaction has been approved by a majority of the disinterested directors
who have determined that such Affiliate Transaction is in the best
interests of the Company or such Restricted Subsidiary and (ii) with
respect to any Affiliate Transaction involving aggregate payments in excess
of $5,000,000, an opinion as to the fairness from a financial point of view
to the Company or such Restricted Subsidiary issued by an investment
banking firm of national standing, or in the case of a
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transaction involving a sale or transfer of assets subject to valuation
such as real estate, an appraisal issued by a nationally recognized
appraisal firm, together with an Officers' Certificate to the effect that
such opinion complies with this clause (ii); provided that the following
shall not be deemed Affiliate Transactions:
(i) any employment agreement or consulting agreement
(including stock options) entered into by the Company
or any of its Restricted Subsidiaries in the ordinary
course of business and consistent with industry
practice;
(ii) any agreement or arrangement with respect to the
compensation of a director of the Company or any
Restricted Subsidiary approved by the Board of
Directors and consistent with industry practice;
(iii) transactions between or among the Company, its
Wholly-Owned Restricted Subsidiaries or a
majority-owned Restricted Subsidiary (so long as no
minority interest is owned by a Person which is
otherwise an Affiliate);
(iv) transactions constituting Restricted Payments and
permitted by Section 4.13(a) hereof;
(v) transactions pursuant to contracts existing on the
Issue Date and disclosed in Schedule E attached
hereto;
(vi) transactions between the Company or its Restricted
Subsidiaries on the one hand, and Merrill Lynch or
its Affiliates on the other hand, involving the
provision of financial or consulting services by
Merrill Lynch or its Affiliates;
(vii) making loans or advances to officers, employees or
consultants of the Company and its Subsidiaries
(including travel and moving expenses) in the
ordinary course of business not to exceed $l,000,000;
and
(viii) the issuance of stock options for Common Stock of the
Company pursuant to any plan approved by the Board of
Directors.
SECTION 1.0317.
SECTION 4.17. Restricted and Unrestricted Subsidiaries.
(a) the Company may designate a Subsidiary (including a
newly formed or newly acquired Subsidiary) of the Company or any of its
Restricted
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Subsidiaries as an Unrestricted Subsidiary, provided that (i) such
designation is at the time permitted under Section 4.13(a) hereof and (ii)
immediately after giving effect to the transaction, the Company could incur
$1.00 of additional Indebtedness pursuant to Section 4.09(a)(i) hereof.
Notwithstanding any provision of this Section 4.17(a), all Subsidiaries of
an Unrestricted Subsidiary will be Unrestricted Subsidiaries.
(b) The Company will not designate an Unrestricted
Subsidiary as a Restricted Subsidiary unless after giving effect to such
designation on a pro forma basis, (i) the Company could incur at least
$1.00 of additional Indebtedness pursuant to Section 4.09(a)(i) hereof and
(ii) no Default or Event of Default would occur or be continuing. Subject
to this Section 4.17(b), an Unrestricted Subsidiary may be redesignated as
a Restricted Subsidiary.
(c) The designation of a Subsidiary of the Company as an
Unrestricted Subsidiary or the designation of an Unrestricted Subsidiary of
the Company as a Restricted Subsidiary shall be made by the Board of
Directors as evidenced by a Board Resolution delivered to the Trustee and
shall be effective as of the date specified in such Board Resolution, which
shall not be prior to the date such Board Resolution is delivered to the
Trustee.
SECTION 1.0318.
SECTION 4.18. Reports. Whether or not the Company is subject to
Section 13(a) or Section 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 Section 13(a) or
Section 15(d) of the Exchange Act 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
Security Register without cost to such Holders or Persons, and (ii) file
with the Trustee, 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 Section 15(d) of the
Exchange Act, any successor provisions thereto or this Section 4.18. The
Company shall not be required to file any report with the Commission if the
Commission does not permit such filing.
SECTION 1.0319.
SECTION 4.19. Compliance Certificate; Notice of Default or Event of
Default.
(a) The Company shall deliver to the Trustee within 120
calendar days after the end of each fiscal year of the Company ending after
the date hereof, an Officers'
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Certificate (which shall be signed by Officers satisfying the requirements
of Section 314 of the Trust Indenture Act), stating whether or not, to the
best knowledge of such Officers, the Company has complied with all
conditions and covenants under this Indenture, and, if the Company shall be
in Default, specifying all such Defaults and the nature thereof of which
such Officer may have knowledge.
(b) So long as (and to the extent) not contrary to the then
current recommendations of the American Institute of Certified Public
Accountants, the year-end financial statements delivered pursuant to
Section 4.18 above shall be accompanied by a written statement of the
Company's independent public accountants (who shall be a firm of
established national reputation) that in making the examination necessary
for certification of such financial statements, nothing has come to their
attention which would lead them to believe that the Company has violated
any provision of Article IV or Article V of this Indenture (or if any
violation has occurred, specifying the nature and existence thereof), it
being understood that such accountants shall not be liable directly or
indirectly to any Person for any failure to obtain knowledge of such
violation.
(c) The Company shall deliver written notice to the Trustee
within 5 Business Days after becoming aware of any Default or Event of
Default or any event of default or any default under any other mortgage,
indenture or instrument referred to in Section 6.01(e) hereof, describing
such Default, Event of Default or other event of default or default, its
status and what action the Company is taking or proposes to take with
respect thereto.
(d) For the purposes of this Section 4.19, compliance shall
be determined without regard to any period of grace or requirement of
notice under this Indenture.
SECTION 1.0320.
SECTION 4.20. Issuance of Contingent Warrants. The Company will issue
to Holders of the Notes Contingent Warrants (the "Contingent Warrants")
exercisable for Class A Common Stock of the Company representing 5.0
percent of the Common Stock of the Company on a fully diluted basis as of
the date of such issuance items (as used herein, the term "fully-diluted"
does not include (i) any Common Stock issued for fair market value
subsequent to the Issue Date (as determined in the Warranty Agreement),
(ii) the 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 option plans existing on the date of this Indenture and
disclosed on Schedule F attached hereto, or (iii) certain additional shares
of Common Stock issuable pursuant to agreements or stock option plans as
disclosed on Schedule F attached hereto) after giving effect to the
issuance of such Contingent Warrants, in the event that, on or prior to
September 30, 1998, the Company does not effect a Qualified Equity
Offering. All such Contingent Warrants will be issued pursuant to the
Warrant Agreement with the same
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rights thereunder as the Initial Warrants, and Holders will have the
benefits of the Registration Rights Agreement.
Any Contingent Warrants issued shall be issued to the
Holders of the outstanding Notes as of September 30, 1998 pro rata, based
upon the aggregate principal amount at Stated Maturity of the Notes held by
such Holder as of September 30, 1998.
SECTION 1.0321.
SECTION 4.21. Limitations on Line of Business. The Company shall not,
and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, engage to any substantial extent in any line or lines of
business activity other than the Telecommunications Business.
SECTION 1.0322.
SECTION 4.22. [INTENTIONALLY OMITTED]
SECTION 1.0323.
SECTION 4.23. Waiver of Certain Covenants. The Company may omit in
respect of any Notes, in any particular instance, to comply with the
provisions of any covenant or condition described in this Article IV hereof
other than Sections 4.07, 4.08 and 4.20 hereof, if before or after the time
for such compliance the Holders of at least a majority in principal amount
at Stated Maturity of the outstanding Notes (75 percent in principal amount
at Stated Maturity of the Notes for Section 4.20 hereof) either waive such
compliance in such instance or generally waive compliance with such
covenant or condition in compliance with the provisions of this Indenture,
but no such waiver shall extend to or affect such covenant or condition
except to the extent so expressly waived and, until such waiver shall
become effective, the obligations of the Company and the duties of the
Trustee in respect of any such covenant or condition shall remain in full
force and effect.
ARTICLE V
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
SECTION 4.
SECTION 1.041. Merger, Consolidation or Sale of Assets. The
Company shall not in any transaction or series of related 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 of the Company 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 its Restricted Subsidiaries taken as a whole to any other
Person, unless:
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(a) either (i) the Company shall be the continuing
corporation or (ii) 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 its
Restricted Subsidiaries taken as a whole (any such corporation or Person
being 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 an indenture supplemental hereto, executed and
delivered to the Trustee, in form reasonably satisfactory to the Trustee,
the due and punctual payment of the principal of (and premium, if any) and
interest and Special Interest, if any, of all the Notes and the performance
of every covenant and obligation in this Indenture on the part of the
Company to be performed or observed;
(b) immediately after giving effect to such transaction or
series of related 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 related
transactions), no Default or Event of Default shall have occurred and be
continuing or would result therefrom; and
(c) immediately after giving effect to such transaction or
series or related transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of
transactions), the Company (or the Surviving Entity, if the Company is not
continuing) would (A) be permitted to incur $1.00 of additional
Indebtedness under Section 4.09(a)(i) hereof; provided that this Section
5.01(c) shall not apply to any merger or consolidation into or with, or any
such transfer of all of the Property and assets of the Company and the
Restricted Subsidiaries into, the Company; and
(d) 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, sale,
assignment, conveyance, lease, transfer of assets or other transactions
contemplated by this Section 5.01, 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,
lease, transfer or other transaction and any supplemental indenture in
respect thereto comply with this Article V and that all conditions
precedent herein provided for relating to such transactions have been
complied with (all of the foregoing, a "Permitted Merger").
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SECTION 1.042. Successor Corporation Substituted. Upon any
Permitted Merger, the Surviving Entity shall succeed to, and be substituted
for, and may exercise every right and power of, the Company hereunder and
the Notes with the same effect as if such Surviving Entity had been named
as the Company herein; and when a Surviving Person duly assumes all of the
obligations and covenants of the Company pursuant hereto and the Notes,
except in the case of a lease, the predecessor Person shall be relieved of
all such obligations.
If such Surviving Entity shall have succeeded to and been substituted
for the Company, such surviving Entity may cause to be signed, and may
issue either in its own name or in the name of the Company prior to such
succession any or all of the Notes issuable hereunder which theretofore
shall not have been signed by the Company and delivered to the Trustee; and
upon the order of such Surviving Entity, instead of the Company, and
subject to all of the terms, conditions and limitations in this Indenture,
the Trustee shall act thereafter and shall deliver any Notes which
previously shall have been signed and delivered by two Officers of the
Company to the Trustee for authentication. All of the Notes so issued, and
any Notes which such Surviving Entity thereafter shall cause to be signed
and delivered to the Trustee, shall have the same legal rights and benefits
under this Indenture as the Notes theretofore or thereafter issued in
accordance with the terms of this Indenture and the Guarantees, if any, as
though all of such Notes had been issued on the date of execution hereof.
In the case of any such substitution, merger, sale, transfer,
conveyance or other disposal, such changes in phraseology and form (and in
substance) may be made in the Notes to be issued as may be appropriate.
For all purposes of this Indenture and the Notes, Subsidiaries of any
Surviving Entity will, upon such transaction or series of transactions,
become Restricted Subsidiaries or Unrestricted Subsidiaries as provided
pursuant to this Indenture, and all Indebtedness and all Liens on Property
or assets of the Surviving Entity and its Restricted Subsidiaries
immediately prior to such transaction or series of transactions shall be
deemed to have been incurred upon such transaction or series of
transactions.
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION 5.
SECTION 1.051. Events of Default. "Event of Default,"
wherever used herein with respect to the Notes, means any one of the
following events (whatever the reason for such event, and whether it
shall be voluntary or involuntary, or be effected by operation of law,
pursuant to any judgment, decree or order of any court or any order,
rule or regulation of any administrative or governmental body):
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(a) default in the payment of interest (or Special
Interest, if any) on any Note when the same becomes due and payable, and
the continuance of such Default for a period of 30 days; or
(b) default in the payment of the principal of (or premium,
if any, on) any Note when the same becomes due and payable whether upon
Maturity, optional redemption, required repurchase (including pursuant to a
Change of Control Offer or any Asset Sale Offer) or otherwise, or the
failure to make an offer to purchase any Note as herein required; or
(c) default in the performance, or breach, of any covenant
or agreement continued in Section 4.07, Section 4.08, Section 4.09, Section
4.12, Section 4.13, Section 4.20 or Article V hereof; or
(d) default in the performance, or breach, of any covenant
or warranty of the Company contained in this Indenture or the Notes (other
than a covenant or warranty addressed in Section 6.01(a), Section 6.01(b)
or Section 6.01(c) hereof), and the 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 the Holders of
at least 25 percent of the aggregate principal amount at Stated Maturity of
the outstanding Notes; or
(e) Indebtedness of the Company or any Restricted
Subsidiary is not paid when due and payable within the applicable grace
period, if any, or is accelerated by the holders thereof and, in either
case, the principal amount of such accelerated or unpaid Indebtedness
exceeds $10,000,000; or
(f) the entry by a court of competent jurisdiction of one
or more final non-appealable judgments uninsured or unindemnified for the
payment of money against the Company or any Restricted Subsidiary of the
Company in an aggregate uninsured or unindemnified amount in excess of
$10,000,000, which is not discharged, waived, 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 of the Company in an involuntary case
or proceeding under United States 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 of the Company 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 of the Company
under United States bankruptcy laws, as now or hereafter constituted, or
any other applicable federal, state or foreign bankruptcy, insolvency, or
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similar law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or any
Significant Restricted Subsidiary of the Company or of any substantial part
of the Property or assets of the Company or any Significant Restricted
Subsidiary of the Company, or ordering the winding-up or liquidation of the
affairs of the Company or any Significant Restricted Subsidiary of the
Company, 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; or
(h) (i) the commencement by the Company or any Significant
Restricted Subsidiary of the Company of a voluntary case or proceeding
under United States 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 of the Company to the entry of a decree
or order for relief in respect of the Company or any Significant Restricted
Subsidiary of the Company in an involuntary case or proceeding under United
States 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 of
the Company; or (iii) the filing by the Company or an Significant
Restricted Subsidiary of the Company of a petition or answer or consent
seeking reorganization or relief under United States 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 of the Company 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 of the
Company or of any substantial part of the Property or assets of the Company
or any Significant Restricted Subsidiary of the Company, or the making by
the Company or any Significant Restricted Subsidiary of the Company of an
assignment for the benefit of creditors; or (v) the admission by the
Company or any Significant Restricted Subsidiary of the Company in writing
of its inability to pay its debts generally as they become due; or (vi) the
taking of corporate action by the Company or any Significant Restricted
Subsidiary of the Company in furtherance of any such action.
SECTION 1.052. Acceleration. If any Event of Default (other
than an Event of Default specified in Section 6.01(g) or Section 6.01(h)
hereof) occurs and is continuing, then and in every such case, the Trustee
by a notice in writing to the Company, or the Holders of not less than 25
percent of the outstanding aggregate principal amount at Stated Maturity of
Notes by a notice in writing to the Company and the Trustee, may declare
the Default Amount, premium, if any, and any accrued and unpaid interest
(and Special Interest, if any) on all Notes then outstanding to be
immediately due and payable. Upon any such declaration, such Default
Amount,
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premium, if any, and any accrued and unpaid interest (and Special Interest,
if any) on all Notes then outstanding will become and be immediately due
and payable. If an Event of Default specified in Section 6.01(g) or Section
6.01(h) hereof occurs, the Default Amount, premium, if any, and any accrued
and unpaid interest (and Special Interest, if any) on all Notes then
outstanding shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any
Holder of Notes.
In the event of a declaration of acceleration because an Event of
Default set forth in Section 6.01(e) hereof 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 Section 6.01(e) hereof shall be remedied, or cured or waived by the
holders of the relevant Indebtedness within 60 days after such event of
default; provided that no judgment or decree for the payment of the money
due on the Notes has been obtained by the Trustee as hereinafter in this
Article VI provided.
Until August 15, 2000, the Default Amount shall equal the Accreted
Value of the Notes as of the date of any determination. On or after August
15, 2000 the Default Amount of each Note shall equal 100 percent of the
principal amount at Stated Maturity thereof.
At any time after a declaration of acceleration with respect to Notes
has been made and before a judgment or decree for payment of the money due
has been obtained by the Trustee as hereinafter in this Article VI
provided, the Holders of a majority in aggregate principal amount at Stated
Maturity of the outstanding Notes, by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if,
(a) the Company has paid or deposited with the Trustee a
sum sufficient to pay
(i) all overdue installments of interest and Special
Interest, if any, on all Notes,
(ii) the principal of (and premium, if any, on) any Notes
which have become due otherwise than by such
declaration of acceleration and interest thereon at
the rate or rates prescribed therefor in the Notes
and this Indenture,
(iii) to the extent that payment of such interest is
lawful, interest on the Defaulted Interest (including
Special Interest, if any) at the rate prescribed
therefor in the Notes and this Indenture, and
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(iv) all monies paid or advanced by the Trustee hereunder
and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents
and counsel and all other amounts due to the Trustee
pursuant to Section 7.07 hereof; and
(b) all Events of Default with respect to the Notes,
other than the non-payment of the principal of Notes which have become due
solely by such declaration of acceleration, have been cured or waived by
the Holders as provided herein.
No such rescission shall affect any subsequent Default or impair any
right consequent thereon.
SECTION 1.053. Other Remedies. The Company covenants that if
an Event of Default specified in Section 6.01(a) or Section 6.01(b) occurs
the Company shall, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Holders, the whole amount then due and payable on the Notes
for principal (and premium, if any), accrued and unpaid interest and
Special Interest, if any, and, to the extent that payment of such interest
shall be legally enforceable, interest upon the overdue principal (and
premium, if any) and upon Defaulted Interest, at the rate or rates
prescribed therefor in such Notes; and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel and all other amounts
due to the Trustee pursuant to Section 7.07 hereof.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may
institute a judicial proceeding for the collection of, or pursue any
available remedy under this Indenture, or otherwise to collect, the sums so
due and unpaid, and may prosecute such proceeding to judgment or final
decree, and may enforce the same against the Company or any other obligor
upon such Notes and collect the monies adjudged or decreed to be payable in
the manner provided by law out of the Property and assets of the Company or
any other obligor upon such Notes, wherever situated.
If an Event of Default with respect to the Notes occurs and is
continuing, the Trustee may in its discretion proceed to protect and
enforce its rights and the rights of the Holders by such appropriate
judicial proceedings as the Trustee shall deem most effectual to protect
and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
SECTION 1.054. Waiver of Existing Defaults. The Holders of a
majority in aggregate principal amount at Stated Maturity of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all
the Notes waive any existing Default or
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Event of Default and its consequences under this Indenture except (a) 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, the
Notes, (b) in respect of a covenant or provision hereof which under Section
9.02 hereof cannot be modified or amended without the consent of the Holder
of each outstanding Note affected or (c) in respect of the right to require
the Company to issue Contingent Warrants pursuant to Section 4.20 hereof,
which right under Section 9.02 hereof cannot be waived without the consent
of Holders of not less than 75 percent in aggregate principal amount at
Stated Maturity of the outstanding Notes. Upon any such waiver, such
Default shall cease to exist, and any Event of Default arising therefrom
shall be deemed to have been cured for every purpose of this Indenture; but
no such waiver shall extend to any subsequent or other Default or impair
any right consequent thereon.
SECTION 1.055. Control by Majority. The Holders of not less
than a majority in aggregate principal amount at Stated Maturity of the
outstanding Notes shall 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; provided that
(a) such direction shall not be in conflict with any rule
of law or with this Indenture or unduly prejudicial to the rights of other
Holders and would not subject the Trustee to personal liability, it being
understood that (subject to Section 7.01 hereof) the Trustee shall have no
duty to ascertain whether or not such directions are unduly prejudicial to
such Holders, and
(b) the Trustee may take any other action deemed proper by
the Trustee which is not inconsistent with such direction.
SECTION 1.056. Limitation on Suits. No Holder of Notes shall
have any right to institute any proceeding, judicial or otherwise, with
respect to this Indenture, or for the appointment of a receiver or trustee,
or for any other remedy hereunder, unless:
(a) such Holder has previously given written notice to the
Trustee of a continuing Event of Default with respect to the Notes;
(b) the Holders of not less than 25 percent in aggregate
principal amount at Stated Maturity of the outstanding Notes shall have
made written request to the Trustee to institute proceedings in respect of
such Event of Default in its own name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee
security or indemnity satisfactory to the Trustee in its reasonable
discretion against the costs, expenses and liabilities to be incurred in
compliance with such request;
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(d) the Trustee for 30 days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written request has
been given to the Trustee during such 30-day period by the Holders of a
majority in aggregate principal amount at Stated Maturity of the
outstanding Notes;
in any event, it being understood and intended that no one or more
Holders of Notes shall have any right in any manner whatever by virtue of,
or by availing of, any provision of this Indenture to affect, disturb or
prejudice the rights of any other Holders of Notes, or to obtain or to seek
to obtain priority or preference over any other of such Holders or to
enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all Holders of Notes.
SECTION 1.057. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any
Holder to receive payment of principal of (premium, if any) and interest
(and Special Interest, if any) on the Notes held by such Holder, on or
after the respective due dates expressed in the Notes or the Redemption
Dates or purchase dates provided for herein or therein, or to bring suit
for the enforcement of any such payment on or after such respective dates,
shall be absolute and unconditional and shall not be impaired or affected
without the consent of such Holder.
SECTION 1.058. Trustee May File Proofs of Claim. In case of
the pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceedings, or any voluntary or involuntary case under United States
bankruptcy laws, as now or hereafter constituted, relative to the Company
or any other obligor upon the Notes or the Property and assets of the
Company or of such other obligor or their creditors, the Trustee
(irrespective of whether the principal of such Notes shall then be due and
payable as therein expressed or by declaration or otherwise or irrespective
of whether the Trustee or any Holder shall have made any demand on the
Company for the payment of overdue principal or interest or performed any
other act pursuant to the provisions of this Article) shall be entitled and
empowered, by intervention in such proceeding or otherwise, (i) to file and
prove a claim for the whole amount of principal (and premium, if any) and
interest (and Special Interest, if any) owing and unpaid in respect of the
Notes, to file such other papers or documents and to take such other
actions, including participating as a member or otherwise in any official
committee of creditors appointed in the matter, as may be necessary or
advisable in order to have the claims of the Trustee (including any claim
for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel and all other amounts due to the
Trustee pursuant to Section 7.07 hereof) and of the Holders allowed in such
judicial proceeding, (ii) unless prohibited by applicable law and
regulations to vote on behalf of the Holders of the Notes in any election
of a trustee or standby trustee in an arrangement, reorganization,
liquidation or
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other bankruptcy or insolvency proceedings or Person performing similar
actions in comparable proceedings, and (iii) to collect and receive any
moneys or other Property payable or deliverable on any such claims and to
distribute the same; and any receiver, assignee, trustee, custodian,
liquidator, sequestrator (or other similar official) in any such proceeding
is hereby authorized by each Holder to make such payments to the Trustee,
and in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due it
for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, and any other amounts due the Trustee
under Section 7.07 hereof. Nothing contained herein shall be deemed to
authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder in any
such proceeding.
In any proceedings brought by the Trustee (and any proceedings
involving the interpretation of this Indenture to which the Trustee shall
be a party), the Trustee shall be held to represent all the Holders of the
Notes, and it shall not be necessary to make any Holders of the Notes
parties to any such proceedings.
SECTION 1.059. Priorities. Any money collected by the
Trustee pursuant to this Article VI shall be applied in the following
order, at the date or dates fixed by the Trustee and, in case of the
distribution of such money on account of principal (premium, if any),
interest or Special Interest, if any, upon presentation of the Notes and
the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under
Section 7.07 hereof;
SECOND: To the payment of the amounts then due and unpaid
for principal of (and premium, if any) or interest and Special Interest, if
any, on the Notes, ratably, without preference or priority of any kind,
according to the amounts due and payable on such Notes for principal (and
premium, if any) and interest or Special Interest, if any, respectively;
and
THIRD: To the Company, the Guarantors, if any, or as a court
of competent jurisdiction shall decide.
The Trustee may fix a record date and payment date from any payment to
Holders pursuant to this Section 6.09. At least 15 days before such record
date, the Company shall mail to each Holder and the Trustee a notice that
states such record date, the payment date and amount to be paid. The
Trustee may mail such notice in the name and at the expense of the Company.
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SECTION 1.0510.
SECTION 6.10. Undertaking for Costs. All parties to this Indenture
agree, and each Holder of any Note by such Holder's acceptance thereof
shall be deemed to have agreed, that any court may in its discretion
require, in any suit for the enforcement of any right or remedy under this
Indenture and the Guarantees, if any, or in any suit against the Trustee
for any action taken, suffered or omitted by it as Trustee, the filing by
any party litigant in such suit of an undertaking to pay the costs of such
suit and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigation in such
suit, having due regard to the merits and good faith of the claims or
defenses made by such party litigant; but the provisions of this Section
shall not apply to any suit instituted by the Trustee, to any suit
instituted by any Holder, or group of Holders, holding in the aggregate
more than 10 percent in principal amount at Stated Maturity of the
outstanding Notes, or to any suit instituted by any Holder for the
enforcement of the payment of the principal of (or premium, if any) or
interest or Special Interest, if any, on any Note on or after its Stated
Maturity.
SECTION 1.0511.
SECTION 6.11. Waiver of Usury, Stay or Extension Laws. The Company and
each Guarantor, if any, (to the extent it may lawfully do so) shall not at
any time insist upon, or plead, or in any manner whatsoever claim or take
the benefit or advantage of, any usury, stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the
covenants or the performance of this Indenture or the Guarantees, if any;
and the Company and each Guarantor, if any, (to the extent that it may
lawfully do so) hereby expressly waive all benefit or advantage of any such
law, and shall not hinder, delay or impede the execution of any power
herein granted to the Trustee, but shall suffer and permit the execution of
every such power as though no such law had been enacted.
SECTION 1.0512.
SECTION 6.12. Trustee May Enforce Claims Without Possession of the
Notes. All rights of action and claims under this Indenture, the
Guarantees, if any, or the Notes may be prosecuted and enforced by the
Trustee without the possession of any of the Notes or the production
thereof in any proceeding relating thereto, and any such proceeding
instituted by the Trustee shall be brought in its own name, as trustee of
an express trust, and any recovery of judgment shall, after provision for
the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit
of the Holders of the Notes.
SECTION 1.0513.
SECTION 6.13. Restoration of Rights and Remedies. If the Trustee or
any Holder of Notes has instituted any proceeding to enforce any right or
remedy under this Indenture and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to the Trustee
or to such Holder, then and in every such case the Company, the Guarantors,
the Trustee and the Holders shall, subject to any
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determination in such proceeding, be restored severally and respectively to
their former positions hereunder, and thereafter all rights and remedies of
the Trustee and the Holders shall continue as though no such proceeding had
been instituted.
SECTION 1.0514.
SECTION 6.14. Rights and Remedies Cumulative. Except as otherwise
provided in Section 2.07 hereof, no right or remedy herein conferred upon
or reserved to the Trustee or to the Holders is intended to be exclusive of
any other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any
other appropriate right or remedy.
SECTION 1.0515.
SECTION 6.15. Delay or Omission Not Waiver. No delay or omission of
the Trustee or of any Holder of any Note to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an acquiescence
therein. Every right and remedy given by this Article VI, by the
Guarantees, if any, or by law to the Trustee or to the Holders may be
exercised from time to time, and as often as may be deemed expedient, by
the Trustee or by the Holders, as the case may be.
ARTICLE VII
TRUSTEE
SECTION 6.
SECTION 1.061. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing,
the Trustee shall exercise the rights and powers vested in it by this
Indenture and shall use the same degree of care and skill in their exercise
as a prudent person would exercise or use under the circumstances in the
conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default:
(i) the Trustee undertakes to perform such duties and only such duties as
are specifically set forth in this Indenture and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and (ii)
in the absence of bad faith on its part, the Trustee may conclusively rely,
as to the truth of the statements and the correctness of the opinions
expressed therein, upon certificates or opinions furnished to the Trustee
and conforming to the requirements of this Indenture; provided that in the
case of any such certificates or opinions that by any provision of this
Indenture are specifically required to be furnished
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to the Trustee, the Trustee shall examine such certificates and opinions to
determine whether or not they conform to the requirements of this
Indenture.
(c) The Trustee may not be relieved from liability for its
own negligent action, its own negligent failure to act or its own willful
misconduct, provided that: (i) this paragraph (c) shall not limit the
effect of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be
liable for any error of judgment made in good faith by a Trust Officer
unless it is proved that the Trustee was negligent in ascertaining the
pertinent facts; and (iii) the Trustee shall not be liable with respect to
any action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.05 hereof.
(d) The Trustee shall not be liable for interest on any
money received by it except as the Trustee may agree in writing with the
Company.
(e) Money held in trust by the Trustee need not be
segregated from other funds except to the extent required by law.
(f) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder, or in the exercise of
any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against such
risk of liability is not reasonably assured to it.
(g) Every provision of this Indenture relating to the
conduct or affecting the liability of or affording protection to the
Trustee shall be subject to the provisions of this Article VII and to the
provisions of the Trust Indenture Act.
SECTION 1.062. Rights of Trustee.
(a) The Trustee may rely on any document believed by it to
be genuine and to have been signed or presented by the proper Person.
Except as provided in Section 7.01(b) hereof, the Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee
shall not be liable for any action it takes or omits to take in good faith
in reliance on any Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any such agent; provided
that such agent was appointed with due care by the Trustee.
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(d) The Trustee shall not be liable for any action it takes
or omits to take in good faith which it believes to be authorized or within
its rights or powers; provided that the Trustee's conduct does not
constitute willful misconduct or negligence.
(e) The Trustee shall not be charged with knowledge of any
Default or Event of Default under Sections 6.01(c), 6.01(d), 6.01(e) or
6.01(f), 6.01(g) or 6.01(h) hereof (provided that the Trustee shall comply
with the "automatic stay" provisions of United States bankruptcy laws), of
the identity of any Restricted Subsidiary or of the existence of any Change
of Control or Asset Sale unless either (i) a Trust Officer shall have
actual knowledge thereof, or (ii) the Trustee shall have received notice
thereof in accordance with Sections 4.19 and 12.02 hereof from the Company
or in accordance with Section 12.02 hereof from any Holder of Notes.
(f) The Trustee may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon.
(g) The Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture or other paper or document, but
the Trustee, in its discretion may make such further inquiry or
investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books, records and premises of the
Company, personally or by agent or attorney.
(h) The Trustee shall be under no obligation to exercise
any of the rights or powers vested by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it
in compliance with such request or direction.
(i) The Trustee shall not be required to give any bond or
surety in respect of the performance of its powers and duties hereunder.
As used throughout this Indenture, the term "actual knowledge" means
the actual fact or statement of knowing, without any duty to make any
investigation with regard thereto.
SECTION 1.063. Individual Rights of Trustee. The Trustee,
any Paying Agent or Registrar, in its individual or any other capacity, may
become the owner or pledgee of Notes and may otherwise deal with the
Company or its Affiliates with the same rights it would have if it were not
Trustee, Paying Agent or Registrar hereunder, as
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the case may be; provided that the Trustee must in any event comply with
Section 7.10 and Section 7.11 hereof.
SECTION 1.064. Trustee's Disclaimer. The Trustee shall not
be responsible for and makes no representation as to the validity or
adequacy of this Indenture, the Guarantees, if any, or the Notes, it shall
not be accountable for the Company's use of the proceeds from the Notes,
and it shall not be responsible (a) for any statement of the Company in
this Indenture, including the recitals contained herein, or in any document
issued in connection with the sale of the Notes or in the Notes other than
the Trustee's certificate of authentication or (b) for compliance by the
Company with the Registration Rights Agreement.
SECTION 1.065. Notice of Defaults. Within 90 days after
the occurrence of any Default hereunder with respect to the Notes, the
Trustee shall transmit by mail to all Holders, as their names and addresses
appear in the Security Register, notice of such Default hereunder known to
the Trustee, unless such Default shall have been cured or waived; provided
that, except in the case of a Default in the payment of the principal of
(or premium, if any) or interest or Special Interest, if any, on any Note,
the Trustee shall be protected in withholding such notice if and so long as
the board of directors, the executive committee or a trust committee of
directors and/or Trust Officers of the Trustee in good faith determine that
the withholding of such notice is in the interest of Holders.
SECTION 1.066. Preservation of Information; Reports by
Trustee to Holders.
(a) The Company shall furnish or cause to be furnished to
the Trustee:
(i) semiannually, not less than 10 days prior to each
Interest Payment Date, a list, in such form as the
Trustee may reasonably require, of the names and
addresses of the Holders as of the Record Date
immediately preceding such Interest Payment Date, and
(ii) at such other times as the Trustee may request in
writing, within 30 days after the receipt by the
Company of any such request, a list of similar form and
content as of a date not more than 15 days prior to the
time such list is furnished;
provided that if and so long as the Trustee shall be the Registrar for
the Notes, no such list need be furnished with respect to the Notes.
(b) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders contained in the
most recent list furnished to the Trustee as provided in Section 7.06(a)
hereof and the names and
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addresses of Holders received by the Trustee in its capacity as Registrar,
if so acting. The Trustee may destroy any list furnished to it as provided
in Section 7.06(a) hereof upon receipt of a new list so furnished.
(c) Holders may communicate as provided in Section 312(b)
of the Trust Indenture Act with other Holders with respect to their rights
under this Indenture, the Guarantees, if any, or the Notes.
(d) Each Holder of Notes, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company nor
the Trustee shall be held accountable by reason of the disclosure of any
such information as to the names and addresses of the Holders in accordance
with this Section 7.06, regardless of the source from which such
information was derived, and that the Trustee shall not be held accountable
by reason of mailing any material pursuant to a request made under this
Section 7.06.
(e) Within 60 days after May 15 of each year commencing
with the year 1998, the Trustee shall transmit by mail to all Holders of
Notes, a brief report dated as of such May 15 if and to the extent required
under Section 313(a) of the Trust Indenture Act.
(f) The Trustee shall comply with Sections 313(b) and
313(c) of the Trust Indenture Act.
(g) A copy of each report described in Section 7.06(e)
hereof shall, at the time of its transmission to Holders, be filed by the
Trustee with each securities exchange, if any, upon which the Notes are
then listed, with the Commission and also with the Company. The Company
shall promptly notify the Trustee of any securities exchange upon which the
Notes are listed.
SECTION 1.067. Compensation and Indemnity. The Company
shall pay to the Trustee from time to time reasonable compensation for its
services. The Company shall reimburse the Trustee upon request for all
reasonable out-of-pocket expenses incurred or made by it, including costs
of collection, in addition to the compensation for its services. Such
expenses shall include the reasonable compensation and expenses,
disbursements and advances of the Trustee's agents and counsel. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust.
The Company shall indemnify the Trustee for, and hold it harmless
against, any and all loss, liability or expense (including reasonable
attorneys' fees) arising out of or incurred by it in connection with the
acceptance or administration of the trust created by this Indenture and the
performance of its duties hereunder, except as set forth in the next
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paragraph. The Trustee shall notify the Company promptly of any claim for
which it may seek indemnity. Failure by the Trustee to so notify the
Company shall not relieve the Company of its obligations hereunder. The
Company shall defend any such claim and the Trustee shall cooperate in the
defense of such claim. The Trustee may have separate counsel and the
Company shall pay the reasonable fees and expenses of such counsel. The
Company need not pay for any settlement made without its consent, which
consent shall not be unreasonably withheld.
The Company need not reimburse any expense or indemnify against any
loss, liability or expense incurred by the Trustee through the Trustee's
own willful misconduct or negligence.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a Lien prior to the Notes on all money or property held
or collected by the Trustee other than money or property held in trust to
pay principal of, premium, if any, and interest (including Special
Interest, if any) on, particular Notes.
The Company's payment obligations pursuant to this Section 7.07 shall
survive the resignation or removal of the Trustee and discharge of this
Indenture and any Guarantees. Subject to any other rights available to the
Trustee under applicable bankruptcy law, when the Trustee incurs expenses
after the occurrence of a Default specified in Section 6.01(g) or Section
6.01(h) hereof, the expenses are intended to constitute expenses of
administration under bankruptcy law.
SECTION 1.068. Replacement of Trustee.
(a) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article VII shall
become effective until the acceptance of appointment by the successor
Trustee under this Section 7.08.
(b) The Trustee may resign at any time by giving written
notice thereof to the Company. If an instrument of acceptance by a
successor Trustee shall not have been delivered to the Trustee within 30
calendar days after the giving of such notice of resignation, the resigning
Trustee may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the
Holders of a majority in aggregate principal amount at Stated Maturity of
the outstanding Notes, delivered to the Trustee and to the Company.
(d) If at any time:
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(i) The Trustee shall fail to comply with Section 310(b)
of the Trust Indenture Act after written request
therefor by the Company or by any Holder who has been
a bona fide Holder of a Note for at least six months,
unless the Trustee's duty to resign is stayed in
accordance with the provisions of Section 310(b) of
the Trust Indenture Act; or
(ii) The Trustee shall cease to be eligible under Section
7.10 hereof and shall fail to resign after written
request therefor by the Company or by any such Holder;
or
(iii) The Trustee shall become incapable of acting or a
decree or order for relief by a court having
jurisdiction in the premises shall have been entered
in respect of the Trustee in an involuntary case under
the United States bankruptcy laws, as now or hereafter
constituted, or any other applicable federal or state
bankruptcy, insolvency or similar law; or a decree or
order by a court having jurisdiction in the premises
shall have been entered for the appointment of a
receiver, custodian, liquidator, assignee, trustee,
sequestrator (or other similar official) of the
Trustee or of its Property and assets or affairs, or
any public officer shall take charge or control of the
Trustee or of its Property and assets or affairs for
the purpose of rehabilitation, conservation, winding
up or liquidation; or
(iv) The Trustee shall commence a voluntary case under the
United States bankruptcy laws, as now or hereafter
constituted, or any other applicable federal or state
bankruptcy, insolvency or similar law or shall consent
to the appointment of or taking possession by a
receiver, custodian, liquidator, assignee, trustee,
sequestrator (or other similar official) of the
Trustee or its Property and assets or affairs, or
shall make an assignment for the benefit of creditors,
or shall admit in writing its inability to pay its
debts generally as they become due, or shall take
corporate action in furtherance of any such action,
then, in any such case, (i) the Company by a Board Resolution may
remove the Trustee with respect to the Notes, or (ii) subject to Section
6.10 hereof, any Holder who has been a bona fide Holder of a Note for at
least six months may, on behalf of such Holder and all others similarly
situated, petition any court of competent jurisdiction for the removal of
the Trustee and the appointment of a successor Trustee for the Notes.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee
for any cause, the Company, by
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or pursuant to a Board Resolution, shall promptly appoint a successor
Trustee. If, within one year after such resignation, removal or
incapability, or the occurrence of such vacancy, a successor Trustee shall
be appointed by the Holders of a majority in aggregate principal amount at
Stated Maturity of the outstanding Notes delivered to the Company and the
retiring Trustee, the successor Trustee so appointed shall, forthwith upon
its acceptance of such appointment in accordance with this Section 7.08,
become the successor Trustee and to that extent replace any successor
Trustee appointed by the Company. If no successor Trustee shall have been
so appointed by the Company or the Holders and shall have accepted
appointment in the manner hereinafter provided, any Holder that has been a
bona fide Holder of a Note for at least six months may, subject to Section
6.10 hereof, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the appointment of a
successor Trustee.
(f) The Company shall give notice of each resignation and
each removal of the Trustee and each appointment of a successor Trustee by
mailing written notice of such resignation, removal and appointment by
first class mail, postage prepaid, to the Holders as their names and
addresses appear in the Security Register. Each notice shall include the
name of the successor Trustee with respect to the Notes and the address of
its Corporate Trust Office.
(g) In the event of an appointment hereunder of a successor
Trustee, each such successor Trustee so appointed shall execute,
acknowledge and deliver to the Company and to the retiring trustee an
instrument accepting such appointment, and thereupon the resignation or
removal of the retiring Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested
with all the rights, powers, trusts, and duties of the retiring Trustee
but, on request of the Company or the successor Trustee, such retiring
Trustee shall, upon payment of its charges, execute and deliver an
instrument transferring to such successor Trustee all the rights, powers
and trusts of the retiring Trustee, and shall duly assign, transfer and
deliver to such successor Trustee all Property and money held by such
former Trustee hereunder, subject to its Lien, if any, provided for in
Section 7.07 hereof.
(h) Upon request of any such successor Trustee, the Company
shall execute any and all instruments for more fully and certainly vesting
in and confirming to such successor Trustee all such rights, powers and
trusts referred to in Section 7.08(g) hereof.
(i) No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article VII and under the Trust Indenture Act.
SECTION 1.069. Successor Trustee by Merger. Any corporation
into which the Trustee may be merged or converted or with which it may be
consolidated, or any
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corporation resulting from any merger, conversion or consolidation to which
the Trustee shall be a party, or any corporation succeeding to all or
substantially all of the corporate trust business of the Trustee, shall be
the successor of the Trustee hereunder (provided that such corporation
shall be otherwise qualified and eligible under this Article VII and under
the Trust Indenture Act) without the execution or filing of any paper or
any further act on the part of any of the parties hereto. In case any
Notes shall have been authenticated, but not delivered, by the Trustee then
in office, any successor by merger, conversion or consolidation to such
authenticating Trustee may adopt such authentication and deliver the Notes
so authenticated with the same effect as if such successor Trustee had
itself authenticated such Notes. In the event that any Notes shall not
have been authenticated by such predecessor Trustee, any such successor
Trustee may authenticate and deliver such Notes, in either its own name or
that of its predecessor Trustee, with the full force and effect which this
Indenture provides for the certificate of authentication of the Trustee.
SECTION 1.0610.
SECTION 7.10. Eligibility; Disqualification. There shall at all
times be a Trustee hereunder which shall be
(i) a corporation organized and doing business under the laws of the
United States of America, any State or Territory thereof or the
District of Columbia, authorized under such laws to exercise
corporate trust powers, and subject to supervision or examination
by federal, State, Territorial or District of Columbia authority,
or
(ii) a corporation or other Person organized and doing business under
the laws of a foreign government that is permitted to act as
Trustee pursuant to a rule, regulation or order of the
Commission, authorized under such laws to exercise corporate
trust powers, and subject to supervision or examination by
authority of such foreign government or a political subdivision
thereof substantially equivalent to supervision or examination
applicable to United States institutional trustees,
in either case having a combined capital and surplus of at least
$100,000,000.
If such Person publishes reports of condition at least annually,
pursuant to law or to the requirements of the aforesaid supervising or
examining authority, then for the purposes of this Section 7.10, the
combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be
eligible to serve as Trustee hereunder pursuant to the provisions of this
Section 7.10, it shall resign immediately in the manner and with the effect
specified in this Article VII.
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The Indenture shall always have a Trustee which satisfies the
requirements of Section 310(a)(1), (2), and (5) of the Trust Indenture Act.
If the Trustee has or shall acquire any "conflicting interest" within the
meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the
Company shall in all respects comply with the provisions of Section 310(b)
of the Trust Indenture Act. Nothing herein shall prevent the Trustee from
filing with the Commission the application referred to in the penultimate
paragraph of Section 310(b) of the Trust Indenture Act.
Neither the Company, any Guarantor, any Subsidiary nor any Affiliate
of the Company shall serve as Trustee hereunder.
SECTION 1.0611.
SECTION 7.11. Preferential Collection of Claims Against Company. The
Trustee shall comply with Section 311(a) of the Trust Indenture Act,
excluding any creditor relationship listed in Section 311(b) of the Trust
Indenture Act. A Trustee who has resigned or been removed shall be subject
to Section 311(a) of the Trust Indenture Act to the extent indicated
therein.
ARTICLE VIII
DEFEASANCE
SECTION 7.
SECTION 1.071. Company's Option to Effect Legal Defeasance or
Covenant Defeasance. The Company may elect, at its option, at any time, to
have Section 8.02 or Section 8.03 hereof applied to the outstanding Notes
(in whole and not in part) upon compliance with the conditions set forth
below in this Article VIII, such election shall be evidenced by a Board
Resolution delivered to the Trustee.
SECTION 1.072. Legal Defeasance and Discharge. Upon the
Company's exercise of its option to have this Section 8.02 applied to the
outstanding Notes (in whole and not in part), the Company shall be deemed
to have been discharged from its obligations with respect to such Notes as
provided in this Section 8.02 on and after the date the conditions set
forth in Section 8.04 hereof are satisfied (hereinafter called
"Defeasance"). For this purpose, such Defeasance means that the Company
shall be deemed to have paid and discharged the entire indebtedness
represented by such Notes and the Company and the Guarantors, if any, shall
be deemed to have satisfied all their other obligations under such Notes,
the Guarantees, if any, and this Indenture (and the Trustee, at the expense
of the Company, shall execute proper instruments acknowledging the same),
subject to the following which shall survive until otherwise terminated or
discharged hereunder:
(a) the rights of Holders of such Notes to receive, solely from
the trust fund described in Section 8.04 hereof and as more fully set forth
in such Section 8.04
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payments in respect of the principal of and any premium and interest (and
Special Interest, if any) on such Notes when payments are due,
(b) the Company's obligations with respect to such Notes under
Sections 2.06, 2.07, 2.09, 4.02, 4.03, 4.04 and 11.03 hereof,
(c) the rights, powers, trusts, duties and immunities of the
Trustee under this Indenture,
(d) Article III hereof, and
(e) this Article VIII.
Subject to compliance with this Article VIII, the Company may exercise
its option to have this Section 8.02 applied to the outstanding Notes (in
whole and not in part) notwithstanding the prior exercise of its option to
have Section 8.03 hereof applied to such Notes.
SECTION 1.073. Covenant Defeasance. Upon the Company's exercise
of its option to have this Section 8.03 applied to the outstanding Notes
(in whole and not in part), (i) the Company shall be released from its
obligations under Section 5.01(c), Sections 4.05 through 4.18, inclusive,
Sections 4.20 and 4.21 hereof, and any covenant added to this Indenture
subsequent to the Issue Date pursuant to Section 9.01 hereof, (ii) the
occurrence of any event specified in Section 6.01(c) or Section 6.01(d)
hereof with respect to any of Section 5.01(c), Sections 4.05 through 4.18,
inclusive, Sections 4.20 and 4.21 hereof and any covenant added to this
Indenture subsequent to the Issue Date pursuant to Section 9.01 hereof,
shall be deemed not to be or result in an Event of Default, in each case
with respect to such Notes as provided in this Section 8.03 on and after
the date the conditions set forth in Section 8.04 hereof are satisfied
(hereinafter called "Covenant Defeasance"). For this purpose, such Covenant
Defeasance means that, with respect to such Notes, the Company and the
Guarantors, if any, may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such
specified Section (to extent so specified in the case of Sections 6.01(c)
and 6.01(d) hereof), whether directly or indirectly by reason of any
reference elsewhere herein to any such Section or by reason of any
reference in any such Section to any other provision herein or in any other
document; but the remainder of this Indenture, the Guarantees, if any, and
such Notes shall be unaffected thereby.
SECTION 1.074. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to the application of Section 8.02 or
Section 8.03 hereof to the outstanding Notes:
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(a) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee as trust funds in trust for the purpose of
making the following payments, specifically pledged as security for, and
dedicated solely to the benefits of the Holders of such Notes, (i) money in
an amount, or (ii) U.S. Government Obligations which through the scheduled
payment of principal and interest in respect thereof in accordance with
their terms will provide, not later than one day before the due date of any
payment, money in an amount, or (iii) a combination thereof, in each case
sufficient, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered
to the Trustee, to pay and discharge, and which shall be applied by the
Trustee (or any such other qualifying trustee) to pay and discharge, the
principal of and any installment of interest (including Special Interest,
if any) on such Notes at the Stated Maturity thereof, in accordance with
the terms of this Indenture and such Notes.
(b) In the event of an election to have Section 8.02 hereof
apply to the outstanding Notes, the Company shall have delivered to the
Trustee an Opinion of Counsel stating that (i) the Company has received
from, or there has been published by, the Internal Revenue Service a ruling
or (ii) since the date of this Indenture, there has been a change in the
applicable federal income tax law, in either case (i) or (ii) to the effect
that, and based thereon such opinion shall confirm that, the Holders of
such Notes will not recognize gain or loss for federal income tax purposes
as a result of the deposit, Defeasance and discharge to be effected with
respect to such Notes and will be subject to federal income tax on the same
amount, in the same manner and at the same times as would be the case if
such deposit, Defeasance and discharge were not to occur.
(c) In the event of an election to have Section 8.03 hereof
apply to the outstanding Notes, the Company shall have delivered to the
Trustee an Opinion of Counsel to the effect that the Holders of such Notes
will not recognize gain or loss for federal income tax purposes as a result
of the deposit and Covenant Defeasance to be effected with respect to such
Notes and will be subject to federal income tax on the same amount, in the
same manner and at the same times as would be the case if such deposit and
Covenant Defeasance were not to occur.
(d) No Default or Event of Default with respect to the
outstanding Notes shall have occurred and be continuing at the time of such
deposit after giving effect thereto and no Default or Event of Default
under Section 6.01(g) or 6.01(h) shall have occurred and be continuing on
or prior to the 91st day after the date of such deposit (it being
understood that this condition shall not be deemed satisfied until after
such 91st day).
(e) Such Defeasance or Covenant Defeasance shall not cause the
Trustee to have a conflicting interest within the meaning of the Trust
Indenture Act
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(assuming for the purpose of this clause (e) that all Notes are in default
within the meaning of the Trust Indenture Act).
(f) Such Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any other agreement
or instrument to which the Company or any Guarantor, if any, is a party or
by which it is bound.
(g) Such Defeasance or Covenant Defeasance shall not result in
the trust arising from such deposit constituting an investment company
within the meaning of the Investment Company Act of 1940, as amended,
unless such trust shall be registered under such Act or exempt from
registration thereunder.
(h) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent with respect to such Defeasance or Covenant Defeasance have been
complied with.
SECTION 1.075. Deposited Money and U.S. Government Obligations
to be Held in Trust; Miscellaneous Provisions. All money and U.S.
Government Obligations (including the proceeds thereof) deposited with the
Trustee pursuant to Section 8.04 hereof in respect of the outstanding Notes
shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either
directly or through any such Paying Agent as the Trustee may determine, to
the Holders of such Notes, of all sums due and to become due thereon in
respect of principal and any premium and interest, but money so held in
trust need not be segregated from other funds except to the extent required
by law. The Company shall pay and indemnify the Trustee against any tax,
fee or other charge imposed on or assessed against the U.S. Government
Obligations deposited pursuant to Section 8.04 hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of outstanding Notes.
Anything in this Article VIII to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Order any money or U.S. Government Obligations held by it as provided in
Section 8.04 hereof which, in the opinion of a nationally recognized firm
of independent public accounts expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof that would
the be required to be deposited to effect the Defeasance or Covenant
Defeasance, as the case may be, with respect to the outstanding Notes.
SECTION 1.076. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money in accordance with this Article VIII with respect
to any Notes by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application then the obligations under this Indenture, the Guarantees, if
any, and such Notes from which the Company and any Guarantor has been
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discharged or released pursuant to Section 8.02 or 8.03 hereof shall be
revived and reinstated as though no deposit has occurred pursuant to this
Article VIII with respect to such Notes, until such time as the Trustee or
Paying Agent is permitted to apply all money held in trust pursuant to
Section 8.05 hereof with respect to such Notes in accordance with this
Article VIII; provided that if the Company or any Guarantor makes any
payment of principal of or any premium, interest or Special Interest, if
any, on any such Note following such reinstatement of its obligations, the
Company or such Guarantor, as the case may be, shall be subrogated to the
rights (if any) of the Holders of such Notes to receive such payment from
the money so held in trust.
Article IX
AMENDMENTS
SECTION 8.
SECTION 1.081. Without Consent of Holders. The Company, the
Guarantors, if any, and the Trustee may, at any time, and from time to
time, without notice to or consent of any Holders of Notes, enter into one
or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(a) to evidence the succession of another Person to the Company
or a Guarantor, as applicable, and the assumption by such successor of the
covenants and obligations of the Company in this Indenture, the Notes or
such Guarantor contained in its Guarantee and this Indenture; or
(b) to add to the covenants of the Company, for the benefit of
the Holders of all of the Notes, or to surrender any right or power herein
conferred upon the Company or the Guarantors, if any, by this Indenture; or
(c) to add any additional Events of Default; or
(d) to provide for uncertificated Notes in addition to or in
place of Certificated Notes; or
(e) to evidence and provide for the acceptance of appointment
hereunder of a successor Trustee; or
(f) to cure any ambiguity herein, or to correct or supplement
any provision hereof which may be inconsistent with any other provision
hereof or to add any other provisions with respect to matters or questions
arising under this Indenture; provided that such actions shall not
adversely affect the interests of the Holders of Notes in any material
respect; or
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(g) to provide for Restricted Subsidiaries to become Guarantors
pursuant to Section 4.10 hereof and Article X hereof; or
(h) to secure the Notes; or
(i) to comply with the requirements of the Commission in order
to effect or maintain qualification of this Indenture under the Trust
Indenture Act.
SECTION 1.082. With Consent of Holders. With the consent of the
Holders of not less than a majority in aggregate principal amount at Stated
Maturity of the outstanding Notes, by Act of said Holders delivered to the
Company, the Guarantors, if any, and the Trustee, the Company, the
Guarantors, if any, and the Trustee may enter into one or more indentures
supplemental hereto for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Indenture or of
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 Note:
(a) change the Stated Maturity of the principal of, or any
installment of interest or Special Interest, if any, on, any Note, or
reduce the Accreted Value or principal amount at Stated Maturity thereof
(or any premium, if any), or the interest (including Special Interest, if
any) 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 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; or
(b) reduce the percentage in principal amount of the outstanding
Notes, the consent of whose Holders is necessary for any such supplemental
indenture or required for any waiver of compliance with certain provisions
of this Indenture, or the Guarantees, if any, or Defaults hereunder; or
(c) modify any of the provisions of Section 6.04 hereof, except
to increase any percentage set forth therein or to provide that certain
other provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each outstanding Note affected thereby; or
(d) subordinate in right of payment, or otherwise subordinate,
the Notes or any Guarantees to any other Indebtedness; or
(e) modify any of the provisions of this Section 9.02, except to
increase any percentage set forth herein or to provide that certain other
provisions of this
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Indenture cannot be modified or waived without the consent of the Holder of
each outstanding Note affected thereby; or
(f) modify the obligations of the Company to make offers to
purchase Notes upon a Change of Control or from the proceeds of Asset Sales
provided that the Holders of not less than 75 percent in aggregate
principal amount at Stated Maturity of the outstanding Notes may, on behalf
of the Holders of all such Notes, waive any right to require the Company to
issue to the Holders of the Notes Contingent Warrants.
It shall not be necessary for any Act of Holders under this Section
9.02 to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approval the substance
thereof.
SECTION 1.083. Effect of Supplemental Indentures. Upon the
execution of any supplemental indenture under this Article IX, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every
Holder of Notes theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
SECTION 1.084. Compliance with Trust Indenture Act. Every
amendment or supplement to this Indenture or the Notes shall comply with
the Trust Indenture Act as then in effect.
SECTION 1.085. Revocation and Effect of Consents and Waivers.
A consent to an amendment, supplement or a waiver by a Holder of a Note
shall bind the Holder and every subsequent Holder of such Note or portion
of such Note that evidences the same debt as the consenting Holder's Note,
even if notation of the consent or waiver is not made on such Note;
provided that any such Holder or subsequent Holder may revoke the consent
or waiver as to such Holder's Note or portion of such Note if the Trustee
receives the notice of revocation before the date the amendment, supplement
or waiver become effective. After an amendment, supplement or waiver
becomes effective pursuant to this Article IX, it shall bind every Holder.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to give their consent or
take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding
the immediately preceding paragraph, those Persons who were Holders at such
record date (or their duly designated proxies), and only those Persons,
shall be entitled to give such consent or to revoke any consent previously
given or to take any such action, whether or not such Persons continue to
be Holders after
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such record date. No such consent shall be valid or effective for more than
120 days after such record date.
SECTION 1.086. Notation on or Exchange of Notes. If a
supplemental indenture changes the terms of a Note, the Trustee may require
the Holder thereof to deliver such Note to the Trustee. The Trustee may
place an appropriate notation on such Note regarding the changed terms and
return it to the Holder. Alternatively, if the Company or the Trustee so
determines, the Company in exchange for such Note shall issue and the
Trustee shall authenticate a new Note that reflects the changed terms.
Failure to make the appropriate notation or to issue a new Note shall not
affect the validity of such amendment of supplement.
SECTION 1.087. Trustee to Execute Supplemental Indentures. The
Trustee shall execute any supplemental indenture authorized pursuant to
this Article IX if such supplemental indenture does not adversely affect
the rights, duties, liabilities or immunities of the Trustee. If it does,
the Trustee may, but shall not be required to, execute such supplemental
indenture. In executing any supplemental indenture, the Trustee shall be
entitled to received indemnity reasonably satisfactory to it and to
receive, and (subject to Section 7.01 hereof) shall be fully protected in
relying upon, an Officers' Certificate (which need only cover the matters
set forth in clause (a) below) and an Opinion of Counsel provided by the
Company stating that:
(a) such supplemental indenture is authorized or permitted by
this Indenture and that all conditions precedent to the execution, delivery
and performance of such supplemental indenture have been satisfied;
(b) the Company and the Guarantors, if any, have all necessary
corporate power and authority to execute and deliver the supplemental
indenture and that the execution, delivery and performance of such
supplemental indenture has been duly authorized by all necessary corporate
action of the Company and the Guarantors, if any;
(c) the execution, delivery and performance of the supplemental
indenture do not conflict with, or result in the breach of or constitute a
default under any of the terms, conditions or provisions of (i) this
Indenture, (ii) the charter documents and by-laws of the Company or any
Guarantor, or (iii) any material agreement or instrument to which the
Company or any Guarantor is subject;
(d) to the best knowledge and belief of legal counsel writing
such Opinion of Counsel, the execution, delivery and performance of the
supplemental indenture do not conflict with, or result in the breach of any
of the terms, conditions or provisions of (i) any law or regulation
applicable to the Company or any Guarantor, or (ii) any material order,
writ, injunction or decree of any court or governmental instrumentality
applicable to the Company or any Guarantor;
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(e) such supplemental indenture has been duly and validly
executed and delivery by the Company and the Guarantors, if any, and this
Indenture together with such supplemental indenture constitutes a legal,
valid and binding obligation of the Company and the Guarantors, if any,
enforceable against the Company and the Guarantors, as applicable, in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency or similar laws affecting the enforcement
of creditors' rights generally and general equitable principles; and
(f) this Indenture together with such amendment or supplement
complies with the Trust Indenture Act.
SECTION 1.088. Solicitation of Consents. Neither the Company
nor any of its Subsidiaries nor any of their Affiliates shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fees or otherwise, to any Holders of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or
provisions of this Indenture, the Guarantees, if any, or the Notes unless
such consideration is offered to be paid or agreed to be paid to all
Holders of the Notes that consent, waive or agree to amend in the time
frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
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ARTICLE X
GUARANTEES
SECTION 9.
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SECTION 1.091. Guarantees.
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(a) Subject to the provisions of this Article X, each Restricted
Subsidiary of the Company, if any, which in accordance with Section 4.10
hereof is required in the future to become a Guarantor and to guarantee the
obligations of the Company and the Guarantors under the Notes and the
Guarantees, upon execution of a supplemental indenture, hereby jointly and
severally, irrevocably and unconditionally guarantees to the Trustee and to
each Holder of a Note authenticated and delivered by the Trustee
irrespective of the validity or enforceability of this Indenture, the Notes
or the obligations of the Company and any other Guarantors, under this
Indenture that: (i) the principal of, premium, if any, and any interest,
and Special Interest, if any, on the Notes (including, without limitation,
any interest that accrues after the filing of a proceeding of the type
described in Sections 6.1(g) and (h)) and any fees, expenses and other
amounts owing under this Indenture will be duly and punctually paid in full
when due, whether at Stated Maturity, by acceleration, call for redemption,
upon a Change of Control Offer, Asset Sale Offer, purchase or otherwise,
and interest on the overdue principal and (to the extent permitted by law)
interest, if any, and Special Interest, if any, on the Notes and any other
amounts due in respect of the Notes, if lawful, and all other obligations
of the Company and the Guarantors, if any, to the Holders of the Notes
under this Indenture and the Notes, whether now or hereafter existing, will
be promptly paid in full or performed, all strictly in accordance with the
terms hereof, of the Notes and the Guarantees, if any; and (ii) in case of
any extension of time of payment or renewal of any Notes or any of such
other obligations, the same will be promptly paid in full when due or
performed in accordance with the terms of the extension or renewal, whether
at Stated Maturity, by acceleration, call for redemption, upon a Change of
Control Offer, Asset Sale Offer, purchase or otherwise. If payment is not
made when due of any amount so guaranteed for whatever reason, each
Guarantor shall be jointly and severally obligated to pay the same
individually whether or not such failure to pay has become an Event of
Default which could cause acceleration pursuant to Section 6.02. Each
Guarantor agrees that this is a guarantee of payment and not a guarantee of
collection. An Event of Default under this Indenture or the Notes shall
constitute an Event of Default under this Guarantee, and shall entitle the
Holders to accelerate the obligations of each Guarantor hereunder in the
same manner and to the same extent as the obligations of the Company. This
Guarantee is intended to be superior to or pari passu in right of payment
with all Indebtedness of the Guarantors and each Guarantor's obligations
are independent of any obligation of the Company or any other Guarantor.
(b) Each Guarantor hereby agrees that its obligations hereunder
shall
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be joint and several, absolute, irrevocable and unconditional, irrespective
of the validity, regularity or enforceability of the Notes, this Indenture
or any other document relating thereto, the absence of any action to
enforce the same, any waiver or consent by any Holder with respect to any
provisions hereof or thereof, any release of any other Guarantor the
recovery of any judgment against the Company or any other Person, any
action to enforce the same or any other circumstance (including, without
limitation, any statute of limitations) which might otherwise constitute a
legal or equitable discharge or defense of a Guarantor. Each Guarantor
hereby waives promptness, diligence, presentment, demand of payment, filing
of claims with a court in the event of insolvency or bankruptcy of the
Company or any other Person, any right to require a proceeding first
against the Company or any other Person, protest, notice and all demands
whatsoever and covenants that its Guarantee will not be discharged except
by complete performance of the obligations contained in the Notes, this
Indenture, and this Guarantee. If any Holder or the Trustee is required by
any court or otherwise to return to the Company or to any Guarantor, or any
receiver, trustee, assignee, liquidator or similar official under any
applicable bankruptcy or insolvency or other similar law any amount paid by
the Company or such Guarantor to the Trustee or such Holder, this
Guarantee, to the extent theretofore discharged, shall be reinstated in
full force and effect.
(c) Until such time as the Notes and the other obligations of
the Company guaranteed hereby have been satisfied in full, each Guarantor
hereby irrevocably waives any claim or other rights that it may now or
hereafter acquire against the Company or any other Guarantor that arise
from the existence, payment, performance or enforcement of such Guarantor's
obligations under this Guarantee, including, without limitation, any right
of subrogation, reimbursement, exoneration, contribution or indemnification
and any right to participate in any claim or remedy of the Holders or the
Trustee against the Company or any other Guarantor, whether or not such
claim, remedy or right arises in equity or under contract, statute or
common law, including, without limitation, the right to take or receive
from the Company or any other Guarantor, directly or indirectly, in cash or
other property or by set-off or in any other manner, payment or security on
account of such claim, remedy or right. If any amount shall be paid to such
Guarantor in violation of the preceding sentence at any time prior to the
later of the payments in full of the Notes and all other amounts payable
under this Indenture, and this Guarantee, and the Stated Maturity of the
Notes, such amount shall be held in trust for the benefit of the Holders
and the Trustee and shall forthwith be paid to the Trustee to be credited
and applied to the Notes and all other amounts payable under this
Guarantee, whether matured or unmatured, in accordance with the terms of
this Indenture, or to be held as collateral for any obligations or other
amounts payable under this Guarantee thereafter arising. Each Guarantor
acknowledges that it will receive direct and indirect benefits from the
financing arrangements contemplated by this Indenture and that the waiver
set forth in this Section 10.01(c) is knowingly made in contemplation of
such benefits. Each Guarantor further agrees that, as between it, on the
one hand, and the Holders and the Trustee, on the other hand, (x) subject
to this Article X, the maturity of
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the obligations guaranteed hereby may be accelerated as provided in Article
VI for the purposes of this Guarantee, notwithstanding any stay, injunction
or other prohibition preventing such acceleration in respect of the
obligations guaranteed hereby, and (y) in the event of any acceleration of
such obligations guaranteed hereby as provided in Article VI, such
obligations (whether or not due and payable) shall further then become due
and payable by the Guarantors for the purposes of this Guarantee.
(d) A Guarantor that makes a distribution or payment under a
Guarantee shall be entitled to contribution from each other Guarantor in a
pro rata amount based on the Adjusted Net Assets of each such other
Guarantor for all payments, damages and expenses incurred by that Guarantor
in discharging the Company's obligations with respect to the Notes and this
Indenture or any other Guarantor with respect to its Guarantee, so long as
the exercise of such right does not impair the rights of the Holders of the
Notes under the Guarantees.
(e) The Company shall cause each Restricted Subsidiary which,
after the date of this Indenture, is required pursuant to Section 4.10(a)
hereof to become a Guarantor to (a) execute and deliver to the Trustee a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee which subjects such Restricted Subsidiary to the provisions of this
Indenture as a Guarantor, and (b) deliver to the Trustee an Opinion of
Counsel to the effect that such supplemental indenture has been duly
authorized and executed by such Person and constitutes the legal, valid,
binding and enforceable obligation of such Person (subject to such
customary exceptions concerning debtor's rights and equitable principles as
may be acceptable to the Trustee in its reasonable discretion) and
containing such other matters as the Trustee may reasonably request.
SECTION 1.092. Limitation of Guarantor's Liability. Each
Guarantor and, by its acceptance hereof, each beneficiary hereof, hereby
confirms that it is its intention that the Guarantee by such Guarantor not
constitute a fraudulent transfer or conveyance for purposes of the United
States Bankruptcy Code, the Uniform Fraudulent Conveyance Act, the Uniform
Fraudulent Transfer Act, or any other bankruptcy, receivership, insolvency,
liquidation or other similar legislation or legal principles under any
applicable foreign law to the extent applicable to any Guarantees. To
effectuate the foregoing intention, each such Guarantor hereby irrevocably
agrees that the obligation of such Guarantor under its Guarantee under this
Article X shall be limited to the lesser of (a) an amount equal to such
Guarantor's Adjusted Net Assets as of the date such Guarantee is executed
and delivered or (b) the maximum amount as will, after giving effect to
such maximum amount and all other contingent and fixed liabilities of such
Guarantor that are relevant under such laws and after giving effect to any
collections from, rights to receive contribution from or payments made by
or on behalf of any other Guarantor in respect of the obligations of such
other Guarantor under this Article X result in the obligations of such
Guarantor in respect of such maximum amount not constituting
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a fraudulent conveyance or fraudulent transfer or not otherwise being void,
voidable or unenforceable under any bankruptcy, reorganization,
receivership, insolvency, liquidation or other similar legislation or legal
principles under any applicable foreign law.
SECTION 1.093. Execution and Delivery of Guarantees. To further
evidence its Guarantee set forth in Section 10.01 hereof, each Guarantor
hereby agrees that a notation of such Guarantee may be, but is not required
to be, endorsed on each Note authenticated and delivered by the Trustee and
executed by either manual or facsimile signature of an authorized officer
of such Guarantor. Each Guarantor hereby agrees that its Guarantee set
forth in Section 10.01 hereof shall remain in full force and effect
notwithstanding any failure to endorse on each Note a notation of such
Guarantee. If an Officer of a Guarantor whose signature is on this
Indenture or a Note no longer holds that office at the time the Trustee
authenticates such Note or at any time thereafter, such Guarantor's
Guarantee of such Note shall be valid nevertheless. The delivery of any
Note by the Trustee, after the authentication thereof hereunder, whether or
not endorsed with a notation of the Guarantee, shall constitute due
delivery of any Guarantee set forth in this Indenture on behalf of such
Guarantor.
SECTION 1.094. When a Guarantor May Merge, etc. No Guarantor
shall consolidate with or merge with or into (whether or not such Guarantor
is the surviving person) another corporation, Person or entity whether or
not affiliated with such Guarantor (but excluding any consolidation,
amalgamation or merger if the surviving corporation is no longer a
Subsidiary of the Company) unless (i) subject to the provisions of Section
10.05 hereof, the Person formed by or surviving any such consolidation or
merger (if other than such Guarantor) assumes all the obligations of such
Guarantor pursuant to a supplemental indenture in form reasonably
satisfactory to the Trustee under the Notes and this Indenture and (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists. In connection with any such consolidation or merger, the
Trustee shall be entitled to receive an Officers' Certificate and an
Opinion of Counsel stating that such consolidation, amalgamation or merger
is permitted by this Section 10.04 .
SECTION 1.095. Release of a Guarantor.
----------------------
(a) Upon the sale or other transfer of all of the Capital Stock
of a Guarantor to any Person that is not an Affiliate of the Company in
compliance with the terms of this Indenture (including, without limitation,
Section 4.08 hereof), such Guarantor shall be deemed automatically and
unconditionally released and discharged from all obligations under this
Indenture without any further action required on the part of the Trustee or
any Holder; provided that the Net Cash Proceeds of such sale or other
disposition are applied in accordance with Section 4.08 of this Indenture
as if such sale or disposition were an Asset Sale and in accordance with
the applicable provisions of this Indenture. The Trustee shall deliver an
appropriate instrument or instruments evidencing
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such release upon receipt of a request of the Company accompanied by an
Officers' Certificate and Opinion of Counsel certifying as to the
compliance with this Section 10.05(a) and the other applicable provisions
of this Indenture.
(b) Notwithstanding the foregoing, any Guarantee by a Restricted
Subsidiary shall be automatically and unconditionally released and
discharged upon the release or discharge of the guarantee of Guaranteed
Indebtedness which resulted in the creation of such Guarantee pursuant to
Section 4.10 hereof, except a discharge or release by, or as a result of,
payment under such guarantee. The Trustee shall deliver an appropriate
instrument or instruments evidencing such release upon receipt of a request
of the Company accompanied by an Officers' Certificate and Opinion of
Counsel certifying as to compliance with this Section 10.05(b) and the
other applicable provisions of this Indenture.
ARTICLE XI
SATISFACTION AND DISCHARGE
SECTION 11.01.
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Satisfaction and Discharge. This Indenture shall upon the request
of the Company cease to be of further effect (except as to surviving rights
of registration of transfer or exchange of Notes herein expressly provided
for, the Company's obligations under Sections 7.07 and 11.04 hereof, the
Company's rights of optional redemption hereunder, and the Company's, the
Trustee's and the Paying Agent's obligations under Section 11.03 hereof)
and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging satisfaction and discharge of this Indenture when
(a) either
(i) all Notes theretofore authenticated and delivered (other
than (A) Notes which have been destroyed, lost or stolen
and which have been replaced or paid as provided in Section
2.07 and (B) Notes for whose payment money has been
deposited in trust with the Trustee or any Paying Agent and
thereafter paid to the Company or discharged from such
trust) have been delivered to the Trustee for cancellation;
or
(ii) all such Notes not theretofore delivered to the Trustee for
cancellation
(A) have become due and payable, or
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(B) will become due and payable at their Stated
Maturity within one year, or
(C) are to be called for redemption within one
year under arrangements satisfactory to the
Trustee for the giving of notice of
redemption by the Trustee in the name, and at
the expense, of the Company,
and the Company, in the case of clause (A), (B) or (C) above, has
irrevocably deposited or caused to be deposited with the Trustee as trust
funds in trust for such purpose money or U.S. Government Obligations in an
amount sufficient (as certified by an independent public accountant
designated by the Company) to pay and discharge the entire indebtedness on
such Notes not theretofore delivered to the Trustee for cancellation, for
principal (and premium, if any) and interest and Special Interest, if any,
to the date of such deposit (in the case of Notes which have become due and
payable) or the Stated Maturity or Redemption Date, as the case may be;
(b) the Company has paid or caused to be paid all other sums
then due and payable hereunder by the Company;
(c) no Default or Event of Default with respect to the Notes
shall have occurred and be continuing on the date of such deposit and after
giving effect to such deposit; and
(d) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of
this Indenture have been compiled with.
Notwithstanding the satisfaction and discharge of this Indenture, the
Company's obligations in Sections 2.03, 2.04, 2.06, 2.07, 2.11, 7.07, 7.08,
11.02, 11.03 and 11.04 and the Trustee's and Paying Agent's obligations in
Section 11.03 shall survive until the Notes are no longer outstanding.
Thereafter, only the Company's obligations in Sections 7.07, 11.03 and
11.04 and the Trustee's and Paying Agent's obligations in Section 11.03
shall survive.
In order to have money available on a payment date to pay principal or
interest on the Notes, the U.S. Government Obligations shall be payable as
to principal or interest at least one Business Day before such payment date
in such amounts as will provide the necessary money. U.S. Government
Obligations shall not be callable at the issuer's option.
SECTION 1.102. Application of Trust Money. All money deposited
with the Trustee pursuant to Section 11.01 shall be held in trust and, at
the written direction of the
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Company, be invested prior to maturity in U.S. Government Obligations, and
applied by the Trustee in accordance with the provisions of the Notes and
this Indenture, to the payment, either directly or through any Paying Agent
as the Trustee may determine, to the Persons entitled thereto, of the
principal (and premium if any) and interest (including Special Interest, if
any) for the payment of which money has been deposited with the Trustee;
but such money need not be segregated from other funds except to the extent
required by law.
SECTION 1.103. Repayment to the Company. The Trustee and the
Paying Agent shall promptly pay to the Company upon written request any
excess money or securities held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon written
request any money held by them for the payment of principal or interest
that remains unclaimed for two years after the date upon which such payment
shall have become due; provided that the Company shall have either caused
notice of such payment to be mailed to each Holder of the Notes entitled
thereto no less than 30 days prior to such repayment or within such period
shall have published such notice in a financial newspaper of widespread
circulation published in The City of New York, including, without
limitation, The Wall Street Journal. After payment to the Company, Holders
entitled to the money must look to the Company for payment as general
creditors unless an applicable abandoned property law designates another
person, and all liability of the Trustee and such Paying Agent with respect
to such money shall cease.
SECTION 1.104. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with
Section 11.01 by reason of any legal proceeding or by reason of any order
or judgment of any court or governmental authority enjoining, restraining
or otherwise prohibiting such application, the Company's and Guarantors'
obligations under this Indenture, the Notes and the Guarantees, if any,
shall be revived and reinstated as though no deposit has occurred pursuant
to Section 11.01 until such time as the Trustee or Paying Agent is
permitted to apply all such money or U.S. Government Obligations in
accordance with Section 11.02; provided that if the Company or the
Guarantors have made any payment of interest on or principal of any Notes
because of the reinstatement of their obligations, the Company or such
Guarantors shall be subrogated to the rights of the Holders of such Notes
to receive such payment from the money or U.S. Government Obligations held
by the Trustee or Paying Agent.
ARTICLE XII
MISCELLANEOUS
SECTION 11.
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SECTION 1.111. Trust Indenture Act Controls. If and to the extent
that any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by, or with another provision (an "incorporated
provision") included in this Indenture by operation of, Sections 310 to
318, inclusive, of the Trust Indenture Act, such imposed duties or
incorporated provision shall control. If any provisions of this Indenture
modifies or excludes any provision of the Trust Indenture Act that may be
so modified or excluded, the latter provision shall be deemed to apply to
this Indenture as so modified or excluded, as the case may be.
SECTION 1.112. Notices. Any notice or communication shall be in
writing and delivered in person or mailed by first class mail, postage
prepaid, addressed as follows: if to the Company: USN Communications, Inc.,
10 South Riverside Plaza, Suite 401, Chicago, Illinois 60606-3709,
Attention: General Counsel, with a copy to Skadden, Arps, Slate, Meager &
Flom, 333 West Wacker Drive, Chicago, Illinois 60606, Attention: Gary P.
Cullen; if to the Trustee: Harris Trust and Savings Bank, 311 West Monroe,
Chicago, Illinois 60606, Attention: Indenture Trustee Administration.
The Company or the Trustee, by notice to the other, may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Holder shall be sent to the Holder
by first class mail, postage prepaid, at the Holder's address as it appears
in the Security Register and shall be duly given if so sent within the time
prescribed. Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other
Holders. If a notice or communication is mailed to the Company, the Trustee
or a Holder in the manner provided above, it is duly given, whether or not
the addressee receives it, but shall not be effective in the case of the
Trustee unless it is actually received. In case by reason of the suspension
of regular mail service or by reason of any other cause it shall be
impracticable to give notice by mail to Holders, then such notification as
shall be made with the approval of the Trustee shall constitute a
sufficient notification for every purpose hereunder.
SECTION 1.113. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Company to the Trustee to
take or refrain from taking any action under this Indenture, the Company
shall furnish to the Trustee: (a) an Officers' Certificate stating that, in
the opinion of the signers, all conditions precedent, if any, provided for
in this Indenture relating to the proposed action have been complied with;
and (b) an Opinion of Counsel stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
SECTION 1.114. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a covenant or
condition provided for in this Indenture (other than pursuant to Section
4.19 hereof) shall include: (a) a statement that the individual making such
certificate or opinion has read such covenant or
109
<PAGE>
condition; (b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based; (c) a statement that,
in the opinion of such individual, such person has made such examination or
investigation as is necessary to enable such person to express an informed
opinion as to whether or not such covenant or condition has been complied
with; and (d) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
SECTION 1.115. Communications by Holders with Other Holders.
Holders may communicate pursuant to Section 312(b) of the Trust Indenture
Act with other Holders with respect to their rights under this Indenture or
the Notes. The Company, the Guarantors, the Trustee, the Registrar and
anyone else shall have the protection of Section 312(c) of the Trust
Indenture Act.
SECTION 1.116. Rules by Trustee, Paying Agent and Registrar. The
Trustee may make reasonable rules for action by or a meeting of Holders,
and any Registrar and Paying Agent may make reasonable rules for their
functions; provided that no such rule shall conflict with terms of this
Indenture or the Trust Indenture Act.
SECTION 1.117. Payments on Business Days. If a payment hereunder
is scheduled to be made on a date that is not a Business Day, payment shall
be made on the next succeeding date that is a Business Day, and no interest
shall accrue with respect to that payment during the intervening period. If
a regular record date is a date that is not a Business Day, such record
date shall not be affected.
SECTION 1.118. Governing Law. THIS INDENTURE AND THE NOTES
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK, EXCEPT WITH REGARD TO PRINCIPLES OF CONFLICTS OF LAWS,
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
SECTION 1.119. No Recourse Against Others. No director,
officer, employer, incorporator or stockholder of the Company, as such,
shall have any liability for any obligations of the Company under the Notes
or this 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 Note, each Holder waives and releases all such liability (but
only such liability) as part of the consideration for issuance of such Note
to such Holder.
SECTION 1.1110.
SECTION 12.10. Successors. All agreements of the Company in
this Indenture and the Notes shall bind its successors and assigns whether
so expressed or not.
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<PAGE>
All agreements of the Trustee in this Indenture shall bind its successors
and assigns whether so expressed or not.
SECTION 1.1111.
SECTION 12.11. Counterparts. This Indenture may be executed in
any number of counterparts and by the parties thereto in separate
counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
SECTION 1.1112.
SECTION 12.12. Table of Contents; Headings. The table of
contents, cross-reference table and headings of the Articles and Sections
of this Indenture have been inserted for convenience of reference only, are
not intended to be considered a part hereof and shall not modify or
restrict any of the terms of provisions hereof.
SECTION 1.1113.
SECTION 12.13. Severability. In case any provision in this
Indenture or in the Notes shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
SECTION 1.1114.
SECTION 12.14. Further Instruments and Acts. Upon request of the
Trustee, the Company will execute and deliver such further instruments and
do such further acts as may be reasonably necessary or proper to carry out
more effectively the purposes of this Indenture.
SECTION 1.1115.
SECTION 12.15. Independent Covenants. Each covenant contained in
this Indenture is intended by the parties to be a separate and independent
covenant, the compliance or noncompliance with such to be determined
independently and without regard to whether the Company or a Restricted
Subsidiary is in compliance with another covenant contained in this
Indenture.
111
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto
affixed and attested, all as of the day and year first above written.
USN COMMUNICATIONS, INC.
By _________________________
Name:
Title:
[Corporate Seal]
Attest
____________________________
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By _________________________
Name:
Title:
[Corporate Seal]
Attest
____________________________
112
<PAGE>
STATE OF ILLINOIS )
) SS.:
COUNTY OF COOK )
On the ___ day of August, 1997, before me personally came _______________,
to me known, who being by me duly sworn, did depose and say that he is
________________________ of USN Communications, Inc., one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
_______
Notary Public
State of Illinois
My commission expires
[Seal]
113
<PAGE>
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the ___ day of August, 1997, before me personally came
_________________, to me known, who being by me duly sworn, did depose and say
that he is ___________________ of Harris Trust and Savings Bank, the Trustee
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
_______
Notary Public
State of New York
My commission expires
[Seal]
114
<PAGE>
FORM OF FACE OF INITIAL GLOBAL NOTE*
-----------------------------------
USN COMMUNICATIONS, INC.
US $___________ CUSIP No. ___________
14 5/8% SENIOR DISCOUNT NOTE DUE 2004
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER
REFERRED TO.
THE NOTE EVIDENCED HEREBY (THE "SECURITY") HAS NOT BEEN REGISTERED UNDER
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY
INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS
SECURITY, BY ITS ACCEPTANCE HEREOF, (1) REPRESENTS THAT IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT
("RULE 144A"), (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS
TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER
THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER
OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY)
OR THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS
THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH
LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE
RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS
SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT
TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
- -------------------
* Modified, as applicable, in the event that such Global Note represents
Additional Notes, to reflect that the Additional Notes will be registered
securities and will not be entitled to benefit from the provisions of the
Registration Rights Agreement.
<PAGE>
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM
NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A,
OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH
PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE
HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY (THE "DEPOSITARY") TO USN COMMUNICATIONS, INC. OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY NOTE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS
IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY OR SUCH
OTHER REPRESENTATIVE OF THE DEPOSITARY OR SUCH OTHER NAME AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT HEREON
IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF THE DEPOSITARY OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE
SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET
FORTH IN SECTION 2.06 OF THE INDENTURE, DATED AS OF AUGUST 15, 1997,
BETWEEN USN COMMUNICATIONS, INC. AND THE TRUSTEE NAMED THEREIN, PURSUANT TO
WHICH THIS NOTE WAS ISSUED.
UNTIL THE EARLIEST TO OCCUR OF (I) FEBRUARY 15, 1998, (II) THE OCCURRENCE
OF AN EXERCISE EVENT (AS DEFINED IN THE WARRANT AGREEMENT, DATED AS OF
AUGUST 15, 1997, BETWEEN USN COMMUNICATIONS, INC. (THE "COMPANY") AND
HARRIS TRUST AND SAVINGS BANK, AS WARRANT AGENT (THE "WARRANT AGREEMENT")),
(III) THE OCCURRENCE OF AN EVENT OF DEFAULT
A-2
<PAGE>
(AS DEFINED IN THE INDENTURE RELATING TO 14 5/8% SENIOR DISCOUNT NOTES DUE
2004 (THE "NOTES") OF THE COMPANY), (IV) THE DATE ON WHICH A REGISTRATION
STATEMENT WITH RESPECT TO THE NOTES OR AN EXCHANGE OFFER RELATING TO THE
NOTES IS DECLARED EFFECTIVE, OR (V) SUCH EARLIER DATE AS DETERMINED BY
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED IN ITS SOLE DISCRETION,
THE NOTES EVIDENCED HEREBY MAY NOT BE SOLD, ASSIGNED OR OTHERWISE
TRANSFERRED TO ANY PERSON UNLESS, SIMULTANEOUSLY WITH SUCH TRANSFER, THE
HOLDER HEREOF TRANSFERS TO SUCH TRANSFEREE $1,000 PRINCIPAL AMOUNT AT
STATED MATURITY OF NOTES AND TEN WARRANTS, EACH WARRANT ENTITLING THE
HOLDER THEREOF TO PURCHASE 0.134484 SHARES OF CLASS A COMMON STOCK OF THE
COMPANY (SUBJECT TO ADJUSTMENT UNDER SECTION 15 OF THE WARRANT AGREEMENT)
SO TRANSFERRED.
GLOBAL NOTE
REPRESENTING 14 5/8% SENIOR DISCOUNT NOTES DUE 2004
USN COMMUNICATIONS, INC., a Delaware corporation, for value received,
hereby promises to pay to CEDE & CO., or its registered assigns, the principal
sum indicated on Schedule A hereof, on August 15, 2004.
Reference is hereby made to the further provisions of this Global Note
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this
Global Note shall not be entitled to any benefit under the Indenture relating to
the Notes or be valid or obligatory for any purposes.
A-3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Global Note to be duly
executed under its corporate seal.
Dated:
USN COMMUNICATIONS, INC.
By:___________________________
Name:
Title:
[Corporate Seal]
Attest:
- -----------------------
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
HARRIS TRUST AND SAVINGS BANK,
as Trustee, certifies that this is one of
the Notes referred to in the Indenture.
By: _____________________
Authorized Officer
A-4
<PAGE>
FORM OF REVERSE SIDE OF INITIAL GLOBAL NOTE
-------------------------------------------
USN COMMUNICATIONS, INC.
GLOBAL NOTE
REPRESENTING 14 5/8% SENIOR DISCOUNT NOTES DUE 2004
1. Indenture.
This Global Note is one of one or more duly authorized issues of debt
securities of the Company (as defined below) designated as its "14 5/8% Senior
Discount Notes due 2004" (herein called the " Notes") limited in aggregate
principal amount at Stated Maturity to $204,725,000, issued under an indenture
dated as of August 15, 1997 (as amended or supplemented from time to time, the
"Indenture") between the Company and HARRIS TRUST AND SAVINGS BANK, as trustee
(the "Trustee," which term includes any successor Trustee under the Indenture),
to which Indenture reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee and each Holder of Notes and of the terms upon which the Notes are,
and are to be, authenticated and delivered. The summary of the terms of this
Global Note contained herein does not purport to be complete and is qualified by
reference to the Indenture. All terms used in this Global Note which are not
defined herein shall have the meanings assigned to them in the Indenture.
The Indenture imposes certain limitations on the ability of the
Company and its Restricted Subsidiaries to, among other things, make certain
Investments and other Restricted Payments, pay dividends and other
distributions, incur Indebtedness, enter into or permit consensual restrictions
upon the payment of certain dividends and distributions by such Restricted
Subsidiaries, enter into or permit certain transactions with Affiliates, create
Liens, enter into or permit certain Sale and Leaseback Transactions, make Asset
Sales and engage in businesses other than the Telecommunications Business. The
Indenture also imposes limitations on the ability of the Company to consolidate
or merge with or into any other Person or permit any other Person to merge with
or into the Company, or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property of the Company to any other
Person and on the ability of the Company's Restricted Subsidiaries to issue
Capital Stock.
A-5
<PAGE>
2. Principal and Interest.
USN COMMUNICATIONS, INC., a Delaware corporation (such corporation,
and its successors and assigns under the Indenture hereinafter referred to,
being herein called the "Company"), promises to pay the principal amount set
forth on Schedule A of this Global Note to the Holder hereof on August 15, 2004.
This Global Note is issued at a discounted principal value of
$_______________. This Global Note will accrete in value in the manner specified
below in this paragraph at a rate of 14 5/8% per annum, compounded semiannually,
to an aggregate principal amount of $______________ by August 15, 2000.
Thereafter, interest will accrue on this Global Note at a rate of 14 5/8% per
annum from August 15, 2000 and will be payable in cash semiannually on February
15 and August 15 of each year (an "Interest Payment Date"), commencing on
February 15, 2001, to the Holder hereof until the principal amount is paid or
made available for payment. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, subject to certain exceptions
provided in the Indenture, be paid to the Person in whose name this Global Note
(or the Note in exchange or substitution for which this Global Note was issued)
is registered at the close of business on the Record Date for the interest
payable on such Interest Payment Date. The Record Date for any interest payment
is the close of business on January 31 or July 31, as the case may be, whether
or not a Business Day, immediately preceding the Interest Payment Date on which
such interest is payable. Any such interest not so punctually paid or duly
provided for ("Defaulted Interest") shall forthwith cease to be payable to the
Holder on such Record Date and shall be paid as provided in Section 2.11 of the
Indenture. Interest will be computed on the basis of a 360-day year of twelve
30-day months.
Each payment of interest in respect of an Interest Payment Date will
include interest (including Special Interest (as hereinafter defined), if any)
accrued through the day before such Interest Payment Date. If an Interest
Payment Date falls on a day that is not a Business Day, the interest payment to
be made on such Interest Payment Date will be made on the next succeeding
Business Day with the same force and effect as if made on such Interest Payment
Date, and no additional interest will accrue as a result of such delayed
payment.
If this Global Note is exchanged in an Exchange Offer prior to the
Record Date for the first Interest Payment Date following such exchange, accrued
and unpaid interest, if any, on this Global Note, up to but not including the
date of issuance of the Exchange Note or Exchange Notes issued in exchange for
this Global Note, shall be paid on the first Interest Payment Date for such
Exchange Note or Exchange Notes to the Holder or Holders of such Exchange Note
or Exchange Notes on the first Record Date with respect to such Exchange Note or
Exchange Notes. If this Global Note is exchanged in an Exchange Offer subsequent
to the Record Date for the first Interest Payment Date following such exchange
but on or prior to such Interest Payment Date, then any such accrued and unpaid
interest with respect to this Global Note and any accrued and unpaid interest on
the Exchange Note or Exchange Notes issued in exchange for this Global Note,
through the day before such Interest Payment Date, shall be paid on such
Interest Payment Date to the Holder of this Global Note on such Record
A-6
<PAGE>
Date. Any accretion of value with respect to this Global Note up to but not
including the date of issuance of the Exchange Note or Exchange Notes issued in
exchange for this Global Note shall be included as Accreted Value with respect
to such Exchange Note or Exchange Notes.
To the extent lawful, the Company shall pay interest on (i) if prior
to August 15, 2000, any overdue Accreted Value of (and premium, if any, on) this
Global Note or, if on or after August 15, 2000, any overdue principal amount of
(and premium, if any, on) this Global Note, at the interest rate borne on this
Global Note plus 1% per annum, and (ii) Defaulted Interest (without regard to
any applicable grace period), at the same rate. The Company's obligation
pursuant to the previous sentence shall apply whether such overdue amount is due
at its Stated Maturity, as a result of the Company's obligations pursuant to
Section 3.05, Section 4.07 or Section 4.08 of the Indenture, or otherwise.
"Accreted Value" is defined in the Indenture to mean, for any
Specified Date, the amount provided below for each $1,000 principal amount at
Stated Maturity of the Notes:
(a) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
Semi-Annual Accrual Date Accreted Value
------------------------ --------------
<S> <C>
February 15, 1998................................. $ 702.67
August 15, 1998................................... 754.05
February 15, 1999................................. 809.19
August 15, 1999................................... 868.36
February 15, 2000................................. 931.86
August 15, 2000................................... 1,000.00
</TABLE>
(b) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (i) $654.78 and (ii) an
amount equal to the product of (A) the Accreted Value for the first Semi-
Annual Accrual Date less the original issue price multiplied by (B) 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 Semi-Annual Accrual Date, using a 360-day year of twelve 30-
day months;
(c) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (i) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(ii) an amount equal to the product of (A) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (B) a
fraction, the numerator of which is the number of
A-7
<PAGE>
days from the immediately preceding 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 Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
3. Special Interest.
The Holder of this Global Note is entitled to the benefits of the
Registration Rights Agreement, dated August 15, 1997, among the Company and the
Initial Purchasers (the "Registration Rights Agreement"), which agreement is
attached to the Indenture as Exhibit E thereto.
If either (i) the Exchange Offer Registration Statement or the Note
Shelf Registration Statement (as such terms are defined in the Registration
Rights Agreement) required to be filed is not filed with the Securities and
Exchange Commission (the "Commission") on or prior to 60 days after the Issue
Date (with respect to the Exchange Offer Registration Statement) or promptly
after 120 days after the Issue Date (with respect to the Note Shelf Registration
Statement), (ii) any such Exchange Offer or Note Shelf Registration Statement
has not been declared effective by the Commission on or prior to 120 days or 180
days, respectively, after the Issue Date (an "Effectiveness Target Date"), (iii)
the Exchange Offer has not been consummated on or prior to 180 days after the
Issue Date, or (iv) any Registration Statement required is filed and declared
effective but shall thereafter cease to be effective or fail to be usable for
its intended purpose without being succeeded immediately by a post-effective
amendment to such Registration Statement that cures such failure and that is
itself declared effective for a period of more than 30 consecutive days (each
such event referred to in clauses (i) through (iv), a "Registration Default"),
then commencing on the day following the date on which such Registration Default
occurs, the Company agrees to pay to the Holder of this Global Note additional
interest at a rate of 0.50% per annum during the first 90-day period immediately
following the occurrence of such Registration Default ("Special Interest"). The
amount of Special Interest payable to such Holder shall increase by an
additional 0.50% per annum for each subsequent 90-day period up to a maximum
rate of 1.50% per annum. A Registration Default shall cease, and Special
Interest shall cease to be payable with respect to such Registration Default (1)
upon the filing of the applicable Registration Statement, in the case of clause
(i) above, (2) upon the effectiveness of the Registration Statement, in the case
of clause (ii) above, (3) upon the consummation of the Exchange Offer, in the
case of clause (iii) above, and (4) when the Registration Statement becomes
effective or usable in the case of clause (iv) above. Notwithstanding anything
hereunder to the contrary, (I) the amount of Special Interest payable shall not
increase because more than one Registration Default has occurred and is pending,
(II) if the Holder of this Global Note is not entitled to the benefits of the
Note Shelf Registration (i.e., such Holder has not elected to include
information), such Holder shall not be entitled to Special Interest with respect
to a Registration Default that pertains to the Registration Statement and (III)
if this Global Note constitutes a unsold allotment from the original sale of the
Notes or the Holder of this Global Note otherwise is not entitled to participate
in the Exchange Offer, such Holder
A-8
<PAGE>
shall not be entitled to Special Interest by reason of a Registration Default
that pertains to an Exchange Offer.
All accrued Special Interest shall be paid to record Holders in the
same manner in which payments of interest are made pursuant to the Indenture.
Except as expressly provided in this paragraph 3, Special Interest
shall be treated as interest and any date on which Special Interest is due and
payable shall be treated as an Interest Payment Date, for all purposes under
this Global Note and the Indenture.
4. Method of Payment.
The Company, through the Paying Agent, shall pay interest on this
Global Note to the registered Holder of this Global Note, as provided above. The
Holder must surrender this Global Note to a Paying Agent to collect principal
payments. The Company will pay principal and interest in money of the United
States of America that at the time of payment is legal tender for payment of all
debts public and private. Principal and interest will be payable at the office
of the Paying Agent but, at the option of the Company, interest may be paid by
check mailed to the registered Holders at their registered addresses.
5. Paying Agent and Registrar.
Initially, the Trustee will act as Paying Agent and Registrar under
the Indenture. The Company may, upon written notice to the Trustee, appoint and
change any Paying Agent or Registrar. The Company or any of its subsidiaries may
act as Paying Agent or Registrar.
6. Optional Redemption.
The Notes will not be redeemable at the option of the Company prior to
August 15, 2002, subject to provisions of the following paragraph. Thereafter,
the Notes will be subject to redemption at the option of the Company, in whole
or in part, upon not less than 30 nor more than 60 days' notice, at the
Redemption Prices (expressed as percentages of principal amount at Stated
Maturity thereof) set forth below, plus accrued and unpaid interest (if any) and
Special Interest (if any), if redeemed during the twelve months beginning August
15 of each year indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002.............................................. 107.313%
2003.............................................. 103.656%
</TABLE>
Notwithstanding the foregoing, in the event that on or prior to August
15, 2000, the Company consummates one or more Public Equity Offerings of its
Common Stock in an
A-9
<PAGE>
aggregate amount equal to or exceeding $40,000,000, up to a maximum of 35
percent of the aggregate principal amount at Stated Maturity of the Notes will
be redeemable at the option of the Company out of the net proceeds of such sale
or sales to the extent that such proceeds consist of cash or cash equivalents.
Such Notes will be redeemable on not less than 30 nor more than 60 days' prior
notice at a Redemption Price equal to 114.63% of the Accreted Value of the Notes
to be redeemed on the Redemption Date plus accrued and unpaid interest, if any,
and Special Interest, if any, to the Redemption Date. Any such redemption shall
occur within 90 days after (but not before) such sale or last such sale in the
case of a series of related transactions; provided that immediately after giving
effect to such redemption not less than 65% of the aggregate principal amount at
Stated Maturity of the Notes originally issued remain outstanding.
7. Notice of Redemption.
At least 30 days but not more than 60 days before a Redemption Date,
the Company shall send a notice of redemption, first-class mail, postage
prepaid, to Holders of Notes to be redeemed at the addresses of such Holders as
they appear in the Security Register.
If less than all of the Notes are to be redeemed at any time, the
Notes to be redeemed will be chosen by the Trustee in accordance with the
Indenture. If any Note is redeemed subsequent to a Record Date with respect to
any Interest Payment Date specified above and on or prior to such Interest
Payment Date, then any accrued interest (including Special Interest, if any)
will be paid on such Interest Payment Date to the Holder of the Note at the
close of business on such Record Date. If money in an amount sufficient to pay
the Redemption Price plus accrued and unpaid interest, if any, and Special
Interest, if any, to such Redemption Date of all Notes (or portions thereof) to
be redeemed on the Redemption Date is deposited with the Paying Agent on or
before the applicable Redemption Date and certain other conditions are
satisfied, interest (including Special Interest, if any) on the Notes to be
redeemed on the applicable Redemption Date will cease to accrue or such Notes
will cease to accrete in value, as the case may be.
The Notes are not subject to any sinking fund.
8. Repurchase at the Option of Holders upon Change of Control.
Upon the occurrence of a Change of Control, each Holder of Notes shall
have the right to require the Company to purchase such Holder's Notes, in whole
or in part in a principal amount that is an integral multiple of $1,000,
pursuant to a Change of Control Offer, at a purchase price in cash equal to 101%
of the Accreted Value of such Notes (or portions thereof) on any Change of
Control Payment Date occurring prior to August 15, 2000, plus accrued and unpaid
interest, if any, and Special Interest, if any, thereon to such Change of
Control Payment Date, or 101% of the principal amount at Stated Maturity of such
Notes (or portions thereof) on any Change of Control Payment Date occurring on
or after August 15, 2000, plus accrued and unpaid interest, if any, and Special
Interest, if any, to such Change of Control Payment Date.
A-10
<PAGE>
Within 30 days following any Change of Control, the Company shall
send, or cause to be sent, by first-class mail, postage prepaid, a notice
regarding the Change of Control Offer to each Holder of Notes. The Holder of
this Global Note may elect to have this Global Note or a portion hereof in an
authorized denomination purchased by completing the form entitled "Option of
Holder to Require Purchase" appearing below and tendering this Global Note
pursuant to the Change of Control Offer. Unless the Company defaults in the
payment of the Change of Control Purchase Price with respect thereto, all Notes
or portions thereof accepted for payment pursuant to the Change of Control Offer
will cease to accrete in value or accrue interest, as the case may be, and
accrue Special Interest, if any, from and after the Change of Control Payment
Date.
9. Repurchase at the Option of Holders Upon Asset Sale.
If at any time the Company or any Restricted Subsidiary engages in any
Asset Sale, as a result of which the aggregate amount of Excess Proceeds exceeds
$5,000,000, the Company shall, within 30 days of the date the amount of Excess
Proceeds exceeds $5,000,000, use the then-existing Excess Proceeds to make an
offer to purchase from all Holders of the Notes and Old Senior Notes, on a pro
rata basis, Notes and Old 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 in cash equal to (i) 100% of the Accreted
Value of such Notes on any Asset Sale Payment Date occurring prior to August 15,
2000, plus accrued and unpaid interest, if any, and Special Interest, if any,
thereon to such Asset Sale Payment Date, or 100% of the principal amount at
Stated Maturity of such Notes on any Asset Sale Payment Date occurring on or
after August 15, 2000, plus accrued and unpaid interest, if any, and Special
Interest, if any, thereon to such Asset Sale Payment Date, with respect to the
Notes, or (ii) 100% of the "Accreted Value" (as defined in the Old Senior Note
Indenture) of such Old 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, thereon to such Asset Sale Payment Date, or 100% of the
principal amount at Stated Maturity of such Old 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, thereon to such Asset Sale
Payment Date, with respect to the Old Senior Notes. Upon completion of an Asset
Sale Offer (including payment of the Asset Sale Purchase Price for accepted
Notes and Old Senior Notes), 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, including the making of an "Asset
Sale Offer" pursuant to the Convertible Note Indenture and/or the New
Convertible Note Indenture.
Within 30 days of the date on which the amount of Excess Proceeds
exceeds $5,000,000, the Company shall send, or cause to be sent, by first-class
mail, postage prepaid, a notice regarding the Asset Sale Offer to each Holder of
Notes. The Holder of this Global Note may elect to have this Global Note or a
portion hereof in an authorized denomination purchased by completing the form
entitled "Option of Holder to Require Purchase" appearing below and tendering
this Global Note pursuant to the Asset Sale Offer. Unless the Company
A-11
<PAGE>
defaults in the payment of the Asset Sale Purchase Price with respect thereto,
all Notes or portions thereof selected for payment pursuant to the Asset Sale
Offer will cease to accrete in value or accrue interest, as the case may be, and
accrue Special Interest, if any, from and after the Asset Sale Payment Date.
10. The Global Note.
So long as this Global Note is registered in the name of the
Depositary or its nominee, members of, or participants in, the Depositary
("Agent Members") shall have no rights under the Indenture with respect to this
Global Note held on their behalf by the Depositary or the Trustee as its
custodian, and the Depositary may be treated by the Company, the Trustee and any
agent of the Company or the Trustee as the absolute owner of this Global Note
for all purposes. Notwithstanding the foregoing, nothing herein shall (i)
prevent the Company, the Trustee or any agent of the Company or the Trustee,
from giving effect to any written certification, proxy or other authorization
furnished by the Depositary or (ii) impair, as between the Depositary and its
Agent Members, the operation of customary practices governing the exercise of
the rights of a Holder of Notes.
The Holder of this Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests in this Global Note through Agent Members, to take any action which a
Holder of Notes is entitled to take under the Indenture or the Notes.
Whenever, as a result of optional redemption by the Company, a Change
of Control Offer, an Asset Sale Offer, an Exchange Offer or an exchange for
Certificated Notes, this Global Note is redeemed, repurchased or exchanged in
part, this Global Note shall be surrendered by the Holder thereof to the Trustee
who shall cause an adjustment to be made to Schedule A hereof so that the
principal amount at Stated Maturity of this Global Note will be equal to the
portion not redeemed, repurchased or exchanged and shall thereafter return this
Global Note to such Holder; provided that this Global Note shall be in a
principal amount at Stated Maturity of $1,000 or an integral multiple of $1,000.
11. The Exchange Offer.
Any Notes represented by this Global Note which are presented to the
Registrar for exchange pursuant to the Exchange Offer (as defined in the
Registration Rights Agreement) shall be exchanged for a Global Note representing
Exchange Notes of equal principal amount at Stated Maturity upon surrender of
this Global Note to the Registrar in accordance with the terms of the Exchange
Offer and the Indenture.
12. Transfer and Exchange.
By its acceptance of any Note represented by a certificate bearing the
Private Placement Legend, each Holder of, and each beneficial owner of an
interest in, such a Note acknowledges the restrictions on transfer of such a
Note set forth in the Private Placement
A-12
<PAGE>
Legend and under the heading "Notice to Investors" in the Final Memorandum, and
agrees that it will transfer such a Note only in accordance with the Private
Placement Legend and the restrictions set forth under the heading "Notice to
Investors" in the Final Memorandum.
In connection with any transfer of a Note bearing the Private
Placement Legend, each Holder agrees to deliver to the Company, such
satisfactory evidence, which may include an opinion of independent counsel
licensed to practice law in the State of New York, as reasonably may be
requested by the Company to confirm that such transfer is being made in
accordance with the limitations set forth in the Private Placement Legend. In
the event the Company determines that any such transfer is not in accordance
with the Private Placement Legend, the Company shall so inform the Registrar who
shall not register such transfer; provided that the Registrar shall not be
required to determine (but may rely on a determination made by the Company with
respect to) the sufficiency of any such evidence.
Upon the registration of transfer, exchange or replacement of a Note
not bearing the Private Placement Legend, the Trustee shall deliver a Note that
does not bear the Private Placement Legend. Upon the transfer, exchange or
replacement of a Note bearing the Private Placement Legend, the Trustee shall
deliver a Note bearing the Private Placement Legend, unless such legend may be
removed from such Note as provided in the next sentence. The Private Placement
Legend may be removed from a Note if there is delivered to the Company such
satisfactory evidence, which may include an opinion of independent counsel
licensed to practice law in the State of New York, as reasonably may be
requested by the Company to confirm that neither such legend nor the
restrictions on transfer set forth therein are required to ensure that transfers
of such Note will not violate the registration and prospectus delivery
requirements of the Securities Act; provided that the Trustee shall not be
required to determine (but may rely on a determination made by the Company with
respect to) the sufficiency of any such evidence. Upon provision of such
evidence, the Trustee shall authenticate and deliver in exchange for such Note,
a Note or Notes (representing the same aggregate principal amount at Stated
Maturity of the Note being exchanged) without such legend. If the Private
Placement Legend has been removed from a Note, as provided above, no other Note
issued in exchange for all or any part of such Note shall bear such legend,
unless the Company has reasonable cause to believe that such other Note
represents a "restricted security" within the meaning of Rule 144 and instructs
the Trustee to cause a legend to appear thereon.
By its acceptance of any Note represented by a certificate bearing the
Unit Legend, each Holder of, and beneficial owner of an interest in, such a Note
acknowledges that the Notes represented hereby initially were issued as part of
the issuance of Units, each of which consists of $1,000 principal amount at
Stated Maturity of Notes and ten Warrants and agrees to the restrictions on
transfer of Units set forth in the Final Memorandum and the Unit Legend and
agrees that prior to the Separability Date, Notes will not be transferable
except as part of a transfer of Units. The Registrar shall not register the
transfer of any Note unless the Company receives evidence reasonably
satisfactory to it that such transfer is part of a transfer of a Unit or Units;
provided that the Registrar shall not be required to determine (but may rely on
the determination made by the Company with respect to) the sufficiency of any
such evidence.
A-13
<PAGE>
The Holder of this Global Note shall, by acceptance of this Global
Note, agrees that transfers of beneficial interests in this Global Note may be
effected only through a book-entry system maintained by such Holder (or its
agent), and that ownership of a beneficial interest in the Notes represented
thereby shall be required to be reflected in book-entry form. Transfers of this
Global Note shall be limited to transfers in whole, and not in part, to the
Depositary, its successors and their respective nominees. Interests of
beneficial owners in this Global Note may be transferred in accordance with the
rules and procedures of the Depositary (or its successors).
This Global Note will be exchanged by the Company for one or more
Certificated Notes if (a) the Depositary (i) has notified the Company that it is
unwilling or unable to continue as, or ceases to be, a clearing agency
registered under Section 17A of the Exchange Act and (ii) a successor to the
Depositary registered as a clearing agency under Section 17A of the Exchange Act
is not able to be appointed by the Company within 90 days or (b) the Depositary
is at any time unwilling or unable to continue as Depositary and a successor to
the Depositary is not able to be appointed by the Company within 90 days. If an
Event of Default occurs and is continuing, the Company shall, at the request of
the Holder hereof, exchange all or part of this Global Note for one or more
Certificated Notes; provided that the principal amount at Stated Maturity of
each of such Certificated Notes and this Global Note, after such exchange, shall
be $1,000 or an integral multiple thereof. Whenever this Global Note is
exchanged as a whole for one or more Certificated Notes, it shall be surrendered
by the Holder to the Trustee for cancellation. Whenever this Global Note is
exchanged in part for one or more Certificated Notes, it shall be surrendered by
the Holder to the Trustee and the Trustee shall make the appropriate notations
thereon pursuant to Section 2.05(c) of the Indenture. All Certificated Notes
issued in exchange for this Global Note or any portion hereof shall be
registered in such names as the Depositary shall instruct the Trustee. Any
Certificated Notes issued in exchange for this Global Note shall include (i) the
Private Placement Legend except as set forth in Section 2.06(a)(iii) of the
Indenture and (ii) the Unit Legend except as set forth in Section 2.06(k) of the
Indenture. Interests in this Global Note may not be exchanged for Certificated
Notes other than as provided in this paragraph.
Prior to the effectiveness under the Securities Act of a Shelf
Registration Statement or following the suspension or termination thereof, the
Holder of this Global Note (or holders of interests therein) registered and
prospective purchasers designated by such Holder (or such holders of interests
therein) shall have the right to obtain from the Company upon request by such
Holder (or such holders of interests) or prospective purchasers, during any
period in which the Company is not subject to Section 13 or 15(d) of the
Exchange Act, or exempt from reporting pursuant to 12g3-2(b) under the Exchange
Act, the information required by paragraph (d)(4)(i) of Rule 144A in connection
with any transfer or proposed transfer of this Global Note or interests.
A-14
<PAGE>
13. Contingent Warrants.
The Company will issue to the Holders of the Notes Contingent Warrants
exercisable for Class A Common Stock of the Company representing 5.0% of the
Common Stock of the Company on a fully diluted basis (subject to certain
exceptions) as of the date of issuance of such Contingent Warrants after giving
effect to the issuance thereof in the event that on or prior to September 30,
1998 the Company has not consummated a Qualified Equity Offering. Such
Contingent Warrants will be issued pursuant to the Warrant Agreement with the
same rights thereunder as the Initial Warrants and Holders thereof will have the
benefits of the Registration Rights Agreement.
Any Contingent Warrants issued shall be issued to the Holders of the
outstanding Notes as of September 30, 1998, pro rata, based upon the aggregate
principal amount at Stated Maturity of the Global Notes held by such Holder as
of September 30, 1998.
14. Guarantees.
The Company shall not permit any of its Restricted Subsidiaries,
directly or indirectly, to guarantee any Indebtedness of the Company
("Guaranteed Indebtedness") other than the Notes, unless (i) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to the
Indenture providing for a Guarantee (a "Guarantee") of payment of the Notes by
such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Restricted Subsidiary of the Company as a result of any
payment by such Restricted Subsidiary under its Guarantee, provided that any
Restricted Subsidiary may guarantee any Credit Facility so long as such
Restricted Subsidiary enters into a Guarantee ranking pari passu with its
guarantee under such Credit Facility. If the Guaranteed Indebtedness is pari
passu with the Notes, then the guarantee of such Guaranteed Indebtedness shall
be pari passu with or subordinated to the Guarantee; and if the Guaranteed
Indebtedness is subordinated to the Notes, then the guarantee of such Guaranteed
Indebtedness shall be subordinated to the Guarantee at least to the extent that
the Guaranteed Indebtedness is subordinated to this Note. Notwithstanding the
provisions of Section 4.10(a) of the Indenture, 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.
15. Denominations.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and integral multiples thereof of principal amount at
Stated Maturity.
A-15
<PAGE>
16. Unclaimed Money.
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment unless such abandoned property
law designates another Person.
17. Discharge and Defeasance.
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Notes and the Indenture if the Company
irrevocably deposits with the Trustee money or U.S. Government Obligations for
the payment of principal and interest (including Special Interest, if any) on
the Notes to redemption or maturity, as the case may be.
18. Amendment, Waiver.
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in aggregate principal amount of the outstanding Notes and
(ii) any past Default and its consequences may be waived with the written
consent of the Holders of at least a majority in aggregate principal amount at
Stated Maturity of the outstanding Notes. The Holders of not less than 75% in
aggregate principal amount at Stated Maturity of the outstanding Notes may, on
behalf of the Holders of all such Notes, waive any rights to require the Company
to issue to the Holders of the Notes Contingent Warrants. Subject to certain
exceptions set forth in the Indenture, without the consent of any Holder of
Notes, the Company and the Trustee may amend the Indenture or the Notes (i) to
evidence the succession of another Person to the Company or a Guarantor and the
assumption by such successor of the covenants of the Company or a Guarantor
under the Indenture and contained in the Notes; (ii) to add additional covenants
or to surrender rights and powers conferred on the Company or the Guarantors, if
any; (iii) to add any additional Events of Default; (iv) to provide for
uncertificated Notes in addition to or in place of Certificated Notes; (v) to
evidence and provide for the acceptance of appointment under the Indenture of a
successor Trustee; (vi) to cure any ambiguity in the Indenture, to correct or
supplement any provision in the 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
provide for Restricted Subsidiaries to become Guarantors pursuant to the terms
of the Indenture; (viii) to secure the Notes; or (ix) to comply with the
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
A-16
<PAGE>
19. Defaults and Remedies.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount at Stated Maturity of the
Notes, subject to certain limitations, may declare all the Notes to be
immediately due and payable. Certain events of bankruptcy or insolvency are
Events of Default and shall result in the Notes being immediately due and
payable upon the occurrence of such Events of Default without any further act of
the Trustee or any Holder.
Holders of Notes may not enforce the Indenture, the Guarantees or the
Notes except as provided in the Indenture. The Trustee may refuse to enforce the
Indenture, the Guarantees or the Notes unless it receives reasonable indemnity
or security. Subject to certain limitations, Holders of a majority in aggregate
principal amount at Stated Maturity of the Notes may direct the Trustee in its
exercise of any trust or power under the Indenture. The Holders of a majority in
aggregate principal amount at Stated Maturity of the outstanding Notes, by
written notice to the Company and the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree, and if all Events of Default have been cured or waived
except nonpayment of principal and interest that has become due solely because
of the acceleration.
20. Individual Rights of Trustee.
Subject to certain limitations imposed by the Trust Indenture Act, the
Trustee or any Paying Agent or Registrar, in its individual or any other
capacity, may become the owner or pledgee of Notes and may otherwise deal with
the Company or its Affiliates with the same rights it would have if it were not
Trustee, Paying Agent or Registrar, as the case may be, under the Indenture.
21. No Recourse Against Certain Others.
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes or the 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 Note, each Holder waives and releases all such liability (but only
such liability) as part of the consideration for issuance of such Note to such
Holder.
A-17
<PAGE>
22. Governing Law.
THE INDENTURE AND THIS GLOBAL NOTE SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCEPT WITH REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS, APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED IN SAID STATE.
The Company will furnish to any Holder of Notes upon written request
and without charge to the Holder a copy of the Indenture which has in it the
text of this Global Note. Requests may be made to:
USN COMMUNICATIONS, INC.
10 South Riverside Plaza
Suite 401
Chicago, Illinois 60606-3709
Attention: General Counsel
A-18
<PAGE>
SCHEDULE A
SCHEDULE OF PRINCIPAL AMOUNT
----------------------------
The initial principal amount at Stated Maturity of this Global Note shall be
$_________________. The following decreases/increases in the principal amount at
Stated Maturity of this Global Note have been made:
<TABLE>
<CAPTION>
================================================================================
Total Principal
Decrease in Increase in Amount at Maturity Notation
Date of Principal Principal Following such Made by or
Decrease/ Amount at Amount at Decrease/ on Behalf of
Increase Maturity Maturity Increase Trustee
- -------- -------- -------- -------- -------
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
A-19
<PAGE>
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Global Note)
FOR VALUE RECEIVED ____________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE
- ----------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
- --------------------------------------------------------------------------------
this Global Note, together with all right, title and interest herein, and does
hereby irrevocably constitute and appoint __________________________ Attorney to
transfer this Global Note on the Security Register, with full power of
substitution.
Date:
-------------
- ------------------- -----------------------
Signature of Holder Signature Guaranteed:
Commercial Bank or Trust Company
or Member Firm of the New York
Stock Exchange, Inc.
NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Global Note in every particular, without
alteration or any change whatsoever.
A-20
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
[_] In connection with the Change of Control Offer made pursuant to Section
4.07 of the Indenture, the undersigned hereby elects to have
[_] the entire principal amount at Stated Maturity
[_] $________________ ($1,000 in principal amount at Stated Maturity or an
integral multiple thereof) of this Global Note
repurchased by the Company. The undersigned hereby directs the Trustee or
Paying Agent to pay it or _________________ an amount in cash equal to 101%
of the Accreted Value with respect to the principal amount at Stated
Maturity indicated in the preceding sentence or of the principal amount at
Stated Maturity indicated in the preceding sentence, as the case may be,
plus accrued and unpaid interest and Special Interest thereon, if any, to
the Change of Control Payment Date.
[_] In connection with the Asset Sale Offer made pursuant to Section 4.08 of
the Indenture, the undersigned hereby elects to have
[_] the entire principal amount at Stated Maturity
[_] $________________ ($1,000 in principal amount at Stated Maturity or an
integral multiple thereof) of this Global Note
repurchased by the Company. The undersigned hereby directs the Trustee or
Paying Agent to pay it or ______________ an amount in cash equal to 100% of
the Accreted Value with respect to the principal amount at Stated Maturity
indicated in the preceding sentence or of the principal amount at Stated
Maturity indicated in the preceding sentence, as the case may be, plus
accrued and unpaid interest and Special Interest thereon, if any, to the
Asset Sale Payment Date.
Date:
---------------
- -------------------------- -------------------------------
Signature of Holder Signature Guaranteed:
Commercial Bank or Trust Company
or Member Firm of the New York
Stock Exchange, Inc.
NOTICE: The signature to the foregoing must correspond to the Name as written
upon the face of this Global Note in every particular, without alteration or any
change whatsoever.
A-21
<PAGE>
Exh. 4.4
- -------------------------------------------------------------------------------
USN COMMUNICATIONS, INC.
9% CONVERTIBLE SUBORDINATED NOTES DUE 2004
- -------------------------------------------------------------------------------
SUPPLEMENTAL INDENTURE NO. 1
Dated as of August 12, 1997
- -------------------------------------------------------------------------------
HARRIS TRUST AND SAVINGS BANK,
Trustee
- -------------------------------------------------------------------------------
<PAGE>
SUPPLEMENTAL INDENTURE NO. 1, dated as of August 12, 1997 (the
"Supplement"), to the Indenture, dated as of September 30, 1996 (the
"Indenture"), between USN COMMUNICATIONS, INC. (formerly, United USN, Inc.), a
Delaware corporation (the "Company"), having its principal office at 10 South
Riverside Plaza, Suite 401, Chicago, Illinois 60606. Capitalized terms used
herein but not otherwise defined shall have the meanings ascribed to such terms
in the Indenture.
RECITALS OF THE COMPANY
WHEREAS, the Company and the Trustee have entered into the Indenture
pursuant to which the Company has issued $36,000,000 aggregate principal amount
at Stated Maturity of its 9% Convertible Subordinated Notes due 2004 (the
"Convertible Notes");
WHEREAS, Section 9.02 of the Indenture provides that the Company and the
Trustee, with the consent of the Holder of each outstanding Convertible Note,
may enter into one or more indentures supplemental thereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or modifying in any manner the rights of the
Holders;
WHEREAS, all acts and things prescribed by the Indenture and by law
necessary to make this Supplement a valid instrument legally binding on the
Company and the Trustee, in accordance with its terms, have been duly done and
performed; and
WHEREAS, all conditions precedent to amend or supplement the Indenture have
been met, including, without limitation, receipt of the consents of each of the
Holders of the outstanding Convertible Notes.
NOW, THEREFORE, each party agrees, for the benefit of the other parties and
for the equal and ratable benefit of the Holders of the Notes, to the deletions,
amendments and modifications set forth below which will become operative
pursuant to the terms hereof.
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<PAGE>
ARTICLE I
AMENDMENTS
Section 1.01 Deletions, Amendments and Modifications to Article I.
(a) The following terms are inserted in Section 1.1 of the
Indenture as new definitions.
""Consent Agreement" means the Consent Agreement, dated as of August
12, 1997, by and among the Company, Merrill Lynch Global Allocation Fund,
Inc. and Merrill Lynch Equity/Convertible Series (Global Allocation
Portfolio)."
""New Convertible Note Asset Sale Offer" means an "Asset Sale Offer"
as defined in and made pursuant to the provisions of the New Convertible
Note Indenture."
""New Convertible Note Indenture" means the Indenture, to be dated the
date of issuance of the New Convertible Notes, if issued, between the
Company and the New Convertible Note Trustee, as amended and supplemented
from time to time."
""New Convertible Note Trustee" means the trustee to be appointed, if
applicable, under the New Convertible Note Indenture and any successor
appointed in accordance with the terms thereof."
""New Convertible Notes" means a new issue of 9% convertible
subordinated notes in an amount yielding $10 million in proceeds to the
Company to be issued by the Company pursuant to the New Convertible Note
Indenture, if applicable, pursuant to the exercise by certain Persons of an
option to purchase such notes pursuant to the Consent Agreement."
""New Senior Note Asset Sale Offer" means an "Asset Sale Offer" as
defined in and made pursuant to the provisions of the New Senior Note
Indenture."
""New Senior Note Guarantees" means a guarantee of payment of the New
Senior Notes in the form of a supplemental indenture to the New
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<PAGE>
Senior Note Indenture to be executed and delivered pursuant to the New
Senior Note Indenture."
""New Senior Note Indenture" means the indenture, dated the date
hereof, between the Company and the New Senior Note Trustee, as amended and
supplemented from time to time."
""New Senior Notes" means $152,800,000 aggregate principal amount at
stated maturity of senior notes to be issued pursuant to the New Senior
Note Indenture and up to $48,500,000 aggregate principal amount at stated
maturity of additional senior notes that may be issued pursuant to the New
Senior Note Indenture upon the exchange of Senior Notes, in whole but not
in part, by the holders thereof for New Senior Notes pursuant to the
Consent Agreement."
(b) The definition of "Additional Warrants" is hereby amended and
modified to read in its entirety as follows:
""Additional Warrants" means the Additional Warrants which may be
issued pursuant to Section 4.15 hereof and the Warrant Agreement 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, among other things, by August 31, 1997,
the Company has not either consummated a qualified Public Offering or been
sold pursuant to a Qualified Sale of the Company.
(c) The definition of "Asset Sale" is hereby amended and modified to
read in its entirety as follows:
""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 the
Restricted Subsidiaries or (c) Property or assets of
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<PAGE>
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 that
constitutes a Restricted Payment permitted under Section 4.13 of the Senior
Note Indenture and/or the New Senior Note Indenture, (iv) a Disposition of
no more than 10 percent of the Capital Stock of USN Solutions 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
Article V hereof and (vi) contribution of assets to any Unrestricted
Subsidiary constituting an Investment otherwise permitted under the Senior
Note Indenture and the New Senior Note Indenture."
(d) The definition of "Pari Passu Indebtedness" is hereby amended and
modified to read in its entirety as follows:
""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, the Senior Note Guarantees, the New
Senior Notes or the New Senior Note Guarantees, as applicable."
(e) The definition of "Senior Indebtedness" is hereby amended and
modified to read in its entirety as follows:
""Senior Indebtedness" means all obligations of the Company under the
Senior Notes, the Senior Note Indenture and the Senior Note Guarantees
contained in the Senior Note Indenture, if any, and the New Senior Notes,
the New Senior Note Indenture and the New Senior Note Guarantees contained
in the New Senior Note Indenture, if any."
(f) Section 1.03(g) is hereby amended and modified to read in its
entirety as follows:
"(g) when used with respect to the Senior Notes, the Convertible
Notes, the New Senior Notes or, if issued, the New Convertible Notes, the
term "principal amount" shall mean the principal amount thereof at the
Stated Maturity of such principal amount; and"
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<PAGE>
Section 1.02 Deletions, Amendments and Modifications to Article IV.
(a) Section 4.08(b)(ii) is hereby amended and modified to read
in its entirety as follows:
"(ii) apply an amount equal to such Net Cash Proceeds, or remaining
Net Cash Proceeds, (A) to the permanent reduction of Indebtedness of the
Company (other than Indebtedness to a Restricted Subsidiary of the Company)
that is pari passu in right of payment with the Senior Notes, the New
Senior Notes, the Convertible Notes and, if issued, the New Convertible
Notes; provided, however, that in connection with any such permanent
reduction of Indebtedness of the Company, the Company shall apply, pro
rata, a portion of such Net Cash Proceeds or remaining Net Cash Proceeds to
the permanent reduction of the aggregate amount of Senior Notes, New Senior
Notes, Convertible Notes and New Convertible Notes outstanding, or (B) to
the permanent reduction of Indebtedness of any Restricted Subsidiary of the
Company that is pari passu in right of payment with such Restricted
Subsidiary's Senior Note Guarantee, New Senior Note Guarantee, Convertible
Note Guarantee and New Convertible Note Guarantee, if applicable (other
than Indebtedness to the Company or another Restricted Subsidiary of the
Company)."
(b) Section 4.08(c) is hereby amended and modified to read in
its entirety as follows:
"(c) If at any time the aggregate amount of Excess Proceeds
calculated as of such date exceeds $5,000,000, the Company shall, within 30
days of the date on which such Excess Proceeds exceed $5,000,000, use such
Excess Proceeds to make an offer, as described in Section 4.08(d) hereof
(an "Asset Sale Offer"), to purchase on a pro rata basis from all Holders
of the Convertible Notes and the holders of New Convertible Notes, if
issued, Convertible Notes and New Convertible 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 percent of the
Accreted Value of such Convertible Notes and New 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, or any "Special
Interest" (as defined in the New Convertible Note Indenture), if any, as
applicable, to such Asset Sale
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<PAGE>
Payment Date, or 100 percent of the principal amount at Stated Maturity of
such Convertible Notes and New 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 or any "Special Interest" (as
defined in the New Convertible Note Indenture), if any, as applicable to
such Asset Sale Payment Date; provided that if any Senior Notes or New
Senior Notes are outstanding and the Senior Note Indenture or the New
Senior Note Indenture has not been satisfied or discharged, the Company
shall be required to apply the Excess Proceeds first to a Senior Note Asset
Sale Offer (as described in the Senior Note Indenture) and a New Senior
Note Asset Sale Offer (as described in the New Senior Note Indenture), on a
pro rata basis, and 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) in the manner permitted by the Senior Note
Indenture and the New Senior Note Indenture and to the extent that the
aggregate amount paid pursuant to the Senior Note Asset Sale Offer and the
New Senior Note Asset Sale Offer and, if applicable, the repayment of
Indebtedness as permitted by the Senior Note Indenture and the New Senior
Note Indenture is less than such Excess Proceeds, the Company shall then
make an Asset Sale Offer for such remaining portion of such Excess Proceeds
within 100 days of the date on which such Excess Proceeds exceeded
$5,000,000."
(c) The first paragraph of Section 4.08(d) and subsection (d)(i) are
hereby amended and modified to read in their entirety as follows:
"(d) Within 30 days (or 100 days if any Senior Notes or New Senior
Notes are outstanding and the Senior Note Indenture or the New Senior Note
Indenture has not been satisfied or discharged) of the date on which the
amount of Excess Proceeds exceeds $5,000,000 (but subject to the proviso of
clause (c) of this Section 4.08), the Company, or the Trustee at the
request and expense of the Company, shall send to each Holder by first
class mail, postage prepaid, a notice prepared by the Company stating:
(i) that an Asset Sale Offer is being made pursuant to this
Section 4.08, and that Convertible Notes that are properly tendered
will be accepted
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<PAGE>
for payment, subject to proration in the event the amount of Excess
Proceeds is less than the aggregate Asset Sale Purchase Price of all
Convertible Notes and New Convertible Notes promptly tendered pursuant
to the Asset Sale Offer and the New Convertible Note Asset Sale Offer,
as applicable;
(d) Section 4.10(a) is hereby amended and modified to read in its
entirety as follows:
"(a) The Company may designate a Subsidiary (including a newly formed
or newly acquired Subsidiary) of the Company or any of its Restricted
Subsidiaries as an Unrestricted Subsidiary, provided that so long as the
Senior Notes or New Senior Notes remain outstanding and the Senior Note
Indenture or the New Senior Note Indenture has not been satisfied or
discharged, (i) immediately after giving effect to the transaction, the
Company could incur $1.00 of additional Indebtedness pursuant to Section
4.09(a) of the Senior Note Indenture and/or Section 4.09(a) of the New
Senior Note Indenture and (ii) such designation is at the time permitted
under Section 4.13(a) of the Senior Note Indenture and/or the New Senior
Note Indenture, as the case may be. Notwithstanding any provision of this
Section 4.10(a), all Subsidiaries of an Unrestricted Subsidiary will be
Unrestricted Subsidiaries."
(e) Section 4.12(c) is hereby amended and modified to read in
its entirety as follows:
"(c) The Company shall deliver written notice to the Trustee within 5
Business Days after becoming aware of (i) any Default or Event of Default,
(ii) any event of default under the Senior Note Indenture or the New Senior
Note Indenture or (iii) any event of default or any default under any other
mortgage, indenture or instrument referred to in Section 6.01(e) hereof,
describing such Default, Event of Default or other event of default or
default, its status and what action the Company is taking or proposes to
take with respect thereto."
8
<PAGE>
(f) Section 4.15 is hereby amended and modified to read in its
entirety as follows:
"SECTION 4.15 Additional Invested 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 August 31, 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 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
percent of the Common Stock on a fully diluted basis (as used herein, the
term "fully diluted" does not include any securities, including Common
Stock, issued in any transaction described in clauses (i) through (xi) of
Section 15(d)(ii) of the Warrant Agreement) after giving effect to the
issuance of such additional convertible securities and (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 to be specified in the Additional Warrants,
if required) on a fully diluted basis (as used herein, the term "fully
diluted" does not include any securities, including Common Stock, issued in
any transaction described in clauses (i) through (xi) of Section 15(d)(ii)
of the Warrant Agreement) after giving effect to the issuance of such
Additional Warrants."
Section 1.03 Deletions, Amendments and Modifications to Article VI.
(a) Section 6.01(i) is hereby amended and modified to read in
its entirety as follows:
"(i) the occurrence and continuation of an "event of default"
under the Senior Note Indenture or the New 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 hereunder."
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<PAGE>
(b) The second paragraph of Section 6.02 is hereby amended and
modified to read in its entirety as follows:
"In the event of a declaration of acceleration because an Event of
Default set forth in Section 6.01(e) hereof 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 Section 6.01(e) hereof 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
hereinafter in this Article VI provided. In the event of a declaration of
acceleration because an Event of Default set forth in Section 6.01(i)
hereof has occurred and is continuing, such declaration of acceleration
shall be automatically rescinded and annulled (A) if the Senior Notes
and/or the New Senior Notes, as applicable, have been repaid, (B) if the
event of default under the Senior Note Indenture and/or the New Senior Note
Indenture, as applicable, triggering such Event of Default pursuant to
Section 6.01(i) hereof shall be remedied or cured, or waived by the holders
of the Senior Notes and/or the New Senior Notes, as applicable, or (C) if
the Senior Notes and/or the New Senior Notes, as applicable, have been
accelerated, then the acceleration of the Senior Notes and/or the New
Senior Notes, as applicable, shall have been rescinded within 60 days of
the occurrence of such event of default under the Senior Note Indenture
and/or the New Senior Note Indenture, as applicable, and, in the case of
clauses (A), (B) or (C) above, the Senior Note Trustee and/or the New
Senior Note Trustee, as applicable, so certifies to the Trustee, provided
that any such event described in clause (A), (B) or (C) above must occur
prior to the commencement of an enforcement proceeding with respect to
this Indenture."
Section 1.04 Deletions, Amendments and Modifications to Article X.
The last sentence of Section 10.01(a) is hereby amended and modified to read in
its entirety as follows:
"This Convertible Note Guarantee is intended to be superior to or pari
passu in right of payment with all Indebtedness of the Guarantors, other
than the Senior Note Guarantees and the New Senior Note Guarantees, if any,
of such Guarantors, and each Guarantor's obligations are independent of any
obligation of the Company or any other Guarantor."
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Section 1.05 Deletions, Amendments and Modifications to Article XI.
The first paragraph of Section 11.09 is hereby amended and modified to read in
its entirety as follows:
"SECTION 11.09 No Waiver of Subordination Provisions. No right of any
present or future holder of any Senior Indebtedness to enforce
subordination as herein provided shall at any time in any way be prejudiced
or impaired by any act or failure to act on the part of the Company or any
Guarantor or by any act or failure to act, in good faith, by any such
holder, or by any noncompliance by the Company or any Guarantor with the
terms, provisions and covenants of this Indenture, regardless of any
knowledge thereof any such holder may have or be otherwise charged with. No
provision of the subordination provisions contained in this Article may be
amended without the consent of the holders of Senior Indebtedness as
provided by the terms of such Senior Indebtedness."
Section 1.06 Deletions, Amendments and Modifications to Article XII.
(a) The second paragraph of Section 12.01 is hereby amended and
modified to read in its entirety as follows:
"The price at which the Common Stock of the Company shall be
delivered upon conversion (herein called the "Conversion Price") shall be
equal to $104.36 per share."
(b) The third sentence of the third paragraph of Section 12.01
is hereby amended and modified to read in its entirety as follows:
"In addition, 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 August 31,
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 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 percent of
the Common Stock on a fully diluted basis (as used herein "fully diluted"
does not include
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any securities, including Common Stock, issued in any transaction described
in clauses (i) through (xi) of Section 15(d)(ii) of the Warrant Agreement)
after giving effect to the issuance of such additional convertible
securities, (ii) grant to the Holders of the Convertible Notes (the
Additional Warrants) on a fully diluted basis (as used herein, the term
"fully diluted" does not include any securities, including Common Stock,
issued in any transaction described in clauses (i) through (xi) of Section
15(d)(ii) of the Warrant Agreement) after giving effect to issuance of such
Additional Warrants, and (iii) adjust the Conversion Price for the
Convertible Notes by dividing the Conversion Price in effect immediately
prior to the issuance of such convertible securities and warrants by 1.15."
(c) Section 12.04(n) is hereby amended and modified to insert
the following after clause (vi) thereof:
"(vii) No adjustment need be made in respect of (1) the issuance of the
warrants to be issued by the Company in connection with the offering of the
New Senior Notes (the "New Warrants") or the exercise of such New Warrants;
(2) the issuance of warrants to be issued to Merrill Lynch Global
Allocation Fund, Inc. and Merrill Lynch Equity/Convertible Series (Global
Allocation Portfolio) pursuant to the Consent Agreement (the "Consent
Warrants") or the exercise of such Consent Warrants; (3) the issuance of
the New Convertible Notes or the conversion thereof; (4) the conversion of
shares of the Company's 9.0% Cumulative Convertible Pay-In-Kind Preferred
Stock, Series A; and (5) any adjustment of the warrant exercise price of
the New Warrants or the Consent Warrants in accordance with their
respective terms or any adjustment in the conversion price of the New
Convertible Notes in accordance with its terms."
ARTICLE IV
MISCELLANEOUS
Section 2.01 Effect of this Supplement. This Supplement is
supplemental to the Indenture and does and shall be deemed to form a part of,
and shall be construed in connection with and as part of, the Indenture for any
and all
12
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purposes. Except as specifically modified herein, the Indenture and the
Convertible Notes are in all respects ratified and confirmed and shall remain in
full force and effect in accordance with their terms.
Section 2.02 Trustee. Except as otherwise expressly provided herein,
no duties, responsibilities or liabilities are assumed, or shall be construed to
be assumed, by the Trustee by the reason of this Supplement. This Supplement is
executed and accepted by the Trustee subject to all the terms and conditions set
forth in the Indenture with the same force and effect as if those terms and
conditions were repeated at length herein and made applicable to the Trustee
with respect hereto. The Trustee assumes no responsibility for the recitals
contained herein, which shall be taken a statements of the Company, and makes no
representation as to the validity or sufficiency of this Supplement.
Section 2.03 GOVERNING LAW. THIS SUPPLEMENT AND THE CONVERTIBLE NOTES
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK, EXCEPT WITH REGARD TO PRINCIPLES OF CONFLICTS OF LAWS, APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
Section 2.04 Counterparts. This Supplement may be executed in any
number of counterparts and by the parties thereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
Section 2.05 Severability. In case any provision in this Supplement,
the Indenture or in the Convertible Notes shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
Section 2.06 Titles and Headings. The titles and headings in this
Supplement are solely for convenience of reference and will not be given any
effect in the construction or interpretation of this Supplement.
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IN WITNESS WHEREOF, the parties hereto have caused this Supplement to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
USN COMMUNICATIONS, INC.
By
-------------------------------
Name:
Title:
[Corporate Seal]
Attest
- --------------------
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By
-------------------------------
Name:
Title:
[Corporate Seal]
Attest
- --------------------
14
<PAGE>
STATE OF ILLINOIS )
) SS.:
COUNTY OF COOK )
On the _____ day of August, 1997, before me personally came
__________________, to me known, who being by me duly sworn, did depose and say
that he is ___________________ of USN Communications, Inc., one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation, and that he signed his name thereto by like
authority.
---------------------------------------
Notary Public
State of Illinois
My commission expires
[Seal]
<PAGE>
STATE OF ILLINOIS )
) SS.:
COUNTY OF COOK )
On the ___ day of August, 1997, before me personally came
________________, to me known, who being by me duly sworn, did depose and say
that he is ___________________ of Harris Trust and Savings Bank, the Trustee
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
---------------------------------------
Notary Public
State of Illinois
My commission expires
[Seal]
<PAGE>
Exh. 4.7
- --------------------------------------------------------------------------------
USN COMMUNICATIONS, INC.
14% SENIOR DISCOUNT NOTES DUE 2003
- --------------------------------------------------------------------------------
SUPPLEMENTAL INDENTURE NO. 2
Dated as of August 18, 1997
- --------------------------------------------------------------------------------
HARRIS TRUST AND SAVINGS BANK,
Trustee
- --------------------------------------------------------------------------------
<PAGE>
SUPPLEMENTAL INDENTURE NO. 2, dated as of August 18, 1997 (the
"Supplement"), to the Indenture, dated as of September 30, 1996, as supplemented
on March 17, 1997 (as supplemented, the "Indenture"), between USN
COMMUNICATIONS, INC. (formerly, United USN, Inc.), a Delaware corporation (the
"Company"), having its principal office at 10 South Riverside Plaza, Suite 401,
Chicago, Illinois 60606-3709, and HARRIS TRUST AND SAVINGS BANK, as trustee
hereunder (the "Trustee"), having its Corporate Trust Office at 311 West Monroe,
Chicago, Illinois 60606. Capitalized terms used herein but not otherwise defined
shall have the meanings ascribed to such terms in the Indenture.
RECITALS OF THE COMPANY
WHEREAS, the Company and the Trustee have entered into the Indenture
pursuant to which the Company has issued $48,500,000 aggregate principal amount
at Stated Maturity of its 14% Senior Discount Notes due 2003 (the "Senior
Notes");
WHEREAS, Section 9.02 of the Indenture provides that the Company and the
Trustee, with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Senior Notes, may enter into one
or more indentures supplemental thereto for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the
Indenture or modifying in any manner the rights of the Holders, subject to
certain exceptions;
WHEREAS, all acts and things prescribed by the Indenture and by law
necessary to make this Supplement a valid instrument legally binding on the
Company and the Trustee, in accordance with its terms, have been duly done and
performed; and
WHEREAS, all conditions precedent to amend or supplement the Indenture have
been met, including, without limitation, receipt of the consent of the Holders
of not less than a majority in aggregate principal amount of the outstanding
Senior Notes.
NOW, THEREFORE, each party agrees, for the benefit of the other parties and
for the equal and ratable benefit of the Holders of the Senior Notes, to the
deletions, amendments and modifications set forth below which will become
operative pursuant to the terms hereof.
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ARTICLE 1.
AMENDMENTS
Section 1.01. Deletions, Amendments and Modifications to Article I.
(a) The following terms are inserted in Section 1.01 of the Indenture
as new definitions.
""Consent Agreement" means the Consent Agreement, dated as of
August 12, 1997, by and among the Company, Merrill Lynch Global Allocation
Fund, Inc. and Merrill Lynch Equity/Convertible Series (Global Allocation
Portfolio)."
""New Convertible Note Asset Sale Offer" means an "Asset Sale
Offer" as defined in and made pursuant to the provisions of the New
Convertible Note Indenture."
""New Convertible Note Indenture" means the indenture, to be
dated the date of issuance of the New Convertible Notes, if issued, between
the Company and the New Convertible Note Trustee, as amended and
supplemented from time to time."
""New Convertible Note Trustee" means the trustee to be
appointed, if applicable, under the New Convertible Note Indenture and any
successor appointed in accordance with the terms thereof."
""New Convertible Notes" means a new issue of 9% convertible
subordinated notes in an amount yielding $10 million in proceeds to the
Company to be issued by the Company pursuant to the New Convertible Note
Indenture, if applicable, pursuant to the exercise by certain Persons of an
option to purchase such notes pursuant to the Consent Agreement."
""New Senior Note Asset Sale Offer" means an "Asset Sale Offer"
as defined in and made pursuant to the provisions of the New Senior Note
Indenture."
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""New Senior Note Guarantees" means a guarantee of payment of the
New Senior Notes in the form of a supplemental indenture to the New Senior
Note Indenture to be executed and delivered pursuant to the New Senior Note
Indenture."
""New Senior Note Indenture" means the Indenture to be entered
into between the Company and Harris Trust and Savings Bank, as trustee
thereunder, relating to the New Senior Notes, as amended and supplemented
from time to time."
""New Senior Note Trustee" means Harris Trust and Savings Bank,
as trustee under the New Senior Note Indenture and any successor appointed
in accordance with the terms thereof."
""New Senior Notes" means up to $152,800,000 aggregate principal
amount at stated maturity of senior notes to be issued pursuant to the New
Senior Note Indenture and up to $52,000,000 aggregate principal amount at
stated maturity of additional New Senior Notes that may be issued pursuant
to the New Senior Note Indenture upon the exchange of Senior Notes, in
whole but not in part, by the holders thereof, for New Senior Notes
pursuant to the Consent Agreement."
(b) The definition of "Cash Proceeds" is hereby replaced in its
entirety with the following:
""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 Senior Notes or Senior Note Guarantees, if any, or the
New Senior Notes or New Senior Note 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."
(c) The definition of "Indebtedness" is hereby replaced in its
entirety by the following:
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<PAGE>
""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 the acquisition of Property, assets or businesses, excluding trade
accounts payable made in the ordinary course of business which are not more
than 90 days overdue or which are being contested in good faith and by
appropriate proceedings, (iii) any reimbursement obligation of such Person
with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) any obligation of
such Person issued or assumed as the deferred purchase price of Property,
assets or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business, which in either
case are not more than 90 days overdue or which are being contested in good
faith and by appropriate proceedings, and for which adequate reserves are
being maintained on the books of the Company in accordance with GAAP), (v)
any Capital Lease Obligation of such Person, (vi) the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person and, to
the extent held by other Persons, the maximum fixed redemption or
repurchase price of Disqualified Stock of such Person's Restricted
Subsidiaries, at the time of determination, (vii) the notional amount of
any Interest Hedging Obligations or Exchange Rate Obligations of such
Person at the time of determination, (viii) any Attributable Indebtedness
with respect to any Sale and Leaseback Transaction to which such Person is
a party and (ix) any obligation of the type referred to in clauses (i)
through (viii) of this definition of another Person and all dividends and
distributions of another Person the payment of which, in either case, such
Person has guaranteed or is responsible or liable, directly or indirectly,
as obligor, guarantor or otherwise. For purposes of the preceding
sentence, the maximum fixed repurchase price of any Disqualified Stock that
does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Stock as if such Disqualified Stock
were repurchased on any date on which Indebtedness shall be required to be
determined pursuant to this 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
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<PAGE>
calculating the amount of the Senior Notes, New Senior Notes, Convertible
Notes or New Convertible Notes, if any, as the case may be, outstanding at
any date, the amount of such Senior Notes shall be the Accreted Value
thereof as of such date, the amount of such New Senior Notes shall be the
"Accreted Value" thereof (as defined in, and determined pursuant to, the
New Senior Note Indenture), the amount of such Convertible Notes shall be
the "Accreted Value" thereof (as defined in, and determined pursuant to,
the Convertible Note Indenture), and the amount of such New Convertible
Notes shall be the "Accreted Value" thereof (as defined in, and determined
pursuant to, the New Convertible Note Indenture) unless cash interest has
commenced to accrue pursuant to the terms of the Senior Notes and the
Senior Note Indenture, the New Senior Notes and the New Senior Note
Indentures, the Convertible Notes and the Convertible Note Indenture or the
New Convertible Notes and the New Convertible Note Indenture, as the case
may be, in which case the amount of the Senior Notes, the New Senior Notes,
the Convertible Notes or the New Convertible Notes, as the case may be,
outstanding will be the aggregate principal amount thereof at Stated
Maturity; provided, further, that for purposes of calculating the amount of
any non-interest bearing or other discount security (other than the Senior
Notes, the New Senior Notes, the Convertible Notes or the New Convertible
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."
(d) The definition of "Pari Passu Indebtedness" is hereby replaced in
its entirety by the following:
""Pari Passu Indebtedness" means any Indebtedness (secured or
unsecured) of the Company or any Guarantor or New Senior Note Guarantor
that ranks pari passu in right of payment with the Senior Notes, the Senior
Note Guarantees, the New Senior Notes or the New Senior Note Guarantees, as
applicable."
(e) The Definition of "Restricted Payment" is hereby replaced in its
entirety by the following:
""Restricted Payment" means (i) a dividend or other distribution
declared or paid on the Capital Stock of the Company or to the Company's
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<PAGE>
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
to any Person not otherwise an Affiliate of the Company holding such Common
Stock as a result of the exercise of the USN Solutions Option; provided that the
Company shall receive pro rata dividends, distributions or payments at the same
time and in the same form and composition of consideration as the dividends,
distributions or payments paid to such minority stockholders), (ii) a payment
made by the Company or any of its Restricted Subsidiaries (other than to the
Company or any Restricted Subsidiary of the Company) to purchase, redeem,
acquire or retire any Capital Stock of the Company or of a Restricted Subsidiary
of the Company, (iii) a payment made by the Company or any of its Restricted
Subsidiaries (other than a payment made solely in Qualified Stock of the
Company) to redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including pursuant to
mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of the Company or
such Restricted Subsidiary which is subordinate (whether pursuant to its terms
or by operation of law) in right of payment to the Senior Notes, any Senior Note
Guarantees, the New Senior Notes or any New Senior Note Guarantees, as
applicable, or the Convertible Notes or any guarantees contained in the
Convertible Note Indenture and, if issued, the New Convertible Notes or any
guarantees contained in the New Convertible Note Indenture 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."
(f) Section 1.03(g) is hereby amended and modified to read in its
entirety as follows:
"(g) when used with respect to the Senior Notes, the New Senior
Notes, the Convertible Notes or the New Convertible Notes, if any, the term
"principal amount" shall mean the principal amount thereof at the Stated
Maturity of such principal amount; and "
Section 1.012. Deletions, Amendments and Modifications to Article
III.
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The second paragraph of Section 3.07 is hereby amended and modified to
read in its entirety as follows:
"Notwithstanding the foregoing, in the event that on or prior to
September 30, 1999, the Company consummates one or more Public Equity
Offerings of its Common Stock or issues or sells Qualified Stock of the
Company to a Strategic Investor, in each case in an aggregate amount equal
to or exceeding $40,000,000, up to a maximum of 25 percent (except as set
forth below) of the aggregate principal amount at Stated Maturity of the
Senior Notes will be redeemable at the option of the Company out of the net
proceeds of such sale or sales to the extent that such proceeds consist of
cash or cash equivalents. Such Senior Notes will be redeemable on not less
than 30 nor more than 60 days' prior notice at a Redemption Price equal to
114 percent of the Accreted Value of the Senior Notes to be redeemed on the
Redemption Date plus accrued and unpaid interest, if any, and Special
Interest, if any, to the Redemption Date. Any such redemption shall occur
within 90 days after (but not before) such sale or last such sale in the
case of a series of related transactions; provided that immediately after
giving effect to such redemption not less than 75 percent of the aggregate
principal amount at Stated Maturity of the Senior Notes originally issued
remain outstanding. Notwithstanding anything to the contrary contained in
this paragraph, the Company shall, prior to September 30, 1999, repurchase,
at the option of the Holders of Senior Notes, up to a maximum of 35% of the
aggregate principal amount at Stated Maturity of the Senior Notes, at a
Redemption Price of 114.63% of the Accreted Value, plus accrued and unpaid
interest, if any, to the Redemption Date (or such higher "Redemption Price"
as is provided for in the Old Senior Note Indenture), on a pro rata basis
together with the holders of the New Senior Notes, in any redemption of New
Senior Notes pursuant to any comparable provisions contained in the New
Senior Note Indenture; provided, that immediately after giving effect to
such repurchase not less than 65% of the aggregate principal amount at
Stated Maturity of the Senior Notes originally issued remain outstanding.
The Company shall provide written notice to the Holders of the Senior Notes
in the event it intends to redeem New Senior Notes following a Public
Equity Offering as permitted by the New Senior Note Indenture, offering to
repurchase a pro rata portion of the Senior Notes and such Holders shall
notify the Company within five business days if they intend to participate
in such repurchase on a pro rata basis together with the holders of the New
Senior Notes as provided for herein."
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<PAGE>
Section 1.013. Deletions, Amendments and Modifications to Article IV.
(a) Section 4.08(b)(ii) is hereby amended and modified to read in its
entirety as follows:
"(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 of the
Company) that is pari passu in right of payment with the Senior Notes, the
New Senior Notes, the Convertible Notes and, if issued, the New Convert
ible Notes and which was secured by such assets transferred and which is
required to be paid in whole or in part (which repayment, in the case of a
revolving credit arrangement or multiple advance arrangement, reduces the
commitment thereunder)."
(b) Section 4.08(c) is hereby amended and modified to read in its
entirety as follows:
"(c) If at any time the aggregate amount of Excess Proceeds
calculated as of such date exceeds $5,000,000, the Company shall, within 30
days of the date on which such Excess Proceeds exceed $5,000,000, use such
Excess Proceeds to make an offer, as described in Section 4.08(d) hereof
(an "Asset Sale Offer"), (A) to purchase on a pro rata basis from all
Holders of the Senior Notes and Holders of the New 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 percent 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
percent 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, with respect to Senior Notes, and 100 percent of
the "Accreted Value" (as defined in the New Senior Note Indenture) of such
New Senior Notes, on any Asset Sale Payment Date occurring prior to August
15, 2000, or 100 percent of the principal amount at Stated Maturity of such
New Senior Notes on any Asset Sale Payment Date occurring on or after
August 15, 2000, plus accrued
9
<PAGE>
and unpaid interest, if any and Special Interest (as defined in and
determined pursuant to New Senior Note Indenture), if any, to such Asset
Sale Payment Date, with respect to New Senior Notes, 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
and New 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."
(c) Section 4.08(d)(i) is hereby amended and modified to read in its
entirety as follows:
"(i) that an Asset Sale Offer is being made pursuant to this Section
4.08, and that all Senior Notes and New Senior Notes that are properly
tendered will be accepted for payment, subject to proration in the event
the amount of Excess Proceeds is less than the aggregate Asset Sale
Purchase Price of all Senior Notes and New Senior Notes promptly tendered
pursuant to the Asset Sale Offer (or in the case of a repurchase
concurrently with the repayment or redemption of Pari Passu Indebtedness,
such amount as is determined pursuant to Section 4.08(c) hereof);"
(d) Section 4.09(b) is hereby amended and modified to read in its
entirety as follows:
"(b) The provisions of Section 4.09(a) hereof shall not apply to:
(i) Indebtedness existing under the Credit Facility; provided that
the aggregate principal amount of all such Indebtedness under the Credit
Facility, when taken together with all Indebtedness of the Company then
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<PAGE>
outstanding which was permitted to have been incurred under clause (xi)
below, shall not exceed $45,000,000 at any one time outstanding, up to
$30,000,000 of aggregate principal amount of which may be secured;
(ii) the Existing Indebtedness;
(iii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness owing to any of its respective
Wholly-Owned Restricted Subsidiaries; provided that any such Indebtedness
is junior and subordinate to the Senior Notes, Senior Note Guarantees, if
any, the New Senior Notes and the New Senior Note Guarantees, if any, and
such Indebtedness is held at all times by the Company or a Wholly-Owned
Restricted Subsidiary of the Company;
(iv) Indebtedness of any Restricted Subsidiary to the Company or a
Wholly-Owned Restricted Subsidiary of the Company;
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Interest Hedging Obligations with respect to any floating
rate Indebtedness that is permitted by this Section 4.09(b);
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness evidenced by the Senior Notes or Senior Note
Guarantees, if any, or the New Senior Notes or the New Senior Note
Guarantees, if any, pursuant to this Indenture or the New Senior Note
Indenture, as applicable, and by the Convertible Notes or the New
Convertible Notes, if any, or the guarantees of the Convertible Notes or
the New Convertible Notes, if any, issued pursuant to the Convertible Note
Indenture or the New Convertible Note Indenture, as applicable;
(vii) Indebtedness in respect of performance, surety or appeal bonds
provided by the Company in the ordinary course of business;
(viii) Vendor Financing not to exceed an aggregate principal amount of
$5,000,000 at any one time outstanding;
(ix) the incurrence by the Company or any of its Restricted
Subsidiaries of Refinancing Indebtedness issued in exchange for, or the
proceeds of which are used to refinance, repurchase, replace, refund or
11
<PAGE>
defease ("Refinance" and correlatively, "Refinanced" and "Refinancing")
Indebtedness permitted pursuant to clauses (ii) or (vi) of this Section
4.09(b); provided that (1) the amount of such Refinancing Indebtedness
shall not exceed the principal amount of, premium, if any, and accrued
interest (and Special Interest on the Senior Notes, Special Interest (as
defined in the New Senior Note Indenture) on the New Senior Notes, Special
Interest (as defined in the Convertible Note Indenture) on the Convertible
Notes and Special Interest (as defined in the New Convertible Note
Indenture) on the New Convertible Notes, as applicable) on the Indebtedness
so Refinanced (or if such Indebtedness was issued with original issue
discount, the original issue price plus amortization of the original issue
discount at the time of the repayment of such Indebtedness) plus the fees,
expenses and costs of such Refinancing and reasonable prepayment premiums,
if any, in connection therewith; (2) such Refinancing Indebtedness shall
have a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being Refinanced; (3) such Refinancing Indebtedness shall have
an Average Life equal to or greater than the Average Life of the
Indebtedness being Refinanced; (4) if the Indebtedness being Refinanced is
subordinated in right of payment to the Senior Notes, such Refinancing
Indebtedness shall be subordinate in right of payment to the Senior Notes
on terms at least as favorable to the Holders of Senior Notes as those
contained in the documentation governing the Indebtedness being so
Refinanced; and (5) no Restricted Subsidiary shall incur Refinancing
Indebtedness to Refinance Indebtedness of the Company or another
Subsidiary; and
(x) Indebtedness of the Company not otherwise permitted to be
incurred pursuant to this Section 4.09(b) in an aggregate amount not to
exceed $5,000,000 at any one time outstanding and which amount shall reduce
the amount permitted to be incurred under Section 4.09(b)(i) above."
(e) Section 4.13 is hereby amended and modified to add "(a)" after
the heading "Restricted Payments."
(f) Section 4.13(b)(iii) is hereby amended and modified to read in
its entirety as follows:
"(iii) so long as no Default or Event of Default shall have occurred
and be continuing or shall occur as a consequence thereof, retiring any
Indebtedness of the Company subordinated in right of payment to the Senior
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Notes, the New Senior Notes, the Convertible Notes and, if issued, the New
Convertible Notes, if any, in exchange for, or out of the proceeds of, the
substantially concurrent incurrence of Indebtedness of the Company (other
than Indebtedness to a Subsidiary of the Company), provided that such new
Indebtedness (A) is subordinated in right of payment to the Senior Notes,
the New Senior Notes, the Convertible Notes and, if issued, the New
Convertible Notes, if any, at least to the same extent as, (B) has an
Average Life at least as long as, and (C) has no scheduled principal
payments due in any amount earlier than, any equivalent amount of principal
under the Indebtedness so retired;"
(g) Section 4.13(b)(iv) is hereby amended and modified to read in its
entirety as follows:
"(iv) so long as no Default or Event of Default shall have occurred
and be continuing or shall occur as a consequence thereof, retiring any
Indebtedness of a Restricted Subsidiary of the Company in exchange for, or
out of the proceeds of, the substantially concurrent incurrence of Indebted
ness of the Company or any Restricted Subsidiary of the Company that is
permitted under Section 4.09 hereof and that (A) is not secured by any
assets of the Company or any Restricted Subsidiary of the Company to a
greater extent than the retired Indebtedness was so secured, (B) has an
Average Life at least as long as the retired, purchased, redeemed or
acquired Indebtedness and (C) is subordinated in right of payment to the
Senior Notes, the New Senior Notes, the Convertible Notes and, if issued,
the New Convertible Notes or the Senior Note Guarantees, the New Senior
Note Guarantees, the guarantees contained in the Convertible Note Indenture
and any guarantees in the New Convertible Note Indenture, at least to the
same extent as the retired Indebtedness;"
(h) Section 4.13(b)(ix) is hereby amended and modified to read in its
entirety as follows:
"(ix) so long as no Default or Event of Default shall have occurred
and be continuing, the Company may redeem Convertible Notes and/or, if
issued, New Convertible Notes pursuant to the terms of the Convertible Note
Indenture and/or the New Convertible Note Indenture, respectively, or
repurchase Convertible Notes and/or, if issued, New Convertible Notes
pursuant to a "Change of Control Offer" under the Convertible Note
Indenture or the New Convertible Note Indenture, as applicable, a
Convertible Note
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Asset Sale Offer or a New Convertible Note Asset Sale Offer or a repurchase
offer upon a "Termination of Trading" of the Common Stock of the Company
pursuant to the terms of the Convertible Note Indenture and/or the New
Convertible Note Indenture, as applicable."
(i) Section 4.14(a) is hereby amended and modified to read in its
entirety as follows:
"(a) any encumbrance or restriction existing (i) as of the Issue Date
pursuant to this Indenture or the Convertible Note Indenture or the
Existing Indebtedness, (ii) as of the date of original issuance of the New
Senior Notes pursuant to the New Senior Note Indenture or (iii) as of the
date or original issuance of the New Convertible Notes pursuant to the New
Convertible Note Indenture;"
(j) Section 4.16 is hereby amended to delete the "and" at the end of
clause (vi) and insert the following clauses after clause (vii):
"(viii) the issuance of approximately $30,000,000 of preferred stock
to certain of the Company's existing stockholders concurrent with the
offering of the New Senior Notes; and
(ix) the provision of a $20 million term loan facility by certain of
the Company's existing stockholders pursuant to the terms and conditions
set forth in the Consent Agreement."
(k) Section 4.22 is hereby amended and modified to read in its
entirety as follows:
"SECTION 4.22 Outside Director. The Company shall nominate and take
all reasonable actions to cause to be elected two disinterested outside
Directors to the Board of Directors of the Company who are not Directors on the
Issue Date and who have experience in the telecommunications industry (the
"Additional Outside Directors"), one of which shall be elected by December 31,
1997 and one of which shall be elected by March 31, 1998. At all times during
the period commencing when each such Additional Outside Director is elected and
ending on Maturity, in the event that a Outside Director (or any successor
Additional Outside Director) is no longer serving as a Director, the Company
shall, as promptly as
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<PAGE>
practicable, nominate and take all reasonable actions to cause to be elected, a
successor Additional Outside Director."
ARTICLE 2.
MISCELLANEOUS
Section 1.021. Effect of this Supplement. This Supplement is
supplemental to the Indenture and does and shall be deemed to form a part of,
and shall be construed in connection with and as part of, the Indenture for any
and all purposes. Except as specifically modified herein, the Indenture and the
Senior Notes are in all respects ratified and confirmed and shall remain in full
force and effect in accordance with their terms.
Section 1.022. Trustee. Except as otherwise expressly provided
herein, no duties, responsibilities or liabilities are assumed, or shall be
construed to be assumed, by the Trustee by reason of this Supplement. This
Supplement is executed and accepted by the Trustee subject to all the terms and
conditions set forth in the Indenture with the same force and effect as if those
terms and conditions were repeated at length herein and made applicable to the
Trustee with respect hereto. The Trustee assumes no responsibility for the
recitals contained herein, which shall be taken as statements of the Company,
and makes no representation as to the validity or sufficiency of this
Supplement.
Section 1.023. GOVERNING LAW. THIS SUPPLEMENT AND THE SENIOR NOTES
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK, EXCEPT WITH REGARD TO PRINCIPLES OF CONFLICTS OF LAWS, APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
Section 1.024. Counterparts. This Supplement may be executed in any
number of counterparts and by the parties thereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
Section 1.025. Severability. In case any provision in this
Supplement, the Indenture or in the Senior Notes shall be invalid, illegal or
unenforceable, the
15
<PAGE>
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
Section 1.026. Titles and Headings. The titles and headings in this
Supplement are solely for convenience of reference and will not be given any
effect in the construction or interpretation of this Supplement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplement to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
USN COMMUNICATIONS, INC.
By
-----------------------------
Name:
Title:
[Corporate Seal]
Attest
- -----------------------------
- -----------------------------
- -----------------------------
- -----------------------------
- -----------------------------
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By
-----------------------------
Name:
Title:
[Corporate Seal]
Attest
- -----------------------------
- -----------------------------
- -----------------------------
- -----------------------------
- -----------------------------
<PAGE>
STATE OF ILLINOIS )
) SS.:
COUNTY OF COOK )
On the ___ day of July, 1997, before me personally came _________
______, to me known, who being by me duly sworn, did depose and say that he is
_______________________ of USN Communications, Inc., one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
--------------------------------
Notary Public
State of Illinois
My commission expires
[Seal]
<PAGE>
STATE OF ILLINOIS )
) SS.:
COUNTY OF COOK )
On the ___ day of July, 1997, before me personally came
_______________, to me known, who being by me duly sworn, did depose and say
that he is _______________________ of Harris Trust and Savings Bank, the Trustee
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
------------------------------
Notary Public
State of Illinois
My commission expires
[Seal]
<PAGE>
Exhibit 5.1
November 21, 1997
USN Communications, Inc.
10 S. Riverside Plaza, Suite 401
Chicago, Illinois 60606
Re: USN Communications, Inc. Registration Statement on Form S-4
(No. 333-37621)
Ladies and Gentlemen:
We have acted as special counsel to USN Communications, Inc., a
Delaware corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-4 (No. 333-37621), as filed by the Company with
the Securities and Exchange Commission (the "Commission") on October 10, 1997
(the "Registration Statement"). The Registration Statement relates to the
registration under the Securities Act of 1933, as amended (the "Act"), of
$152,725,000 aggregate principal amount at maturity of the Company's 14-5/8%
Series B Senior Discount Notes due 2004 (the "New Notes"), which are to be
offered in exchange for an equivalent principal amount at maturity of the
Company's currently outstanding 14-5/8% Senior Discount Notes due 2004 (the "Old
Notes"), as more fully described in the Registration Statement. The New Notes
will be issued pursuant to an indenture, dated as of August 15, 1997 (the
"Indenture"), between the Company and Harris Trust and Savings Bank, as Trustee
(the "Trustee").
This opinion is delivered in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement; (ii) the Indenture, included as Exhibit 4.1 to the Registration
Statement; (iii) the Amended
<PAGE>
USN Communications, Inc.
November __, 1997
Page 2
and Restated Certificate of Incorporation and the By-Laws of the Company, as
presently in effect; and (iv) certain resolutions adopted by the Board of
Directors of the Company relating to the issuance and exchange of the New Notes
for the Old Notes and related matters. We have also examined originals or
copies, certified or otherwise identified to our satisfaction, of such records
of the Company and such agreements, certificates of public officials,
certificates of officers or other representatives of the Company and others, and
such other documents, certificates and records as we have deemed necessary or
appropriate as a basis for the opinions set forth herein.
For purposes of our opinion, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power,
corporate, trust or other, to enter into and perform all obligations thereunder
and have also assumed the due authorization by all requisite action, corporate,
trust or other, and execution and delivery by such parties of such documents and
the validity and binding effect thereof.
We have also assumed that the execution and delivery by the Company
of the Indenture and the performance of its obligations thereunder do not and
will not violate, conflict with or constitute a default under (i) any agreement
or instrument to which the Company or its property is subject, (ii) any law,
rule or regulation to which the Company is subject, (except that we do not make
the assumption set forth in this clause (ii) with respect to Delaware General
Corporation Law and those laws, rules and regulations (other than securities and
anti-fraud laws) of the States of New York and Illinois which, in our
experience, are normally applicable to transactions of the type contemplated by
the Indenture, but without our having made any special investigation concerning
any other laws, rules or regulations) (iii) any judicial or administrative order
or decree of any governmental authority or (iv) any consent, approval, license,
authorization or validation of, or filing, recording or registration with, any
governmental authority. As to any facts material to the opinions expressed
herein which we have not independently established or verified, we have relied
upon statements and representations of officers and other representatives of the
Company and others.
<PAGE>
USN Communications, Inc.
November __, 1997
Page 2
Members of our firm are admitted to the practice of law in the State
of Illinois, and we do not express any opinion as to the laws of any other
jurisdiction other than the State of New York and, with respect to the Delaware
General Corporation Law only, the State of Delaware. We have relied as to
matters of New York law on the opinion of Skadden, Arps, Slate, Meagher & Flom
LLP.
Based upon and subject to the foregoing and to the other
qualifications and limitations set forth herein, we are of the opinion that (i)
when the Registration Statement becomes effective and the Indenture has been
qualified under the Trust Indenture Act of 1939, as amended; and (ii) when the
New Notes have been duly executed and authenticated in accordance with the terms
of the Indenture and delivered in exchange for the Old Notes, the issuance of
the New Notes will have been duly authorized, and the New Notes will be valid
and binding obligations of the Company entitled to the benefits of the Indenture
and enforceable against the Company in accordance with their terms, except (a)
to the extent that enforcement thereof may be limited by (I) bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws now or hereafter in effect relating to creditors' rights generally and (II)
general principles of equity (regardless of whether enforceability is considered
in a proceeding at law or in equity) and (b) we express no opinion as to the
enforceability of the waiver provisions contained in the Indenture.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are included in the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom (Illinois)
<PAGE>
EXHIBIT 10.6
UNITED USN, INC.
1994 STOCK OPTION PLAN,
As Amended and Restated Effective September 20, 1996
1. Purpose of the Plan. The United USN, Inc. 1994 Stock Option Plan
is intended to advance the best interests of United USN, Inc. and its
Subsidiaries by providing the executive officers and other employees of United
USN, Inc. and its Subsidiaries with additional incentives by allowing them to
acquire an ownership interest in United USN, Inc. and thereby encouraging them
to contribute to the success of United USN, Inc.'s business.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
(b) "Board" shall mean the Board of Directors of United USN, Inc.
(c) "Cause", unless otherwise provided in the applicable Option
Agreement, shall mean (i) a material breach of a Participant's employment
agreement or, in the absence of a written agreement, the terms of
employment, (ii) a breach of Participant's duty of loyalty to the Company
or any act of dishonesty or fraud with respect to the Company, (iii) the
commission by Participant of a felony, a crime involving moral turpitude or
other act causing material harm to the Company's standing and reputation,
(iv) Participant's continued failure to perform his or her duties to the
Company or (v) Participant's substandard performance. For the purposes of
this Plan, "substandard performance" shall be determined by a majority of
the Board (excluding Participant). The Board shall give Participant
written notice of the Board's concern over Participant's performance, and
Participant shall have 15 days to prepare for a meeting with the
<PAGE>
Board, at which time Participant may present any information on market
competitive conditions and any other factors bearing upon Participant's
performance. In assessing Participant's performance, the Board shall give
due consideration to the overall industry experience in assessing
Participant's performance. After due consideration of these factors, if a
majority of the Board (excluding Participant) determines in good faith that
Company would have performed substantially better with other management and
that the future performance of the Company would be best served by new
management, the Board may terminate Participant for "substandard
performance."
(d) "Change in Control" shall be deemed to have occurred if an event
set forth in any one of the following paragraphs (i)-(iv) shall have
occurred:
(i) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of United USN, Inc. representing thirty-five
percent (35%) or more of the combined voting power of the then outstanding
securities of United USN, Inc., excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause (x)
of paragraph (iii) below; or
(ii) prior to any initial public offering, the following
individuals cease for any reason to constitute a majority of the number of
directors then serving: individuals who, on September 20, 1996, constitute
the Board and any new director (other than a director whose initial
assumption of office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation, relating to
the election of directors of United USN, Inc.) whose appointment or
election by the Board or nomination for election by the stockholders of
United USN, Inc. was approved or recommended by a vote of at least two-
thirds (2/3) of the directors then still in office who either were
directors on the date hereof or whose appointment, election or nomination
for election was previously so approved or recommended; or
2
<PAGE>
(iii) the stockholders of United USN, Inc. approve a merger or
consolidation of United USN, Inc. with any other corporation or the
issuance of voting securities of United USN, Inc. in connection with a
merger or consolidation of United USN, Inc. (or any direct or indirect
subsidiary of United USN, Inc.) pursuant to applicable stock exchange
requirements, other than (x) a merger or consolidation which would result
in the voting securities of United USN, Inc. outstanding immediately prior
to such merger or consolidation continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity or any parent thereof) at least fifty percent (50%) of the
combined voting power of the securities of United USN, Inc. or such
surviving entity or any parent thereof outstanding immediately after such
merger or consolidation, or (y) a merger or consolidation effected to
implement a recapitalization of United USN, Inc. (or similar transaction)
in which no Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of United USN, Inc. representing thirty-five
percent (35%) or more of the combined voting power of the then outstanding
securities of United USN, Inc.; or
(iv) the stockholders of United USN, Inc. approve a plan of
complete liquidation or dissolution of United USN, Inc. or an agreement
for the sale or disposition by United USN, Inc. of all or substantially all
of the assets of United USN, Inc.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
have occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of
the common stock of United USN, Inc. immediately prior to such transaction
or series of transactions continue to have substantially the same
proportionate ownership in an entity which owns all or substantially all of
the assets of United USN, Inc. immediately following such transaction or
series of transactions.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
3
<PAGE>
(f) "Committee" shall mean a committee of the Board appointed to
administer the Plan. The Committee shall be composed of three or more
directors as appointed from time to time to serve by the Board.
(g) "Common Stock" shall mean the Class A Common Stock, par value $.01
per share, of United USN, Inc., or, in the event that the outstanding
Common Stock is hereafter changed into or exchanged for different stock or
securities, such other stock or securities.
(h) "Company" shall mean United USN, Inc., a Delaware corporation
(and any successors thereto), and any Subsidiary of United USN, Inc. (and
any successors thereto).
(i) "Disability" shall mean the inability, due to illness, accident,
injury, physical or mental incapacity or other disability, of any
Participant to effectively carry out his or her duties and obligations to
the Company on a full-time basis or to participate effectively or actively
in the management of the Company for a period of at least 60 consecutive
days or for shorter periods aggregating at least 90 days (whether or not
consecutive) during any twelve month period, as determined in the
reasonable judgment of the Board.
(j) "Employee" shall mean any person, including officers, employed
by the Company.
(k) "Fair Market Value" of the Common Stock, unless otherwise
provided in the applicable Option Agreement, shall be determined by the
Committee or, in the absence of the Committee, by the Board.
(l) "Incentive Stock Option" shall mean any Option intended to
qualify as an incentive stock option within the meaning of Section 422 of
the Code or any successor provision.
(m) "Nonqualified Stock Option" shall mean an Option not intended to
qualify as an Incentive Stock Option.
4
<PAGE>
(n) "Option" shall mean an Incentive Stock Option or a Nonqualified
Stock Option granted pursuant to the Plan.
(o) "Option Agreement" shall mean the written option agreement
entered into between the Company and the Participant upon the grant of any
Option.
(p) "Option Shares" shall mean the Shares subject to an Option.
(q) "Participant" shall mean any executive officer or other key
employee of the Company who has been selected to participate in the Plan by
the Committee or the Board.
(r) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) United USN, Inc. or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of United USN, Inc. or any of its affiliates, (iii)
an underwriter temporarily holding securities pursuant to an offering of
such securities, (iv) a corporation owned, directly or indirectly, by the
stockholders of United USN, Inc. in substantially the same proportions as
their ownership of stock of United USN, Inc., or (v) any of the following
entities or their affiliates: BT Capital Partners, Inc., Chase Capital
Partners, CIBC Wood Gundy Ventures, Inc., Hancock Venture Partners IV,
Enterprises & Transcommunications, L.P. and Merrill Lynch Global Allocation
Fund, Inc.
(s) "Plan" shall mean the United USN, Inc. 1994 Stock Option Plan, as
it may be amended from time to time.
(t) "Qualified Public Offering" shall mean the sale, in an
underwritten public offering registered under the Securities Act of 1933,
as amended, of shares of Common Stock having an aggregate value of at least
$20 million.
(u) "Sale of United USN, Inc." shall mean a merger or consolidation
effecting a Change in Con-
5
<PAGE>
trol of United USN, Inc., a sale of all or substantially all of United
USN, Inc.'s assets or a sale of a majority of United USN, Inc.'s
outstanding voting securities.
(v) "Share" shall mean one share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(w) "Subsidiary" shall mean a "subsidiary corporation," of United
USN, Inc. whether now or hereafter existing, as such term is defined in
Section 424(f) of the Code.
(x) "United USN, Inc." shall mean United USN, Inc., a Delaware
corporation (and any successors thereto).
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
the Plan, the maximum aggregate number of Shares which may be issued pursuant
to the Plan is 100,452. The Shares may be either authorized but unissued
shares, treasury shares, reacquired shares, or any combination thereof. If an
Option should expire or become unexercisable for any reason without having been
exercised in full, any Shares which would otherwise have been issuable pursuant
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. Administration of the Plan. The Plan shall be administered by the
Committee; provided, however, that if for any reason the Committee shall not
have been appointed by the Board, all authorized duties of the Committee under
the Plan shall be vested in and exercised by the Board. Subject to the
provisions of the Plan and any applicable Option Agreement, the Committee shall
have the authority, in its discretion: (i) to grant Incentive Stock Options or
Nonqualified Stock Options; (ii) to determine the Fair Market Value of the
Common Stock; (iii) to determine in accordance with Section 7(b) of the Plan the
exercise price per share of Options to be granted; (iv) to determine the
Participants to whom, and the time or times at which, Options shall be granted
and the number of Shares to be represented by each Option; (v) to interpret the
Plan; (vi) to prescribe, amend, and rescind rules and regulations relating to
the Plan; (vii) to
6
<PAGE>
determine the terms and provisions of each Option granted (which need not be
identical), including but not limited to the vesting schedule for each Option
granted, and modify or amend the terms of each outstanding Option subject to
Section 16 hereof; (viii) to reduce the exercise price per share of outstanding
and unexercised Options; (ix) to accelerate or defer the exercise date of any
outstanding Option; (x) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an option previously
granted by the Committee; and (xi) to make all other determinations (except a
determination of "Cause" which shall be made by the Board) deemed necessary or
advisable for the administration of the Plan. All decisions, determinations,
and interpretations of the Committee shall be final and binding on all
Participants and any other holders of any Options granted under the Plan.
5. Eligibility.
(a) Options may be granted to Employees who, in the opinion of the
Committee, contribute significantly to the Company. The directors of the
Company who are not Employees shall not be eligible to participate in the
Plan.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonqualified Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair
Market Value of the Common Stock with respect to which Options designated
as Incentive Stock Options are exercisable for the first time by any
Optionee during any calendar year (under all plans of the Company) exceeds
$100,000, such Options shall be treated as Nonqualified Stock Options.
(c) For purposes of Section 5(b), Options shall be taken into account
in the order in which they were granted, and the Fair Market Value of the
Common Stock shall be determined as of the time the Option with respect to
such Shares is granted.
6. Term of Plan. The Plan shall become effective upon the latest of the
following two events to occur: (a) approval of the Plan by the stockholders of
United USN, Inc. and (b) adoption of the Plan by the Board. The
7
<PAGE>
Plan shall continue in effect for ten (10) years from the effective date, unless
sooner terminated in accordance with the provisions of Section 15 of the Plan.
7. Terms of Options. Unless otherwise determined by the Committee and set
forth in the Option Agreement, Options granted pursuant to the Plan shall have
the following terms:
(a) The Option exercise period for each Option shall be no more than
ten (10) years from the date of the grant.
(b) The per Share exercise price of the Options shall be determined
by the Committee and may be fixed at the time of grant, float in accordance
with a predetermined formula, or any combination thereof.
(c) Options shall be exercisable at such time or times as the
Committee shall determine at or subsequent to the grant date.
(d) The consideration to be paid for the Shares to be issued upon
exercise of an option, including the method of payment, shall be determined
by the Committee at the time of grant and may consist of cash and/or
check. The Committee may determine, in its discretion, that additional
forms of payment will be permitted, including, but not limited to, by
delivery of Shares held by the Participant having a Fair Market Value equal
to the exercise price. The Committee, in its discretion, may at any time
prior to the exercise of an Option determine that certain forms of payment
may not be available to a particular Participant.
(e) If permitted by the Committee, in its sole discretion, a
Participant may elect to pay withholding tax obligations by having the
Company withhold Shares having a value equal to the amount of tax required
to be withheld. The value of the Shares to be withheld shall equal the
Fair Market Value of the Shares on the day the Option is exercised.
8
<PAGE>
8. Exercise of Option.
(a) Each Option may be exercised in whole or in part; provided,
however, that no Option may be exercised for a fraction of a Share. An
Option shall be deemed to be exercised when written notice of such exercise
has been given to the Company in accordance with the terms of the Option
Agreement by the person entitled to exercise the Option and full payment
for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the
Committee, consist of any consideration and method of payment allowable
under Section 7(d) of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such
Shares, no right to vote or receive dividends or any other rights as a
stockholder shall exist with respect to the Option Shares, notwithstanding
the exercise of the Option. The Company shall issue (or cause to be issued)
such stock certificate promptly upon exercise of the Option.
(b) In no event shall any part of any Option be exercisable after the
date of expiration thereof (the "Expiration Date"), as determined by the
Committee pursuant to Section 7(a) above.
(c) Except as otherwise provided by the Committee in the Option
Agreement, any portion of a Participant's Option that was not vested and
exercisable on the date of the termination of such Participant's
employment for whatever reason shall expire and be forfeited as of such
date; provided, however, that: (i) if any Participant dies or becomes
subject to any Disability, such Participant's Option will expire 90 days
after the date of his or her death or Disability, but in no event after the
Expiration Date, (ii) if any Participant retires (with the approval of the
Committee or the Board), his or her Option will expire 90 days after the
date of his or her retirement, but in no event after the Expiration Date,
and (iii) if any Participant is discharged for any reason other than for
Cause, such Participant's Option will expire 30 days after the
9
<PAGE>
date of his or her discharge, but in no event after the Expiration Date.
9. Non-Transferability of Options. Options granted under the Plan may not
be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner, other than by will or by the laws of descent or distribution, and may
be exercised, during the lifetime of the Participant, only by the Participant.
In the event of the death of a Participant, the exercise of Options granted
hereunder shall be made only by the executor or administrator of the estate of
the deceased Participant or the person or persons to whom the deceased
Participant's rights under the Option shall pass by will or the laws of descent
and distribution.
10. Adjustments Upon Changes in Capitalization or Sale.
(a) In the event of a reorganization, recapitalization, stock
dividend or stock split, or combination or other change in the shares of
Common Stock, the Board or the Committee may, in its sole discretion, in
order to prevent the dilution or enlargement of rights under outstanding
Options, make such adjustments in the number and type of Shares authorized
by or granted under the Plan, the number and type of Option Shares and the
exercise prices specified therein as may be determined to be appropriate
and equitable.
(b) In the event of a Sale of United USN, Inc. or a Qualified Public
Offering, the Committee may provide, in its discretion, that the Options
shall become immediately exercisable by any Participants at the time of the
Sale of United USN, Inc. or the Qualified Public Offering and that such
Options shall terminate if not exercised as of the date of the Sale of
United USN, Inc., the Qualified Public Offering or other prescribed period
of time.
11. Written Agreement. Each Option granted hereunder to a Participant
shall be embodied in a written Option Agreement which shall be signed by the
Participant and by a duly authorized officer of United USN, Inc. for and in the
name and on behalf of United USN, Inc. and shall be subject to the terms and
conditions prescribed
10
<PAGE>
herein (including, but not limited to, (i) the right of United USN, Inc. and
such other persons as the Committee shall designate ("Designees") to repurchase
from each Participant, and such Participant's permitted transferees, all shares
of Common Stock issued or issuable to such Participant on the exercise of an
Option in the event of such Participant's termination of employment, (ii)
rights of first refusal granted to United USN, Inc. and Designees, (iii)
holdback and other registration right restrictions in the event of a public
registration of any equity securities of United USN, Inc. and (iv) any other
terms and conditions which the Committee shall deem necessary and desirable).
12. Listing, Registration and Compliance with Laws and Regulations.
Options shall be subject to the requirement that if at any time the Committee
shall determine, in its discretion, that the listing, registration or
qualification of the Shares subject to the Options upon any securities exchange
or under any state or federal securities or other law or regulation, or the
consent or approval of any governmental regulatory body, is necessary or
desirable as a condition to or in connection with the granting of the Options or
the issuance or purchase of shares thereunder, no Options may be granted or
exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee. The holders of such Options
will supply the Company with such certificates, representations and information
as the Company shall request and shall otherwise cooperate with the Company in
obtaining such listing, registration, qualification, consent or approval. In
the case of officers and other persons subject to Section 16(b) of the
Securities Exchange Act of 1934, as amended, the Committee may at any time
impose any limitations upon the exercise of an Option that, in the Committee's
discretion, are necessary or desirable in order to comply with such Section
16(b) and the rules and regulations thereunder.
13. Rights of Participants. Nothing in the Plan shall interfere with or
limit in any way the right of the Company to terminate any Participant's
employment at any time (with or without Cause), nor confer upon any Participant
any right to continue in the employ of the Company for any period of time or to
continue his or her present
11
<PAGE>
(or any other) rate of compensation and, except as otherwise provided under
this Plan or by the Committee in the Option Agreement, in the event of any
Participant's termination of employment (including, but not limited to, the
termination of a Participant's employment by the Company without Cause) any
portion of such Participant's Option that was not previously vested and
exercisable will expire and be forfeited as of the date of such termination. No
Employee shall have a right to be selected as a Participant or, having been so
selected, to be selected again as a Participant.
14. Withholding of Taxes. The Company shall be entitled, if necessary or
desirable, to withhold from any Participant from any amounts due and payable by
the Company to such Participant (or secure payment from such Participant in lieu
of withholding) the amount of any withholding or other tax due from the Company
with respect to any Shares issuable under the Plan, and the Company may defer
such issuance unless indemnified to its satisfaction.
15. Amendment, Suspension and Termination of Plan. The Board or the
Committee may suspend or terminate the Plan or any portion thereof at any time
and may amend it from time to time in such respects as the Board or the
Committee may deem advisable; provided, however, that no such amendment shall
be made without stockholder approval to the extent such approval is required by
law, agreement or the rules of any exchange upon which the Common Stock is
listed, and no such amendment, suspension or termination shall impair the
rights of Participants under outstanding Options without the consent of the
Participants affected thereby. No Options shall be granted hereunder after the
tenth anniversary of the adoption of the Plan.
16. Amendment, Modification and Cancellation of Outstanding Options. The
Committee may amend or modify any Option in any manner to the extent that the
Committee would have had the authority under the Plan initially to grant such
Option; provided that no such amendment or modification shall impair the rights
of any Participant under any Option without the consent of such Participant.
With the Participant's consent, the Committee may cancel any Option and issue a
new Option to such Participant.
12
<PAGE>
17. Indemnification. In addition to such other rights of indemnification
as they may have as members of the Board or the Committee, the members of the
Committee shall be indemnified by the Company against all costs and expenses
reasonably incurred by them in connection with any action, suit or proceeding to
which they or any of them may be party by reason of any action taken or failure
to act under or in connection with the Plan or any Option granted thereunder,
and against all amounts paid by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected by the Company) or
paid by them in satisfaction of a judgment in any such action, suit or
proceeding; provided, however, that any such Committee member shall be entitled
to the indemnification rights set forth in this Section 17 only if such member
has acted in good faith and in a manner that such member reasonably believed to
be in or not opposed to the best interests of the Company and, with respect to
any criminal action or proceeding, had no reasonable cause to believe that such
conduct was unlawful, and further provided that upon the institution of any
such action, suit or proceeding a Committee member shall give the Company
written notice thereof and an opportunity, at its own expense, to handle and
defend the same before such Committee member undertakes to handle and defend it
on his or her own behalf.
Amended and Restated by United USN, Inc.
Board of Directors on
September 20, 1996
13
<PAGE>
EXHIBIT 10.7
OMNIBUS SECURITIES PLAN
OF
USN COMMUNICATIONS, INC.
Section 1. Purpose and Establishment.
The purpose of the Omnibus Securities Plan of USN Communications, Inc. (the
"Plan") is to benefit the Company's stockholders by encouraging high levels of
performance by individuals whose performance is a key element in achieving the
Company's continued success, and to enable the Company to recruit, reward,
retain and motivate employees to work as a team to achieve the Company's mission
of being the top performer in its business by rewarding the creation of
stockholder value. The Plan shall become effective upon its adoption by the
Board of Directors of the Company.
Section 2. Definitions in Last Section.
For purposes of the Plan, capitalized terms, unless defined where the respective
term first appears in this Plan, shall have the meanings given in the last
Section hereof.
Section 3. Eligibility.
Awards may be granted only to Employees and Directors who are designated as
Participants from time to time by the Committee. The Committee shall determine
which Employees shall be Participants, the types of Awards to be made to
Participants and the terms, conditions and limitations applicable to the Awards.
Section 4. Awards.
Awards may include, but are not limited to, those described in this Section 4.
The Committee may grant Awards singly, in tandem or in combination with other
Awards, as the Committee may in its sole discretion determine. Subject to the
other provisions of this Plan, Awards may also be granted in combination or in
tandem with, in replacement of, or as alternatives to, grants or rights under
this Plan and any other employee (or director) benefit or compensation plan of
the Company.
4.1 Stock Options
A Stock Option is a right to purchase a specified number of shares of Stock at a
specified price during such specified time as the Committee shall determine.
(a) Options granted may be either of a type that complies with the requirements
of incentive stock options as defined in
<PAGE>
Section 422 of the Code ("Incentive Stock Options") or of a type that does
not comply with such requirements ("Non-Qualified Stock Options");
provided, however, that the grant of any Incentive Stock Option shall be
subject to obtaining (or having obtained) the approval of this Plan by the
Company's stockholders within twelve (12) months before or after the date
the Plan is adopted by the Board.
(b) The exercise price per share of Stock of any Stock Option which is intended
to be an Incentive Stock Option shall be no less than the Fair Market Value
per share of the Stock subject to the option on the date the Stock Option
is granted.
(c) A Stock Option may be exercised, in whole or in part, by giving written
notice of exercise to the Company, specifying the number of shares of Stock
to be purchased.
(d) The exercise price of the Stock Option may be paid in cash or, at the
discretion of the Committee, may also be paid by the tender of Stock
already owned by the Participant, or through a combination of cash and
Stock, or through such other means the Committee determines are consistent
with the Plan's purpose and applicable law. No fractional shares of Stock
will be issued or accepted.
4.2 Stock Appreciation Rights
A Stock Appreciation Right is a right to receive, upon surrender of the right,
an amount payable in cash and/or shares of Stock under such terms and conditions
as the Committee shall determine.
(a) A Stock Appreciation Right may be granted in tandem with part or all of (or
in addition to, or completely independent of) a Stock Option or any other
Award under this Plan. A Stock Appreciation Right issued in tandem with a
Stock Option may be granted at the time of grant of the related Stock
Option or at any time thereafter during the term of the Stock Option.
(b) The amount payable in cash and/or shares of Stock with respect to each
right shall be equal in value to a percentage (including up to 100%) of the
amount by which the Fair Market Value per share of Stock on the exercise
date exceeds the Fair Market Value per share of Stock on the date of grant
of the Stock Appreciation Right. The applicable percentage shall be
established by the Committee. The Award Agreement may state whether the
amount payable is to be paid wholly in cash, wholly in shares of Stock or
partly in each; if the Award Agreement does not so state the manner of
payment, the Committee shall determine such manner of payment at the time
of payment. The amount payable in
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shares of Stock, if any, is determined with reference to the Fair Market
Value per share of Stock on the date of exercise.
(c) Stock Appreciation Rights issued in tandem with Stock Options shall be
exercisable only to the extent that the Stock Options to which they relate
are exercisable. Upon exercise of the tandem Stock Appreciation Right, and
to the extent of such exercise, the Participant's underlying Stock Option
shall automatically terminate. Similarly, upon the exercise of the tandem
Stock Option, and to the extent of such exercise, the Participant's related
Stock Appreciation Right shall automatically terminate.
4.3 Restricted Stock
Restricted Stock is Stock that is issued to a Participant and is subject to such
terms, conditions and restrictions as the Committee deems appropriate, which may
include, but are not limited to, restrictions upon the sale, assignment,
transfer or other disposition of the Restricted Stock and the requirement of
forfeiture of the Restricted Stock upon termination of employment or service
under certain specified conditions. The Committee may provide for the lapse of
any such term or condition or waive any term or condition based on such factors
or criteria as the Committee may determine. Subject to the restrictions stated
in this Section 4.3 and in the applicable Award Agreement, the Participant shall
have, with respect to Awards of Restricted Stock, all of the rights of a
stockholder of the Company, including the right to vote the Restricted Stock and
the right to receive any cash or stock dividends on such Stock.
4.4 Performance Awards
Performance Awards may be granted under this Plan from time to time based on the
terms and conditions as the Committee deems appropriate provided that such
Awards shall not be inconsistent with the terms and purposes of this Plan.
Performance Awards are Awards which are contingent upon the performance of all
or a portion of the Company and/or its subsidiaries and/or which are contingent
upon the individual performance of a Participant. Performance Awards may be in
the form of performance units, performance shares and such other forms of
Performance Awards as the Committee shall determine. The Committee shall
determine the performance measurements and criteria for such Performance Awards.
4.5 Other Awards
The Committee may from time to time grant Stock, other Stock-based and
non-Stock-based Awards under the Plan, including without limitation those Awards
pursuant to which shares of Stock
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are or may in the future be acquired, Awards denominated in Stock units,
securities convertible into Stock, phantom securities, dividend equivalents and
cash. The Committee shall determine the terms and conditions of such other
Stock, Stock-based and non-Stock-based Awards provided that such Awards shall
not be inconsistent with the terms and purposes of this Plan.
Section 5. Award Agreements.
Each Award under this Plan shall be evidenced by an Award Agreement setting
forth the number of shares of Stock or other securities, Stock Appreciation
Rights, or units subject to the Award, if any, and such other terms and
conditions applicable to the Award (and not inconsistent with this Plan) as are
determined by the Committee.
(a) Award Agreements shall include the following terms:
(i) Non-assignability: A provision that the relevant Award shall not be
assigned, pledged or otherwise transferred except by will or by the
laws of descent and distribution and that during the lifetime of a
Participant, the Award shall be exercised only by such Participant or
by the Participant's guardian or legal representative; provided,
however, that, in the Committee's discretion, an Award Agreement may
expressly provide for specifically limited transferability.
(ii) Termination of Employment or Service: A provision describing the
treatment of an Award in the event of the Retirement, Disability,
death or other termination of a Participant's employment or service
with the Company, including but not limited to terms relating to the
vesting, time for exercise, forfeiture or cancellation of an Award in
such circumstances.
(iii) Rights as Stockholder: A provision that a Participant shall have no
rights as a stockholder with respect to any securities covered by an
Award until the date the Participant becomes the holder of record.
Except as provided in Section 8 hereof, no adjustment shall be made
for dividends or other rights, unless the Award Agreement
specifically requires such adjustment, in which case, grants of
dividend equivalents or similar rights shall not be considered to be
a grant of any other stockholder right.
(iv) Withholding: A provision requiring the withholding of applicable
taxes required by law from all amounts
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<PAGE>
paid in satisfaction of an Award to an Employee Participant. In the
case of an Award paid in cash, the withholding obligation shall be
satisfied by withholding the applicable amount and paying the net
amount in cash to the Employee Participant. In the case of Awards
paid in shares of Stock or other securities of the Company, an
Employee Participant may satisfy the withholding obligation by paying
the amount of any taxes in cash or, with the approval of the
Committee, shares of Stock or other securities may be deducted from
the payment to satisfy the obligation in full or in part as long as
such withholding of shares of Stock or other securities does not
violate any applicable laws, rules or regulations of federal, state
or local authorities. The number of shares or other securities to be
deducted shall be determined by reference to the Fair Market Value of
such shares of Stock on the applicable date.
(b) Award Agreements may include, without limitation, the following terms:
(i) Replacement, Substitution, and Reloading: Any provisions
(A) permitting the surrender of outstanding Awards or securities
held by the Participant in order to exercise or realize
rights under other Awards, or in exchange for the grant of
new Awards under similar or different terms (including the
grant of reload options), or,
(B) requiring holders of Awards to surrender outstanding Awards
as a condition precedent to the grant of new Awards under
the Plan.
(ii) Other Terms: Such other terms as are necessary and appropriate to
effect an Award to the Participant including but not limited to (i)
the term of the Award, (ii) vesting provisions, (iii) deferrals, (iv)
any requirements for continued employment or service with the
Company, (v) any other restrictions or conditions (including
performance requirements) on the Award and the method by which
restrictions or conditions lapse, (vi) effect on the Award of a
Change in Control, (vii) the price, amount or value of Awards, (viii)
the right of the Company and such other persons as the Committee
shall designate ("Designees") to repurchase from a Participant, and
such Participant's permitted transferees, all shares of Stock issued
or issuable to such Participant in
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connection with an Award in the event of such Participant's
termination of employment or service, (ix) rights of first refusal
granted to the Company and Designees, (x) holdback and other
registration right restrictions in the event of a public registration
of any equity securities of the Company and (xi) any other terms and
conditions which the Committee shall deem necessary and desirable.
Section 6. Shares of Stock Subject to the Plan.
(a) Subject to the adjustment provisions of Section 8 hereof, the maximum
aggregate number of shares of Stock which may be granted pursuant to the
Plan is Two Hundred Seventy-Five Thousand (275,000).
(b) Any shares of Stock which were subject to any unexercised or undistributed
portion of any terminated, expired, exchanged or forfeited Award (or Awards
settled in cash in lieu of shares of Stock) shall become available for
grant pursuant to new Awards.
(c) The Committee may make such additional rules for determining the number of
shares of Stock granted under the Plan, as it deems necessary or
appropriate.
(d) The Stock which may be issued pursuant to an Award under the Plan may be
treasury Stock or authorized but unissued Stock or Stock acquired,
subsequently or in anticipation of the transaction, in the open market to
satisfy the requirements of the Plan, or any combination of such Stock.
Section 7. Administration.
(a) The Plan and all Awards granted pursuant thereto shall be administered by
the Committee so that, insofar as is possible and practicable, transactions
with respect to Awards under the Plan shall be exempt from Section 16(b) of
the Exchange Act. A majority of the members of the Committee shall
constitute a quorum. The vote of a majority of a quorum shall constitute
action by the Committee.
(b) The Committee shall periodically determine the Participants in the Plan and
the nature, amount, pricing, timing, and other terms of Awards to be made
to such individuals.
(c) The Committee shall have the power to interpret and administer the Plan.
All questions of interpretation with respect to the Plan, the number of
shares of Stock or other securities, Stock Appreciation Rights, or units
granted, and the terms of any Award Agreements shall be determined by the
Committee and its determination shall be final and
6
<PAGE>
conclusive upon all parties in interest. In the event of any conflict
between an Award Agreement and the Plan, the terms of the Plan shall
govern.
(d) The Committee may delegate to the officers or employees of the Company the
authority to execute and deliver such instruments and documents, to do all
such ministerial acts and things, and to take all such other ministerial
steps deemed necessary, advisable or convenient for the effective
administration of the Plan in accordance with its terms and purpose.
Section 8. Equitable Adjustments.
Subject to any required action by the Company's stockholders, upon the
occurrence of any event which affects the shares of Stock in such a way that an
adjustment of outstanding Awards is appropriate in order to prevent the dilution
or enlargement of rights under the Awards (including, without limitation, any
extraordinary dividend or other distribution (whether in cash or in kind),
recapitalization, stock split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event), the Committee shall make appropriate
equitable adjustments, which may include, without limitation, adjustments to
any or all of the number and kind of shares of Stock (or other securities) which
may thereafter be issued in connection with such outstanding Awards and
adjustments to any exercise price specified in the outstanding Awards and shall
also make appropriate equitable adjustments to the number and kind of shares of
Stock (or other securities) authorized by or to be granted under the Plan.
Section 9. Change in Control.
Notwithstanding any other provision of the Plan to the contrary, immediately
prior to any Change in Control of the Company, (i) all Stock Options and
freestanding Stock Appreciation Rights which are then outstanding hereunder
shall become fully vested and exercisable, (ii) all restrictions with respect to
shares of Restricted Stock which are then outstanding hereunder shall lapse and
such shares shall be fully vested and nonforfeitable, and (iii) with respect to
all Performance Awards which are then outstanding hereunder, all uncompleted
performance measurement periods shall be deemed to have been completed, the
target level of performance set forth with respect to each performance goal
under such Performance Awards shall be deemed to have been attained and a pro
rata portion (based on the ratio of (i) the number of full and partial months
which have elapsed from the beginning of the performance measurement period
through the Change in Control to (ii) the number of months originally contained
in the performance measurement period) of each such
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Performance Award shall become payable in cash to the respective Participant,
with the remainder of each such Performance Award being cancelled for no value.
Section 10. Rights of Employees.
(a) Status as an eligible Employee shall not be construed as a commitment that
any Award will be made under the Plan to such eligible Employee or to
eligible Employees generally.
(b) Nothing contained in the Plan (or in any other documents related to this
Plan or to any Award) shall confer upon any Employee or Participant any
right to continue in the employ or other service of the Company or
constitute any contract or limit in any way the right of the Company to
change such person's compensation or other benefits or to terminate the
employment or service of such person with or without cause.
Section 11. Compliance with Applicable Legal Requirements.
Awards shall be subject to the requirement that if at any time the Committee
shall determine, in its discretion, that the listing, registration or
qualification of the shares of the Stock subject to the Awards upon any
securities exchange or under any state or federal securities or other law or
regulation, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition to or in connection with the granting of
the Awards or the issuance or purchase of shares thereunder, no Awards may be
granted or exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee. The holders of such Awards will
supply the Company with such certificates, representations and information as
the Company shall request and shall otherwise cooperate with the Company in
obtaining such listing, registration, qualification, consent or approval.
Section 12. Amendment and Termination.
The Board may at any time amend, suspend or terminate the Plan. The Committee
may at any time alter or amend any or all Award Agreements under the Plan to the
extent permitted by law. However, no such action by the Board or by the
Committee shall impair the rights of Participants under outstanding Awards
without the consent of the Participants affected thereby. Further, the Board
shall not amend the Plan without the approval of the Company's stockholders to
the extent such approval is required by law, agreement or the rules of any
exchange upon which the Stock shall be listed.
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Section 13. Unfunded Plan.
The Plan shall be unfunded. Neither the Company nor the Board shall be required
to segregate any assets that may at any time be represented by Awards made
pursuant to the Plan. Neither the Company, the Committee, nor the Board shall
be deemed to be a trustee of any amounts to be paid under the Plan.
Section 14. Limits of Liability.
(a) Any liability of the Company to any Participant with respect to an Award
shall be based solely upon contractual obligations created by the Plan and
the Award Agreement.
(b) Neither the Company nor any member of the Board or of the Committee, nor
any other person participating in any determination of any question under
the Plan, or in the interpretation, administration or application of the
Plan, shall have any liability to any party for any action taken or not
taken, in good faith under the Plan.
Section 15. Duration of the Plan.
This Plan shall become effective upon its adoption by the Board (the "Effective
Date") and, except as limited by Section 4.1(a) hereof with respect to Incentive
Stock Options, the Committee shall have authority to grant Awards hereunder from
the Effective Date until the tenth (10th) anniversary of the Effective Date,
subject to the ability of the Board to terminate the Plan as provided in Section
12.
Section 16. 1994 Plan.
On and after the Effective Date, grants of options under the Company's 1994
Stock Option Plan, as amended and restated effective September 20, 1996 (the
"Prior Plan") shall continue to be subject to, and administered in accordance
with, the terms of the Prior Plan.
Section 18. Definitions.
For purposes of the Plan, the following terms, as used herein, shall have the
respective meanings specified:
(a) "Award" or "Awards" means an award granted pursuant to Section 4 hereof.
(b) "Award Agreement" means an agreement described in Section 5 hereof entered
into between the Company and a Participant, setting forth the terms,
conditions and any limitations applicable to the Award granted to the
Participant.
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<PAGE>
(c) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the
Exchange Act.
(d) "Beneficiary" means a person or persons designated by a Participant (if the
terms of the relevant Award Agreement permit such a designation) to
receive, in the event of death, any unpaid portion of an Award held by the
Participant. Any Participant so permitted by an Award Agreement may,
subject to such limitations as may be prescribed by the Committee,
designate one or more persons primarily or contingently as beneficiaries in
writing upon forms supplied by and delivered to the Company, and may revoke
such designations in writing. If a Participant having a right to designate
a beneficiary under an Award Agreement fails effectively to designate a
beneficiary, then the Award will be paid in the following order of
priority:
(i) Surviving spouse;
(ii) Surviving children in equal shares;
(iii) To the estate of the Participant.
(e) "Board" means the Board of Directors of the Company as it may be comprised
from time to time.
(f) "Change in Control" of the Company shall be deemed to have occurred if an
event set forth in any one of the following paragraphs (i)-(iv) shall have
occurred:
(i) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of USN Communications, Inc. representing
thirty-five percent (35%) or more of the combined voting power of the
then outstanding securities of USN Communications, Inc., excluding
any Person who becomes such a Beneficial Owner in connection with a
transaction described in clause (x) of paragraph (iii) below; or
(ii) prior to any initial public offering, the following individuals cease
for any reason to constitute a majority of the number of directors
then serving: individuals who, on August 11, 1997, constitute the
Board and any new director (other than a director whose initial
assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent
solicitation, relating to the election of directors of USN
Communications, Inc.) whose appointment or election by the Board or
nomination for election by the stockholders of USN Communications,
Inc. was approved or recommended by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors
on the date hereof or whose appointment, election or nomi-
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nation for election was previously so approved or recommended; or
(iii) the stockholders of USN Communications, Inc. approve a merger or
consolidation of USN Communications, Inc. with any other corporation
or the issuance of voting securities of USN Communications, Inc. in
connection with a merger or consolidation of USN Communications, Inc.
(or any direct or indirect subsidiary of USN Communications, Inc.)
pursuant to applicable stock exchange requirements, other than (x) a
merger or consolidation which would result in the voting securities
of USN Communications, Inc. outstanding immediately prior to such
merger or consolidation continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity or any parent thereof) at least fifty percent (50%)
of the combined voting power of the securities of USN Communications,
Inc. or such surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (y) a merger or
consolidation effected to implement a recapitalization of USN
Communications, Inc. (or similar transaction) in which no Person is
or becomes the Beneficial Owner, directly or indirectly, of
securities of USN Communications, Inc. representing thirty-five
percent (35%) or more of the combined voting power of the then
outstanding securities of USN Communications, Inc.; or
(iv) the stockholders of USN Communications, Inc. approve a plan of
complete liquidation or dissolution of USN Communications, Inc. or an
agreement for the sale or disposition by USN Communications, Inc. of
all or substantially all of the assets of USN Communications, Inc.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
have occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of
the common stock of USN Communications, Inc. immediately prior to such
transaction or series of transactions continue to have substantially the
same proportionate ownership in an entity which owns all or substantially
all of the assets of USN Communications, Inc. immediately following such
transaction or series of transactions.
(g) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute.
(h) "Committee" means a committee of the Board appointed to
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<PAGE>
administer the Plan (which committee may also be the Compensation Committee
of the Board). The Committee shall be composed of two or more directors as
appointed from time to time to serve by the Board. If for any reason a
Committee shall not have been appointed by the Board, the Board shall serve
as such Committee.
(i) "Company" means USN Communications, Inc., a Delaware corporation, or any
successor corporation.
(j) "Director" means a non-employee member of the Board.
(k) "Disability" shall mean the inability, in the opinion of the Committee, of
a Participant, because of an injury or sickness, to work at a reasonable
occupation which is available with the Company or at any gainful occupation
to which the Participant is or may become fitted.
(l) "Employee" means any individual who is an employee of the Company or any
Participating Subsidiary.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as amended and in
effect from time to time, or any successor statute.
(n) "Fair Market Value" of a share of the Stock, unless otherwise provided in
the applicable Award Agreement, means:
(i) If the Stock is admitted to trading on one or more national securities
exchanges,
(A) the average of the reported highest and lowest sale prices per share
of such Stock as reported on the reporting system selected by the
Committee on the relevant date; or
(B) in the absence of reported sales on that date, the average of the
reported highest and lowest sales prices per share on the last
previous day for which there was a reported sale; or
(ii) If the Stock is not admitted to trading on any national securities
exchange, but is admitted to quotation on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") System and has been
designated as a NASDAQ National Market ("NNM") security,
(A) the average of the reported highest and lowest sale prices per share
of such Stock as reported on NASDAQ on the relevant date; or
(B) in the absence of reported sales on that date, the
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<PAGE>
average of the reported highest and lowest sales prices per share on
the last previous day for which there was a reported sale; or
(iii) If the Stock is not admitted to trading on any national securities
exchange, but is admitted to quotation on NASDAQ as a NASDAQ SmallCap
Market security (and has not been designated as a NNM security), the
average of the highest bid and lowest asked prices per share of Stock on
the relevant date; or
(iv) If the preceding clauses (i), (ii) and (iii) do not apply, the Fair
Market Value determined by the Committee, using such criteria as it shall
determine, in good faith and in its sole discretion, to be appropriate for
such valuation.
(o) "Participant" means an Employee or Director who has been designated by the
Committee to receive an Award pursuant to this Plan.
(p) "Participating Subsidiary" means a subsidiary of the Company, of which the
Company beneficially owns (whether at the date of adoption of this Plan or
at a later date), directly or indirectly, more than 50% of the aggregate
voting power of all outstanding classes and series of stock.
(q) "Performance Award" means an Award which is granted pursuant to Section 4.4
hereof and is contingent upon the performance of all or a portion of the
Company and/or its subsidiaries and/or which is contingent upon the
individual performance of the Participant to whom it is granted.
(r) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange
Act, as modified and used in Sections 13(d) and 14(d) thereof, except that
such term shall not include (i) USN Communications, Inc. or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of USN Communications, Inc. or any of its affiliates,
(iii) an underwriter temporarily holding securities pursuant to an offering
of such securities, (iv) a corporation owned, directly or indirectly, by
the stockholders of USN Communications, Inc. in substantially the same
proportions as their ownership of stock of USN Communications, Inc., or
(v) any of the following entities or their affiliates: BT Capital Partners,
Inc., Chase Capital Partners, CIBC Wood Gundy Ventures, Inc., Hancock
Venture Partners IV, Enterprises & Transcommunications, L.P. and Merrill
Lynch Global Allocation Fund, Inc.
(s) "Restricted Stock" means shares of Stock which have certain restrictions
attached to the ownership thereof, which may be
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issued under Section 4.3.
(t) "Retirement" means a termination of employment with the Company or a
Participating Subsidiary at or after age 65 with the prior written consent
of the Committee.
(u) "Stock" means the Class A Common Stock, par value $.01 per share, of the
Company, or, in the event that the outstanding Class A Common Stock is
hereafter changed into, or exchanged for, different stock or securities,
such other stock or securities.
(v) "Stock Appreciation Right" means a right, the value of which is determined
relative to the appreciation in value of shares of Stock, which may be
issued under Section 4.2.
(w) "Stock Option" means a right to purchase shares of Stock granted pursuant
to Section 4.1 and includes Incentive Stock Options and Non-Qualified Stock
Options as defined in Section 4.1.
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Exhibit 10.13
SECOND AMENDMENT
TO
PURCHASE AGREEMENT
This document entered into to be effective as of April 20, 1994 constitutes
the Second Amendment (the "Amendment") to the Purchase Agreement dated as of
April 20, 1994 (the "Agreement") by and among UNITED USN, INC., a Delaware
corporation (the "Company"), CIBC WOOD GUNDY VENTURES, INC., a Delaware
corporation ("CIBC"), and CHEMICAL VENTURE CAPITAL ASSOCIATES, a California
limited partnership ("Chemical"). A First Amendment to the Agreement was made as
of June 10, 1994 in which HANCOCK VENTURE PARTNERS IV--DIRECT FUND L.P.
("Hancock") became a party to the Agreement. In this Amendment, the term
"Purchasers" shall mean and include CIBC, Chemical and Hancock. Except as
otherwise indicated in this Amendment, capitalized terms used herein shall have
the same meanings assigned to such terms in the Agreement.
Recitals
--------
A. The applicability of certain provisions of the Agreement have proven to
be cumbersome or unnecessary during the start-up phase of the Company and its
Subsidiaries.
B. Company and Purchasers desire to conform the terms of the Agreement to
the actual operation of the Company and its Subsidiaries.
C. As permitted by paragraph 9E of the Agreement, Company and Purchaser
hereby give their written consent to the following amendments to the Agreement.
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Paragraph 4A and subparagraphs (i) and (ii) thereof are hereby amended
and restated to read as follows:
4A. Financial Statements and Other Information. Commencing on the
dates specified herein, the Company shall deliver to the Purchasers, or
if the Purchasers have transferred any part of its interest in the Company,
to any other Qualified Holder:
<PAGE>
(i) Commencing with the month ending September 30, 1994, on dates
acceptable to and designated by Purchasers, monthly financial
summaries in form and content acceptable to Purchasers and, commencing
with the quarter ending December 31, 1994, as soon as available but in
any event within 30 days after the end of each quarterly accounting
period in each fiscal year, unaudited consolidating and consolidated
statements of income and cash flows of the Company and its
Subsidiaries for such quarterly period and for the period from the
beginning of the fiscal year to the end of such quarter, and
consolidating and consolidated balance sheets of the Company and its
Subsidiaries as of the end of such quarterly period, setting forth in
each case comparisons to the annual budget and to the corresponding
period in the preceding fiscal year, and all such statements shall be
prepared in accordance with generally accepted accounting principles,
consistently applied;
(ii) accompanying the financial statements referred to in
subparagraph (i), an Officer's Certificate, in the form of attached
Exhibit K stating that there is no Event of Noncompliance in existence
and that neither the Company nor any of its Subsidiaries is in default
under any of its other material agreements or, if any Event of
Noncompliance or any such default exists, specifying the nature and
period of existence thereof and what actions the Company and its
Subsidiaries have taken and propose to take with respect thereto;
2. Subparagraph (viii) of Paragraph 4A is amended and restated to read as
follows:
(viii) within ten days after receipt thereof, copies of all financial
statements provided by UTS to the Company unless such
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<PAGE>
financial statements have been forwarded to each Purchaser; and
The remaining subparagraphs of paragraph 4A shall remain as stated in the
Agreement.
3. Subparagraph (v) of Paragraph 4D is amended and restated to read as
follows:
(v) make, or permit any Subsidiary to make, any loans or advances to,
guarantees for the benefit of or Investments in any Person (other than a
wholly-owned Subsidiary established under the laws of a jurisdiction of the
United States or any of its territorial possessions), except for (a)
reasonable advances to employees in the ordinary course of business, (b)
acquisitions permitted pursuant to subparagraph (x) below, (c) Investments
in UTS pursuant to the UTS Agreement or as approved by a majority of the
members of the Company's board of directors, and (d) Investments having a
stated maturity no greater than one year from the date the Company makes
such Investment in (1) obligations of the United States government or any
agency thereof or obligations guaranteed by the United States government,
(2) certificates of deposit of commercial banks having combined capital and
surplus of at least $50 million, (3) commercial paper with a rating of at
least "Prime-l" by Moody's Investors Service, Inc., or (4) certificates of
deposit or interest-bearing demand deposits of Madison Bank and Trust
Company.
4. Subparagraph (xiv) of Paragraph 4D is amended and restated to read as
follows:
(xiv) enter into, or permit any Subsidiary to enter into, any
transaction with the Company's or any Subsidiary's officers, directors,
employees or Affiliates or any individual related by blood or marriage to
any such Person or any entity in which any such Person or individual owns a
beneficial interest, except (a) pursuant to the UTS Agreement, (b) the
Schwartz Agreement, (c) normal employment arrangements and benefit programs
on reasonable terms, (d)
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agreements for consulting services, other services, office space or the
purchase of goods on terms and conditions no less favorable than available
from unrelated third parties if said agreements are approved by the Chief
Financial Officer, and (e) as otherwise expressly contemplated by this
Agreement;
5. Subparagraph (xvi) of Paragraph 4D is amended and restated to read as
follows:
(xvi) except pursuant to CAP Agreements approved by a majority of the
members of the Company's board of directors, make, or permit any Subsidiary
to enter into, any capital expenditures (including, without limitation,
payments with respect to capitalized leases, as determined in accordance
with generally accepted accounting principles consistently applied)
exceeding $3 million in the aggregate on a consolidated basis during any
12-month period.
6. Subparagraph (xvii) of Paragraph 4D is amended and restated to read as
follows:
(xvii) except pursuant to CAP Agreements approved by a majority of the
members of the Company's board of directors, enter into, or permit any
Subsidiary to enter into, any leases or other rental agreements (excluding
capitalized leases, as determined in accordance with generally accepted
accounting principles consistently applied) under which the amount of the
aggregate lease payments for all such agreements for both the Company and
its Subsidiaries exceeds $3 million on a consolidated basis for any 12-
month period;
7. Paragraph 4N is amended and restated as follows:
4N. Key-Man Life Insurance. Prior to December 31, 1994, Network
shall have obtained key-man life insurance policies on the lives of Thomas
C. Brandenburg and Charles E. Buckman in the face amount of $2,500,000
each. Such insurance policies shall name the Purchasers as beneficiary
and shall provide that such insur-
4
<PAGE>
ance policies may not be cancelled unless the insurance carrier gives at
least 30 days' prior written notice of such cancellation to each Purchaser.
8. The first sentence of subparagraph (i) of Paragraph 6B is amended and
restated as follows:
(i) As of the Tranche I Closing and immediately thereafter, the
authorized capital stock of the Company shall consist of (a) 50,000 shares
of preferred stock, of which 20,000 shares shall be designated as Series A
10% Senior Cumulative Preferred Stock, 6,300 shares shall be issued and
outstanding and 4,950 shares reserved for issuance pursuant to any Tranche
II Closing, and (b) 200,000 shares of Common Stock, of which 85,000 shares
shall be issued and outstanding, 46,420 shares shall be reserved for
issuance pursuant to any Tranche II Closing, 24,076 shares shall be
reserved for issuance in connection with the Management Option Pool
subsequent to the Tranche I Closing and 15,165 shares shall be reserved for
issuance in connection with the Management Option Pool subsequent to any
Tranche II Closing.
The remainder of subparagraph (i) of Paragraph 6B shall remain as stated in
the Agreement.
9. In all other respects, the Agreement shall remain unchanged and in
full force and effect.
5
<PAGE>
EXECUTED AND DELIVERED by the parties on the date first written above.
UNITED USN, INC.
By:
-----------------------------
Thomas C. Brandenburg
Chief Executive Officer
CIBC WOOD GUNDY VENTURES, INC.
By:
-----------------------------
Richard J. Brekka
President
CHEMICAL VENTURE CAPITAL
ASSOCIATES
By:
-----------------------------
Donald J. Hoffman, Jr.
Its:
----------------------------
HANCOCK VENTURE PARTNERS IV -
DIRECT FUND L.P.
By: Back Bay Partners XII L.P.
By: Hancock Venture Partners,
Inc.
By:
-----------------------------
William A Johnston
Senior Vice President
6
<PAGE>
Exhibit 10.21
FIRST AMENDMENT TO
AMENDED AND RESTATED REGISTRATION AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED REGISTRATION AGREEMENT (the
"Amendment") is made as of October 17, 1997, by and among USN Communications,
Inc. (formerly known as United USN, Inc.) (the "Company"), CIBC Wood Gundy
Ventures, Inc. ("CIBC"), Chase Venture Capital Associates, L.P. (formerly known
as Chemical Venture Capital Associates) ("Chase"), Hancock Venture Partners IV -
Direct Fund L.P. ("Hancock Direct Fund IV"), BT Capital Partners, Inc. ("BT"),
Northwood Capital Partners LLC ("Northwood Capital"), Northwood Ventures LLC
("Northwood Ventures"), Enterprises & Transcommunications, L.P. ("E&T"), Hancock
Venture Partners V - Direct Fund L.P. ("Hancock Direct Fund V"), Prime VIII, LP
("Prime VIII") and Fidelity Communications International, Inc. ("FCI") and
Fidelity Investors Limited Partnership ("FILP," and together with FCI,
"Fidelity"). Fidelity, CIBC, Chase, Hancock Direct Fund IV, BT, Northwood
Capital, Northwood Ventures, E&T, Hancock Direct Fund V and Prime VIII are
herein referred to as the "Investors".
Fidelity will purchase shares of the Company's 9.0% Cumulative Convertible
Pay-In-Kind Preferred Stock, Series A, par value $1.00 per share (the "Series A
Preferred Stock"), pursuant to a Purchase Agreement (the "Fidelity Purchase
Agreement"), dated as of October 17, 1997, between the Company and Fidelity.
Prime VIII and Hancock Direct Fund V have purchased shares of Series A
Preferred Stock.
The Company and the Investors desire to amend the Amended and Restated
Registration Agreement, dated as of June 22, 1995 (the "Registration
Agreement"), by and among the Company, CIBC, Chase, Hancock Direct Fund IV, BT,
Northwood Capital, Northwood Ventures and E&T as set forth below. The
undersigned Investors hold all of the Registrable Securities (as defined in the
Registration Agreement). The execution and delivery of this Amendment is a
condition to Fidelity's purchase of Series A Preferred Stock pursuant to the
Fidelity Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties to this Amendment hereby agree as follows:
<PAGE>
1. Investors. Each of Hancock Direct Fund V, Prime VIII and Fidelity
hereby agrees that by its execution of this Amendment it shall become a party to
and be bound by the terms and provisions of the Registration Agreement, as
amended hereby, and the term "Investors" as used in the Registration Agreement,
as amended hereby, shall be deemed to include Hancock Direct Fund V, Prime VIII
and Fidelity.
2. Amendment of Paragraph 8. The first sentence of Paragraph 8 of the
Amended and Restated Registration Agreement is amended and restated as follows:
"Registrable Securities" means (i) any Class A Common Stock, par value $.01
per share, of the Company (the "Class A Common Stock") owned by the Investors,
(ii) any Class A Common Stock issued to the Investors upon the conversion of the
Series A Preferred Stock, (iii) any Class A Common Stock issued to the Investors
upon the conversion of the 9.0% Cumulative Convertible Pay-In-Kind Preferred
Stock, par value $1.00 per share, of the Company and (iv) any Class A Common
Stock issued or issuable with respect to the securities referred to in clause
(i), (ii) or (iii) by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization.
3. Waiver of Section 2. The Investors hereby agree to waive any rights
pursuant to Section 2 of the Registration Agreement in connection with an
initial public offering of the Company's Common Stock.
4. Severability. Whenever possible, each provision of this Amendment
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Amendment is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Amendment.
5. Counterparts. This Amendment may be executed simultaneously in two or
more counterparts, any one of which need not contain the signatures of more than
one party, but all such counterparts taken together shall constitute one and the
same Amendment.
6. Descriptive Headings. The descriptive headings of this Amendment are
inserted for convenience only and do not constitute a part of this Amendment.
7. Effectiveness. The parties hereby acknowledge that pursuant to
Section 9(e) of the Registration Agreement (as in effect immediately prior to
this Amend-
2
<PAGE>
ment), this Amendment shall become effective when executed by the holders of
Registrable Securities and upon the consummation of the closing of the sale of
Series A Preferred Stock to Fidelity.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
USN COMMUNICATIONS, INC.
By:
-----------------------------
Its:
CIBC WOOD GUNDY VENTURES, INC.
By:
-----------------------------
Its:
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By:
-----------------------------
Its:
HANCOCK VENTURE PARTNERS IV DIRECT -
FUND L.P.
By: Back Bay Partners XII L.P.
By: Hancock Venture Partners, Inc.
By:
-----------------------------
Its:
<PAGE>
BT CAPITAL PARTNERS, INC.
By:
-----------------------------
Its:
NORTHWOOD CAPITAL PARTNERS LLC
By:
-----------------------------
Its:
NORTHWOOD VENTURES LLC
By:
-----------------------------
Its:
ENTERPRISES & TRANSCOMMUNICATIONS L.P.
By: Prime Enterprises, L.P.
By: Prime New Ventures Management, L.P.
By: Prime II Management, L.P.
By: Prime II Management, Inc.
By:
-----------------------------
Its:
<PAGE>
HANCOCK VENTURE PARTNERS V -
DIRECT FUND L.P.
By: HVP V - Direct Associates L.L.C.
By: HVP Partners, LLC,
its Managing Member
By:
----------------------------------
Its:
PRIME VIII, LP
By: Prime SKA-I, LLC
General Partner
By:
----------------------------------
Its:
----------------------------------
FIDELITY COMMUNICATIONS
INTERNATIONAL, INC.
By:
----------------------------------
Its:
----------------------------------
FIDELITY INVESTORS LIMITED
PARTNERSHIP
By: Fidelity Investors Management Corp.,
general partner
By:
----------------------------------
Its:
----------------------------------
6
<PAGE>
Exh. 10.25
THIRD AMENDMENT TO
PURCHASE AGREEMENT DATED AS OF JUNE 22, 1995
THIS THIRD AMENDMENT TO PURCHASE AGREEMENT (the "Amendment") is made as of
October 17, 1997, by and among USN Communications, Inc. (formerly known as
United USN, Inc.) (the "Company"), CIBC Wood Gundy Ventures, Inc. ("CIBC"),
Chase Venture Capital Associates, L.P. (successor to Chemical Venture Capital
Associates) ("Chase"), Hancock Venture Partners IV - Direct Fund L.P. ("Hancock
Direct Fund IV"), BT Capital Partners, Inc. ("BT"), Northwood Capital Partners
LLC ("Northwood Capital"), Northwood Ventures LLC ("Northwood Ventures") and
Enterprises & Transcommunications, L.P. ("E&T," and collectively with CIBC,
Chase, Hancock Direct Fund IV, BT, Northwood Capital, Northwood Ventures, and
E&T, the "Original Purchasers"), and Fidelity Communications International,
Inc. ("FCI") and Fidelity Investors Limited Partnership ("FILP," and together
with FCI, "Fidelity").
Fidelity will purchase shares of the Company's 9.0% Cumulative Convertible
Pay-In-Kind Preferred Stock, Series A, par value $1.00 per share (the "Series A
Preferred Stock"), pursuant to a Purchase Agreement (the "Fidelity Purchase
Agreement"), dated as of October 17, 1997, between the Company and Fidelity.
The Company and the Original Purchasers desire to amend the Purchase
Agreement, dated as of June 22, 1995, as amended to date (as so amended, the
"Purchase Agreement"), by and among the Company, CIBC, Chase, Hancock Direct
Fund IV, BT, Northwood Capital, Northwood Ventures and E&T as set forth below.
The undersigned Original Purchasers hold 66 2/3% of the outstanding Investor
Common Stock (as defined in the Purchase Agreement). The execution and delivery
of this Amendment is a condition to Fidelity's purchase of Series A Preferred
Stock pursuant to the Fidelity Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties to this Amendment hereby agree as follows:
1. Amendment of Section 3D.
(a) Each of FCI and FILP hereby agrees that by its execution of this
Amendment it shall become a party to and be bound by the terms and provisions of
Section
<PAGE>
3D of the Purchase Agreement, as amended hereby, and the term "Purchasers" as
used in the Purchase Agreement, as amended hereby, shall be deemed to include
FCI and FILP solely for purposes of Section 3D and the definition of "Section 3D
Required Approval."
(b) The first clause of Section 3D is hereby amended and restated in its
entirety to read as follows:
"So long as any Purchaser holds any Investor Common Stock or any Investor
Preferred Stock, the Company shall not, without the Section 3D Required
Approval:"
2. Amendment of Section 8. Section 8 is hereby amended to add the
following definition immediately following the definition of "Schwartz
Agreement":
"Section 3D Required Approval" means the Company must have delivered a
written notice to the Purchasers stating the action proposed to be taken by the
Company and Purchasers holding at least 66 2/3% of the outstanding Common Stock
Equivalents held by the Purchasers must have approved such action by a written
approval delivered to the Company. "Common Stock Equivalents" shall mean the
total number of shares of the Company's common stock plus the number of shares
of common stock issuable upon conversion of the Company's 9.0% Cumulative
Convertible Pay-In-Kind Preferred Stock and 9.0% Cumulative Convertible Pay-In-
Kind Preferred Stock, Series A.
3. Severability. Whenever possible, each provision of this Amendment
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Amendment is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Amendment.
4. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together shall constitute one
and the same Amendment.
5. Descriptive Headings. The descriptive headings of this Amendment are
inserted for convenience only and do not constitute a part of this Amendment.
2
<PAGE>
6. Effectiveness. The parties hereby acknowledge that pursuant to
Section 9E of the Purchase Agreement (as in effect immediately prior to this
Amendment), this Amendment shall become effective when executed by the holders
of 66 2/3% of the outstanding Investor Common Stock and upon the consummation of
the closing of the sale of Series A Preferred Stock to Fidelity.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
3
<PAGE>
USN COMMUNICATIONS, INC.
By:
--------------------------------
Its:
CIBC WOOD GUNDY VENTURES, INC.
By:
--------------------------------
Its:
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By:
--------------------------------
Its:
HANCOCK VENTURE PARTNERS IV -
DIRECT FUND L.P.
By: Back Bay Partners XII L.P.
By: Hancock Venture Partners, Inc.
By:
--------------------------------
Its:
<PAGE>
BT CAPITAL PARTNERS, INC.
By:
--------------------------------
Its:
NORTHWOOD CAPITAL PARTNERS LLC
By:
--------------------------------
Its:
NORTHWOOD VENTURES LLC
By:
--------------------------------
Its:
ENTERPRISES & TRANSCOMMUNICATIONS L.P.
By: Prime Enterprises, L.P.
By: Prime New Ventures Management, L.P.
By: Prime II Management, L.P.
By: Prime II Management, Inc.
By:
--------------------------------
Its:
<PAGE>
FIDELITY COMMUNICATIONS
INTERNATIONAL, INC.
By:
--------------------------------
Its:
FIDELITY INVESTORS LIMITED
PARTNERSHIP
By: Fidelity Investors Management
Corp., a general partner
By:
--------------------------------
Its:
<PAGE>
Exh. 10.28
PURCHASE AGREEMENT
DATED AS OF OCTOBER 17, 1997
AMONG
FIDELITY COMMUNICATIONS INTERNATIONAL, INC.,
FIDELITY INVESTORS LIMITED PARTNERSHIP
AND
USN COMMUNICATIONS, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Authorization and Closing................................... 1
1A. Authorization of Series A Preferred Stock................... 1
1B. Purchase and Sale of Series A Preferred Stock............... 1
1C. The Closing................................................. 1
Section 2. Conditions to Purchasers' Obligations at the Closing........ 2
2A. Representations and Warranties; Covenants................... 2
2B. Certificate of Designations................................. 2
2C. Certificate of Incorporation................................ 2
2D. Blue Sky Clearance.......................................... 2
2E. Closing Documents........................................... 2
2F. Opinion..................................................... 3
2G. Registration Agreement...................................... 3
2H. Original Purchase Agreement................................. 3
2I. No Material Adverse Change.................................. 3
Section 3. Covenants................................................... 4
3A. Current Public Information.................................. 4
3B. Election of Fidelity Director............................... 4
3C. Inspection of Property...................................... 5
3D. Financial Statements and Other Information.................. 5
3E. Affirmative Covenants....................................... 7
3F. Compliance with Agreements.................................. 8
3G. Directors and Officers Indemnity Insurance.................. 8
Section 4. Transfer of Restricted Securities........................... 9
Section 5. Representations and Warranties of the Company............... 10
5A. Organization and Corporate Power............................ 10
5B. Capital Stock and Related Matters........................... 10
5C. Subsidiaries; Investments................................... 12
5D. Registration Statement...................................... 12
5E. Authorization; No Breach.................................... 12
5F. Financial Statements........................................ 13
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
5G. Absence of Certain Developments............................. 13
5H. Assets...................................................... 14
5I. Tax Matters................................................. 14
5J. Proprietary Rights.......................................... 14
5K. Governmental Consents, etc.................................. 14
5L. Insurance................................................... 15
5M. Employees................................................... 15
5N. Compliance with Laws........................................ 15
Section 6. Definitions................................................. 15
Section 7. Miscellaneous............................................... 17
7A. Purchasers' Investment Representations...................... 17
7B. Purchasers' Authorization................................... 17
7C. Effect of a Qualified Public Offering....................... 17
7D. Treatment of the Series A Preferred Stock................... 18
7E. Consent to Amendments....................................... 18
7F. Survival of Representations and Warranties.................. 18
7G. Severability................................................ 19
7H. Counterparts................................................ 19
7I. Descriptive Headings; Interpretation........................ 19
7J. Governing Law............................................... 19
7K. Notices..................................................... 19
7L. Indemnification............................................. 20
7M. Expenses.................................................... 20
Exhibit A Series A Certificate of Designations
Exhibit B Certificate of Incorporation
Exhibit C Form of Third Amendment to Purchase Agreement dated as
of June 22, 1995
Schedule I Exceptions to Registration Statement
</TABLE>
ii
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT is made as of October 17, 1997 (this
"Agreement") by and among USN Communications, Inc., a Delaware corporation (the
"Company") and Fidelity Communications International, Inc., a Massachusetts
corporation ("FCI") and Fidelity Investors Limited Partnership, a Delaware
limited partnership ("FILP", and collectively with FCI, the "Purchasers").
Unless otherwise defined herein, capitalized terms used herein are defined in
Section 6 hereof.
The Purchasers desire to purchase from the Company and the Company
desires to sell to the Purchasers shares of the Company's 9.0% Cumulative
Convertible Pay-In-Kind Preferred Stock, Series A, par value $1.00 per share
(the "Series A Preferred Stock").
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Authorization and Closing.
1A. Authorization of Series A Preferred Stock. The Company has
authorized the issuance and sale to FCI of ten thousand (10,000) shares and to
FILP of five thousand (5,000) shares (collectively, the "Shares") of Series A
Preferred Stock having the rights and preferences set forth in Exhibit A
attached hereto.
1B. Purchase and Sale of Series A Preferred Stock. At the
Closing, the Company shall sell to FCI and FILP and, subject to the terms and
conditions set forth herein, FCI and FILP shall purchase the Shares from the
Company for an aggregate purchase price of ten million dollars ($10,000,000) and
five million dollars ($5,000,000), respectively.
1C. The Closing. Subject to the satisfaction of the conditions
set forth in Section 2, the closing of the transactions contemplated by Sections
1A and 1B (the "Closing") shall take place at the offices of the Company, 10
South Riverside Plaza, Chicago, Illinois 60606 at 10:00 a.m. local time on
October 17, 1997, or at such other place and time as may be mutually agreeable
to the Company and the Purchasers. At the Closing, the Company shall arrange to
deliver to the Purchasers stock certificates evidencing the Shares, registered
in the Purchasers' or their respective
<PAGE>
nominees' name, upon payment of the purchase price thereof by wire transfer of
immediately available funds to the Company's account at Harris Trust and Savings
Bank, Chicago, Illinois, in the amount set forth Section 1B.
Section 2. Conditions to Purchasers' Obligations at the Closing. The
obligation of the Purchasers to purchase and pay for the Shares at the Closing
is subject to the satisfaction as of the Closing of the following conditions:
2A. Representations and Warranties; Covenants. The
representations and warranties contained in Section 5 hereof shall be true and
correct at and as of the Closing as though then made, except to the extent of
changes caused by the transactions expressly contemplated herein, and the
Company shall have performed in all material respects all of the covenants
required to be performed by it hereunder prior to the Closing.
2B. Certificate of Designations. The Certificate of
Designations, Powers, Rights and Preferences (the "Series A Certificate of
Designations"), substantially in the form of Exhibit A attached hereto, shall be
in full force and effect as of the Closing under the laws of the State of
Delaware and shall not have been amended or modified.
2C. Certificate of Incorporation. The Company's Certificate of
Incorporation, substantially in the form of Exhibit B attached hereto, shall be
in full force and effect as of the Closing under the laws of the State of
Delaware and shall not have been amended or modified.
2D. Blue Sky Clearance. The Company shall have made all pre-
sale filings under applicable state securities laws necessary, if any, to
consummate the issuance of the Shares pursuant to this Agreement in compliance
with such laws.
2E. Closing Documents. The Company shall deliver to Purchasers
at the Closing all of the following documents:
(i) an Officer's Certificate, dated the date of the
Closing, stating that the conditions specified in paragraphs 2A
through 2D, inclusive, and paragraphs 2F through 2I have been fully
satisfied;
(ii) certified copies of the resolutions duly adopted by
the Company's Board of Directors authorizing the execu-
2
<PAGE>
tion, delivery and performance of this Agreement, the amendment to the
Registration Agreement (as defined), the amendment to the Original
Purchase Agreement (as defined) and the issuance and sale of the
Shares;
(iii) copies of the Certificate of Incorporation and the
Series A Certificate of Designations, certified by the Secretary of
State of the State of Delaware, and the Company's by-laws, certified
by the Company's secretary, each as in effect at the Closing;
(iv) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of
the transactions hereunder (including, without limitation, all blue
sky law filings and waivers of all preemptive rights and rights of
first refusal); and
2F. Opinion. The Company shall cause to be delivered an opinion
of Skadden, Arps, Slate, Meagher & Flom as to the due incorporation and good
standing, capitalization, due authorization and enforceability of this
Agreement, the amendment to the Registration Agreement and the amendment to the
Original Purchase Agreement.
2G. Registration Agreement. The Amended and Restated
Registration Agreement dated as of June 22, 1995 (the "Registration Agreement"),
by and among the Company and the Investors (as defined therein) shall be amended
as necessary to include the Purchasers as parties thereto on comparable terms
with the other Investors.
2H. Original Purchase Agreement. The Purchase Agreement dated as
of June 22, 1995, as amended to date (as so amended, the "Original Purchase
Agreement") by and among the Company and the Original Purchasers shall be
amended substantially as set forth in Exhibit C hereto.
2I. No Material Adverse Change. Subsequent to the date of this
Agreement, there has been no material adverse change in the business, financial
condition or results of operations of the Company and its subsidiaries taken as
a whole.
3
<PAGE>
Section 3. Covenants.
3A. Current Public Information. The Company shall file all
reports required to be filed by it under the Securities Act of 1933, as amended
(the "Securities Act") and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the rules and regulations adopted by the Securities and
Exchange Commission (the "Commission") thereunder and shall take such further
action as the Purchasers may reasonably request, all to the extent required to
enable such holders to sell Restricted Securities pursuant to Rule 144 adopted
by the Commission under the Securities Act (as such rule may be amended from
time to time) or any similar rule or regulation hereafter adopted by the
Commission.
3B. Election of Fidelity Director.
(i) Subject to the following clause (ii), from and after
the Closing, the Company shall take all actions necessary to cause one
representative designated by the Purchasers (the "Fidelity Director") to be
nominated for election to the Board of Directors of the Company.
(ii) The Purchasers' right to designate such representative
shall terminate at such time as (x) the Purchasers shall collectively hold
Shares and/or Class A Common Stock issued upon the conversion of the Shares
representing less than 66 2/3% of the Shares (and/or Class A Common Stock
issuable upon conversion of the Shares) originally sold to the Purchasers or (y)
the sale in an underwritten public offering registered under the Securities Act
of shares of common stock of the Company ("Qualified Public Offering"),
provided, that upon the consummation of such Qualified Public Offering, the
rights of the Original Purchasers to representation on the Board of Directors
shall also be terminated.
(iii) In the event that the Fidelity Director for any
reason ceases to serve as a member of the Board during such director's term of
office, the resulting vacancy on the Board shall be filled by a representative
designated by the Purchasers.
(iv) Subject to clause (ii) above, each Investor (as
identified on the signature page hereto), shall take all actions within
4
<PAGE>
its control (including, without limitation, attendance at meetings in
person or by proxy for purposes of obtaining a quorum and execution of
written consents in lieu of meetings) to cause the Fidelity Director
to be elected to the Board and to effectuate the provisions of clause
(iii) above.
(v) The Company shall pay the reasonable out-of-pocket
expenses incurred by the Fidelity Director in connection with
attending the meetings of the Board or any committees thereof.
3C. Inspection of Property. The Company shall permit any
representatives designated by the Purchasers, upon reasonable notice and during
normal business hours and such other times as the Purchasers may reasonably
request, to (i) visit and inspect any of the properties of the Company and its
subsidiaries, (ii) examine the corporate and financial records of the Company
and its subsidiaries and make copies thereof or extracts therefrom and (iii)
discuss the affairs, finances and accounts of any such corporations with the
directors, officers, key employees and independent accountants of the Company
and its subsidiaries.
3D. Financial Statements and Other Information. The Company
shall deliver to the Purchasers:
(i) As soon as available but in any event within 30 days
after the end of each monthly accounting period in each fiscal year
(other than quarterly accounting periods of any year), unaudited
consolidating and consolidated statements of income and cash flows of
the Company and its subsidiaries for such monthly period and for the
period from the beginning of the fiscal year to the end of such month,
and consolidated and consolidating balance sheets of the Company and
its subsidiaries as of the end of each monthly period, setting forth
in each case comparisons to the annual budget and to the corresponding
period in the preceding fiscal year;
(ii) As soon as available but in any event within 45 days
after the end of each quarterly accounting period in each fiscal year
(other than the fourth such quarterly accounting period of any year),
unaudited consolidating and consolidated statements of income and cash
flows of the Company and its subsidiaries for such quarterly period
and for the period from the beginning of the fiscal year to the
5
<PAGE>
end of such quarter, and consolidating and consolidated balance sheets
of the Company and its subsidiaries as of the end of such quarterly
period, setting forth in each case comparisons to the annual budget
and to the corresponding period in the preceding fiscal year;
(iii) within the 90 days after the end of each fiscal year,
unaudited consolidating and audited consolidated statements of income
and cash flows of the Company and its subsidiaries for such fiscal
year, and unaudited consolidating and audited consolidated balance
sheets of the Company and its subsidiaries as of the end of such
fiscal year, setting forth in each case comparisons to the preceding
fiscal year and comparisons to budget will be provided under separate
cover, and accompanied by a certificate from an independent accounting
firm of recognized national standing, addressed to the Company's board
of directors, stating that in the course of its examination nothing
came to its attention that caused it to believe that there was any
default by the Company or any subsidiary in the fulfillment of or
compliance with any of the terms, covenants, provisions or conditions
of any material agreement to which the Company or any subsidiary is a
party or, if such accountants have reason to believe any default by
the Company or any subsidiary exists, a certificate specifying the
nature and period of existence thereof;
(iv) promptly (but in any event within five business days)
after the discovery or receipt of notice of any Event of
Noncompliance, any default under any material agreement to which the
Company or any of its subsidiaries is a party or any other material
adverse event or circumstance affecting the Company or any subsidiary
(including the filing of any material litigation against the Company
or any subsidiary or the existence of any dispute with any Person
which involves a reasonable likelihood of such litigation being
commenced), an Officer's Certificate specifying the nature and period
of existence thereof and what actions the Company and its subsidiaries
have taken and propose to take with respect thereto; and
(v) with reasonable promptness, such other information and
financial data concerning the Company and its subsidiaries as the
Purchasers may reasonably request.
6
<PAGE>
Each of the financial statements referred to in any of subparagraphs
(i), (ii) and (iii) shall be true and correct in all material respects as of the
dates and for the periods stated therein, be prepared in accordance with
generally accepted accounting principles consistently applied, subject in the
case of the unaudited financial statements to changes resulting from normal
year-end audit adjustments (none of which would, alone or in the aggregate, be
materially adverse to the financial condition, operating results, assets,
operations or business prospects of the Company and its subsidiaries taken as a
whole) and except for the absence of footnotes.
Additionally, the Company will promptly provide to the Purchasers all
reports and other materials filed by the Company with the Securities and
Exchange Commission pursuant to the periodic reporting requirements of the
Securities Exchange Act.
Except as otherwise required by law or judicial order or decree or by
any governmental agency or authority, the Purchasers shall use their best
efforts to maintain the confidentiality of all nonpublic information obtained by
it hereunder which the Company or its subsidiaries has reasonably designated as
proprietary or confidential in nature.
3E. Affirmative Covenants. So long as the Purchasers hold any
Series A Preferred Stock, the Company shall, and shall cause each of its
subsidiaries to:
(i) at all times cause to be done all things necessary to
maintain, preserve and renew its corporate existence and all material
licenses, authorizations and permits necessary to the conduct of its
businesses;
(ii) maintain and keep its properties in good repair,
working order and condition, and from time to time make all necessary or
desirable repairs, renewals and replacements, so that its businesses may be
properly and advantageously conducted at all times;
(iii) pay and discharge when payable all taxes, assessments
and governmental charges imposed upon its properties or upon the income or
profits therefrom (in each case before the same becomes delinquent and
before penalties accrue thereon) and all claims for labor, materials or
supplies which if unpaid would by law become
7
<PAGE>
a lien upon any of its property, unless and to the extent that the same are
being contested in good faith and by appropriate proceedings and adequate
reserves (as determined in accordance with generally accepted accounting
principles, consistently applied) have been established on its books with
respect thereto;
(iv) comply with all other obligations which it incurs
pursuant to any contract or agreement, whether oral or written, express or
implied, as such obligations become due, unless and to the extent that the
same are being contested in good faith and by appropriate proceedings and
adequate reserves (as determined in accordance with generally accepted
accounting principles, consistently applied) have been established on its
books with respect thereto;
(v) comply with all applicable laws, rules and regulations
of all governmental authorities, the violation of which would reasonably be
expected to have a material adverse effect upon the financial condition,
operating results, assets, operations or business prospects of the Company
and its subsidiaries taken as a whole; and
(vi) apply for and continue in force with good and
responsible insurance companies adequate insurance covering risks of such
types and in such amounts as are customary for corporations of similar size
engaged in a similar line of business;
3F. Compliance with Agreements. The Company shall perform and
observe all of its obligations to each holder of the Shares set forth in the
Certificate of Incorporation, the Series A Certificate of Designations and the
Company's bylaws.
3G. Directors and Officers Indemnity Insurance. As of November
15, 1997, the date of the expiration of the Company's existing directors and
officers indemnity insurance coverage, the Company will enter into a new policy
providing for directors and officers indemnity insurance coverage reasonably
acceptable to the Purchasers. The Company shall maintain directors and officers
indemnity insurance coverage reasonably satisfactory to the Purchasers for so
long as the Fidelity Director serves on the Board of Directors of the Company
and for five years thereafter.
8
<PAGE>
Section 4. Transfer of Restricted Securities.
(i) Restricted Securities are transferable only pursuant to
(a) public offerings registered under the Securities Act, (b) Rule 144 or
Rule 144A of the Commission (or any similar rule or rules then in force) if
such rule is available, and (c) subject to the conditions specified in
subparagraph (ii) below, any other legally available means of transfer.
(ii) In connection with the transfer of any Restricted
Securities (other than a transfer described in subparagraph (i)(a) or (b)
above), the holder thereof shall (unless such requirement is waived in
writing by the Company) deliver written notice to the Company describing in
reasonable detail the transfer or proposed transfer, together with an
opinion of counsel which (to the Company's reasonable satisfaction) is
knowledgeable in securities law matters to the effect that such transfer of
Restricted Securities may be effected without registration of such
Restricted Securities under the Securities Act. In addition, if the holder
of the Restricted Securities delivers to the Company an opinion of counsel
that no subsequent transfer of such Restricted Securities shall require
registration under the Securities Act, the Company shall promptly upon such
contemplated transfer deliver new certificates for such Restricted
Securities which do not bear the Securities Act legend set forth in Section
7A. If the Company is not required to deliver new certificates for such
Restricted Securities not bearing such legend, the holder thereof shall not
transfer the same until the prospective transferee has confirmed to the
Company in writing its agreement to be bound by the conditions contained in
this subparagraph and Section 7A.
(iii) Upon the request of any holder of Restricted
Securities that are eligible for sale pursuant to Rule 144(k) together with
the delivery to the Company of an opinion of counsel that no subsequent
transfer of such Restricted Securities shall require registration under the
Securities Act, the Company shall remove the foregoing legend from the
certificates representing such holder's Restricted Securities.
9
<PAGE>
Section 5. Representations and Warranties of the Company. As a
material inducement to the Purchasers to enter into this Agreement and purchase
the Shares, the Company hereby represents and warrants that:
5A. Organization and Corporate Power. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and is qualified to do business in
every jurisdiction in which its ownership of property or conduct of business
requires it to qualify, except where the failure to qualify would not reasonably
be expected to have a material adverse effect on the Company and its
subsidiaries taken as a whole. The Company has all requisite corporate power and
authority and all material licenses, permits and authorizations necessary to own
and operate its properties, to carry on its businesses as now conducted and
presently proposed to be conducted and to carry out the transactions
contemplated by this Agreement. The copies of the Company's Certificate of
Incorporation, Certificates of Designations and by-laws that have been furnished
to the Purchasers' special counsel reflect all amendments made thereto at any
time prior to the date of this Agreement and are correct and complete.
5B. Capital Stock and Related Matters.
(i) As of the Closing and immediately thereafter, the
authorized capital stock of the Company shall consist of 30,300,000 shares
of capital stock, consisting of (a) 30,050,000 shares of Common Stock, par
value $.01 per share, of which 30,000,000 shares are designated Class A
Common Stock and 50,000 shares are designated as Class B Common Stock and
(b) 250,000 shares of Preferred Stock, par value $1.00 per share, of which
30,000 shares are designated as 9% Cumulative Convertible Pay-In-Kind
Preferred Stock and 150,000 are designated as Series A Preferred Stock.
(ii) Except (x) as set forth in the Registration Statement,
(y) the USN Solutions Option, and (z) the ratification by the Board on
October 17, 1997 of a grant of options to purchase 75,000 shares of Class A
Common Stock granted on September 4, 1997, as of the Closing, neither the
Company nor any subsidiary shall have outstanding any stock or securities
convertible or exchangeable for any shares of its capital stock or
containing any profit participation features, nor shall it have outstanding
any rights or options to subscribe for or to purchase its capital stock or
any stock or securities
10
<PAGE>
convertible into or exchangeable for its capital stock or any stock
appreciation rights or phantom stock plans except as provided in this
Agreement. Except as set forth in the Registration Statement, as of the
Closing, neither the Company nor any subsidiary shall be subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any warrants, options or other
rights to acquire its capital stock, except pursuant to the Certificates of
Designations, the Certificate of Incorporation, the Original Purchase
Agreement and the First Purchase Agreement. As of the Closing, all of the
outstanding shares of the Company's capital stock, including, without
limitation, the Series A Preferred Stock, shall be validly issued, fully
paid and nonassessable.
(iii) There are no statutory or contractual stockholders'
preemptive rights or rights of refusal that have not been waived with
respect to the issuance of the Shares hereunder. The Company and its
subsidiaries have not violated any applicable federal or state securities
laws in connection with the offer, sale or issuance of any of their
respective capital stock, and the offer, sale and issuance of the Shares
hereunder does not require registration under the Securities Act or any
applicable state securities laws. Except as contemplated by this Agreement
or set forth in the Registration Statement, to the best of the Company's
knowledge, there are no agreements between the stockholders of the Company
or its subsidiaries with respect to the voting or transfer of the capital
stock of the Company or its subsidiaries or with respect to any other
aspect of the affairs of the Company or its subsidiaries other than the
First Purchase Agreement, the Original Purchase Agreement, the Amended and
Restated Stockholders' Agreement, dated July 21, 1995, by and among the
Company and the Stockholders (as defined therein), the Registration
Agreement and the Second Amended and Restated Stock Transfer Agreement,
dated as of July 21, 1995, by and among the Company and the Stockholders
(as defined therein).
(iv) Following the declaration of a dividend by the Board
of Directors of the Company on September 4, 1997, payable at the rate of
nine shares of Class A Common Stock for each share of Class A Common Stock
outstanding, the Conversion Price (as defined
11
<PAGE>
in the Series A Certificate of Designations) with respect to the Series A
Preferred Stock is $8.80127.
(v) The shares of Class A Common Stock issuable upon
conversion of the Shares (the "Conversion Shares") have been duly reserved
for issuance in accordance with the terms of the Series A Preferred Stock.
When issued upon conversion of the Series A Preferred Stock, the Conversion
Shares will be duly authorized, validly issued, fully paid and non-
assessable.
5C. Subsidiaries; Investments. Each subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has all requisite corporate power and
authority and all material licenses, permits and authorizations necessary to own
its properties and to carry on its businesses as now being conducted and as
presently proposed to be conducted and is qualified to do business in every
jurisdiction in which its ownership of property or the conduct of business
requires it to qualify. All of the outstanding shares of capital stock of each
subsidiary are validly issued, fully paid and nonassessable and all such shares
are owned by the Company or another subsidiary free and clear of any lien,
charge or encumbrance. Neither the Company nor any subsidiary owns or holds the
right to acquire any shares of stock or any other security or interest in any
other Person.
5D. Registration Statement. Except as set forth on Schedule I
attached hereto and as contemplated by this Agreement, the information set forth
in the Registration Statement, under the captions "Risk Factors," "Recent
Developments," "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Management," "Certain
Relationships and Related Transactions," "Stock Ownership," "Certain Other
Indebtedness," "Business" and "Description of Capital Stock," as of the date
hereof, does not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading.
5E. Authorization; No Breach. The execution, delivery and
performance of this Agreement has been duly authorized by the Company. Each of
this Agreement, the Certificate of Incorporation, the Certificates of
Designations, the Registration Agreement and the Original Purchase Agreement,
each as amended as contemplated hereby, constitutes or will constitute a valid
and binding obligation of
12
<PAGE>
the Company, enforceable in accordance with its terms, except as such
enforcement may be limited by (i) any applicable constitutional, bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws now or hereafter in effect relating to or affecting creditors' rights
generally and (ii) general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law). The execution
and delivery by the Company of this Agreement and the amendments to each of the
Registration Agreement and the Original Purchase Agreement and the offering,
sale and issuance of the Series A Preferred Stock hereunder, and the fulfillment
of and compliance with the respective terms hereof and thereof by the Company do
not and shall not (i) conflict with or result in a breach of the terms,
conditions or provisions of, (ii) constitute a default under, (iii) result in
the creation of any lien, security interest, charge or encumbrance upon the
Company's capital stock or assets pursuant to, (iv) give any third party the
right to modify, terminate or accelerate any obligation under, (v) result in a
violation of, or (vi) require any authorization, consent, approval, exemption or
other action by or notice to any court or administrative or governmental body
pursuant to, the charter or by-laws of the Company or any subsidiary, or any
law, statute, rule or regulation to which the Company or any subsidiary is
subject, or any agreement, instrument, order, judgment or decree to which the
Company or any subsidiary is subject.
5F. Financial Statements. The historical financial statements
(including in all cases the related schedules and notes thereto, if any) forming
a part of the Registration Statement are accurate and complete in all material
respects, consistent with the books and records of the Company (which, in turn,
are accurate and complete in all material respects) and have been prepared in
accordance with generally accepted accounting principles, consistently applied,
subject in the case of the unaudited financial statements to the absence of
footnote disclosure and changes resulting from normal year-end adjustments (none
of which would, alone or in the aggregate, be materially adverse to the
financial condition, operating results, assets, operations or business prospects
of the Company and its subsidiaries taken as a whole).
5G. Absence of Certain Developments. Except as expressly
contemplated by this Agreement or as set forth in the Registration Statement,
subsequent to the date as of which such information is given in the
Registration Statement, neither the Company nor any of its subsidiaries has
incurred any liability or obligation, direct or contingent, or entered into any
transaction, not in the ordinary course of business, that is material to the
Company and its subsidiaries taken as a whole, and there has not been any change
in the capital stock of the Company, or
13
<PAGE>
material increase in the short-term debt or long-term debt of the Company or any
of its subsidiaries, or any development which would have a material adverse
effect on the Company and its subsidiaries taken as a whole.
5H. Assets. The Company and each subsidiary have good and
marketable title to, or a valid leasehold interest in, the properties and assets
described in the Registration Statement as being owned by it, free and clear of
all liens, security interests, charges and encumbrances except as described in
the Registration Statement or such as do not materially affect, singularly or in
the aggregate, the value of such properties and assets that are material to the
Company and its subsidiaries taken as a whole. Except as described in the
Registration Statement, the Company's and each subsidiary's buildings, equipment
and other tangible assets are in good operating condition in all material
respects and are fit for use in the ordinary course of business. The Company and
each subsidiary own, or have a valid leasehold interest in, all assets necessary
for the conduct of their respective businesses as presently conducted and as
presently proposed to be conducted.
5I. Tax Matters. The Company and each subsidiary have filed all
material tax returns which they are required to file under applicable laws and
regulations (or have obtained extensions for such filings); all such returns are
complete and correct in all material respects; and the Company and each
subsidiary in all material respects have paid all taxes due and owing by them
and have withheld and paid over all taxes which they are obligated to withhold
from amounts paid or owing to any employee, stockholder, creditor or other third
party.
5J. Proprietary Rights. The Company and its subsidiaries own or
possess all patents, trademarks, trademark registrations, service marks, service
mark registrations, trade names, copyrights, licenses, inventions, trade secrets
and rights described in the Registration Statement as being owned by them or any
of them or necessary for the conduct of their respective businesses except where
the lack of such ownership or possession would not have a material adverse
effect on the Company and its subsidiaries taken as a whole, and the Company is
not aware of any claim to the contrary or any challenge by any other person to
the rights of the Company and the subsidiaries with respect to the foregoing
which would, if successful, have a material adverse effect on the Company and
the subsidiaries taken as a whole.
5K. Governmental Consents, etc. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental
14
<PAGE>
authority is required in connection with the execution, delivery and performance
by the Company of this Agreement or other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby, except as expressly contemplated herein or in the exhibits hereto.
5L. Insurance. The Company and its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are customary in the businesses in which they are
engaged. Neither the Company nor any subsidiary is in default with respect to
its obligations under any material insurance policy maintained by it, and each
such policy is in full force and effect.
5M. Employees. The Company and each subsidiary has complied in
all material respects with all laws relating to the employment of labor,
including provisions thereof relating to wages, hours, equal opportunity,
collective bargaining and the payment of social security and other taxes, and
the Company and its subsidiaries have no material labor relations problems
(including any union organization activities, threatened or actual strikes or
work stoppages or material grievances).
5N. Compliance with Laws. Neither the Company nor any
subsidiary has violated any law or any governmental regulation or requirement
which violation would have a material adverse effect upon the financial
condition, operating results, assets, operations or business prospects of the
Company and its subsidiaries taken as a whole, and neither the Company nor any
subsidiary has received notice of any such violation. Neither the Company nor
any subsidiary is subject to any clean up liability, or has reason to believe it
may become subject to any clean up liability, under any federal, state or local
environmental law, rule or regulation, which liability would have a material
adverse effect on the Company and its subsidiaries taken as a whole.
Section 6. Definitions. For the purposes of this Agreement, the
following terms have the meanings set forth below:
"Certificates of Designations" means the Series A Certificate of
Designations and the 9.0% Certificate of Designations.
"Certificate of Incorporation" means the Company's Amended and
Restated Certificate of Incorporation in the form set forth in Exhibit B hereto.
15
<PAGE>
"Common Stock" means the Company's Class A Common Stock, par value
$.01 per share, and the Company's Class B Common Stock, par value $.01 per
share.
"9.0% Certificate of Designations" means the Company's Certificate of
Designations, Powers, Rights and Preferences of 9.0% Cumulative Convertible Pay-
In-Kind Preferred Stock.
"Original Purchasers" means the "Purchasers" as defined in the
Original Purchase Agreement.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a limited liability company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Stock" means the Series A Preferred Stock and the Company's
9.0% Cumulative Convertible Pay-In-Kind Preferred Stock.
"Registration Statement" means the Company's Registration Statement on
Form S-4, filed by the Company with the Securities and Exchange Commission on
October 10, 1997.
"Restricted Securities" means (i) the Shares issued hereunder, (ii)
shares of Class A Common Stock issued upon conversion of the Shares (the
"Conversion Shares") and (iii) any securities issued with respect to the Shares
or the Conversion Shares by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular Restricted Securities, such
securities shall cease to be Restricted Securities when they have (a) been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) become eligible for sale
pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act or (c) been otherwise transferred and new certificates for them
not bearing the Securities Act legend set forth in Section 7A have been
delivered by the Company in accordance with Section 4(ii). Whenever any
particular securities cease to be Restricted Securities, the holder thereof
shall be entitled to receive from the Company, without expense, new certificates
representing such securities not bearing a Securities Act legend of the
character set forth in Section 7A.
16
<PAGE>
"Series A Certificate of Designations" means the Company's Certificate
of Designations, Powers, Rights and Preferences of 9.0% Cumulative Convertible
Pay-In-Kind Preferred Stock, Series A, establishing the terms and the relative
rights and preferences of the Series A Preferred Stock in the form set forth in
Exhibit A hereto.
Section 7. Miscellaneous.
7A. Purchasers' Investment Representations. Each of the
Purchasers hereby represents that it is an "accredited investor" within the
meaning of Rule 501(a) of Regulation D promulgated under the Securities Act, it
is acquiring the Restricted Securities purchased hereunder or acquired pursuant
hereto for its own account with the present intention of holding such securities
for purposes of investment, and that it has no intention of selling such
securities in a public distribution in violation of the federal securities laws
or any applicable state securities laws; provided, that nothing contained herein
shall prevent the Purchasers and subsequent holders of Restricted Securities
from transferring such securities in compliance with the provisions of Section 4
hereof. Each certificate for Restricted Securities shall be imprinted with a
legend in substantially the following form:
"The securities represented by this certificate were originally issued on
October 17, 1997, and have not been registered under the Securities Act of
1933, as amended. The transfer of the securities represented by this
certificate is subject to the conditions specified in the Purchase
Agreement, dated as of October 17, 1997, between the issuer (the "Company")
and certain investors, and the Company reserves the right to refuse the
transfer of such securities until such conditions have been fulfilled with
respect to such transfer. A copy of such conditions shall be furnished by
the Company to the holder hereof upon written request and without charge."
7B. Purchasers' Authorization. The Purchasers' investment
committee or similar authority has approved and authorized the consummation of
the transactions contemplated by this Agreement.
7C. Effect of a Qualified Public Offering. Each of the
Purchasers agrees that upon the consummation of a Qualified Public Offering:
(i) All rights granted to the Purchasers pursuant to the
Third Amendment to the Original Purchase Agreement will be
17
<PAGE>
terminated and the Purchasers will take all action necessary to effectuate
such termination;
(ii) All covenants contained in this Purchase Agreement
shall be terminated and of no further force and effect; and
(iii) The Purchasers will convert the Shares to Class A
Common Stock in accordance with the terms of the Series A Certificate of
Designations concurrently with closing of a Qualified Public Offering and
will enter into a lock-up agreement to the effect that the Purchasers will
not sell, offer to sell, grant any option for the sale of, or dispose of
any capital stock or security convertible into capital stock for a period
of 180 days from the date of the prospectus without the consent of the
underwriters for such offering.
Notwithstanding the foregoing, the agreement of the Purchasers
pursuant to this Section 7C shall be effective when and to the extent that (x)
the covenants of the Company in favor of the Original Purchasers paralleling
those referred to in clauses (i) and (ii) above shall have been terminated and
(y) the Original Purchasers shall have converted all shares of Preferred Stock
held by them into Class A Common Stock and entered into a comparable lock-up
agreement.
7D. Treatment of the Series A Preferred Stock. The Company
covenants and agrees that (i) so long as applicable income tax laws prohibit a
deduction for distributions made by the Company with respect to preferred stock,
it shall treat all distributions paid by it on the Series A Preferred Stock as
non-deductible distributions in respect of such stock on its applicable income
tax returns and (ii) it shall treat the Series A Preferred Stock as preferred
stock in all of its financial statements and other reports and shall treat all
distributions paid by it on the Series A Preferred Stock as distributions on
preferred stock in such statements and reports.
7E. Consent to Amendments. Except as otherwise expressly
provided herein, the provisions of this Agreement may be amended or waived and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company has obtained the
written consent of the Purchasers. No other course of dealing between the
Company and the Purchasers or any delay in exercising any rights hereunder or
under the Certificate of
18
<PAGE>
Incorporation or the Certificates of Designations shall operate as a waiver of
any rights of the Purchasers.
7F. Survival of Representations and Warranties. All
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby,
regardless of any investigation made by the Purchasers or on their behalf.
7G. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
7H. Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
7I. Descriptive Headings; Interpretation. The descriptive
headings of this Agreement are inserted for convenience only and do not
constitute a Section of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
7J. Governing Law. The corporate law of the State of Delaware
shall govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity and
interpretation of this Agreement and the exhibits and schedules hereto shall be
governed by the internal law, and not the law of conflicts, of the State of New
York.
7K. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, dispatched by telegram or electronic facsimile transmission
(confirmed in writing by mail simultaneously dispatched), sent to the recipient
by reputable express courier service (charges prepaid) or mailed to the
recipient by certified or registered mail, return receipt requested and postage
prepaid. Such notices, demands and other communications shall be sent to the
Company at
19
<PAGE>
USN Communications, Inc.
10 South Riverside Plaza, Suite 401
Chicago, Illinois 60606
Attention: Secretary
Telephone: (312) 906-3600
Facsimile: (312) 906-3636
and to the Purchasers at
82 Devonshire Street
Mailzone R25D
Boston, MA 02109
Attention:
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
7L. Indemnification. The Company agrees to indemnify and hold
the Purchasers harmless against and in respect of any and all direct out-of-
pocket damages, losses, liabilities, obligations, costs and expenses (including
reasonable attorneys' fees) which either of the Purchasers may suffer or incur
as a result of a breach of any of the representations, warranties or agreements
by the Company set forth herein (notwithstanding any investigations or
verifications made by or on behalf of the Purchasers).
7M. Expenses. The Company agrees to pay, and hold each of the
Purchasers harmless against liability for the payment of (i) the fees and
expenses incurred with respect to any amendments or waivers (whether or not the
same become effective) under or in respect of this Agreement, the agreements
contemplated hereby, the Certificate of Incorporation or the Series A
Certificate of Designation, (ii) stamp and other taxes which may be payable in
respect of the execution and delivery of this Agreement or the issuance,
delivery or acquisition of the Shares, (iii) the fees and expenses incurred with
respect to the enforcement of the rights granted under this Agreement, the
agreements contemplated hereby, the Certificate of Incorporation or the Series
A Certificate of Designation and (iv) the reasonable fees and expenses incurred
by either of the Purchasers in connection with any transaction, claim or event
which such Purchaser believes affects the Company or its subsidiaries and as to
which such Purchaser seeks advice of counsel.
20
<PAGE>
* * * * *
21
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
USN COMMUNICATIONS, INC.
__________________________________________________
By: J. Thomas Elliott
Its: President and Chief Executive Officer
FIDELITY COMMUNICATIONS
INTERNATIONAL, INC.
By:_______________________________________________
Name___________________________________________
Its:___________________________________________
FIDELITY INVESTORS LIMITED PARTNERSHIP
By: Fidelity Investors Management Corp., general
partner
By:_______________________________________________
Name___________________________________________
Its:___________________________________________
<PAGE>
Accepted and agreed to on this
_______ day of October by the
following Investors for purposes
of Section 3B only:
CIBC WOOD GUNDY VENTURES, INC.
By:
-----------------------------------
Its:
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By:
-----------------------------------
Its:
HANCOCK VENTURE PARTNERS IV -
DIRECT FUND L.P.
By: Back Bay Partners XII L.P.
By: Hancock Venture
Partners, Inc.
By:
-----------------------------------
Its:
BT CAPITAL PARTNERS, INC.
By:
-----------------------------------
Its:
<PAGE>
NORTHWOOD CAPITAL PARTNERS LLC
By:
-----------------------------------
Its:
NORTHWOOD VENTURES LLC
By:
-----------------------------------
Its:
ENTERPRISES & TRANSCOMMUNICATIONS L.P.
By: Prime Enterprises, L.P.
By: Prime New Ventures Management,
L.P.
By: Prime II Management, L.P.
By: Prime II Management, Inc.
By:
-----------------------------------
Its:
<PAGE>
Schedule I
Exceptions to Registration Statement
None.
<PAGE>
Exh. 10.38
Dated as of August 25, 1997
by and between
USN COMMUNICATIONS, INC.
and
HARRIS TRUST AND SAVINGS BANK
as Warrant Agent
<PAGE>
WARRANT AGREEMENT
TABLE OF CONTENTS*
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1. Appointment of Warrant Agent................................... 1
SECTION 2. Issuance of Warrants........................................... 1
SECTION 3. Warrant Certificates........................................... 1
SECTION 4. Execution of Warrant Certificates.............................. 2
SECTION 5. Transfers of Warrants.......................................... 2
(a) [Intentionally Omitted.]....................................... 2
(b) Private Placement Legend....................................... 2
(c) [Intentionally Omitted.]....................................... 4
SECTION 6. Registration and Countersignature.............................. 4
SECTION 7. (a) Registration of Transfers and Exchanges................... 4
(b) [Intentionally Omitted.]....................................... 5
(c) Special Transfer Provisions.................................... 5
SECTION 8. Terms of Warrants; Exercise of Warrants........................ 6
SECTION 9. Reports........................................................ 7
SECTION 10. Payment of Taxes............................................... 8
SECTION 11. Mutilated or Missing Warrant Certificates...................... 8
SECTION 12. Reservation of Warrant Shares.................................. 8
SECTION 13. Obtaining Stock Exchange Listings.............................. 9
SECTION 14. Consolidations, Mergers and Sales of Assets.................... 9
SECTION 15. Adjustment of Number of Warrant Shares......................... 10
SECTION 16. [Intentionally Omitted.]....................................... 18
</TABLE>
- ----------------
* This Table of Contents does not constitute a part of this Agreement or have
any bearing upon the interpretation of any of its terms or provisions.
i
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 17. Fractional Interests......................................... 18
SECTION 18. Notices of Adjustments....................................... 18
SECTION 19. Warrant Agent................................................ 20
SECTION 20. Merger, Consolidation or Change of Name of Warrant Agent..... 21
SECTION 21. Change of Warrant Agent...................................... 22
SECTION 22. Notices to the Company and Warrant Agent..................... 23
SECTION 23. Supplements and Amendments................................... 23
SECTION 24. Successors................................................... 24
SECTION 25. Termination.................................................. 24
SECTION 26. Governing Law; Jurisdiction.................................. 24
SECTION 27. Benefits of This Agreement................................... 24
SECTION 28. Counterparts................................................. 25
SECTION 29. Further Assurances........................................... 25
EXHIBIT A................................................................. 27
EXHIBIT B................................................................. 34
</TABLE>
ii
<PAGE>
WARRANT AGREEMENT (this "Agreement") dated as of August 25, 1997 between
USN Communications, Inc., (the "Company"), and Harris Trust and Savings Bank, as
Warrant Agent (the "Warrant Agent").
WHEREAS, the Company has entered into an agreement, dated as of August
12, 1997, with Merrill Lynch Global Allocation Fund, Inc. and Merrill Lynch
Equity/Convertible Series (Global Allocation Portfolio) (collectively, "MLAM")
pursuant to which the Company has agreed to issue to MLAM warrants (the
"Warrants") to purchase up to an aggregate of 14,516 shares of the Company's
Class A Common Stock, par value $.01 per share (the "Class A Common Stock," and
together with the Company's Class B Common Stock, $.01 par value per share, the
"Common Stock"). Each Warrant entitles the holder thereof, upon exercise, to
purchase fully paid and nonassessable shares of Class A Common Stock at an
exercise price of $.01 per share (the "Exercise Price"). Each Warrant entitles
the holder thereof, upon exercise, to purchase one (1) fully paid and
nonassessable share of Class A Common Stock ("Number of Shares") at the Exercise
Price. The Number of Shares is subject to adjustment under certain circumstances
as provided in Section 15 hereof. The shares of Class A Common Stock issuable
upon exercise of Warrants are referred to herein as "Warrant Shares;" and
WHEREAS, the Warrants shall bear the legend (the "Warrant Legend") set
forth on the form of Warrant Certificate set forth in Exhibit A attached hereto
subject to the terms of this Agreement. Unless registered under the Securities
Act of 1933, as amended (the "Securities Act"), and any applicable state
securities laws, the Warrant Shares shall initially bear the legend set forth in
Exhibit B (the "Warrant Shares Legend"); and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance of Warrant Certificates and other matters as provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent for the Company in accordance with the
instructions set forth hereinafter in this Agreement, and the Warrant Agent
hereby accepts such appointment.
SECTION 2. Issuance of Warrants. Warrants shall be originally issued in
satisfaction of the Company's obligations pursuant to Section 6.1 of the Consent
Agreement.
SECTION 3. Warrant Certificates. The certificates evidencing the Warrants
("Warrant Certificates") shall be substantially in the form annexed hereto as
Exhibit A with such changes as are as necessary to reflect the number of shares
of Class A Common Stock for which the Warrants are then exercisable.
<PAGE>
The Warrants shall be evidenced initially in the form of one or more
permanent physical Warrants (each, a "Physical Warrant") evidenced by a Warrant
Certificate in definitive, fully registered form, substantially in the form set
forth in Exhibit A (each, a "Physical Warrant Certificate").
SECTION 4. Execution of Warrant Certificates. Warrant Certificates shall
be signed on behalf of the Company by any two of the following officers: its
Chairman of the Board, Chief Executive Officer, Chief Financial Officer,
President, any Vice President, Secretary or Assistant Secretary, under its
corporate seal. Each such signature upon the Warrant Certificates may be in the
form of a facsimile signature of the present or any future Chairman of the
Board, Chief Executive Officer, Chief Financial Officer, President or any Vice
President and Secretary or Assistant Secretary and may be imprinted or otherwise
reproduced on the Warrant Certificates and for that purpose the Company may
adopt and use the facsimile signature of any person who shall have been Chairman
of the Board, Chief Executive Officer, Chief Financial Officer, President, any
Vice President, Secretary or Assistant Secretary, notwithstanding the fact that
at the time the Warrant Certificates shall be countersigned and delivered or
disposed of he or she shall have ceased to hold such office. The seal of the
Company may be in the form of a facsimile thereof and may be impressed, affixed,
imprinted or otherwise reproduced on the Warrant Certificates.
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been countersigned by the Warrant Agent, or
disposed of by the Company, such Warrant Certificates nevertheless may be
countersigned and delivered or disposed of as though such person had not ceased
to be such officer of the Company; and any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Agreement any
such person was not such officer.
Warrant Certificates shall be dated the date of countersignature by the
Warrant Agent.
SECTION 5. Transfers of Warrants.
(a) [Intentionally Omitted.]
(b) Private Placement Legend. Except as otherwise provided in Section
7(c) (iii) hereof, each Warrant Certificate shall bear the following legend (the
"Private Placement Legend"):
THE WARRANTS REPRESENTED HEREBY ("WARRANTS") AND, AS OF THE DATE THIS
WARRANT CERTIFICATE WAS ORIGINALLY ISSUED, THE SHARES OF CLASS A COMMON
STOCK, $.01 PAR
2
<PAGE>
VALUE PER SHARE, PURCHASABLE UPON THEIR EXERCISE (THE "WARRANT SHARES"
AND, TOGETHER WITH THE WARRANTS, THE "SECURITY"), HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER
THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF,
(1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), (2) AGREES THAT IT
WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD
OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT OR ANY
SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUANCE
DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON
WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS
SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF
ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION
TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY
EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM
NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A
OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIRE-
3
<PAGE>
MENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH
PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF
THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
(c) [Intentionally Omitted.]
SECTION 6. Registration and Countersignature. The Warrant Agent, on
behalf of the Company, shall number and register the Warrant Certificates in a
register as they are issued by the Company.
Warrant Certificates shall be manually countersigned by the Warrant Agent
and shall not be valid for any purpose unless so countersigned. The Warrant
Agent shall, upon written instructions of the Chairman of the Board, Chief
Executive Officer, Chief Financial Officer, President, any Vice President or
Secretary of the Company, initially countersign and deliver Warrant Certificates
entitling the holders thereof to purchase not more than the number of Warrant
Shares referred to above in the first recital hereof and shall countersign and
deliver Warrant Certificates as otherwise provided in this Agreement. Such
written instructions shall specify the amount of the Warrants to be
countersigned and the date of countersignature.
The Company and the Warrant Agent may deem and treat the registered
holder(s) of the Warrant Certificates as the absolute owner(s) thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone), for all purposes, and neither the Company nor the Warrant Agent shall
be affected by any notice to the contrary.
SECTION 7. (a) Registration of Transfers and Exchanges. In accordance
with this Section 7, and subject to the provisions of Section 5 hereof, the
Warrant Agent shall from time to time register the transfer of any outstanding
Warrant Certificates upon the records to be maintained by it for that purpose,
upon surrender thereof accompanied by a written instrument or instruments of
transfer in form satisfactory to the Warrant Agent, duly executed by the
registered holder or holders thereof or by the duly appointed legal
representative thereof or by a duly authorized attorney. Upon any such
registration of transfer, a new Warrant Certificate shall be issued to the
transferee(s) and the surrendered Warrant Certificate shall be canceled by the
Warrant Agent. Canceled Warrant Certificates shall thereafter be disposed of by
the Warrant Agent in a manner consistent with the Warrant Agent's customary
procedure and in accordance with applicable law.
Warrant Certificates may be exchanged at the option of the holder(s)
thereof, when surrendered to the Warrant Agent at its office for another Warrant
Certificate or other Warrant Certificates of like tenor and representing in the
aggregate a
4
<PAGE>
like number of Warrants. Warrant Certificates surrendered for exchange shall be
canceled by the Warrant Agent. Such canceled Warrant Certificates shall then be
disposed of by the Warrant Agent in a manner consistent with the Warrant Agent's
customary procedure and in accordance with applicable law.
No service charge shall be made for any transfer or exchange of Warrant
Certificates or any issuance of Warrant Certificates in connection with a
Separation, but the Company may require payment of a sum sufficient to cover any
stamp or other governmental charge or tax that may be imposed in connection with
any such transfer or exchange.
The Warrant Agent is hereby authorized to countersign, in accordance with
the provisions of this Section 7 and Section 5, the new Warrant Certificates
required pursuant to the provisions of this Section 7.
(b) [Intentionally Omitted.]
(c) Special Transfer Provisions.
(i) [Intentionally Omitted.]
(ii) Transfers to QIBs. If the Warrant to be transferred consists
of Physical Warrants, the Warrant Agent shall register the transfer if such
transfer is being made by a proposed transferor who has checked the box provided
for on the form of Warrant stating, or has otherwise advised the Company and the
Warrant Agent in writing, that the sale has been made in compliance with the
provisions of Rule 144A to a transferee who has signed the certification
provided for on the form of Warrant stating, or has otherwise advised the
Company and the Warrant Agent in writing, that it is purchasing the Warrant for
its own account or an account with respect to which it exercises sole investment
discretion and that it and any such account is a QIB within the meaning of Rule
144A, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Company as
it has requested pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon its
foregoing representations in order to claim the exemption from registration
provided by Rule 144A.
(iii) Private Placement Legend. Upon the transfer, exchange or
replacement of Warrant Certificates not bearing the Private Placement Legend,
the Warrant Agent shall deliver Warrant Certificates that do not bear the
Private Placement Legend. Upon the transfer, exchange or replacement of Warrant
Certificates bearing the Private Placement Legend, the Warrant Agent shall
deliver only Warrant Certificates that bear the Private Placement Legend unless
there is delivered to the Warrant Agent an opinion of counsel reasonably
satisfactory to the Company and the Warrant Agent to the effect that neither
such legend nor the related restrictions on transfer are required in order to
maintain compliance with the provisions of the Securities Act.
5
<PAGE>
(iv) General. The provisions hereof shall be qualified in their
entirety by any applicable securities laws of the United States and any other
applicable jurisdiction and by the procedures of any applicable clearing agency,
in each case as in effect from time to time, and all such laws and clearing
procedures shall be deemed to be incorporated herein by reference. By its
acceptance of any Warrant Certificate bearing the Private Placement Legend, each
holder of such a Warrant Certificate shall be deemed to acknowledge the
restrictions on transfer of such Warrant Certificate set forth in this Warrant
Agreement and in the Private Placement Legend and agrees that it will transfer
such Warrant Certificate only as provided in this Warrant Agreement. The Warrant
Agent shall not register a transfer of any Warrant Certificate unless such
transfer complies with the restrictions on transfer of such Warrant Certificate
set forth in this Warrant Agreement. In connection with any transfer of Warrant
Certificates, each Warrant holder agrees by its acceptance of the Warrant
Certificates to furnish the Warrant Agent or the Company such certifications,
legal opinions or other information as either of them may reasonably require to
confirm that such transfer is being made pursuant to an exemption from, or a
transaction not subject to, the registration requirements of the Securities Act;
provided that the Warrant Agent shall not be required to determine (but may rely
on a determination made by the Company with respect to) the sufficiency of any
such certifications, legal opinions or other information.
SECTION 8. Terms of Warrants; Exercise of Warrants. Subject to the terms
of this Agreement, each Warrant holder shall have the right, which may be
exercised at any time on or after the date of the occurrence of the earliest of:
(i) immediately prior to the occurrence of a Change of Control (as defined in
the Indenture, dated as of August 15, 1997 (the "Indenture"), between the
Company and Harris Trust and Savings Bank, as Trustee, with respect to the
Company's 14 5/8% Senior Discount Notes due 2004 (the "Senior Notes")); (ii) the
60th day (or such earlier date as determined by the Company in its sole
discretion) following a Public Equity Offering (as defined in the Indenture); or
(iii) February 15, 1998 (each, an "Exercise Event") and on or prior to the close
of business on August 15, 2004 (the "Expiration Date") to exercise Warrants and
receive from the Company the number of fully paid and nonassessable Warrant
Shares which the holder may at the time be entitled to receive on exercise of
such Warrants and payment of the Exercise Price for such Warrant Shares;
provided that upon any such exercise no holder shall be entitled to sell or
transfer such holder's Warrants Shares at any time unless, at the time of such
sale or transfer, (i) a registration statement under the Securities Act covering
the offer and sale of the Warrant Shares has been filed with, and declared
effective by, the Securities and Exchange Commission (the "SEC"), and no stop
order suspending the effectiveness of such registration statement has been
issued by the SEC or (ii) the offer and sale of the Warrant Shares to the
Warrant holder are exempt from registration under the Securities Act and the
holder of the Warrants, if so requested by the Company, has delivered to the
Company an opinion of counsel to such effect. Each Warrant, when exercised, will
entitle the holder thereof to purchase one (1) fully paid and nonassessable
share of Class A Common Stock at the Exercise Price. The Number of Shares is
subject to adjustment under certain circumstances as provided herein by Section
15. Each Warrant not exercised prior to the Expiration Date shall become void
and all
6
<PAGE>
rights thereunder and all rights in respect thereof under this Agreement shall
cease as of such time.
A Warrant may be exercised at any time on or after the occurrence of an
Exercise Event at the election of the holder thereof, either in full or from
time to time in part (in whole shares) upon surrender to the Company at the
principal office of the Warrant Agent of the Warrant Certificate or Certificates
to be exercised with the form of election to purchase on the reverse thereof
duly filled in and signed, which signature shall be guaranteed by an "eligible
guarantor" as defined in the regulations promulgated under the Exchange Act and
upon payment to the Warrant Agent for the account of the Company of the Exercise
Price, as adjusted as herein provided, for each Warrant then exercised. Payment
of the aggregate Exercise Price shall be made in the form of cash or a certified
or official bank or bank cashier's check payable to the order of the Company.
Subject to the provisions of Section 10 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
Warrant holder and in such name or names as the Warrant holder may designate, a
certificate or certificates for the number of whole Warrant Shares issuable upon
the exercise of such Warrants together with any cash which may be payable as
provided in Section 17 hereof. Such certificate or certificates shall be deemed
to have been issued and any person so designated to be named therein shall be
deemed to have become a holder of record of such Warrant Shares as of the date
of the surrender of such Warrants and payment of the aggregate Exercise Price.
No fractional shares shall be issued upon exercise of any Warrants in accordance
with Section 17 hereof.
In the event that a Warrant Certificate is exercised in respect of fewer
than all of the Warrant Shares issuable on such exercise at any time prior to
the Expiration Date, a new Warrant Certificate evidencing the remaining Warrant
or Warrants will be issued, and the Warrant Agent is hereby irrevocably
authorized to countersign and to deliver the required new Warrant Certificate or
Certificates pursuant to the provisions of this Section and of Section 4 hereof,
and the Company, whenever required by the Warrant Agent, will supply the Warrant
Agent with Warrant Certificates duly executed on behalf of the Company for such
purpose.
All Warrant Certificates surrendered upon exercise of Warrants shall be
canceled by the Warrant Agent. Such canceled Warrant Certificates shall then be
disposed of by the Company in accordance with applicable law. The Warrant Agent
shall account promptly to the Company with respect to Warrants exercised and
concurrently pay to the Company all monies received by the Warrant Agent for the
purchase of the Warrant Shares through the exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement and any notices
given or received hereunder available for inspection by the Warrant holders
during normal business hours at its office. The Company shall supply the Warrant
Agent from time to time with such numbers of copies of this Agreement as the
Warrant Agent may request.
7
<PAGE>
SECTION 9. Reports. So long as any of the Warrants remain outstanding,
the Company shall cause copies of all quarterly and annual financial reports and
of the information, documents and other reports (or copies of such portions of
any of the foregoing as the SEC may by rules and regulations prescribe) that the
Company is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act ("SEC Reports") to be filed with the Warrant Agent and mailed to
the holders of Warrants, in each case, within 15 days after filing with the SEC.
So long as any of the Warrants remain outstanding, if the Company is not subject
to the requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall nevertheless continue to cause reports, comparable to those that it would
be required to file pursuant to Section 13 or 15(d) of the Exchange Act if it
were then subject to the requirements of either such Section, to be so filed
with the SEC for public availability (unless the SEC will not accept such a
filing) and with the Warrant Agent and mailed to the holders of Warrants, in
each case, within the same time periods as would have applied (including under
the preceding sentence) had the Company then been subject to the requirements of
Section 13 or 15(d) of the Exchange Act. The Company shall make available to
investors and prospective investors of the Warrants information that satisfies
the requirements of Rule 144A(d) (4) under the Securities Act.
SECTION 10. Payment of Taxes. No service charge shall be made to any
holder of a Warrant for any exercise, exchange or registration of transfer of
Warrant Certificates, and the Company will pay all documentary stamp taxes
attributable to the initial issuance of Warrant Shares upon the exercise of
Warrants or to any Separation; provided that the Company shall not be required
to pay any tax or taxes which may be payable in respect of any transfer involved
in the issue of any Warrant Certificates or any certificates for Warrant Shares
in a name other than that of the registered holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
SECTION 11. Mutilated or Missing Warrant Certificates. If any of the
Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company
may in its discretion issue and the Warrant Agent may countersign, in exchange
and substitution for and upon cancellation of, the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing an
equivalent number of Warrants, but only upon receipt of evidence satisfactory to
the Company and the Warrant Agent of such loss, theft or destruction of such
Warrant Certificate and indemnity and security therefor, if requested, also
satisfactory to them. Applicants for such substitute Warrant Certificates shall
also comply with such other reasonable regulations and pay such other reasonable
charges as the Company or the Warrant Agent may prescribe.
SECTION 12. Reservation of Warrant Shares. The Company will at all times
reserve and keep available, free of preemptive rights and free from all taxes,
liens, charges and security interests with respect to the issuance thereof, out
of the aggregate of its authorized but unissued Class A Common Stock, for the
purpose of enabling it to
8
<PAGE>
satisfy any obligation to issue Warrant Shares upon the exercise of Warrants,
the maximum number of Class A Common Stock which may then be deliverable upon
the exercise of all outstanding Warrants.
The Company or the transfer agent for the Class A Common Stock (the
"Transfer Agent") and every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of any of the rights of
purchase aforesaid will be irrevocably authorized and directed at all times to
reserve such number of authorized shares as shall be required for such purpose.
The Company will keep a copy of this Agreement on file with the Transfer Agent
and with every subsequent transfer agent for any shares of the Company's capital
stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Warrant Agent is hereby irrevocably authorized to requisition from
time to time from such Transfer Agent the stock certificates required to honor
outstanding Warrants upon exercise thereof in accordance with the terms of this
Agreement. The Company will supply such Transfer Agent with duly executed
certificates for such purposes and will provide or otherwise make available to
the Warrant Agent any cash which may be payable as provided in Section 17
hereof. The Company will furnish such Transfer Agent a copy of all notices of
adjustments and certificates related thereto transmitted to each holder pursuant
to Section 18 hereof.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will be, upon payment of the Exercise Price and issuance
thereof, duly and validly issued, fully paid, nonassessable, free of preemptive
rights and free from all taxes, liens, charges and security interests with
respect to the issuance thereof.
SECTION 13. Obtaining Stock Exchange Listings. The Company shall from
time to time take all action necessary so that the Warrant Shares, immediately
upon their issuance upon the exercise of Warrants, will be listed on the
principal securities exchanges, interdealer quotation systems and markets, if
any, on which any shares of Common Stock are then listed or quoted.
SECTION 14. Consolidations, Mergers and Sales of Assets. 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, and in connection therewith,
consideration to the holders of shares of Common Stock in exchange for their
shares is (a) not payable solely in cash, each Warrant thereafter shall entitle
the holder thereof to receive upon exercise thereof the number of shares of
capital stock or other securities or property which the holder of any shares of
Common Stock is entitled to receive upon completion of such consolidation,
merger or sale of assets ("Merger Consideration") or (b) payable solely in cash
("Cash Payment"), or in the event of the dissolution, liquidation or winding-up
of the Company, then the holders of the Warrants will receive distributions on
an equal basis with the holders of shares of Common Stock or other securities
issuable upon exercise of the warrants, as if the Warrants had been exercised
immediately prior to such event, less the Exercise Price. Upon receipt of such
Cash Payment, if any, the Warrants will expire and the rights of the holders
thereof will cease.
9
<PAGE>
In the event the Company is required pursuant to the provisions of this
Section 14 to make a Cash Payment as a result 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, if any, necessary to pay the holders
of the Warrants. After such funds and the surrendered Warrant Certificate are
received, the Warrant Agent shall make payment by delivering a check in such
amount as is appropriate to such Person or Persons as it may be directed in
writing by the holders surrendering such Warrants.
SECTION 15. Adjustment of Number of Warrant Shares.
(a) In case the Company shall (i) make a dividend or other distribution
on the Common Stock exclusively in Common Stock, (ii) make a dividend or other
distribution on the Common Stock in shares of its capital stock other than
Common Stock, (iii) subdivide its outstanding shares of Common Stock or (iv)
combine its outstanding shares of Common Stock into a smaller number of shares
of Common Stock, the number and kind of shares of Common Stock or capital stock
of the Company issuable upon the exercise of a Warrant (as in effect immediately
prior to such dividend or distribution) shall be proportionately adjusted so
that the holder of any Warrant thereafter exercised may receive the aggregate
number and kind of shares of capital stock of the Company that such holder would
have owned immediately following such dividend or distribution if such Warrant
had been exercised immediately prior thereto.
(b) Subject to the last sentence of paragraph (g) of this Section, in
case the Company shall make a dividend or other distribution on the Common Stock
consisting exclusively of, or shall otherwise issue to all holders of the Common
Stock, rights, options or warrants entitling the holders thereof to subscribe
for or purchase Common Stock or securities convertible into or exchangeable for
Common Stock at a price per share (determined on an as-converted or as-exercised
basis if the rights, options or warrants pertain to securities convertible into
or exchangeable for shares of Common Stock) less than the Current Market Price
(determined as provided in paragraph (h) of this Section) on the date fixed for
the determination of shareholders entitled to receive such rights, options or
warrants, the Number of Shares shall be determined by multiplying the Number of
Shares purchasable immediately prior to the date so fixed by a fraction, of
which the numerator shall be the number of shares of Common Stock outstanding on
the date fixed for determining stockholders entitled to receive such rights,
options or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase, and of which the denominator shall be the number
of shares of Common Stock outstanding on the date fixed for determining
stockholders entitled to receive such rights, options or warrants plus the
number of shares which the aggregate offering price of the total number of
shares of Common Stock so offered would purchase at the Current Market Price;
provided, however, that no further adjustment to the Number of Shares shall be
made upon the subsequent issue or sale of Common Stock pursuant to such options
or warrants. For the purposes of this paragraph (b), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of Common Stock.
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The Company shall not issue any rights, options or warrants in respect of Common
Stock held in the treasury of the Company.
(c) [Intentionally Omitted.]
(d) (i) Subject to the last sentence of this paragraph (d) (i) and the
last sentence of paragraph (g) of this Section, in case the Company shall, by
dividend or otherwise, distribute to all holders of Common Stock evidences of
its indebtedness, cash or other assets (including securities, but excluding any
rights, options or warrants referred to in paragraph (b) of this Section,
excluding any dividend or distribution paid exclusively in cash out of
consolidated current or retained earnings as shown on the books of the Company
prepared in accordance with GAAP (other than any Extraordinary Cash Dividend (as
hereinafter defined)) and excluding any dividend or distribution referred to in
paragraph (a) of this Section, the Number of Shares shall be increased by
multiplying the Number of Shares issuable immediately prior to the close of
business on the date fixed for the determination of shareholders entitled to
such distribution by a fraction of which the numerator shall be the Current
Market Price (determined as provided in paragraph (h) of this Section) on such
date and the denominator shall be the Current Market Price on such date less the
fair market value (as determined by the Board of Directors, whose determination
shall be conclusive and described in a resolution of the Board of Directors) on
such date of the portion of the evidences of indebtedness, shares of capital
stock, cash and other assets to be distributed applicable to one share of Common
Stock, such increase to become effective immediately prior to the opening of
business on the day following such date; provided, that, in the event that the
amount of such dividend as so determined is equal to or greater than 100% of
such Current Market Price, in lieu of the foregoing adjustment, adequate
provision shall be made so that the holder of a Warrant shall receive a pro rata
share of such dividend based upon the maximum number of shares of Common Stock,
at the time issuable to such holder (determined without regard to whether the
Warrant is exercisable at such time). If the Board of Directors determines the
fair market value of any distribution for purposes of this paragraph (d) (i) by
reference to the actual or when-issued trading market for any securities
comprising part or all of such distribution, it must in doing so consider the
prices in such market over the same period used in computing the Current Market
Price pursuant to paragraph (h) of this Section, to the extent possible. For
purposes of this paragraph (d) (i), an "Extraordinary Cash Dividend" shall be
that portion, if any, of the aggregate amount of all cash dividends paid in any
fiscal year which exceed $25,000,000. For purposes of this paragraph (d), any
dividend or distribution that includes Common Stock, rights, options or warrants
to subscribe for or purchase Common Stock or securities convertible into or
exchangeable for Common Stock shall be deemed to be (x) a dividend or
distribution of the evidences of indebtedness, cash, assets or shares of capital
stock other than such Common Stock, such rights, options or warrants or such
convertible or exchangeable securities (making any increase in the Number of
Shares required by this paragraph (d) (i) immediately followed by (y) in the
case of such Common Stock or such rights, options or warrants, a dividend or
distribution thereof (making any further adjustment to the Number of Shares
required by paragraph (a) and (b) of this Section, except any shares of Common
Stock included in such dividend or distribution shall not be deemed "outstanding
at the close of
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business on the date fixed for such determination" within the meaning of
paragraph (a) of this Section), or (z) in the case of such convertible or
exchangeable securities, a dividend or distribution of the number of shares of
Common Stock as would then be issuable upon the exercise or exchange thereof,
whether or not the exercise or exchange of such securities is subject to any
conditions (making any further reduction in Number of Shares required by
paragraph (a) of this Section, except the shares deemed to constitute such
dividend or distribution shall not be deemed "outstanding at the close of
business on the date fixed for such determination" within the meaning of
paragraph (a) of this Section).
(ii) In case the Company shall issue Common Stock for a
consideration per share less than the Current Market Price (determined as
provided in paragraph (h) of this Section), the Number of Shares shall be
increased by multiplying the Number of Shares issuable immediately prior to the
close of business on the date on which the Company fixes the offering price of
such additional shares by a fraction of which the numerator shall be the number
of shares of Common Stock outstanding immediately after giving effect to such
issuance and the denominator of which shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus a fraction equal to the aggregate consideration received by
the Company from the issuance of such additional shares of Common Stock over the
Current Market Price on the date on which the Company fixes the offering price
of such additional shares (determined as provided in paragraph (h) of this
Section), and the increase in the Number of Shares provided for in the preceding
sentence shall not apply upon (i) the issuance of securities in transactions
described in paragraphs (a), (b), (d) (i), and d (iii), or (f) of this Section
or pursuant to the exercise, exchange or conversion of any such securities (to
the extent applicable, including the 9% Preferred Stock (as defined below) and
the New Equity (as defined below)); (ii) the issuance of Common Stock upon the
exercise or exchange of securities (including options) convertible or
exchangeable for shares of Common Stock outstanding on the date of this Warrant
Agreement, or issuable pursuant to binding agreements in effect on the date of
this Warrant Agreement as set forth on Schedule F hereto or subsequently issued
by the Company for a consideration per share equal to the Current Market Price
(determined as provided in paragraph (h) of this Section); (iii) the issuance of
Common Stock upon the exercise of options issued to the Company's directors,
officers and employees under bona fide employee benefit plans adopted by the
Board of Directors and approved by the holders of Common Stock when required by
law or otherwise where such issuances have been approved by the Board of
Directors (but only to the extent that the aggregate number of shares excluded
pursuant to this subclause (iii) and issued after the date of this Warrant
Agreement shall not exceed 3% of the Common Stock outstanding at the time of
issuance; provided, that options granted pursuant to this subclause (iii)
exercisable for no more than 2% of such outstanding Common Stock may have
exercise prices less than 50% of the price per share based on a valuation of the
Company, after the issuance of shares of New Equity for approximately $30
million, of $160,000,000); (iv) the issuance of Common Stock to shareholders of
any person that immediately or subsequently merges with or into the Company or
any subsidiary thereof in proportion to their stock holdings of such person
immediately prior to such merger, upon such merger; (v) the issuance of Common
Stock in a bona fide underwritten public offering; (vi) the issuance of Common
Stock in a bona
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fide private placement through a placement agent that is a member firm of the
National Association of Securities Dealers, Inc. (except to the extent that any
discount from the Current Market Price (determined as provided in paragraph (h)
of this Section) attributable to restrictions on transferability of the Common
Stock, as determined in good faith by the Board of Directors and described in a
resolution thereof which shall be filed with the Warrant Agent, shall exceed
20%), or issuable pursuant to a binding agreement in effect on the date of this
Warrant Agreement; (vii) the issuance of Common Stock as a dividend on any
securities outstanding on the date of this Warrant Agreement required to be made
pursuant to the certificate of designation pertaining to such securities in
effect at the time such securities were issued; (viii) the issuance of Common
Stock upon the conversion of the New Convertible Notes (as defined below); (ix)
the issuance of Common Stock upon the exercise of warrants issued, and the
Contingent Warrants that may be issued, pursuant to the Warrant Agreement, dated
as of August 15, 1997, between the Company and Harris Trust and Savings Bank, in
connection with the offering of the Company's Senior Notes and the Indenture
(collectively, the "New Warrants"); or (x) the issuance of Common Stock upon the
exercise of Warrants.
(iii) In case the Company shall issue any securities convertible
into or exchangeable for Common Stock for a consideration per share of Common
Stock (including the minimum consideration per share payable upon exercise or
exchange of any securities convertible into or exchangeable for Common Stock)
initially deliverable upon exercise or exchange of such securities less than the
Current Market Price (determined as provided in paragraph (h) of this Section),
including, but not limited to, the issuance of any equity securities of the
Company after the date of original issuance of the Warrants (the "Issue Date")
and on or prior to September 15, 1997 resulting in net proceeds to the Company
of up to $20,000,000, the Number of Shares shall be increased by multiplying the
Number of Shares issuable immediately prior to the close of business on the date
on which the Company fixes the offering price of such additional shares by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such securities plus the
maximum number of shares of Common Stock deliverable upon exercise of or in
exchange for such securities at the initial exercise or exchange rate and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such securities plus a fraction equal to
the aggregate consideration received for the issuance of such securities
(including the minimum consideration per share payable upon exercise or exchange
of any securities convertible into or exchangeable for Common Stock) over the
Current Market Price on the date on which the Company fixes the offering price
of such additional shares (determined as provided in paragraph (h) of this
Section). The increase in Number of Shares provided for in the preceding
sentence shall not apply to (i) (A) securities issued in transactions described
in paragraphs (a), (b), (d) (i) and (d) (ii) of this Section, (B) any shares of
9% Cumulative Convertible Pay-In-Kind Preferred Stock, par value $1.00 per share
(the "9% Preferred Stock"), received as a dividend on the 9% Preferred Stock or
(C) any shares of 9% Cumulative Convertible Pay-In-Kind Preferred Stock, Series
A (the "New Equity") received as a dividend thereon; (ii) convertible securities
issued to shareholders of any person that merges into the Company, or with a
Subsidiary of the Company, in proportion to their stock holdings of such person
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immediately prior to such merger, upon such merger; (iii) convertible securities
issued in a bona fide underwritten public offering; (iv) convertible securities
issued in a bona fide private placement through a placement agent that is a
member firm of the National Association of Securities Dealers, Inc. (except to
the extent that any discount from the Current Market Price (determined as
provided in paragraph (h) of this Section) attributable to restrictions on
transferability of Common Stock issuable upon exercise, as determined in good
faith by the Board of Directors and described in a resolution thereof which
shall be filed with the Warrant Agent, shall exceed 20% of the then Current
Market Price), or issuable pursuant to a binding agreement in effect on the date
of this Warrant Agreement; (v) stock options issued to the Company's directors,
officers or employees; (vi) the grant of Contingent Warrants; (vii) convertible
notes issuable to MLAM (the "New Convertible Notes") upon the exercise of an
option granted pursuant to the Consent Agreement; (viii) the grant of New
Warrants; (ix) the issuance of warrants exercisable for up to 5% of the
Company's Common Stock (on a fully diluted basis) issued in connection with an
offering of the Company's debt securities; or (x) the grant of any securities
convertible into or exchangeable for Common Stock outstanding on the date of
this Warrant Agreement or issuable pursuant to binding agreements in effect on
the date of this Warrant Agreement as set forth on Schedule F hereto.
(e) In case the Company shall, by dividend or otherwise, at any time
distribute to all holders of Common Stock cash (excluding any cash that is
distributed as part of a distribution referred to in paragraph (d) (i) of this
Section or in connection with a transaction to which Section 14 applies) in an
aggregate amount that, together with (i) the aggregate amount of any other
distributions to all holders of Common Stock made exclusively in cash within the
12 months preceding the date fixed for the determination of shareholders
entitled to such distribution and in respect of which no adjustment in the
Number of Shares pursuant to paragraph (d) (i) or this paragraph (e) has been
made previously and (ii) the aggregate of any cash plus the fair market value
(as determined by the Board of Directors, whose determination shall be
conclusive and described in a resolution of the Board of Directors) as of such
date of determination of consideration payable in respect of any tender offer by
the Company or a Subsidiary for all or any portion of the Common Stock, and any
purchase by the Company of Common Stock in the open market, consummated within
the 12 months preceding such date of-determination and in respect of which no
adjustment in the Number of Shares pursuant to paragraph (f) of this Section has
been made previously, exceeds 12.5% of the product of the Current Market Price
(determined as provided in paragraph (h) of this Section) on such date of
determination times the number of shares of Common Stock outstanding on such
date, the Number of Shares shall be increased by multiplying the Number of
Shares issuable immediately prior to the close of business on such date of
determination by a fraction of which the numerator shall be such Current Market
Price and the denominator shall be the Current Market Price (determined as
provided in paragraph (h) of this Section) on such date less the amount of cash
to be distributed at such time applicable to one share of Common Stock, such
increase to become effective immediately prior to the opening of business on the
day after such date.
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(f) In case a tender or exchange offer made by the Company or any
subsidiary for all or any portion of the Common Stock shall be consummated, or
in case the Company shall purchase Common Stock in the open market, the Number
of Shares shall be increased by multiplying the Number of Shares issuable
immediately prior to the Expiration Time by a fraction of which the numerator
shall be the sum of (A) the fair market value (determined as aforesaid) of the
aggregate consideration payable to shareholders upon consummation of such tender
or exchange offer, or upon such purchase, and (B) the product of such Current
Market Price times such number of outstanding shares at the Expiration Time
minus the number of shares accepted for payment in such tender or exchange
offer, or so purchased (the "Purchased Shares") and the denominator shall be the
product of the Current Market Price (determined as provided in paragraph (h) of
this Section) times the number of shares of Common Stock outstanding (including
any Shares of Common Stock tendered or submitted for exchange) at the Expiration
Time. For the purpose of this paragraph, "Expiration Time" means either the last
time that tenders may be made pursuant to a tender offer or exchanges may be
made pursuant to an exchange offer, or the time of an agreement to purchase
shares in the open market, as the case may be. Any increase in the Number of
Shares pursuant to this paragraph shall be made immediately following the close
of business on the last trading day used to compute Current Market Price;
provided, however, that, such increase shall be deemed to have become effective
immediately prior to the opening of business on the day following the Expiration
Time. To the extent that a holder exercises Warrants prior to the conclusion of
the period for which Current Market Price is to be calculated, any adjustment in
the number of shares of Common Stock issuable upon exercise of such Warrant
shall inure to the benefit of the holder of record of such Warrant at the close
of business on the first Trading Day following the Expiration Time. In no event
shall the Number of Shares be reduced as a result of the consummation of any of
the transactions contemplated by this paragraph (f).
(g) The reclassification of any class of Common Stock into securities
which include securities other than such class of Common Stock (other than any
reclassification upon a consolidation or merger to which Section 14 applies)
shall be deemed to involve (i) a distribution of such securities other than such
class of Common Stock to all holders of such class of Common Stock (and the
effective date of such reclassification shall be deemed to be "the date fixed
for the determination of shareholders entitled to such distribution" within the
meaning of paragraph (d) (i) of this Section), and (ii) a subdivision or
combination, as the case may be, of the number of shares of such class of Common
Stock outstanding prior to such reclassification into the number of such class
of Common Stock outstanding immediately thereafter (and the effective date of
such reclassification shall be deemed to be the day upon which such subdivision
becomes effective or the day upon which such combination becomes effective, as
the case may be, and the day upon which such subdivision or combination becomes
effective within the meaning of paragraph (a) of this Section). Rights, options
or warrants issued by the Company to all holders thereof to subscribe for or
purchase Common Stock entitling the holders thereof to subscribe for or purchase
Common Stock (either initially or under certain circumstances), which rights,
options or warrants (i) are deemed to be transferred with such Common Stock,
(ii) are not exercisable and (iii) are also issued in respect of
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<PAGE>
future issuances of Common Stock, in each case in clauses (i) through (iii)
until or upon the occurrence of a specified event or events ("Trigger Event"),
shall for purposes of this Section 15 not be deemed issued until the occurrence
of the earliest Trigger Event.
(h) For the purpose of any computation under this paragraph and
paragraphs (b), (d) and (e) of this Section, the current market price per share
of Common Stock (the "Current Market Price" per share of Common Stock of the
Company or any other security) on any date shall be deemed to be the average of
the daily Closing Prices for the 30 consecutive trading days commencing 45
trading days before the date in question. For the purpose of any computation
under paragraph (f) of this Section, the Current Market Price on any date shall
be deemed to be the average of the daily closing prices for the five consecutive
trading days commencing on the first trading day immediately following the
expiration time. Notwithstanding anything to the contrary contained in this
paragraph, (i) the "ex" date for any event (other than the issuance or
distribution requiring such computation) that requires an adjustment to the
conversion price pursuant to paragraph (a), (b), (d) or (e) above occurs on or
after the 15th trading day prior to the date in question and prior to the "ex"
date for the issuance or distribution requiring such computation, the closing
price for each trading day prior to the "ex" date for such other event shall be
adjusted by multiplying such closing price by the same fraction by which the
conversion price is so required to be adjusted as a result of such other event,
(ii) if the "ex" date for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the conversion price
pursuant to paragraph (a), (b), (d), (e) or (f) above occurs on or after the
"ex" date for the issuance or distribution requiring such computation and on or
prior to the date in question, the closing price for each trading day on and
after the "ex" date for such other event shall be adjusted by multiplying such
closing price by the reciprocal of the fraction by which the conversion price is
so required to be adjusted as a result of such other event, and (iii) if the
"ex" date for the issuance or distribution requiring such computation is on or
prior to the date in question, after taking into account any adjustment required
pursuant to clause (ii) of this proviso, the closing price for each trading day
on or after such "ex" date shall be adjusted by adding thereto the amount of any
cash and the fair market value on the date in question (as determined by the
Board of Directors in a manner consistent with any determination of such value
for the purposes of paragraph (d) or (e) of this Section, whose determination
shall be conclusive and described in a resolution of the Board of Directors) of
the evidences of indebtedness, shares of Capital Stock or assets being
distributed applicable to one share of Common Stock of the Company as of the
close of business on the day before such "ex" date. If on any date there has not
been a Public Equity Offering or if there is no closing price available for the
Common Stock of the Company on any date, the Current Market Price shall be
determined (a) in good faith by the Board of Directors of the Company and
certified in a board resolution, based on the most recently completed arms
length transaction between the Company and a person other than an Affiliate (as
defined in Rule 405 of the Securities Act of 1933, as amended) of the Company
and the closing of which occurs on such date or within such six-month period of
(b) if no arms-length transaction shall have occurred with the six-month period
preceding such date or if the current transaction is in excess of $1 million, by
an
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Independent Financial Expert appointed in the manner provided for in paragraph
(i) (i) of this Section 15.
(i) (i) If any event shall occur as to which the other provisions of
this Section 15 are not strictly applicable but the failure to make any
adjustment would have the effect of depriving holders of the benefit of all or a
portion of the exercise rights in respect of any Warrant in accordance with the
essential intent and principles of this Section 15, then, in each such case, the
Company shall appoint an Independent Financial Expert, which shall give its
opinion upon the adjustment, if any, on a basis consistent with the essential
intent and principles established in this Section 15 necessary to preserve,
without dilution, such exercise rights. Upon receipt of such opinion, the
Company will promptly mail a copy thereof to the holders and shall make the
adjustments described therein. As used herein, an "Independent Financial
Expert" is a firm (a) which does not, and whose directors, officers and
employees or affiliates do not have a direct or indirect financial interest in
the Company and (b) which, in the judgment of the Board of Directors, is
otherwise independent and qualified to perform the task for which it is to be
engaged.
(ii) The Company will not, by amendment of its articles of
incorporation or through any consolidation, merger, reorganization, transfer of
assets, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of the
Warrants, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holders thereof against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (i) will take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Class A Common Stock on the exercise of the Warrants
from time to time outstanding and (ii) will not take any action which results in
any adjustment of the Number of Shares if the total number of shares of Class A
Common Stock issuable after the action upon the exercise of all of the Warrants
would exceed the total number of shares of Class A Common Stock then authorized
by the Company's certificate of incorporation and available for the purposes of
issue upon such exercise.
(j) The Company may, but shall not be obligated to, make such increases
in the Number of Shares, in addition to those required by paragraphs (a), (b),
(d), (e), (f) and (g) of this Section, 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 shall not be taxable to the recipients or if
that is not possible, to diminish any income taxes that are otherwise payable
because of such event.
(k) No adjustment in the Number of Shares shall be required unless such
adjustment (plus any other adjustments not previously made by reason of this
paragraph (k)) would require an increase or decrease of at least 1% in the
Number of Shares; provided, however, that any adjustments which by reason of
this paragraph (k) are not
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required to be made shall be carried forward and taken into account in any
subsequent adjustment.
(l) In any case in which this Section 15 shall require that an
adjustment in the Number of Shares be made effective as of or immediately after
a record date for a specified event, the Company may elect to defer until the
occurrence of such event (i) issuing to the holder of any Warrant exercised
after such record date the shares of Common Stock and other capital stock of the
Company, if any, issuable upon such exercise over and above the shares of Common
Stock and other capital stock of the Company, if any, issuable upon such
exercise on the basis of the Number of Shares prior to such adjustment and (ii)
paying to such holder any amount in cash in lieu of a fractional share pursuant
to Section 17 hereof; provided, however, that the Company shall deliver to such
holder a due bill or other appropriate instrument evidencing such holder's right
to receive such additional shares of Common Stock, other capital stock and cash
upon the occurrence of the event requiring such adjustment.
(m) (i) No adjustment need be made for a transaction referred to in
subsections (a), (b), (e) or (f) of this Section 15 if holders are to
participate in the transaction on a basis and with notice that the Board of
Directors determines to be fair and appropriate in light of the basis and notice
on which holders of shares of Common Stock of the Company participate in the
transaction.
(ii) No adjustment need be made for (x) a transaction referred to in
subsections (b), (d) (ii) or (d) (iii) of this Section 15 if the below market
portion of such issuances, taken together with the below market portion of all
other below market issuances and with the above market portion of all above
market tender or exchange offers described in clause (y) of this paragraph made
on and after the date of this Warrant Agreement, is less than 2.0% of the
product of the Current Market Price and the number of outstanding shares ("Total
Capitalization") of the Company (determined by reference to the sum of the
percentages of Total Capitalization of the Company attributable to each such
transaction on the date thereof) and (y) a transaction referred to in subsection
(f) of this Section 15 if the above market portion of such tender or exchange
offers, taken together with the above market portion of all other above market
tender or exchange offers and with the below market portion of all below market
issuances described in clause (x) of this paragraph made on or after the date of
this Warrant Agreement, is less than 2.0% of the Total Capitalization of the
Company (determined by reference to the sum of the percentages of Total
Capitalization of the Company attributable to each such transaction on the date
thereof).
(iii) No adjustment need be made for a change in the par value, or
from par value to no par value, or from no par value to par value, of the Common
Stock.
SECTION 16. [Intentionally Omitted.]
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SECTION 17. Fractional Interests. The Company shall not be required to
issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be presented for exercise in full at the same time by the same
holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 17,
be issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall notify the Warrant Agent in writing of the amount to be paid in
lieu of the fraction of a Warrant Share and concurrently pay or provide to the
Warrant Agent for payment to the Warrant holder an amount in cash equal to the
product of (i) such fraction of a Warrant Share multiplied by (ii) the
difference of the Current Market Price of Class A Common Stock on the trading
day immediately preceding the date the Warrant is presented for exercise over
the Exercise Price, computed to the nearest whole cent.
SECTION 18. Notices of Adjustments.
(a) Whenever the Number of Shares is adjusted as herein provided:
(i) The Company shall compute the adjusted Number of Shares in
accordance with Section 15 and shall prepare a certificate signed by the
Treasurer or Chief Financial Officer of the Company setting forth the adjusted
Number of Shares and showing in reasonable detail the facts upon which such
adjustment is based, and such certificate shall within 15 days thereafter be
filed (with a copy to the Warrant Agent) at each office or agency maintained for
the purpose of exercise of Warrants pursuant to this Agreement; and
(ii) a notice stating that the Number of Shares has been adjusted
and setting forth the adjusted Number of Shares shall be prepared within 15 days
thereafter, and as soon as practicable after it is prepared, such notice shall
be furnished by the Company to the Warrant Agent and mailed by the Company at
its expense to all registered holders at their last addresses as they shall
appear in the Warrant register.
(b) In case:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable (i) otherwise than exclusively in cash
or (ii) exclusively in cash in an amount that would require an adjustment in the
Number of Shares pursuant to paragraph (e) of Section 15; or
(ii) the Company shall authorize the granting to the holders of its
shares of Common Stock of rights, options or warrants to subscribe for or
purchase any shares of Capital Shares of any class or of any other rights
(excluding shares of Capital Shares or options for Capital Shares issued
pursuant to a benefit plan for employees, officers or directors of the Company);
or
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(iii) of any reclassification of the shares of any class of Common
Stock of the Company (other than a subdivision or combination of the outstanding
shares of such class of Common Stock), or of any consolidation, merger or share
exchange to which the Company is a party and for which approval of any
shareholders of the Company is required, or of the sale or transfer of all or
substantially all of the assets of the Company; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(v) the Company or any subsidiary shall commence a tender or
exchange offer for all or a portion of the outstanding shares of Common Stock
(or shall amend any such tender or exchange offer to change the maximum number
of shares being sought or the amount or type of consideration being offered
(including by exchange) therefor); then the Company shall cause to be filed at
each office or agency maintained pursuant to this Agreement, and shall cause to
be mailed to all registered holders at their last addresses as they shall appear
in the Warrant register, at least 21 days (or 11 days in any case specified in
clause (a), (b) or (e) above) prior to the applicable record, effective or
expiration date hereinafter specified, a notice stating (x) the date on which a
record is to be taken for the purpose of such dividend, distribution or granting
of rights, options or warrants, or, if a record is not to be taken, the date as
of which the holders of its shares of Common Stock of record who will be
entitled to such dividend, distribution, rights, options or warrants are to be
determined, (y) the date on which such reclassification, consolidation, merger,
share exchange, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of its shares of Common Stock of record shall be entitled to exchange
their shares of Common Stock, for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, share exchange, sale,
transfer, dissolution, liquidation or winding up, or (z) the date on which such
tender or exchange offer (other than an exchange offer contemplated by clause
(y) above) commenced, the date on which such tender or exchange offer is
scheduled to expire unless extended, the consideration offered and the other
material terms thereof (or the material terms of any amendment thereto). Neither
the failure to give any such notice nor any defect therein shall affect the
legality or validity of any action described in clauses (a) through (e) of this
Section 18.
SECTION 19. Warrant Agent. The Warrant Agent undertakes the duties and
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the holders of Warrants, by their acceptance
thereof, shall be bound.
(a) The statements contained herein and in the Warrant Certificates shall
be taken as statements of the Company. The Warrant Agent assumes no responsibil-
ity for the correctness of any of the same except such as describe the Warrant
Agent or action taken or to be taken by it. The Warrant Agent assumes no
responsibility with respect to the distribution of the Warrant Certificates
except as herein otherwise provided.
20
<PAGE>
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrant Certificates to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel satisfactory
to it (who may be counsel for the Company) and the Warrant Agent shall incur no
liability or responsibility to the Company or to any holder of any Warrant
Certificate in respect of any action taken, suffered or omitted by it here under
in good faith and in accordance with the opinion or the advice of such counsel.
(d) The Warrant Agent shall incur no liability or responsibility to the
Company or to any holder of any Warrant Certificate for any action taken in
reliance on any Warrant Certificate, certificate of shares, notice, resolution,
waiver, consent, order, certificate, or other paper, document or instrument
believed by it to be genuine and to have been signed, sent or presented by the
proper party or parties. The Warrant Agent shall not be bound by any notice or
demand, or any waiver, modification, termination or revision of this Agreement
or any of the terms hereof, unless evidenced by a writing between the Company
and the Warrant Agent.
(e) The Company agrees to pay to the Warrant Agent such reasonable
compensation from time to time as agreed between the Company and the Warrant
Agent for all services rendered by the Warrant Agent hereunder and in connection
with the execution of this Agreement, to reimburse the Warrant Agent for all
expenses, taxes (including withholding taxes and the reasonable fees and
expenses of its counsel and agents) and governmental charges and other charges
of any kind and nature incurred by the Warrant Agent in the execution, delivery
and performance of its responsibilities under this Agreement and to indemnify
the Warrant Agent and save harmless against any and all losses, liabilities, or
expenses, including judgments, costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution, delivery and performance of its
responsibilities under this Agreement except as a result of its negligence,
willful misconduct or bad faith. The provisions of this Section 19(e) shall
survive termination of this Agreement and the resignation or removal of the
Warrant Agent.
(f) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to involve
expense unless the Company or one or more registered holders of Warrant
Certificates shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as it may
consider proper, whether with or without any such security or indemnity. All
rights of action under this Agreement or under any of the Warrants may be
enforced by the Warrant Agent without the possession of any of the Warrant
Certificates or the production thereof at any trial or other proceeding relative
thereto, and any such action, suit or proceeding instituted by the Warrant Agent
shall be brought in its name as Warrant Agent and any recovery of judgment shall
be for the ratable benefit of the registered holders of the Warrants, as their
respective rights or interests may appear.
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(g) Except as required by law, the Warrant Agent, and any stockholder,
director, officer or employee of the Warrant Agent, may buy, sell or deal in any
of the Warrants or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be interested, or
contract with or lend money to the Company or otherwise act as fully and freely
as though it were not Warrant Agent under this Agreement. Nothing herein shall
preclude the Warrant Agent from acting in any other capacity for the Company or
for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as agent for the
Company, and its duties shall be determined solely by the provisions hereof. The
Warrant Agent shall not be liable for anything which it may do or refrain from
doing in connection with this Agreement except for its own negligence or bad
faith.
(i) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of any Warrant Certificate to make or cause to be
made any adjustment of the Number of Shares or other securities or property
deliverable as provided in this Agreement, or to determine whether any facts
exist which may require any of such adjustments, or with respect to the nature
or extent of any such adjustments, when made, or with respect to the method
employed in making the same. The Warrant Agent shall not be accountable with
respect to the validity or value or the kind or amount of any Warrant Shares or
of any securities or property which may at any time be issued or delivered upon
the exercise of any Warrant or with respect to whether any such Warrant Shares
or other securities will when issued be validly issued and fully paid and
nonassessable, and makes no representation with respect thereto.
SECTION 20. Merger, Consolidation or Change of Name of Warrant Agent.
Any corporation into which the Warrant Agent may be merged or with which it may
be consolidated, or any corporation resulting from any merger or consolidation
to which the Warrant Agent shall be a party, or any corporation succeeding to
the business of the Warrant Agent, shall be the successor to the Warrant Agent
hereunder without the execution or filing of any paper or any further act on the
part of any of the parties hereto; provided that such corporation would be
eligible for appointment as a successor warrant agent under the provisions of
Section 21 hereof. To the extent practicable, the Warrant Agent shall provide
prior written notice to the Company of any such merger, consolidation,
succession or similar change with respect to the Warrant Agent; provided,
however, that the failure to deliver such notice will not affect the rights of
any of the parties hereto. In case at the time such successor to the Warrant
Agent shall succeed to the agency created by this Agreement, and in case at that
time any of the Warrant Certificates shall have been countersigned but not
delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent; and in case at that time any of
the Warrant Certificates shall not have been countersigned, any successor to the
Warrant Agent may countersign such Warrant Certificates either in the name of
the predecessor Warrant Agent or in the name of the successor to the Warrant
Agent; and in all such cases such Warrant Certificates shall have the full force
and effect provided in the Warrant Certificates and in this Agreement.
22
<PAGE>
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrant Certificates shall have been countersigned but not
delivered, the Warrant Agent whose name has been changed may adopt the
countersignature under its prior name, and in case at that time any of the
Warrant Certificates shall not have been countersigned, the Warrant Agent may
countersign such Warrant Certificates either in its prior name or in its changed
name, and in all such cases such Warrant Certificates shall have the full force
and effect provided in the Warrant Certificates and in this Agreement.
SECTION 21. Change of Warrant Agent. If the Warrant Agent shall become
incapable of acting as Warrant Agent or shall resign as provided below, the
Company shall appoint a successor to such Warrant Agent. If the Company shall
fail to make such appointment within a period of 30 days after it has been
notified in writing of such incapacity by the Warrant Agent or by the registered
holders of a majority of Warrant Certificates, then the registered holder of any
Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a successor to the Warrant Agent. Pending appointment of a
successor to such Warrant Agent, either by the Company or by such a court, the
duties of the Warrant Agent shall be carried out by the Company. The holders of
a majority of the unexercised Warrants shall be entitled at any time to remove
the Warrant Agent and appoint a successor to such Warrant Agent. Such successor
to the Warrant Agent need not be approved by the Company or the former Warrant
Agent. After appointment the successor to the Warrant Agent shall be vested with
the same powers, rights, duties and responsibilities as if it had been
originally named as Warrant Agent without further act or deed; but the former
Warrant Agent shall deliver and transfer to the successor to the Warrant Agent
any property at the time held by it hereunder and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Failure to
give any notice provided for in Section 21, however, or any defect therein,
shall not affect the legality or validity of the appointment of a successor to
the Warrant Agent.
The Warrant Agent may resign at any time and be discharged from the
obligations hereby created by so notifying the Company in writing at least 30
days in advance of the proposed effective date of its resignation. If no
successor Warrant Agent accepts the engagement hereunder by such time, the
Company shall act as Warrant Agent.
SECTION 22. Notices to the Company and Warrant Agent. Any notice or
demand authorized by this Agreement to be given or made by the Warrant Agent or
by the registered holder of any Warrant Certificate to or on the Company shall
be sufficiently given or made when and if deposited in the mail, first class or
registered, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent), as follows:
USN Communications, Inc.
10 Riverside Plaza, Suite 401
Chicago, IL 60606-3709
Attention: General Counsel
23
<PAGE>
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive, Suite 2300
Chicago, IL 60606
Attention: Gary P. Cullen
Any notice pursuant to this Agreement to be given by the Company or by
the registered holder(s) of any Warrant Certificate to the Warrant Agent shall
be sufficiently given when and if deposited in the mail, first-class or
registered, postage prepaid, addressed (until another address is filed in
writing by the Warrant Agent with the Company) to the Warrant Agent as follows:
Harris Trust and Savings Bank
311 West Monroe
Chicago, Illinois 60603
Attention: Indenture Trust Division
Notice may also be given by facsimile transmission (effective when
receipt is acknowledged) (effective at the time of delivery) or by overnight
delivery service (effective the next business day).
SECTION 23. Supplements and Amendments. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement without the
consent of any holders of Warrant Certificates in order to cure any ambiguity or
to correct or supplement any provision contained herein which may be defective
or inconsistent with any other provision herein, or to make any other provisions
in regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not in any way
materially adversely affect the interests of the holders of Warrant
Certificates. Any amendment or supplement to this Agreement that has a material
adverse effect on the interests of holders shall require the written consent of
registered holders of a majority of the then outstanding Warrants. The consent
of each holder of a Warrant affected shall be required for any amendment
pursuant to which the Exercise Price would be increased or the Number of Shares
purchasable upon exercise of Warrants would be decreased (other than in
accordance with Sections 15 or 17 hereof). In executing any amendment or
supplement, the Warrant Agent shall be entitled to receive an opinion of counsel
to the effect that such amendment or supplement is authorized and permitted by
this Agreement.
SECTION 24. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
SECTION 25. Termination. This Agreement shall terminate at 5:00 p.m.,
New York, New York time on August 15, 2004. Notwithstanding the foregoing, this
Agreement will terminate on such earlier date on which all outstanding Warrants
have
24
<PAGE>
been exercised. The provisions of Sections 19 and 27 hereof shall survive
such termination.
SECTION 26. Governing Law; Jurisdiction. This Agreement and each
Warrant Certificate shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and to be performed
in the State of New York. The Company irrevocably consents to the jurisdiction
of any United States or State Court located in the State of New York in any suit
or proceeding based on or arising under this Agreement or the Warrant
Certificates and irrevocably agrees that all claims in respect of such suit or
proceeding may be determined in any such court. The Company irrevocably waives
the defense of an inconvenient forum to the maintenance of such suit or
proceeding. The Company hereby agrees to designate and appoint Corporation
Service Company, 500 Central Avenue, Albany, New York 12210 as an agent upon
whom process may be served in any suit or proceeding based on or arising under
this Agreement. The Company further agrees that service of process upon the
Company, or upon an agent appointed pursuant to the preceding sentence
accompanied with written notice of said service to the Company, as the case may
be, mailed by first class mail shall be deemed in every respect effective
service of process upon the Company in any such suit or proceeding. Nothing
herein shall affect the Warrant Agent's or any Warrant holder's right to serve
process in any other manner permitted by law. The Company agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
SECTION 27. Benefits of This Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrant Certificates any legal
or equitable right, remedy or claim under this Agreement; but this Agreement
shall be for the sole and exclusive benefit of the Company, the Warrant Agent
and the registered holders of the Warrant Certificates.
SECTION 28. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
SECTION 29. Further Assurances. From time to time on and after the date
hereof, the Company shall deliver or cause to be delivered to the Warrant Agent
such further documents and instruments and shall do and cause to be done such
further acts as the Warrant Agent shall reasonably request (it being understood
that the Warrant Agent shall have no obligation to make such request) to carry
out more effectively the provisions and purposes of this Agreement, to evidence
compliance herewith or to assure itself that it is protected hereunder.
25
<PAGE>
IN WITNESS WHEREOF, the parties here to have caused this Agreement to be
duly executed, as of the day and year first above written.
USN COMMUNICATIONS, INC.
By:
---------------------------
Name:
Title:
HARRIS TRUST AND SAVINGS
BANK, as Warrant Agent
By:
---------------------------
Name:
Title:
<PAGE>
EXHIBIT A
Form of Warrant Certificate
Face
No. _____
Warrant Certificate
USN COMMUNICATIONS, INC.
This Warrant Certificate certifies that ___________, or its registered
assigns, is the registered holder of __________ warrants expiring August 15,
2004 (the "Warrants") to purchase ______ shares of Class A Common Stock, par
value $.01 per share (the "Class A Common Stock"), of USN Communications, Inc.
("the Company"). Each Warrant entitles the holder upon exercise to receive from
the Company, at any time on or after 9:00 a.m., New York, New York time on or
after the occurrence of an Exercise Event (as defined in the Warrant Agreement,
dated as of August 15, 1997 (the "Warrant Agreement"), by and between USN
Communications, Inc. and Harris Trust and Savings Bank) and prior to the close
of business on a date seven years following the date of the Warrant Agreement,
one (1) fully paid and nonassessable share ("Number of Shares") of Class A
Common Stock (each a "Warrant Share") at the initial exercise price (the
"Exercise Price") of $.01 per share payable in the form of cash or certified
check, official bank check or bank cashier's check payable to the order of the
Company, upon surrender of this Warrant Certificate and payment of the aggregate
Exercise Price at the office or agency of the Warrant Agent, but only subject to
the conditions set forth herein and in the Warrant Agreement referred to herein.
The number of Warrant Shares issuable upon exercise of the Warrants is subject
to adjustment upon the occurrence of certain events set forth in the Warrant
Agreement. All capitalized terms not defined herein shall have the meaning
assigned to such terms in the Warrant Agreement.
No Warrant may be exercised after 5:00 p.m., New York, New York time on
August 15, 2004 and to the extent not exercised by such time such Warrants shall
become void.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent, as such term is used in the Warrant Agreement.
This Warrant Certificate shall be governed and construed in accordance
with the internal laws of the State of New York.
27
<PAGE>
IN WITNESS WHEREOF, USN Communications, Inc. has caused this Warrant
Certificate to be signed by its Chief Executive Officer and by its Secretary,
and has caused a facsimile its corporate seal to be affixed hereunto or
imprinted hereon.
Dated:
USN COMMUNICATIONS, INC.
By:
---------------------------
Chief Executive Officer
By:
---------------------------
Secretary
(seal)
Countersigned:
HARRIS TRUST AND SAVINGS BANK,
as Warrant Agent
By:
---------------------------
Authorized Signatory
28
<PAGE>
Form of Warrant Certificate
Reverse
THE WARRANTS REPRESENTED HEREBY AND, AS OF THE DATE THIS WARRANT
CERTIFICATE WAS ORIGINALLY ISSUED, THE SHARES OF CLASS A COMMON STOCK, $.01
PAR VALUE PER SHARE (THE "CLASS A COMMON STOCK") PURCHASABLE UPON THEIR
EXERCISE (THE "WARRANT SHARES" AND, TOGETHER WITH THE WARRANTS, THE
"SECURITY"), HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY, BY ITS
ACCEPTANCE HEREOF, (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), (2)
AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH
SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT
OR ANY SUCCESSOR PROVISIONS THEREUNDER) AFTER THE LATER OF THE ORIGINAL
ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY
ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS
SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF
ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION
TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT
(A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM
NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A OR
(D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH
PERSON TO WHOM THIS SECURITY IS TRANS-
29
<PAGE>
FERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND
WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION
TERMINATION DATE.
By accepting a Warrant Certificate bearing the legend above, each holder shall
be bound by all of the terms and provisions of the Warrant Agreement (a copy of
which is available on request to the Company or the Warrant Agent) as fully and
effectively as if such holder had signed the same.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring August 15, 2004, each entitling the holder
upon exercise to receive one (1) share of Class A Common Stock of the Company,
and are issued pursuant to the Warrant Agreement, duly executed and delivered by
the Company to the Warrant Agent, which Warrant Agreement is hereby incorporated
by reference in and made a part of this instrument and is hereby referred to for
a description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Warrant Agent, the Company and the holders (the
words "holders" or "holder" meaning the registered holders or registered holder)
of the Warrants.
Warrants may be exercised at any time on or after 9:00 a.m., New York,
New York time on or after the occurrence of an Exercise Event (as defined in the
Warrant Agreement) and prior to the close of business on August 15, 2004. The
holder of Warrants evidenced by this Warrant Certificate may exercise them by
surrendering this Warrant Certificate, with the form of election to purchase set
forth hereon properly completed and executed, together with payment of the
Exercise Price in the form of cash or certified or official bank check or
official bank cashier's check payable to the order of the Company, at the office
of the Warrant Agent. In the event that upon any exercise of Warrants evidenced
hereby the number of Warrants exercised shall be less than the total number of
Warrants evidenced hereby, there shall be issued to the holder hereof or his
assignee a new Warrant Certificate evidencing the number of Warrants not
exercised.
The Warrant Agreement provides that upon the occurrence of certain events
the Number of Shares set forth on the face hereof may, subject to certain
conditions, be adjusted. No fractional shares of Class A Common Stock will be
issued upon the exercise of any Warrant, but the Company will pay the cash value
thereof determined as provided in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Warrant Agent
by the registered holder thereof in person or by a legal representative or
attorney duly authorized in writing, may be exchanged, in the manner and subject
to the limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
30
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Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Warrant Agent a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder(s) thereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, of any distribution to the
holder(s) hereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.
31
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Form of Election to Purchase
(To Be Executed Upon Exercise Of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive _______ shares of Class A
Common Stock and herewith tenders payment for such shares to the order of USN
Communications, Inc. in the amount of $____ in accordance with the terms hereof.
The undersigned requests that a certificate for such shares be registered
in the name of _______________________, whose address is _______________________
________________________ and that such shares be delivered to _________________,
whose address is _______________.
If said number of shares is less than all of the shares of Common Stock
purchasable hereunder, the undersigned requests that a new Warrant Certificate
representing the remaining balance of such shares be registered in the name of
__________________, whose address is _______________ and that such Warrant
Certificate be delivered to _________________, whose address is
__________________.
Date: _____________
Your Signature:___________________
(Sign exactly as your name appears on the face of this Warrant)
Signature Guarantee:
FORM OF TRANSFER NOTICE
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
___________________________
___________________________
Please print or typewrite name and address including zip code of assignee
__________________________________________________________
the within Warrant Certificate and all rights thereunder, hereby irrevocably
constituting and appointing
___________________________
attorney to transfer the Warrants evidenced by said Warrant Certificate (the
"Warrants") on the books of the Company with full power of substitution in the
premises.
In connection with any transfer of the Warrants occurring prior to the
date which is the earlier of (i) the date of an effective Registration or (ii)
two years after the
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<PAGE>
later of the original issuance of the Warrants or the last date on which the
Warrants were held by an affiliate of the Company, the undersigned confirms,
that without utilizing any general solicitation or general advertising:
Check One
[_] (a) the Warrants are being transferred in compliance with the exemption
from registration under the Securities Act of 1933, as amended,
provided by Rule 144A thereunder.
or
[_] (b) the Warrants are being transferred other than in accordance with (a)
above and documents are being furnished which comply with the
conditions of transfer set forth in this Warrant Certificate and the
Warrant Agreement.
If none of the foregoing boxes is checked, the Warrant Agent shall not be
obligated to register the Warrants in the name of any Person other than the
holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 7 (c) of the Warrant Agreement
shall have been satisfied.
Date: NOTICE: The signature to this assignment must correspond with
the name as written upon the face of the within-
mentioned instrument in every particular, without
alteration or any change whatsoever.
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Warrant for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Dated:
NOTICE: To be executed by an executive officer
33
<PAGE>
EXHIBIT B
FORM OF WARRANT SHARES LEGEND
THE SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE (THE
"SECURITY"), HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS.
NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF
THIS SECURITY, BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR
SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT
OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE
DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH
THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR
ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE
REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER,
SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY
SUBSIDIARY THEREOF, (B) PURSUANT TO REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES
ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY
BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT
PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL
BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH
PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER
THE RESALE RESTRICTION TERMINATION DATE.
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<PAGE>
EXHIBIT 10.39
------------------------------
REGISTRATION RIGHTS AGREEMENT
Dated As of August 15, 1997
by and among
USN COMMUNICATIONS, INC.
and
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
and
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
as Initial Purchasers
------------------------------
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of August 15, 1997 by among USN COMMUNICATIONS, INC., a Delaware
corporation (the "Company"), and MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED ("Merrill Lynch") and DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION ("DLJ" and, together with Merrill Lynch, the "Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement, dated as of
August 13, 1997, by and among the Company and the Initial Purchasers (the
"Purchase Agreement"), which provides for, among other things, the sale by the
Company to the Initial Purchasers of 152,725 Units (the "Units"), each Unit
consisting of $1,000 principal amount at Stated Maturity of a 14 5/8% Senior
Discount Note due 2004 (each, a "Note" and collectively, the "Notes") and ten
warrants (each, a "Warrant" and collectively, the "Warrants"), each Warrant
entitling the holder to purchase 0.134484 shares of Class A Common Stock, $.01
par value per share (the "Class A Common Stock"), of the Company. In order to
induce the Initial Purchasers to enter into the Purchase Agreement, the Company
has agreed to provide to the Initial Purchasers and their direct and indirect
transferees the registration rights set forth in this Agreement. The execution
of this Agreement is a condition to the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the following meanings:
"Advice" shall have the meaning set forth in Section 6(c) hereof.
"Business Day" shall mean any day except a Saturday, Sunday or other
day in The City of New York, or in the city of the corporate trust office of the
Trustee, on which banks are authorized to close.
"Broker-Dealer" shall mean any broker or dealer registered under the
Exchange Act.
"Broker-Dealer Transfer Restricted Notes" shall mean Exchange Notes
that are acquired by a Broker-Dealer in the Exchange Offer in substitution for
notes that such Broker-Dealer acquired for its own account as a result of
market-making activities or other trading activities (other than Notes acquired
directly from the Company or any of its affiliates).
<PAGE>
"Class A Common Stock" shall mean the Class A Common Stock, $.01 par
value per share, of the Company.
"Class B Common Stock" shall mean the Class B Common Stock, $.01 par
value per share, of the Company.
"Closing Time" shall mean August 18, 1997.
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall mean, together, the Class A Common Stock and the
Class B Common Stock.
"Company" shall have the meaning set forth in the preamble to this
Agreement and also includes the Company's successors and permitted assigns.
"Consummate" an Exchange Offer shall be deemed "Consummated" for
purposes of this Agreement upon the occurrence of (a) the filing and
effectiveness under the Securities Act of the Exchange Offer Registration
Statement relating to the Exchange Notes to be issued in the Exchange Offer, (b)
the maintenance of such Exchange Offer Registration Statement continuously
effective and the keeping of the Exchange Offer open for a period not less than
the minimum period required pursuant to Section 3(b) hereof and (c) the delivery
by the Company to the Registrar under the Indenture of Exchange Notes in the
same aggregate principal amount upon maturity as the aggregate principal amount
upon maturity, if any, of Notes properly tendered by Holders thereof pursuant to
the Exchange Offer.
"Depositary" shall mean The Depository Trust Company, or any other
depositary appointed by the Company; provided, however, that such Depositary
must have an address in the Borough of Manhattan, in The City of New York.
"DLJ" shall have the meaning set forth in the preamble to this
Agreement.
"Effectiveness Target Date" shall have the meaning set forth in
Section 5 and as specified in Sections 3 and 4 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.
"Exchange Notes" shall mean the Company's 14 5/8% Senior Discount
Notes due 2004, to be issued pursuant to the Indenture in the Exchange Offer.
"Exchange Offer" shall mean the registration by the Company under the
Securities Act of the Exchange Notes pursuant to the Exchange Offer Registration
Statement pursuant to which the Company shall offer the Holders of all
outstanding Transfer Restricted Notes
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<PAGE>
the opportunity to exchange all such outstanding Transfer Restricted Notes,
being the original evidence of indebtedness, for Exchange Notes, as evidence of
the same indebtedness in an aggregate principal amount equal to the aggregate
principal amount of the Transfer Restricted Notes properly tendered in such
Exchange Offer by such Holders.
"Exchange Offer Registration Statement" shall mean the Registration
Statement relating to the Exchange Offer and the registration of Exchange Notes
for sale from time to time by the Market Makers pursuant to Section 4(h) hereof,
including the related Prospectus.
"Exempt Resales" shall mean the transactions in which the Initial
Purchasers propose to sell the Securities (i) to certain persons whom an Initial
Purchaser reasonably believes to be a "qualified institutional buyers," as such
term is defined in Rule 144A under the Securities Act and (ii) to non-U.S.
persons outside the United States to whom an Initial Purchaser reasonably
believes offers and sales of the Securities may be made in reliance upon
Regulation S under the Securities Act.
"Holders" shall have the meaning set forth in Section 2 hereof.
"Indemnified Holder" shall have the meaning set forth in Section 8(a)
hereof.
"Indenture" shall mean the Indenture, dated as of the Closing Time,
between the Company and the Trustee, pursuant to which the Notes and the
Exchange Notes are to be issued, as such Indenture is amended or supplemented
from time to time in accordance with the terms thereof.
"Initial Purchasers" shall have the meaning set forth in the preamble
to this Agreement.
"Interest Payment Date" shall have the meaning set forth in the
Indenture and the Notes.
"IPO Effective Date" shall have the meaning set forth in Section 4(c)
hereof.
"Managing Underwriter(s)" shall have the meaning set forth in Section
6(b) hereof.
"Market Makers" shall mean each of Merrill Lynch and DLJ.
"Merrill Lynch" shall have the meaning set forth in the preamble to
this Agreement.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Note Registration Default" shall have the meaning set forth in
Section 5(a) hereof.
"Note Shelf Registration Statement" shall have the meaning set forth
in Section 4(a) hereof.
3
<PAGE>
"Notes" shall have the meaning set forth in the preamble to this
Agreement.
"Offering Memorandum" shall mean the Offering Memorandum, dated August
13, 1997, and all amendments and supplements thereto, relating to the Units,
Notes and Warrants and prepared by the Company pursuant to the Purchase
Agreement.
"Person" shall mean an individual, partnership, corporation, limited
liability company, trust, unincorporated organization or a government or agency
or political subdivision thereof.
"Prospectus" shall mean the prospectus included in a Registration
Statement at the time such Registration Statement is declared effective, as
amended or supplemented by any prospectus supplement, term sheet, abbreviated
term sheet, supplement with pricing related information and by all other
amendments thereto, including post-effective amendments, and all material
incorporated by reference into such Prospectus.
"Public Equity Offering" means an underwritten public offering of
Capital Stock (other than Disqualified Stock (as defined in the Indenture)) of
the Company pursuant to an effective registration statement filed under the
Securities Act.
"Purchase Agreement" shall have the meaning set forth in the preamble
to this Agreement.
"Record Holder" shall mean, with respect to any Special Interest
Payment Date for the Notes, each Person who is a Holder of Notes on the record
date with respect to the Interest Payment Date on which such Special Interest
Payment Date shall occur.
"Registration Statement" shall mean any registration statement of the
Company relating to (a) an offering of Exchange Notes pursuant to an Exchange
Offer or the sale of Exchange Notes from time to time by the Market Makers or
(b) the registration of Transfer Restricted Securities or Securities pursuant to
a Shelf Registration Statement, in any case, (i) which is filed pursuant to the
provisions of this Agreement and (ii) including the Prospectus included therein,
all amendments and supplements thereto (including post-effective amendments) and
all exhibits and materials incorporated by reference therein.
"Restricted Broker-Dealer" shall mean any Broker-Dealer that holds
Broker-Dealer Transfer Restricted Notes.
"Securities" shall mean the Units, the Notes, the Warrants and the
Warrant Shares.
"Securities Act" shall meant the Securities Act of 1933, as amended,
and the rules and regulations of the Commission promulgated thereunder.
"Selling Holders" shall have the meaning set forth in Section 6(b)
hereof.
4
<PAGE>
"Shelf Registration Statement" shall mean the Note Shelf Registration
Statement, the Warrant Shelf Registration Statement and the Warrant Shares Shelf
Registration Statement, as applicable.
"Special Interest Payment Date" shall mean, with respect to the Notes,
each Interest Payment Date for such Notes, if applicable.
"TIA" shall mean the Trust Indenture Act of 1939 (15 U.S.C. Section
77aaa-77bbbb) as in effect at the Closing Time.
"Transfer Restricted Notes" shall mean each Note, until the earliest
to occur of (a) the date on which such Note is replaced in the Exchange Offer,
(b) the date on which such Note has been effectively registered under the
Securities Act and disposed of in accordance with the Note Shelf Registration
Statement and (c) the date on which such Note is distributed to the public
pursuant to Rule 144 under the Securities Act.
"Transfer Restricted Securities" shall mean, together, Transfer
Restricted Notes, Transfer Restricted Warrants and Transfer Restricted Warrant
Shares.
"Transfer Restricted Warrant Share" shall mean each outstanding
Warrant Share, until the earlier to occur of (a) the date on which such Warrant
Share has been effectively registered under the Securities Act and disposed of
in accordance with a Warrant Shares Shelf Registration Statement and (b) the
date on which such Warrant Share is distributed to the public pursuant to Rule
144 under the Securities Act.
"Transfer Restricted Warrants" shall mean each outstanding Warrant,
until the earlier to occur of (a) the date on which such Warrant has been
effectively registered under the Securities Act and disposed of in accordance
with a Warrant Shelf Registration Statement and (b) the date on which such
Warrant is distributed to the public pursuant to Rule 144 under the Securities
Act.
"Trustee" shall mean Harris Trust and Savings Bank.
"Underwriter" shall mean any underwriter, placement agent, selling
broker, dealer manager, qualified independent underwriter or similar securities
industry professional.
"Underwritten Offering" shall mean an offering in which securities of
the Company are sold by the applicable Holders to an underwriter for reoffering
to the public.
"Units" shall have the meaning set forth in the preamble to this
Agreement.
"Warrant Agent" shall mean Harris Trust and Savings Bank.
5
<PAGE>
"Warrant Agreement" shall mean the Warrant Agreement, dated the date
hereof, by and between the Company and the Warrant Agent pursuant to which the
Warrants are or may be issued from time to time as such Warrant Agreement is
amended or supplemented from time to time in accordance with the terms thereof.
"Warrant Shares" shall mean the shares of Class A Common Stock
issuable upon the exercise of the Warrants.
"Warrant Shelf Registration Statement" shall have the meaning set
forth in Section 4(b) hereof.
"Warrant Shares Shelf Registration Statement" shall have the meaning
set forth in Section 4(c) hereof.
SECTION 2. HOLDERS
A Person is deemed to be a holder of Transfer Restricted Securities
(each, a "Holder") whenever such Person owns of record Transfer Restricted
Securities.
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permitted by applicable
federal law (after the procedures set forth in Section 6(a)(i) below have been
complied with), the Company shall (i) cause to be filed with the Commission
within 60 days after the date of original issuance of the Notes, the Exchange
Offer Registration Statement, (ii) use its best efforts to cause such Exchange
Offer Registration Statement to become effective under the Securities Act within
120 days after the date of original issuance of the Notes, (iii) in connection
with the foregoing, cause all necessary filings, if any, in connection with the
registration and qualification of the Exchange Notes to be made under the
Securities Act and the Blue Sky laws of such jurisdictions as are necessary to
permit Consummation of the Exchange Offer (provided, however, that the Company
shall not be obligated to file in any jurisdiction in which they are not so
qualified or take any action which would subject them to general service of
process or taxation in any jurisdiction where it is not so subject), and (iv)
upon the effectiveness of such Exchange Offer Registration Statement, commence
and Consummate the Exchange Offer within 180 days (or longer if required by
applicable law) after the date of original issuance of the Notes. Any Notes not
tendered will remain outstanding and continue to accrete interest or accrue
interest, as the case may be, but will not retain any rights under this
Agreement. The Exchange Offer shall be on the appropriate form permitting
registration of the Exchange Notes to be offered in substitution for the Notes
that are Transfer Restricted Notes and to permit sales of Broker-Dealer Transfer
Restricted Notes by Restricted Broker-Dealers as contemplated by Section 3(c)
below and the sale of Exchange Notes from time to time by the Market Makers as
contemplated by Section 12 hereof.
(b) The Company shall cause the Exchange Offer to comply with all
applicable federal and state securities laws. No securities other than the
Transfer Restricted Notes shall be
6
<PAGE>
included in the Exchange Offer Registration Statement; provided that the Company
may include in the Exchange Offer Registration Statement additional notes issued
pursuant to the Indenture. The Company shall use its best efforts to cause the
Exchange Offer to be Consummated within 180 days after the Closing Date.
(c) The Company shall include a "Plan of Distribution" section in the
Prospectus contained in the Exchange Offer Registration Statement and indicate
therein that any affiliate of the Company who holds Notes or Restricted Broker-
Dealer who holds Notes that are Transfer Restricted Notes, and that were
acquired for the account of such Broker-Dealer as a result of market-making
activities or other trading activities, may acquire Exchange Notes in
substitution for such Notes (other than Transfer Restricted Notes acquired
directly from the Company) pursuant to the Exchange Offer; provided, however,
that such Broker-Dealer may be deemed to be an "underwriter" within the meaning
of the Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act in connection with its initial sale of each
Exchange Note received by such Broker-Dealer in the Exchange Offer, which
prospectus delivery requirement may be satisfied by the delivery by such Broker-
Dealer of the Prospectus contained in the Exchange Offer Registration Statement.
Such "Plan of Distribution" section shall also contain all other information
with respect to such sales of Broker-Dealer Transfer Restricted Notes by
Restricted Broker-Dealers that the Commission may require in order to permit
such sales pursuant thereto, but such "Plan of Distribution" shall not name any
such Broker-Dealer or disclose the amount of Notes held by any such Broker-
Dealer except to the extent required by the Commission.
Each Holder of Notes (other than certain specified holders) who wishes
to acquire Exchange Notes, as substitute evidence of the indebtedness originally
evidenced by the Notes, pursuant to the Exchange Offer, will be required to
represent that (i) it is not an affiliate of the Company, (ii) any Exchange
Notes to be received by it were acquired in the ordinary course of its business
and (iii) at the time of commencement of the Exchange Offer, it has no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes.
The Company shall use its best efforts to keep the Exchange Offer
Registration Statement continuously effective, supplemented and amended as
required by the provisions of Section 6(b) below to the extent necessary to
ensure that it is available for sales of Broker-Dealer Transfer Restricted Notes
by Restricted Broker-Dealers, and to ensure that such Exchange Offer
Registration Statement conforms with the requirements of this Agreement, the
Securities Act and the policies, rules and regulations of the Commission as
announced from time to time, for a period of at least 20 business days (or
longer if required by applicable law) from the date on which the Exchange Offer
is Consummated.
The Company shall promptly provide a reasonable number of copies of
the latest version of the Prospectus included in the Exchange Offer Registration
Statement to such Restricted Broker-Dealers upon request, and in no event later
than two days after such request, at any time during such 60-day period in order
to facilitate such sales.
7
<PAGE>
SECTION 4. SHELF REGISTRATION
(a) Note Shelf Registration. In the event that either (a) any changes
in law or applicable interpretations of the staff of the Commission do not
permit the Company to effect the Exchange Offer or, (b) the Exchange Offer
Registration Statement is not declared effective within 120 days following the
date of original issuance of the Notes, then the Company shall cause to be filed
as promptly as practicable a shelf registration statement under the Securities
Act (which may be an amendment to the Exchange Offer Registration Statement (the
"Note Shelf Registration Statement")), relating to all Transfer Restricted
Notes, the Holders of which shall have provided the information required
pursuant to Section 4(d) hereof, and shall use its best efforts to cause such
Note Shelf Registration Statement to become effective by the 180th day after the
original issuance of the Notes. The Company shall use its best efforts to keep
the Note Shelf Registration Statement continuously effective, supplemented and
amended as required by the provisions of Sections 6(b) and (c) hereof to the
extent necessary to ensure that it is available for sales of Transfer Restricted
Notes by the Holders thereof entitled to the benefit of this Section 4(a), and
to ensure that it conforms with the requirements of this Agreement, the
Securities Act and the policies, rules and regulations of the Commission as
announced from time to time, until two years after its effective date or such
shorter period that will terminate when all the Transfer Restricted Notes
covered by such Shelf Registration Statement have been sold pursuant to such
Note Shelf Registration Statement or otherwise.
(b) Warrant Shelf Registration: The Company shall cause to be filed
within 60 days after the date of original issuance of the Warrants, or shall
otherwise cause the Warrants to be registered under the Securities Act pursuant
to, a shelf registration statement under the Securities Act (the "Warrant Shelf
Registration Statement"), relating to all Transfer Restricted Warrants, the
Holders of which shall have provided the information required pursuant to
Section 4(d) hereof, and, if such Warrant Shelf Registration Statement has not
been declared effective under the Securities Act, shall use its best efforts to
cause such Warrant Shelf Registration Statement to become effective under the
Securities Act within 120 days after the date of original issuance of the
Warrants. The Company shall use its best efforts to keep the Warrant Shelf
Registration Statement continuously effective, supplemented and amended as
required by the provisions of Sections 6(b) and (c) hereof to the extent
necessary to ensure that it is available for sales of Transfer Restricted
Warrants by the Holders thereof entitled to the benefit of this Section 4(b),
and to ensure that it conforms with the requirements of this Agreement, the
Securities Act and the policies, rules and regulations of the Commission as
announced from time to time, until the earlier of (i) such time as all Transfer
Restricted Warrants have been sold thereunder or otherwise or exercised and (ii)
two years after its effective date; provided, that (x) in the event the Company
is required to issue Contingent Warrants, the Company shall amend the Warrant
Shelf Registration Statement to include such Contingent Warrants, and (y) the
Company may include in the Warrant Shelf Registration Statement additional
warrants issued pursuant to the Warrant Agreement, and in the case of either (x)
or (y), the time period specified in this Section 4(b)(ii) shall be two years
after the issuance of such additional warrants pursuant to the Warrant Agreement
and/or Contingent Warrants.
8
<PAGE>
(c) Warrant Shares Shelf Registration. The Company shall cause to be
filed within 270 days after the date of original issuance of the Warrants, or
shall otherwise cause the Warrants to be registered under the Securities Act
pursuant to, a shelf registration statement under the Securities Act (the
"Warrant Shares Shelf Registration Statement"), relating to all Transfer
Restricted Warrant Shares, the Holders of which shall have provided the
information required pursuant to Section 4(d) hereof, and, if such Warrant
Shares Shelf Registration Statement has not been declared effective under the
Securities Act shall use its best efforts to cause such Warrant Shares Shelf
Registration Statement to become effective under the Securities Act within 360
days after the date of original issuance of the Warrants; provided, however,
that if prior to such 270th day, the Company shall file a Registration Statement
with respect to any Public Equity Offering, then the Company shall cause the
Warrant Shares Shelf Registration Statement to be filed on or prior to such date
and; provided, further, that at the time such Registration Statement relating to
any such Public Equity Offering has been declared effective (the "IPO Effective
Date"), the Company shall use its best efforts to cause such Warrant Shares
Shelf Registration Statement to become effective on the earlier of (i) such
360th day and (ii) sixty days following the IPO Effective Date (or such earlier
date as the Warrants may be exercised pursuant to Section 8(ii) of the Warrant
Agreement). The Company shall use its best efforts to keep the Warrant Shares
Shelf Registration Statement continuously effective, supplemented and amended as
required by the provisions of Sections 6(b) and (c) hereof to the extent
necessary to ensure that it is available for sales of Transfer Restricted
Warrant Shares by the Holders thereof entitled to the benefit of this Section
4(c), and to ensure that it conforms with the requirements of this Agreement,
the Securities Act and the policies, rules and regulations of the Commission as
announced from time to time, until the earlier of (i) such time as all Warrants
have been exercised or have expired either pursuant to the terms thereof or as a
result of such Warrants becoming no longer issuable and (ii) the date when all
the Transfer Restricted Warrant Shares covered by such Warrant Shares Shelf
Registration Statement have been sold pursuant to such Warrant Shares Shelf
Registration Statement or otherwise.
(d) Provision by Holders of Certain Information in Connection with a
Shelf Registration Statement. A Holder of Transfer Restricted Securities may not
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Company in writing, within ten (10) Business Days after receipt of a written
request therefor, such information specified in Item 507 of Regulation S-K under
the Securities Act, and any other similar information reasonably requested by
the Company, for use in connection with any Shelf Registration Statement,
Prospectus or preliminary Prospectus included therein. Each Holder as to which
any Shelf Registration Statement is being effected agrees to furnish promptly to
the Company all information required to be disclosed in order to make the
information previously furnished to the Company by such Holder not materially
misleading. A Holder of Notes shall not be entitled to receive Special Interest
pursuant to Section 5 to the extent that such Holder fails to comply with any
obligation under this subsection and the failure by such Holder to comply with
any obligation under this subsection and the failure by such Holder to comply
with such obligation is the sole reason for the accrual of Special Interest
pursuant to Section 5 hereof.
(e) Limitation on Sale. Each Holder whose Transfer Restricted
Securities are covered by a Shelf Registration Statement filed pursuant to
Section 4 agrees, upon the request of
9
<PAGE>
the Underwriter(s) in any Underwritten Offering permitted pursuant to this
Agreement, not to effect any public sale or distribution of securities of the
Company of the same class as the Transfer Restricted Securities included in such
Shelf Registration Statement (except as part of such registration) including a
sale pursuant to Rule 144 under the Securities Act, during the 10-day period
prior to, and during the 120-day period (subject to Section 6(d) hereof)
beginning on, the closing date of any such Underwritten Offering made pursuant
to such Shelf Registration Statement, to the extent timely notified in writing
by the Company or such Underwriter(s).
(f) Shelf Registration for Market Making. The Company shall (i)
include in the Exchange Offer Registration Statement, the Note Shelf
Registration Statement (if applicable), the Warrant Shelf Registration Statement
and the Warrant Shares Shelf Registration Statement such disclosures as may be
necessary to permit the Prospectus contained in each such Registration Statement
to be used in connection with offers and sales by the Market Makers of the
Exchange Notes and the Transfer Restricted Securities and (ii) following the
effectiveness of each such Registration Statement, use its best efforts to keep
each such Registration Statement continuously effective, supplemented and
amended as required by the provisions of Sections 6(b) and (c) hereof for the
time periods specified in Section 3 or 4 of this Agreement, as applicable, to
the extent necessary to ensure that it is available for sales of Exchange Notes
and Transfer Restricted Securities in connection with market making activities
by the Market Makers entitled to the benefit of this Section 4(f), and to ensure
that it conforms with the requirements of this Agreement, the Securities Act and
the policies, rules and regulations of the Commission as announced from time to
time, for so long as any Shelf Registration Statement is required to be
effective pursuant to this Agreement and such Market Makers or any of their
affiliates (as defined in the rules and regulations of the Commission under the
Securities Act) own any equity securities of the Company and propose to make a
market in the Securities as part of their business in the ordinary course.
SECTION 5. SPECIAL INTEREST
If (i) any Exchange Offer Registration Statement or Note Shelf
Registration Statement required to be filed pursuant to this Agreement is not
filed with the Commission on or prior to the date specified for such filing in
this Agreement, (ii) any such Exchange Offer Registration Statement or Note
Shelf Registration Statement has not been declared effective by the Commission
on or prior to the date specified for such effectiveness in this Agreement (the
"Effectiveness Target Date"), (iii) the Exchange Offer has not been Consummated
on or prior to the date specified in this Agreement, or (iv) any Exchange Offer
Registration Statement or Note Shelf Registration Statement required by this
Agreement is filed and declared effective but shall thereafter within the time
periods specified in Section 3 or 4 of this Agreement, as applicable, cease to
be effective or fail to be usable for its intended purpose without being
succeeded immediately by a post-effective amendment to such Exchange Offer
Registration Statement or Note Shelf Registration Statement that cures such
failure and that is itself declared effective for a period of more than 30
consecutive days (each such event referred to in clauses (i) through (iv), a
"Note Registration Default"), then commencing on the day following the date on
which such Note Registration Default occurs, the Company agrees to pay to each
Holder of Transfer Restricted Notes during the first 90-day period immediately
following the occurrence of such Note Registration Default additional interest
at the rate of 0.5% per annum ("Special Interest"). The
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<PAGE>
amount of Special Interest payable to each Holder shall increase by an
additional 0.5% per annum for each subsequent 90-day period up to a maximum rate
of 1.5% per annum. A Note Registration Default shall cease, and Special Interest
shall cease to be payable with respect to such Note Registration Default (1)
upon the filing of the applicable Exchange Offer Registration Statement or Note
Shelf Registration Statement, in the case of clause (i) above, (2) upon the
effectiveness of the Exchange Offer Registration Statement or Note Shelf
Registration Statement, in the case of clause (ii) above, (3) upon the
Consummation of the Exchange Offer, in the case of (iii) above, and (4) when the
Exchange Offer Registration Statement or Note Shelf Registration Statement
becomes effective or usable in the case of clause (iv) above. Notwithstanding
the foregoing to the contrary, (I) the amount of Special Interest payable shall
not increase because more than one Note Registration Default has occurred and is
pending, (II) a Holder of Transfer Restricted Notes who is not entitled to the
benefits of a Note Shelf Registration (i.e., such Holder has not elected to
include Transfer Restricted Notes in such Notes Shelf Registration or has failed
to provide all the information required pursuant to Section 4(d) hereof) shall
not be entitled to Special Interest with respect to a Note Registration Default
that pertains to a Note Shelf Registration Statement and (III) a Holder of Notes
constituting an unsold allotment from the original sale of the Notes shall not
be entitled to Special Interest by reason of a Note Registration Default that
pertains to an Exchange Offer.
All accrued Special Interest shall be paid to Record Holders on each
Special Interest Payment Date in the same manner in which payments of interest
are made pursuant to the Indenture. All obligations of the Company set forth in
the preceding paragraph that are outstanding with respect to any Transfer
Restricted Note at the time such security ceases to be a Transfer Restricted
Note shall survive until such time as all such obligations with respect to such
security shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) Exchange Offer Registration Statement.
(i) If there is a substantial question as to whether the
Exchange Offer is permitted by applicable federal law, the Company hereby
agrees to seek oral interpretive advice, a no-action letter or other
interpretive advice from the Commission staff allowing the Company to
Consummate an Exchange Offer for such Notes and in connection with the
foregoing (A) to participate in telephonic conferences with the Commission
staff, (B) to deliver to the Commission staff an analysis prepared by
counsel to the Company setting forth the legal basis, if any, upon which
such counsel has concluded that such an Exchange Offer should be permitted
and (C) to pursue diligently a resolution by the Commission staff of such
submission (which need not be favorable); provided, however, that the
Company may alternatively determine to file a Note Shelf Registration
Statement and provided, further, that the Company agrees to pursue the
issuance of a decision to the Commission staff level, but shall not be
required to take commercially unreasonable action in connection therewith.
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(ii) As a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer Restricted
Notes shall furnish, upon the request of the Company, prior to the
Consummation of the Exchange Offer, a written representation to the Company
(which may be contained in the letter of transmittal furnished in
connection with the Exchange Offer) to the effect that such Holder (A) is
not an affiliate of the Company (or that if it is such an affiliate, it
will comply with the registration and prospectus delivery requirements of
the Securities Act to the extent applicable), (B) is not engaged in, and
does not intend to engage in, and has no arrangement or understanding with
any person to participate in, a distribution of the Exchange Notes to be
issued in the Exchange Offer and (C) is acquiring the Exchange Notes in its
ordinary course of business. The Company shall ensure that each Holder and
Broker-Dealer acknowledges and agrees that any such Broker-Dealer and any
such Holder using the Exchange Offer to participate in a distribution of
the securities to be acquired in the Exchange Offer (1) could not under
Commission policy as in effect on the date of this Agreement rely on the
position of the Commission enunciated in Morgan Stanley and Co., Inc.
(available June 5, 1991) and Exxon Capital Holdings Corporation (available
May 13, 1988), as interpreted in the Commission's letter to Shearman &
Sterling dated July 2, 1993, and similar no-action letters (including, if
applicable, any no-action letter obtained pursuant to clause (i) above),
and (2) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction and that such a secondary resale transaction must be covered by
an effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K
if the resales are of Exchange Notes obtained by such Holder in
substitution for Notes acquired by such Holder directly from the Company.
(iii) Prior to effectiveness of the Exchange Offer Registration
Statement, the Company shall provide a supplemental letter to the
Commission (A) stating that the Company is registering the Exchange Offer
in reliance on the position of the Commission enunciated in Exxon Capital
Holdings Corporation (available May 13, 1988), Morgan Stanley and Co., Inc.
(available June 5, 1991) and, if applicable, any no-action letter obtained
pursuant to clause (i) above, (B) representing that the Company has not
entered into any arrangement or understanding with any Person to distribute
the Exchange Notes to be received in the Exchange Offer and that, to the
best of the Company's information and belief (if in fact the following
statement is to the Company's knowledge true and correct), each Holder
participating in the Exchange Offer is acquiring the Exchange Notes in its
ordinary course of business and has no arrangement or understanding with
any Person to participate in the distribution of the Exchange Notes
received in the Exchange Offer and (C) including any other undertaking or
representation reasonably required by the Commission as set forth in any
no-action letter obtained pursuant to clause (i) above.
(b) General Provisions. In connection with any Registration
Statement and any related Prospectus provided for by this Agreement, the Company
shall:
(i) use its reasonable best efforts to keep such Registration
Statement continuously effective and provide all requisite financial
statements for the periods
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specified in Section 3 or 4 of this Agreement, as applicable. Upon the
occurrence of any event that would cause any such Registration Statement or
the Prospectus contained therein (A) to contain a material misstatement or
omission or (B) not to be effective and usable for resale of Transfer
Restricted Securities, during the period required by this Agreement, the
Company shall, in the case of clause (A), take appropriate action to
correct any such misstatement or omission and, in the case of clause (A) or
(B), cause such Registration Statement and the related Prospectus to become
effective and usable for their intended purpose(s) as soon as practicable
thereafter;
(ii) prepare and file with the Commission such amendments and
post-effective amendments to the Registration Statement as may be necessary
to keep the Registration Statement effective for the periods set forth in
Section 3 or 4 hereof, as applicable, and otherwise to comply with the
applicable provisions of the Securities Act and the rules and regulations
promulgated thereunder in respect of such amendments; and comply with the
provisions of the Securities Act directly applicable to and required to be
complied with by the Company with respect to the disposition of all
securities covered by such Registration Statement during the applicable
period in accordance with the intended method or methods of distribution by
the sellers thereof set forth in such Registration Statement or Prospectus
or supplement to the Prospectus;
(iii) in the case of a Shelf Registration Statement, advise the
managing Underwriter(s) with respect to such Registration Statement (the
"Managing Underwriter(s)"), if any, and selling holders named in any
Registration Statement (the "Selling Holders") promptly and confirm such
advice in writing, (A) when the Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to any Shelf
Registration Statement or any post-effective amendment thereto, when the
same has become effective, (B) of any request by the Commission for
amendments to a Shelf Registration Statement or amendments or supplements
to the Prospectus or for additional information relating thereto, (C) of
the issuance by the Commission of any stop order suspending the
effectiveness of a Shelf Registration Statement under the Securities Act or
of the suspension by any state securities commission of the qualification
of the Transfer Restricted Securities for offering or sale in any
jurisdiction, or the initiation of any proceeding for any of the preceding
purposes, (D) of the existence of any fact or the happening of any event
that makes any statement of a material fact made in the Registration
Statement, the Prospectus, any amendment or supplement thereto or any
document incorporated by reference therein untrue, or that requires the
making of any additions to or changes in the Registration Statement in
order to make the statements therein not misleading, or that requires the
making of any additions to or changes in the Prospectus in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading or (E) of the Company's reasonable determination
that a post-effective amendment to the Registration Statement would be
appropriate. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, or any state
securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption from qualification of the
Transfer Restricted Securities under state securities or Blue Sky laws, the
Company shall use its
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reasonable best efforts to obtain the withdrawal or lifting of such order
at the earliest possible time;
(iv) to the extent reasonably practicable, furnish to the Initial
Purchasers, each Selling Holder and each of the Managing Underwriter(s) in
connection with such sale, if any, before filing with the Commission,
copies of any Registration Statement or any Prospectus included therein or
any amendments or supplements to any such Registration Statement or
Prospectus which documents will be subject to the review and comment of
such Holders and Managing Underwriter(s) in connection with such sale, if
any, for a period of three Business Days, and the Company will not file any
such Registration Statement or Prospectus or any amendment or supplement to
any such Registration Statement or Prospectus to which the Selling Holders
or the Managing Underwriter(s), if any, shall object on reasonable legal
grounds within three business days after the receipt thereof. A Selling
Holder or Underwriter, if any, shall be deemed to have reasonably objected
to such filing if such document as proposed to be filed contains a material
misstatement or omission;
(v) to the extent reasonably practicable, prior to the filing of
any document that is to be incorporated by reference into a Registration
Statement or Prospectus, provide copies of such document to the Selling
Holders and to the Managing Underwriter(s) in connection with such sale, if
any, for a period of three Business Days, make the Company's
representatives available for discussion of such document and other
customary due diligence matters during such period, and include such
information in such document prior to the filing thereof as such Selling
Holders or Managing Underwriter(s), if any, reasonably may request within
three Business Days; provided, however, that any document incorporated by
reference in any such Registration Statement or Prospectus shall be
provided to the Initial Purchasers, such Selling Holders and such Managing
Underwriter(s) no later than the time that such amendment or supplement is
filed with the Commission;
(vi) in the case of a Shelf Registration Statement, make
available at reasonable times for inspection by the Selling Holders, any
Managing Underwriter(s) and any attorney or accountant retained by such
Selling Holders or any of such Managing Underwriter(s), all relevant
information as is customary for similar due diligence examinations, and
cause the Company's officers, directors and employees to supply all
information reasonably requested by any such Selling Holder, underwriter,
attorney or accountant in connection with such Shelf Registration Statement
or any post-effective amendment thereto subsequent to the filing thereof
and prior to its effectiveness; provided, however, that such Selling
Holders, Managing Underwriter(s), attorneys or accountants agree to keep
confidential any records, information or documents that are designated by
the Company in writing as confidential and to use such information obtained
pursuant to this provision only in connection with the transaction for
which such information was obtained, and not for any other purpose, unless
(i) such records, information or documents (x) are available to the public,
(y) were already in such Selling Holders', Managing Underwriter(s)',
attorneys' or accountants' possession prior to its receipt from the Company
and they do not otherwise have any obligation to keep such records,
information or
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documents confidential or (z) are obtained by such Selling Holders,
Managing Underwriter(s), attorneys or accountants from a third person who,
insofar as is known to such Selling Holders, Managing Underwriter(s),
attorneys or accountants, after due inquiry, is not prohibited from
transmitting the information to such Selling Holders, Managing
Underwriter(s), attorneys or accountants by a contractual, legal or
fiduciary obligation to the Company or a third party, or (ii) disclosure of
such records, information or documents is required by court or
administrative order after the exhaustion of appeals therefrom;
(vii) if requested by any Selling Holders or the Managing
Underwriter(s) in order to accurately reflect information regarding such
Selling Holder's or Underwriter's plan of distribution as required in the
Registration Statement promptly include in any Registration Statement or
Prospectus, pursuant to a supplement or post-effective amendment if
necessary, such information as such Selling Holders and Managing
Underwriter(s), if any, may reasonably request to have included therein and
make all required filings of such Prospectus supplement or post-effective
amendment as soon as legally required after the Company is notified of the
matters to be included in such Prospectus supplement or post-effective
amendment;
(viii) in the case of a Shelf Registration Statement, furnish to
each Selling Holder and each of the Managing Underwriter(s) in connection
with such sale, if any, without charge, at least one copy of the
Registration Statement, as first filed with the Commission, and of each
amendment thereto, including upon the requests of such Person all documents
incorporated therein by reference (in each case, without exhibits thereto,
unless requested);
(ix) in the case of a Shelf Registration Statement, deliver to
each Selling Holder and each of the Managing Underwriter(s), if any,
without charge, as many copies of the Prospectus (including each
preliminary prospectus) and any amendment or supplement thereto as such
Persons reasonably may request; the Company hereby consents to the use of
the Prospectus and any amendment or supplement thereto by each of the
Selling Holders and each of the Managing Underwriter(s), if any, in
connection with the offering and the sale of the Transfer Restricted
Securities covered by the Prospectus or any amendment or supplement thereto
in compliance with applicable law;
(x) in the case of a Shelf Registration Statement, use its best
efforts to enter into such underwriting agreements and other selling
agreements as are customary in underwritten offerings and take all such
other reasonable actions in connection therewith (including those
reasonably requested by the Managing Underwriter(s) or the Selling Holders
who hold a majority of the Transfer Restricted Securities included in such
registration) in order to expedite or facilitate the disposition of the
Transfer Restricted Securities pursuant to the Shelf Registration
Statement; provided, however, that the Company shall have no liability for
any compensation or reimbursement of expenses due to any Underwriter or
other party assisting in the disposition of such Transfer Restricted
Securities or other expenses incurred by the Holder thereof in connection
with such disposition other than agreed upon expenses, and in such
connection, whether or not an
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<PAGE>
underwriting agreement is entered into and whether or not the registration
is an Underwritten Offering, the Company shall: (i) to the extent possible,
make such representations and warranties to the Selling Holders and the
Managing Underwriter(s), if any, in form, substance and scope as are
customarily made by issuers to underwriters in underwritten offerings, and
confirm the same if and when reasonably requested; (ii) obtain opinions of
counsel to the Company and updates thereof (which counsel and opinions (in
form, scope and substance) shall be reasonably satisfactory to the Managing
Underwriter(s), if any, and the Selling Holders of a majority in principal
amount of the Transfer Restricted Securities included in such Shelf
Registration Statement), addressed to each Selling Holder and each of the
Managing Underwriter(s), if any, covering the matters customarily covered
in opinions requested in underwritten offerings; (iii) to the extent
permitted by the professional standards governing the accounting profession
at the time, obtain "cold comfort" letters and updates thereof (which
letters and updates (in form, scope and substance) shall be reasonably
satisfactory to the Managing Underwriter(s), if any) from the independent
certified public accountants of the Company (and, if necessary, any other
independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements
and financial data are, or are requested to be, included in the
Registration Statement), addressed to each of the Managing Underwriter(s),
if any, and each Selling Holder, such letters to be in customary form and
covering matters of the type customarily covered in "cold comfort" letters
in connection with underwritten offerings; and (iv) deliver such other
documents and certificates as may be reasonably requested by the Selling
Holders of a majority in principal amount of the Transfer Restricted
Securities included in such Registration Statement or the Managing
Underwriter(s), if any, to evidence compliance with clause (i) above and
with any customary conditions contained in the underwriting agreement or
other agreement entered into by the Company pursuant to this clause (x).
The above shall be done at each closing under such underwriting or
similar agreement, as and to the extent required thereunder, and if at any
time the representations and warranties of the Company contemplated in
Section 6(x)(i) above cease to be true and correct, the Company shall so
advise the Managing Underwriter(s), if any, and Selling Holders promptly
and if requested by such Persons, shall confirm such advice in writing;
(xi) cooperate with the Selling Holders, the Managing
Underwriter(s), if any, and their respective counsel in connection with the
registration and qualification of the Transfer Restricted Securities under
the Blue Sky law of such jurisdictions as the Selling Holders or Managing
Underwriter(s) may reasonably request and do any and all other acts or
things reasonably necessary or advisable to enable the disposition in such
jurisdictions of the Transfer Restricted Securities covered by the
applicable Registration Statement; provided, however, that the Company
shall not be required to register or qualify as a foreign corporation where
it is not now so qualified or to take any action that would subject it to
the service of process in suits or to taxation in any jurisdiction where it
is not now so subject;
(xii) in connection with any sale of Transfer Restricted
Securities that will result in such securities no longer being Transfer
Restricted Securities, cooperate with the
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Selling Holders and the Managing Underwriter(s), if any, to facilitate the
timely preparation and delivery of certificates representing Transfer
Restricted Securities to be sold and not bearing any restrictive legends;
and to register such Transfer Restricted Securities in such denominations
and such names as the Holders or the Managing Underwriter(s), if any, may
request at least two Business Days prior to such sale of Transfer
Restricted Securities;
(xiii) use its best efforts to cause the Transfer Restricted
Securities covered by the Registration Statement to be registered with or
approved by such other regulatory agencies or authorities as are necessary
to enable the seller or sellers thereof or the Managing Underwriter(s), if
any, to consummate the disposition of such Transfer Restricted Securities
subject to the proviso contained in clause (xi) above;
(xiv) in the case of a Shelf Registration Statement, if any
fact or event contemplated by Section 6(b)(iii)(D) or (E) above shall exist
or have occurred, use its reasonable best efforts to prepare a supplement
or post-effective amendment to a Shelf Registration Statement or related
Prospectus or any document incorporated therein by reference or file any
other required document so that, as thereafter delivered to the purchasers
of Transfer Restricted Securities, such Prospectus will not contain an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(xv) provide CUSIP number(s) for all Transfer Restricted
Securities not later than the effective date of a Registration Statement
covering such Transfer Restricted Securities and provide the Trustee under
the Indenture with printed certificates for the Transfer Restricted
Securities which are in a form eligible for deposit with the Depositary;
(xvi) cooperate and assist in any filings required to be made
with the NASD and in the performance of any due diligence investigation by
any underwriter (including any "qualified independent underwriter") that is
required to be retained in accordance with the rules and regulations of the
NASD, and use its best efforts to cause such Registration Statement to
become effective and approved by such regulatory agencies or authorities as
are necessary to enable the Holders selling Transfer Restricted Securities
to consummate the disposition of such Transfer Restricted Securities;
(xvii) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to its security holders with regard to any applicable
Registration Statement, as soon as practicable, a consolidated earnings
statement meeting the requirements of Rule 158 (which need not be audited)
covering a twelve-month period beginning after the effective date of the
Registration Statement (as such term is defined in paragraph (c) of Rule
158 under the Securities Act);
(xviii) cause the Indenture to be qualified under the TIA not
later than the effective date of the first Registration Statement required
by this Agreement in connection with the Transfer Restricted Notes or
Exchange Notes, and, in connection therewith,
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<PAGE>
cooperate with the Trustee and the Holders of Notes to effect such changes
to the Indenture as may be required for the Indenture to be so qualified in
accordance with the terms of the TIA; and execute and use its best efforts
to cause the Trustee to execute all documents that may be required to
effect such changes and all other forms and documents required to be filed
with the Commission to enable the Indenture to be so qualified in a timely
manner.
(c) Restrictions on Holders. Each Holder agrees by acquisition of a
Transfer Restricted Security that, upon receipt of any notice from the Company
of the existence of any fact of the kind described in Section 6(b)(iii)(C), (D)
or (E) hereof, such Holder will forthwith discontinue disposition of Transfer
Restricted Securities pursuant to the applicable Registration Statement until
such Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 6(b)(xiv) hereof, or until it is advised in writing (the
"Advice") by the Company that the use of the Prospectus currently being used may
be resumed, and has received copies of any additional or supplemental filings
that are incorporated by reference in the Prospectus. If so directed by the
Company, each Holder will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in such Holder's possession, of
the Prospectus covering such Transfer Restricted Securities that was current at
the time of receipt of such notice. In the event the Company shall give any such
notice, the time period regarding the effectiveness of such Registration
Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended
by the number of days during the period from and including the date of the
giving of such notice pursuant to Section 6(b)(iii)(C), (D) or (E) hereof to and
including the date when each Selling Holder covered by such Registration
Statement shall have received (x) the copies of the supplemented or amended
Prospectus contemplated by Section 6(b)(xiv) hereof or (y) the Advice.
Subject to Section 6(d) hereof, each Holder further agrees that, upon
receipt of notice from the Company that the Company intends to make an offering
to the public of its securities, whether or not through an Underwriter, such
Holder will forthwith discontinue disposition of Transfer Restricted Securities
for such period (not to exceed 120 days) as is required to complete such
offering and for a further period of 120 days after the completion of such
offering.
(d) In the event that the Company agrees with any other Person that
such Person shall be restricted from effecting any public sale or disposition of
securities of the Company for a shorter period than the periods stated in
Sections 4(e) or Section 6(c) of this Agreement, then the respective periods
stated in Sections 4(e) and 6(c) hereof shall be adjusted, from time to time, so
that the Holders shall have the benefit of the shortest period to which the
Company has agreed.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's performance of or
compliance with this Agreement will be borne by the Company, regardless of
whether a Registration Statement becomes effective, including without
limitation: (i) all registration and filing fees and expenses (including filings
made with the NASD (including, if applicable, the fees and expenses of any
"qualified independent underwriter" and its counsel, as may be required by the
rules and regulations of the NASD); (ii) all fees and expenses of compliance
with federal securities and state Blue Sky or securities laws; (iii) all
printing expenses of printing (including printing certificates for
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the Exchange Notes and printing of Prospectuses, if necessary); (iv) all fees
and disbursements directly related to the Exchange Offer of counsel for the
Company and, in accordance with Section 7(b) below, the Holders of Transfer
Restricted Notes; and (v) all fees and disbursements of independent certified
public accountants of the Company (including the expenses of any special audit
and comfort letters required by or incident to such performance).
Notwithstanding anything in this Section 7 to the contrary, the Company shall
not be required to pay (a) the fees and expenses of any Underwriter or of legal
counsel for any Underwriter, other than a "qualified independent underwriter"
(acting solely in such capacity) as provided in clause (i) of the preceding
sentence or (b) any underwriting discounts and commissions and transfer taxes,
if any, relating to the sale or disposition of such Holder's Transfer Restricted
Securities.
The Company will, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expenses of any annual audit and the
fees and expenses of any Person, including special experts, retained by the
Company.
(b) In connection with the Exchange Offer and the Shelf Registration
Statements, the Company will reimburse the Holders of Transfer Restricted Notes
for the reasonable fees and disbursements of not more than one counsel chosen by
the Holders of a majority of the principal amount of such Transfer Restricted
Notes; provided, however, that such counsel must be reasonably satisfactory to
the Company and that such fees shall not exceed $10,000 with respect to the
Exchange Offer and $10,000 with respect to the Shelf Registration Statements in
the aggregate.
SECTION 8. INDEMNIFICATION AND CONTRIBUTION
(a) The Company shall indemnify and hold harmless each Initial
Purchaser, each Restricted Broker-Dealer, each Holder, each Underwriter who
participates in an offering of Transfer Restricted Securities, their respective
affiliates and each Person, if any, who controls any of such parties within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, joint or several, as incurred, arising out of any
untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement (or any amendment or
supplement thereto) covering Transfer Restricted Securities or
Exchange Notes, including all documents incorporated therein by
reference, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact contained in any
Prospectus (or any amendment or supplement thereto) or the omission or
alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
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(ii) against any and all loss, liability, claim, damage and
expense whatsoever, joint or several, as incurred, to the extent of
the aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any court or governmental agency or
body, commenced or threatened, or of any claim whatsoever based upon
any such untrue statement or omission, or any such alleged untrue
statement or omission; provided, that (subject to Sections 8(c) and
8(d) below) any such settlement is effected with the prior written
consent of the Company; and
(iii) to the extent provided for in Section 8(c) below, against
any and all expenses whatsoever, as incurred including reasonable fees
and disbursements of one counsel chosen by Merrill Lynch, such Holder,
such Restricted Broker-Dealer or any Underwriter, reasonably incurred
in investigating, preparing or defending against any litigation, or
any investigation or proceeding by any court or governmental agency or
body commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue
statement or omission, to the extent that any such expense is not paid
under subparagraph (i) or (ii) of this Section 8(a);
provided, however, that this indemnity does not apply to any loss, liability,
claim, damage or expense to the extent arising out of an untrue statement or
omission or alleged untrue statement or omission (i) made in reliance upon and
in conformity with information furnished in writing to the Company by or on
behalf of such Initial Purchaser, such Holder, such Restricted Broker-
Dealer or any Underwriter with respect to such Initial Purchaser, Holder,
Restricted Broker-Dealer or Underwriter, as the case may be, expressly for use
in the Registration Statement (or any amendment or supplement thereto) or any
Prospectus (or any amendment or supplement thereto) or (ii) contained in any
preliminary Prospectus if such Initial Purchaser, such Holder, such Restricted
Broker-Dealer or such Underwriter failed to send or deliver a copy of the
Prospectus (in the form it was provided to such parties for confirmation of
sales) to the Person asserting such losses, claims, damages or liabilities on or
prior to the delivery of written confirmation of any sale of securities covered
thereby to such Person in any case where the Company shall have previously
furnished copies therefor to such Initial Purchaser, such Holder, such
Restricted Broker-Dealer or such Underwriter, as the case may be, in accordance
with this Agreement, at or prior to the written confirmation of the sale of such
Securities to such Person and the untrue statement contained in or the omission
from the preliminary Prospectus was corrected in the final Prospectus (or any
amendment or supplement thereto). Any amounts advanced by the Company to an
indemnified party pursuant to this Section 8 as a result of such losses shall be
returned to the Company if it shall be finally determined by a court of
competent jurisdiction in a judgment not subject to appeal or final review that
such indemnified party was not entitled to indemnification by the Company.
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(b) Each Holder agrees, severally and not jointly, to indemnify and
hold harmless the Company, each Initial Purchaser, each Underwriter who
participates in an offering of Transfer Restricted Securities and the other
Selling Holders and each of their respective directors and each Person, if any,
who controls any of the Company, any Initial Purchaser, any Underwriter or any
other Selling Holder within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, against any and all loss, liability, claim,
damage and expense whatsoever described in the indemnity contained in Section
8(a) hereof, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in any Registration
Statement (or any amendment or supplement thereto) or any Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Selling Holder with
respect to such Holder expressly for use in the Registration Statement (or any
supplement thereto), or any such Prospectus (or any amendment thereto);
provided, however, that, in the case of the Shelf Registration Statement, no
such Holder shall be liable for any claims hereunder in excess of the amount of
net proceeds received by such Holder from the sale of Transfer Restricted
Securities pursuant to the Shelf Registration Statement; provided, further, that
for purposes of Section 8(a)(iii), such counsel shall (subject to Section 8(c)
hereof) be chosen by the Company.
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. If it so elects
within a reasonable time after receipt of such notice, an indemnifying party,
severally or jointly with any other indemnifying parties receiving such notice,
may assume the defense of such action with counsel chosen by it and reasonably
acceptable to the indemnified parties defendant in such action. If an
indemnifying party assumes the defense of such action, the indemnifying parties
shall not be liable for any fees and expenses of counsel for the indemnified
parties incurred thereafter in connection with such action, provided, however,
that if the instance contemplated by clause (ii) of the following sentence
occurs then the indemnifying party can no longer assume such defense.
Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in any action, the indemnified party shall have
the right to employ separate counsel at any time, and the indemnifying party
shall bear the reasonable fees, costs and expenses of such separate counsel if
(i) the indemnifying party shall have failed to assume the defense and employ
counsel or (ii) the use of counsel chosen by the indemnifying party to represent
the indemnified party would, in the opinion of counsel to the indemnified party,
present such counsel with a conflict of interest. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
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Section 8 (whether or not the indemnified parties are actual or potential
parties thereto), unless such settlement, compromise or consent (i) includes a
full and unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and the offer
and sale of any Securities and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for reasonable fees and
expenses of counsel pursuant to Section 8(a)(iii) above, then such indemnifying
party agrees that it shall be liable for any settlement of the nature
contemplated by Section 8(a)(ii) effected without its written consent if (i)
such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) In order to provide for just and equitable contribution in
circumstances under which any of the indemnity provisions set forth in this
Section 8 is for any reason held to be unavailable to or insufficient to hold
harmless the indemnified parties although applicable in accordance with its
terms, the Company, the Initial Purchasers and the Holders, as applicable, shall
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by such indemnity agreement incurred by the Company, the
Initial Purchaser and the Holders; provided, however, that no Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person that was not
guilty of such fraudulent misrepresentation. As between the Company and the
Initial Purchasers and the Holders, such parties shall contribute to such
aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by such indemnity agreement in such proportion as shall be
appropriate to reflect the relative fault of the Company on the one hand and the
Holder of Transfer Restricted Securities, the Restricted Broker-Dealer or
Initial Purchaser, as the case may be, on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative fault of the Company on the one hand and the Holder of
Transfer Restricted Securities, the Restricted Broker-Dealer or the Initial
Purchasers, as the case may be, on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, or by the Holder of Transfer
Restricted Securities, the Restricted Broker-Dealer or the Initial Purchasers,
as the case may be, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Holders of the Transfer Restricted Securities and
the Initial Purchasers agree that it would not be just and equitable if
contribution pursuant to this Section 8
22
<PAGE>
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 8.
For purposes of this Section 8, each affiliate of any Person, if any,
who controls a Holder of a Transfer Restricted Security, an Initial Purchaser or
a Restricted Broker-Dealer within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act shall have the same rights to contribution
as such other Person, and each director of the Company, each affiliate of the
Company, each executive officer of the Company who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as the Company.
SECTION 9. RULE 144 AND 144A
The Company covenants that, so long as any Transfer Restricted
Securities remain outstanding, it will file the reports required to be filed by
it (if so required) under the Exchange Act and the rules and regulations
thereunder in a timely manner and, if at any time the Company is not required to
file such reports, it will, so long as any Transfer Restricted Securities remain
outstanding, upon the request of any Holder of Transfer Restricted Securities,
use its best efforts to make available to such Holder and any prospective
purchaser the information required to permit sales pursuant to Rule 144 and Rule
144A. The Company further covenants that it will take such further action as any
Holder of Transfer Restricted Securities may reasonably request, all to the
extent required from time to time, to enable such Holder to sell Transfer
Restricted Securities without registration under the Securities Act pursuant to
the exemptions provided by Rule 144 and Rule 144A. Upon the request of any
Holder of Transfer Restricted Securities, the Company will deliver to such
Holder a written statement as to whether the Company has complied with such
information and requirements.
SECTION 10. UNDERWRITTEN OFFERINGS
The Holders of Transfer Restricted Securities may elect to sell their
Transfer Restricted Securities pursuant to up to three Underwritten Offerings;
provided, however, that in no event shall any Holder commence any such
Underwritten Offering if (A) a period of less than 180 days has elapsed (i)
since the consummation of the most recent Underwritten Offering hereunder or
(ii) since the consummation of any offering of securities by the Company to the
public, whether or not through an Underwriter, or (B) the Company notifies such
Holder that it intends to make such an offering within the next 120 days. No
Holder may participate in any Underwritten Offering hereunder unless such Holder
(a) agrees to sell such Holder's Transfer Restricted Securities on the basis
provided in customary underwriting arrangements entered into in connection
therewith and (b) completes and executes all reasonable questionnaires, powers
of attorney, lock-up letters and other documents required under the terms of
such underwriting arrangements. Nothing in this Agreement shall give any Holder
any right to join in any offering by the Company of its securities to the
public.
23
<PAGE>
SECTION 11. SELECTION OF UNDERWRITERS
In any Underwritten offering, the Underwriters for the offering will
be selected by the Holders of a majority in aggregate principal amount of the
Transfer Restricted Securities included in such offering; provided, that such
investment bankers and managers must be reasonably satisfactory to the Company.
SECTION 12. MISCELLANEOUS
(a) Remedies. Each Holder, in addition to being entitled to exercise
all rights provided herein, in the Indenture, the Purchase Agreement or granted
by law, including recovery of liquidated or other damages, will be entitled to
specific performance of its rights under this Agreement. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Agreement and hereby agrees
to waive the defense in any action for specific performance that a remedy at law
would be adequate.
(b) No Inconsistent Agreements. The Company will not on or after the
date of this Agreement enter into any agreement with respect to its securities
that is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof, provided, however, that nothing
herein shall be deemed to prevent the Company from entering into arrangements
for the sale of its securities pursuant to normal and customary arrangements
therefor.
(c) Amendments and Waivers. The provisions of this Agreement,
including provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to or departures from the provisions
hereof may not be given, otherwise than with the prior written consent of the
Company and the Holders of a majority of the outstanding principal amount of
Transfer Restricted Securities; provided, however, that no amendment,
modification, or supplement or waiver or consent to the departure with respect
to the provisions of Section 8 hereof shall be effective as against any Holder
of Transfer Restricted Securities or the Company unless consented to in writing
by such Holder of Transfer Restricted Securities or the Company, as the case may
be.
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the records of
the Registrar under the Indenture with a copy to the Registrar under the
Indenture;
24
<PAGE>
(ii) if to the Company:
USN Communications, Inc.
10 S. Riverside Plaza
Suite 401
Chicago, Illinois 60606
Facsimile No.: (312) 906-3636
Attention: General Counsel
Telephone No.: (312) 906-3600
With copies to:
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive
Suite 2100
Chicago, Illinois 60606
Facsimile No.: (312) 407-0411
Attention: Gary P. Cullen
Telephone No. (312) 407-0700
(iii) if to the Initial Purchasers:
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
c/o Merrill Lynch & Co.
North Tower
World Financial Center
New York, NY 10281-1201
Facsimile No.: (212) 449-9120
Attention: Steven Jones
Telephone No.: (212) 449-1000
With copies to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1333 New Hampshire Avenue, N.W., Suite 400
Washington, D.C. 20036
Facsimile No.: (202) 887-4288
Attention: Bruce S. Mendelsohn, P.C.
Stephen E. Older
Telephone No.: (202) 887-4000
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if
25
<PAGE>
telecopied; and on the next business day, if timely delivered to an air courier
guaranteeing overnight delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of the
Initial Purchasers, including, without limitation and without the need for an
express assignment, subsequent Holders; provided, however, that nothing herein
shall be deemed to permit any assignment, transfer or other disposition of
Transfer Restricted Securities in violation of the terms of the Purchase
Agreement or the Indenture. If any transferee of any Holder shall acquire
Transfer Restricted Securities, in any manner, whether by operation of law or
otherwise, such Transfer Restricted Securities shall be held subject to all of
the terms of this Agreement, and by taking and holding such Transfer Restricted
Securities, such Person shall be conclusively deemed to have agreed to be bound
by and to perform all of the terms and provisions of this Agreement and such
Person shall be entitled to receive the benefits hereof.
(f) Third-Party Beneficiaries. Each of the Initial Purchasers and
each Holder shall be a third-party beneficiary of the agreements made hereunder
between the Company, on the one hand, and the Initial Purchasers, on the other
hand, and shall have the right to enforce such agreements directly to the extent
it deems such enforcement necessary or advisable to protect its rights or the
rights of the Holders hereunder.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF. Specified times of day refer to New York City
time.
(j) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(k) Notes Held by the Company or any of its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Transfer Restricted
Securities is required hereunder, Transfer Restricted Securities held by the
Company or any of their affiliates (as such
26
<PAGE>
term is defined in Rule 405 under the Securities Act) shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage.
(l) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the Transfer Restricted Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
27
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
USN COMMUNICATIONS, INC.
By:
--------------------------------
Name:
Title:
Confirmed and accepted as
of the date first above
written.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BY: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
-------------------------
Name:
Title:
28
<PAGE>
EXHIBIT 10.40
================================================================================
Dated as of August 15, 1997
by and between
USN COMMUNICATIONS, INC.
and
HARRIS TRUST AND SAVINGS BANK
as Warrant Agent
================================================================================
<PAGE>
WARRANT AGREEMENT
TABLE OF CONTENTS*
Page
SECTION 1. Appointment of Warrant Agent..................................... 2
SECTION 2. Issuance of Warrants............................................. 2
SECTION 3. Warrant Certificates............................................. 2
SECTION 4. Execution of Warrant Certificates................................ 2
SECTION 5. Transfers of Warrants............................................ 3
(a) Prior to the Separation of Initial Warrants and Notes; Separation
of Initial Warrants and Notes......................................... 3
(b) Private Placement Legend.............................................. 4
(c) Global Warrant Legend................................................. 5
SECTION 6. Registration and Countersignature................................ 6
SECTION 7. (a) Registration of Transfers and Exchanges...................... 6
(b) Book-Entry Provisions for the Global Warrants......................... 7
(c) Special Transfer Provisions........................................... 8
SECTION 8. Terms of Warrants; Exercise of Warrants.......................... 9
SECTION 9. Reports.......................................................... 11
SECTION 10. Payment of Taxes................................................ 11
SECTION 11. Mutilated or Missing Warrant Certificates....................... 11
SECTION 12. Reservation of Warrant Shares................................... 12
SECTION 13. Obtaining Stock Exchange Listings............................... 12
SECTION 14. Consolidations, Mergers and Sales of Assets..................... 12
SECTION 15. Adjustment of Number of Warrant Shares.......................... 13
- -----------------
*This Table of Contents does not constitute a part of this Agreement or have
any bearing upon the interpretation of any of its terms or provisions.
<PAGE>
SECTION 16. [Intentionally Omitted.]........................................ 21
SECTION 17. Fractional Interests............................................ 21
SECTION 18. Notices of Adjustments.......................................... 21
SECTION 19. Warrant Agent................................................... 23
SECTION 20. Merger, Consolidation or Change of Name of Warrant Agent........ 25
SECTION 21. Change of Warrant Agent......................................... 25
SECTION 22. Notices to the Company and Warrant Agent........................ 26
SECTION 23. Supplements and Amendments...................................... 26
SECTION 24. Successors...................................................... 27
SECTION 25. Termination..................................................... 27
SECTION 26. Governing Law; Jurisdiction..................................... 27
SECTION 27. Benefits of This Agreement...................................... 27
SECTION 28. Counterparts.................................................... 28
SECTION 29. Further Assurances.............................................. 28
EXHIBIT A................................................................... 30
EXHIBIT B................................................................... 38
<PAGE>
WARRANT AGREEMENT (this "Agreement") dated as of August 15, 1997
between USN Communications, Inc., (the "Company"), and Harris Trust and Savings
Bank, as Warrant Agent (the "Warrant Agent").
WHEREAS, the Indenture (as defined below) permits the Company to sell
up to $204,725,000 aggregate principal amount at Stated Maturity of 14 5/8%
Senior Discount Notes due 2004 (the "Notes");
WHEREAS, the Company has entered into a purchase agreement, dated
August 13, 1997, with Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"
and, together with Merrill Lynch, the "Initial Purchasers") pursuant to which
the Company has agreed to sell to the Initial Purchasers 152,725 Units (the
"Units") consisting of $152,725,000 aggregate principal amount of Notes and
warrants (the "Initial Warrants") to purchase up to an aggregate of 205,390
shares of the Company's Class A Common Stock, par value $.01 per share (the
"Class A Common Stock," and together with the Company's Class B Common Stock,
$.01 par value per share, the "Common Stock"). Each Warrant entitles the holder
thereof, upon exercise, to purchase fully paid and nonassessable shares of Class
A Common Stock at an exercise price of $.01 per share (the "Exercise Price").
Each Initial Warrant entitles the holder thereof, upon exercise, to purchase
0.134484 fully paid and nonassessable shares of Class A Common Stock ("Number of
Shares") at the Exercise Price. The Number of Shares is subject to adjustment
under certain circumstances as provided in Section 15 hereof. The shares of
Class A Common Stock issuable upon exercise of Warrants are referred to herein
as "Warrant Shares." The Notes will be issued under an indenture, dated as of
August 15, 1997 (the "Indenture"), between the Company and Harris Trust and
Savings Bank, as trustee (the "Trustee"); and
WHEREAS, the Initial Warrants shall bear the legend (the "Warrant
Legend") set forth on the form of Warrant Certificate set forth in Exhibit A
attached hereto and the Notes shall bear the legends set forth in the Indenture,
in each case subject to the terms of this Agreement and the Indenture, as the
case may be. Unless registered under the Securities Act of 1933, as amended
(the "Securities Act"), and any applicable state securities laws, the Warrant
Shares shall initially bear the legend set forth in Exhibit B (the "Warrant
Shares Legend"); and
WHEREAS, the Initial Warrants and the Notes shall not be separately
transferable until the close of business upon the earliest of: (i) February 15,
1998, (ii) the occurrence of an Exercise Event (as defined herein), (iii) the
occurrence of an Event of Default (as defined in the Indenture), (iv) the date
on which a registration statement with respect to (A) the Notes or (B) an offer
by the Company to the holders of Notes of the opportunity to acquire Exchange
Notes in substitution for the Notes (the "Exchange Offer"), is declared
effective, or (v) such earlier date as determined by Merrill Lynch in its sole
discretion (as applicable, the "Separability Date"); and
WHEREAS, pursuant to Section 4.20 of the Indenture, in certain
circumstances the Company will be obligated to issue additional warrants (the
"Contingent Warrants" and, together with the Initial Warrants, collectively, the
"Warrants") on September 30, 1998 (the
1
<PAGE>
"Contingent Warrant Issuance Date") exercisable for Class A Common Stock of the
Company under the same terms and with the same legend (except as set forth
herein) as the Initial Warrants as described above; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance of Warrant Certificates and other matters as provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Appointment of Warrant Agent. The Company hereby appoints
the Warrant Agent to act as agent for the Company in accordance with the
instructions set forth hereinafter in this Agreement, and the Warrant Agent
hereby accepts such appointment.
SECTION 2. Issuance of Warrants. Initial Warrants shall be
originally issued in connection with the issuance of the Notes and shall not be
separately transferable from the Notes until on or after the Separability Date
as provided in Section 5 hereof. Contingent Warrants shall be issued, if
required, in accordance with Section 4.20 of the Indenture.
SECTION 3. Warrant Certificates. The certificates evidencing the
Warrants ("Warrant Certificates") shall be substantially in the form annexed
hereto as Exhibit A with such changes as are as necessary to reflect the number
of shares of Class A Common Stock for which the Warrants are then exercisable.
The Warrants will be offered and sold in reliance on Rule 144A and
shall be evidenced initially in the form of one or more permanent global
Warrants (each, a "Global Warrant") evidenced by a Warrant Certificate in
definitive, fully registered form, substantially in the form set forth in
Exhibit A (each, a "Global Warrant Certificate"), deposited with the Warrant
Agent, as custodian for The Depository Trust Company, as depositary, or any
successors or assigns thereof (the "Depositary") and registered in the name of a
nominee of the Depositary, duly executed by the Company and countersigned by the
Warrant Agent as hereinafter provided. The aggregate amount of a Global Warrant
may from time to time be increased or decreased by adjustments made on the
records of the Warrant Agent, as custodian for the Depositary or its nominee, as
hereinafter provided.
SECTION 4. Execution of Warrant Certificates. Warrant Certificates
shall be signed on behalf of the Company by any two of the following officers:
its Chairman of the Board, Chief Executive Officer, Chief Financial Officer,
President, any Vice President, Secretary or Assistant Secretary, under its
corporate seal. Each such signature upon the Warrant Certificates may be in the
form of a facsimile signature of the present or any future Chairman of the
Board, Chief Executive Officer, Chief Financial Officer, President or any Vice
President and Secretary or Assistant Secretary and may be imprinted or otherwise
reproduced on the Warrant Certificates and for that purpose the Company may
adopt and use the facsimile signature of any person who shall have been Chairman
of the Board, Chief Executive Officer, Chief Financial
2
<PAGE>
Officer, President, any Vice President, Secretary or Assistant Secretary,
notwithstanding the fact that at the time the Warrant Certificates shall be
countersigned and delivered or disposed of he or she shall have ceased to hold
such office. The seal of the Company may be in the form of a facsimile thereof
and may be impressed, affixed, imprinted or otherwise reproduced on the Warrant
Certificates.
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been countersigned by the Warrant Agent, or
disposed of by the Company, such Warrant Certificates nevertheless may be
countersigned and delivered or disposed of as though such person had not ceased
to be such officer of the Company; and any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Agreement any
such person was not such officer.
Warrant Certificates shall be dated the date of countersignature by
the Warrant Agent.
SECTION 5. Transfers of Warrants.
---------------------
(a) Prior to the Separation of Initial Warrants and Notes;
Separation of Initial Warrants and Notes. Notwithstanding the provisions of
Section 7 hereof, on or after the Separability Date, the registered holder
of a Warrant Certificate containing a Warrant Legend may surrender such
Warrant Certificate accompanied by a written instrument or instruments of
transfer in form satisfactory to the Warrant Agent, duly executed by the
registered holder or holders thereof or by the duly appointed legal
representative thereof or by a duly authorized attorney to the Warrant
Agent, at its address specified in Section 22 hereof (the "Warrant Agent
Office") for the exchange of such Warrant Certificate containing a Warrant
Legend, in whole or in part, for a new Warrant Certificate or certificates
not containing the first paragraph of the Warrant Legend (such surrender
and exchange being referred to herein as a "Separation" and the related
Warrants being referred to as "Separated").
Until the Separability Date, no Initial Warrant may be sold, assigned
or otherwise transferred to any person unless simultaneously with such transfer,
the Warrant Agent receives confirmation from the Trustee that the holder thereof
has requested a transfer to such transferee of $1,000 principal amount of Notes
for each ten Initial Warrants, each Initial Warrant entitling the holder thereof
to purchase 0.134484 shares of Class A Common Stock of the Company (subject to
adjustment under Section 15 hereof) so transferred. In connection with the
foregoing, upon original issuance of the Initial Warrants until Separation each
Initial Warrant Certificate will bear the following legend:
UNTIL THE EARLIEST TO OCCUR OF (I) FEBRUARY 15, 1998, (II)
THE OCCURRENCE OF AN EXERCISE EVENT (AS DEFINED IN THE
WARRANT AGREEMENT, DATED AS OF AUGUST 15, 1997, BETWEEN USN
COMMUNICATIONS,
3
<PAGE>
INC. (THE "COMPANY") AND HARRIS TRUST AND SAVINGS BANK,
AS WARRANT AGENT (THE "WARRANT AGREEMENT")), (III) THE
OCCURRENCE OF AN EVENT OF DEFAULT (AS DEFINED IN THE
INDENTURE RELATING TO 14 5/8% SENIOR DISCOUNT NOTES DUE 2004
(THE "NOTES") OF THE COMPANY), (IV) THE DATE ON WHICH A
REGISTRATION STATEMENT WITH RESPECT TO THE NOTES OR AN
EXCHANGE OFFER RELATING TO THE NOTES IS DECLARED EFFECTIVE,
OR (V) SUCH EARLIER DATE AS DETERMINED BY MERRILL LYNCH,
PIERCE, FENNER & SMITH INCORPORATED IN ITS SOLE DISCRETION,
THE WARRANTS EVIDENCED HEREBY MAY NOT BE SOLD, ASSIGNED OR
OTHERWISE TRANSFERRED TO ANY PERSON UNLESS, SIMULTANEOUSLY
WITH SUCH TRANSFER, THE HOLDER HEREOF TRANSFERS TO SUCH
TRANSFEREE $1,000 PRINCIPAL AMOUNT AT STATED MATURITY OF
NOTES AND TEN WARRANTS, EACH WARRANT ENTITLING THE
TRANSFEREE TO PURCHASE 0.134484 SHARES OF CLASS A COMMON
STOCK OF THE COMPANY (SUBJECT TO ADJUSTMENT UNDER SECTION 15
OF THE WARRANT AGREEMENT) SO TRANSFERRED.
(b) Private Placement Legend. Except as otherwise provided in
Section 7(c) (iii) hereof, each Warrant Certificate shall bear the
following legend (the "Private Placement Legend"):
THE WARRANTS REPRESENTED HEREBY ("WARRANTS") AND, AS OF THE
DATE THIS WARRANT CERTIFICATE WAS ORIGINALLY ISSUED, THE
SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE,
PURCHASABLE UPON THEIR EXERCISE (THE "WARRANT SHARES" AND,
TOGETHER WITH THE WARRANTS, THE "SECURITY"), HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION
IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS
SECURITY, BY ITS ACCEPTANCE HEREOF, (1) REPRESENTS THAT IT
IS A
4
<PAGE>
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT ("RULE 144A"), (2) AGREES THAT IT
WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH
SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE
SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER
THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF (OR OF ANY
PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH THE
COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF
THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y)
SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE
LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER SELL
OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE
COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE
UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES
ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON
IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER"
AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT
OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A OR (D) PURSUANT TO ANOTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH
PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL
BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE
RESTRICTION TERMINATION DATE.
(c) Global Warrant Legend. The Global Warrant Certificate shall
also bear the following legend:
UNLESS THIS WARRANT IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (THE
"DEPOSITARY") TO THE COMPANY OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY WARRANT ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY
AS IS
5
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REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY
OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITARY OR SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITARY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR
TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO.,
HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE &
CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE
AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 7 OF THE WARRANT
AGREEMENT.
SECTION 6. Registration and Countersignature. The Warrant Agent, on
behalf of the Company, shall number and register the Warrant Certificates in a
register as they are issued by the Company.
Warrant Certificates shall be manually countersigned by the Warrant
Agent and shall not be valid for any purpose unless so countersigned. The
Warrant Agent shall, upon written instructions of the Chairman of the Board,
Chief Executive Officer, Chief Financial Officer, President, a Senior Vice
President or Secretary of the Company, initially countersign and deliver Warrant
Certificates entitling the holders thereof to purchase not more than the number
of Warrant Shares referred to above in the first recital hereof and shall
countersign and deliver Warrant Certificates as otherwise provided in this
Agreement. Such written instructions shall specify the amount of the Warrants
to be countersigned and the date of countersignature.
The Company and the Warrant Agent may deem and treat the registered
holder(s) of the Warrant Certificates as the absolute owner(s) thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone), for all purposes, and neither the Company nor the Warrant Agent shall
be affected by any notice to the contrary. The Company agrees to arrange for
the Trustee (or any other Registrar thereunder) to act as registrar hereunder
with respect to Warrants that are not Separated.
SECTION 7. (a) Registration of Transfers and Exchanges. In
accordance with this Section 7, and subject to the provisions of Section 5
hereof, the Warrant Agent shall from time to time register the transfer of any
outstanding Warrant Certificates upon the records to be maintained by it for
that purpose, upon surrender thereof accompanied by a written instrument or
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instruments of transfer in form satisfactory to the Warrant Agent, duly executed
by the registered holder or holders thereof or by the duly appointed legal
representative thereof or by a duly authorized attorney. Upon any such
registration of transfer, a new Warrant Certificate shall be issued to the
transferee(s) and the surrendered Warrant Certificate shall be canceled by the
Warrant Agent. Canceled Warrant Certificates shall thereafter be disposed of by
the Warrant Agent in a manner consistent with the Warrant Agent's customary
procedure and in accordance with applicable law.
(a) Warrant Certificates may be exchanged at the option of the
holder(s) thereof, when surrendered to the Warrant Agent at its office for
another Warrant Certificate or other Warrant Certificates of like tenor and
representing in the aggregate a like number of Warrants. Warrant Certificates
surrendered for exchange shall be canceled by the Warrant Agent. Such canceled
Warrant Certificates shall then be disposed of by the Warrant Agent in a manner
consistent with the Warrant Agent's customary procedure and in accordance with
applicable law.
No service charge shall be made for any transfer or exchange of
Warrant Certificates or any issuance of Warrant Certificates in connection with
a Separation, but the Company may require payment of a sum sufficient to cover
any stamp or other governmental charge or tax that may be imposed in connection
with any such transfer or exchange.
The Warrant Agent is hereby authorized to countersign, in accordance
with the provisions of this Section 7 and Section 5, the new Warrant
Certificates required pursuant to the provisions of this Section 7.
(b) Book-Entry Provisions for the Global Warrants
(i) The Global Warrant Certificate initially shall (x) be
registered in the name of the Depositary or the nominee of such Depositary, (y)
be delivered to the Warrant Agent as custodian for the Depositary and (z) bear
legends as set forth in Section 5(b) and (c).
(ii) Transfers of the Global Warrant Certificate shall be limited
to transfers of such Global Warrant Certificate in whole, but not in part, to
the Depositary, its successors or their respective nominees. Beneficial
interests in the Global Warrant may be transferred in accordance with the
applicable rules and procedures of the Depositary. In addition, physical
warrants in substantially the form set forth in Exhibit A ("Physical Warrant
Certificates"), evidencing physical warrants (the "Physical Warrants"), shall be
transferred to all beneficial owners in exchange for their beneficial interests
in the Global Warrant if (x) the Depositary notifies the Company that it is
unwilling or unable to continue as, or ceases to be, a "Clearing Agency"
registered under Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and a successor depositary registered as a "Clearing
Agency" under Section 17 of the Exchange Act is not appointed by the Company
within 90 days of such notice or (y) an Event of Default has occurred and is
continuing and the Warrant Agent has received a request from the Depositary.
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(iii) [Intentionally Omitted.]
(iv) In connection with any transfer of a beneficial interest in
any Global Warrant to a transferee receiving Physical Warrants pursuant to
paragraph (b) (ii) of this Section 7, the Warrant Agent shall reflect on its
books and records the date and a decrease in the aggregate amount of such Global
Warrant in an amount equal to the aggregate amount of the beneficial interest in
such Global Warrant to be transferred, and the Company shall execute, and the
Warrant Agent shall countersign and deliver, one or more Physical Warrants of
like tenor and amount.
(v) In connection with the transfer of an entire Global Warrant
to beneficial owners pursuant to paragraph (b) (ii) of this Section 7, such
Global Warrant shall be deemed to be surrendered to the Warrant Agent for
cancellation, and the Company shall execute, and the Warrant Agent shall
countersign and deliver, to each beneficial owner identified by the Depositary
in exchange for its beneficial interest in such Global Warrant, an equal
aggregate amount of Physical Warrants of authorized denominations.
(vi) Any Physical Warrant delivered in exchange for an interest
in the Global Warrant pursuant to paragraphs (b) (ii), (b) (iv) or (b) (v) of
this Section 7 shall, except as otherwise provided by paragraph (c) (iii) of
this Section 7, bear the legends regarding transfer restrictions applicable to
the Physical Warrant set forth in Sections 5(a) and 5(b).
(vii) The registered holder of a Global Warrant may grant proxies
and otherwise authorize any person, including Agent Members (as defined in
certain regulations of the Depositary) and persons that may hold interests
through Agent Members, to take any action which a Warrant holder is entitled to
take under this Warrant Agreement or the Warrants.
(c) Special Transfer Provisions
(i) [Intentionally Omitted.]
(ii) Transfers to QIBs. If the Warrant to be transferred consists
of Physical Warrants, the Warrant Agent shall register the transfer if such
transfer is being made by a proposed transferor who has checked the box provided
for on the form of Warrant stating, or has otherwise advised the Company and the
Warrant Agent in writing, that the sale has been made in compliance with the
provisions of Rule 144A to a transferee who has signed the certification
provided for on the form of Warrant stating, or has otherwise advised the
Company and the Warrant Agent in writing, that it is purchasing the Warrant for
its own account or an account with respect to which it exercises sole investment
discretion and that it and any such account is a QIB within the meaning of Rule
144A, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Company as
it has requested pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon its
foregoing representations in order to claim the exemption from registration
provided by Rule 144A.
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(iii) Private Placement Legend. Upon the transfer, exchange or
replacement of Warrant Certificates not bearing the Private Placement Legend,
the Warrant Agent shall deliver Warrant Certificates that do not bear the
Private Placement Legend. Upon the transfer, exchange or replacement of Warrant
Certificates bearing the Private Placement Legend, the Warrant Agent shall
deliver only Warrant Certificates that bear the Private Placement Legend unless
there is delivered to the Warrant Agent an opinion of counsel reasonably
satisfactory to the Company and the Warrant Agent to the effect that neither
such legend nor the related restrictions on transfer are required in order to
maintain compliance with the provisions of the Securities Act.
(iv) General. The provisions hereof shall be qualified in their
entirety by any applicable securities laws of the United States and any other
applicable jurisdiction and by the procedures of any applicable clearing agency,
in each case as in effect from time to time, and all such laws and clearing
procedures shall be deemed to be incorporated herein by reference. By its
acceptance of any Warrant Certificate bearing the Private Placement Legend, each
holder of such a Warrant Certificate shall be deemed to acknowledge the
restrictions on transfer of such Warrant Certificate set forth in this Warrant
Agreement and in the Private Placement Legend and agrees that it will transfer
such Warrant Certificate only as provided in this Warrant Agreement. The Warrant
Agent shall not register a transfer of any Warrant Certificate unless such
transfer complies with the restrictions on transfer of such Warrant Certificate
set forth in this Warrant Agreement. In connection with any transfer of Warrant
Certificates, each Warrant holder agrees by its acceptance of the Warrant
Certificates to furnish the Warrant Agent or the Company such certifications,
legal opinions or other information as either of them may reasonably require to
confirm that such transfer is being made pursuant to an exemption from, or a
transaction not subject to, the registration requirements of the Securities Act;
provided that the Warrant Agent shall not be required to determine (but may rely
on a determination made by the Company with respect to) the sufficiency of any
such certifications, legal opinions or other information.
SECTION 8. Terms of Warrants; Exercise of Warrants. Subject to the
terms of this Agreement, each Warrant holder shall have the right, which may be
exercised at any time on or after the date of the occurrence of the earliest of:
(i) immediately prior to the occurrence of a Change of Control (as defined in
the Indenture); (ii) the 60th day (or such earlier date as determined by the
Company in its sole discretion) following a Public Equity Offering (as defined
in the Indenture); or (iii) February 15, 1998 (each, an "Exercise Event") and on
or prior to the close of business on August 15, 2004 (the "Expiration Date") to
exercise Warrants and receive from the Company the number of fully paid and
nonassessable Warrant Shares which the holder may at the time be entitled to
receive on exercise of such Warrants and payment of the Exercise Price for such
Warrant Shares; provided that upon any such exercise no holder shall be entitled
to sell or transfer such holder's Warrants Shares at any time unless, at the
time of such sale or transfer, (i) a registration statement under the Securities
Act covering the offer and sale of the Warrant Shares has been filed with, and
declared effective by, the Securities and Exchange Commission (the "SEC"), and
no stop order suspending the effectiveness of such registration statement has
been issued by the SEC or (ii) the offer and sale of the Warrant Shares to the
Warrant holder are exempt from registration under the Securities Act and the
holder of the Warrants, if so requested by the Company, has delivered to the
Company an opinion of counsel
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to such effect. Each Initial Warrant, when exercised, will entitle the holder
thereof to purchase 0.134484 fully paid and nonassessable shares of Class A
Common Stock at the Exercise Price. The Number of Shares is subject to
adjustment under certain circumstances as provided herein by Section 15. Each
Warrant not exercised prior to the Expiration Date shall become void and all
rights thereunder and all rights in respect thereof under this Agreement shall
cease as of such time.
A Warrant may be exercised at any time on or after the occurrence of
an Exercise Event at the election of the holder thereof, either in full or from
time to time in part (in whole shares) upon surrender to the Company at the
principal office of the Warrant Agent of the Warrant Certificate or Certificates
to be exercised with the form of election to purchase on the reverse thereof
duly filled in and signed, which signature shall be guaranteed by an "eligible
guarantor" as defined in the regulations promulgated under the Exchange Act and
upon payment to the Warrant Agent for the account of the Company of the Exercise
Price, as adjusted as herein provided, for each Warrant then exercised. Payment
of the aggregate Exercise Price shall be made in the form of cash or a certified
or official bank or bank cashier's check payable to the order of the Company.
Subject to the provisions of Section 10 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
Warrant holder and in such name or names as the Warrant holder may designate, a
certificate or certificates for the number of whole Warrant Shares issuable upon
the exercise of such Warrants together with any cash which may be payable as
provided in Section 17 hereof. Such certificate or certificates shall be deemed
to have been issued and any person so designated to be named therein shall be
deemed to have become a holder of record of such Warrant Shares as of the date
of the surrender of such Warrants and payment of the aggregate Exercise Price.
No fractional shares shall be issued upon exercise of any Warrants in accordance
with Section 17 hereof.
In the event that a Warrant Certificate is exercised in respect of
fewer than all of the Warrant Shares issuable on such exercise at any time prior
to the Expiration Date, a new Warrant Certificate evidencing the remaining
Warrant or Warrants will be issued, and the Warrant Agent is hereby irrevocably
authorized to countersign and to deliver the required new Warrant Certificate or
Certificates pursuant to the provisions of this Section and of Section 4 hereof,
and the Company, whenever required by the Warrant Agent, will supply the Warrant
Agent with Warrant Certificates duly executed on behalf of the Company for such
purpose.
All Warrant Certificates surrendered upon exercise of Warrants shall be
canceled by the Warrant Agent. Such canceled Warrant Certificates shall then be
disposed of by the Company in accordance with applicable law. The Warrant Agent
shall account promptly to the Company with respect to Warrants exercised and
concurrently pay to the Company all monies received by the Warrant Agent for the
purchase of the Warrant Shares through the exercise of such Warrants.
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The Warrant Agent shall keep copies of this Agreement and any notices given
or received hereunder available for inspection by the Warrant holders during
normal business hours at its office. The Company shall supply the Warrant Agent
from time to time with such numbers of copies of this Agreement as the Warrant
Agent may request.
SECTION 9. Reports. So long as any of the Warrants remain outstanding, the
Company shall cause copies of all quarterly and annual financial reports and of
the information, documents and other reports (or copies of such portions of any
of the foregoing as the SEC may by rules and regulations prescribe) that the
Company is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act ("SEC Reports") to be filed with the Warrant Agent and mailed to
the holders of Warrants, in each case, within 15 days after filing with the SEC.
So long as any of the Warrants remain outstanding, if the Company is not subject
to the requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall nevertheless continue to cause reports, comparable to those that it would
be required to file pursuant to Section 13 or 15(d) of the Exchange Act if it
were then subject to the requirements of either such Section, to be so filed
with the SEC for public availability (unless the SEC will not accept such a
filing) and with the Warrant Agent and mailed to the holders of Warrants, in
each case, within the same time periods as would have applied (including under
the preceding sentence) had the Company then been subject to the requirements of
Section 13 or 15(d) of the Exchange Act. The Company shall make available to
investors and prospective investors of the Warrants information that satisfies
the requirements of Rule 144A(d)(4) under the Securities Act.
SECTION 10. Payment of Taxes. No service charge shall be made to any
holder of a Warrant for any exercise, exchange or registration of transfer of
Warrant Certificates, and the Company will pay all documentary stamp taxes
attributable to the initial issuance of Warrant Shares upon the exercise of
Warrants or to any Separation; provided that the Company shall not be required
to pay any tax or taxes which may be payable in respect of any transfer involved
in the issue of any Warrant Certificates or any certificates for Warrant Shares
in a name other than that of the registered holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
SECTION 11. Mutilated or Missing Warrant Certificates. If any of the
Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company
may in its discretion issue and the Warrant Agent may countersign, in exchange
and substitution for and upon cancellation of, the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing an
equivalent number of Warrants, but only upon receipt of evidence satisfactory to
the Company and the Warrant Agent of such loss, theft or destruction of such
Warrant Certificate and indemnity and security therefor, if requested, also
satisfactory to them. Applicants for such substitute Warrant Certificates shall
also comply with such other reasonable regulations and pay such other reasonable
charges as the Company or the Warrant Agent may prescribe.
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SECTION 12. Reservation of Warrant Shares. The Company will at all times
reserve and keep available, free of preemptive rights and free from all taxes,
liens, charges and security interests with respect to the issuance thereof, out
of the aggregate of its authorized but unissued Class A Common Stock, for the
purpose of enabling it to satisfy any obligation to issue Warrant Shares upon
the exercise of Warrants, the maximum number of Class A Common Stock which may
then be deliverable upon the exercise of all outstanding Warrants.
The Company or the transfer agent for the Class A Common Stock (the
"Transfer Agent") and every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of any of the rights of
purchase aforesaid will be irrevocably authorized and directed at all times to
reserve such number of authorized shares as shall be required for such purpose.
The Company will keep a copy of this Agreement on file with the Transfer Agent
and with every subsequent transfer agent for any shares of the Company's capital
stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Warrant Agent is hereby irrevocably authorized to requisition from
time to time from such Transfer Agent the stock certificates required to honor
outstanding Warrants upon exercise thereof in accordance with the terms of this
Agreement. The Company will supply such Transfer Agent with duly executed
certificates for such purposes and will provide or otherwise make available to
the Warrant Agent any cash which may be payable as provided in Section 17
hereof. The Company will furnish such Transfer Agent a copy of all notices of
adjustments and certificates related thereto transmitted to each holder pursuant
to Section 18 hereof.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will be, upon payment of the Exercise Price and issuance
thereof, duly and validly issued, fully paid, nonassessable, free of preemptive
rights and free from all taxes, liens, charges and security interests with
respect to the issuance thereof.
SECTION 13. Obtaining Stock Exchange Listings. The Company shall from time
to time take all action necessary so that the Warrant Shares, immediately upon
their issuance upon the exercise of Warrants, will be listed on the principal
securities exchanges, interdealer quotation systems and markets, if any, on
which any shares of Common Stock are then listed or quoted.
SECTION 14. Consolidations, Mergers and Sales of Assets. 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, and in connection therewith,
consideration to the holders of shares of Common Stock in exchange for their
shares is (a) not payable solely in cash, each Warrant thereafter shall entitle
the holder thereof to receive upon exercise thereof the number of shares of
capital stock or other securities or property which the holder of any shares of
Common Stock is entitled to receive upon completion of such consolidation,
merger or sale of assets ("Merger Consideration") or (b) payable solely in cash
("Cash Payment"), or in the event of the dissolution, liquidation or winding-up
of the Company, then the holders of the Warrants will receive distributions on
an equal basis with the holders of shares of Common Stock or other securities
issuable upon exercise of the warrants, as if the Warrants had been exercised
immediately prior
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to such event, less the Exercise Price. Upon receipt of such Cash Payment, if
any, the Warrants will expire and the rights of the holders thereof will cease.
In the event the Company is required pursuant to the provisions of this
Section 14 to make a Cash Payment as a result 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, if any, necessary to pay the holders
of the Warrants. After such funds and the surrendered Warrant Certificate are
received, the Warrant Agent shall make payment by delivering a check in such
amount as is appropriate to such Person or Persons as it may be directed in
writing by the holders surrendering such Warrants.
SECTION 15. Adjustment of Number of Warrant Shares.
(a) In case the Company shall (i) make a dividend or other distribution on
the Common Stock exclusively in Common Stock, (ii) make a dividend or other
distribution on the Common Stock in shares of its capital stock other than
Common Stock, (iii) subdivide its outstanding shares of Common Stock or (iv)
combine its outstanding shares of Common Stock into a smaller number of shares
of Common Stock, the number and kind of shares of Common Stock or capital stock
of the Company issuable upon the exercise of a Warrant (as in effect immediately
prior to such dividend or distribution) shall be proportionately adjusted so
that the holder of any Warrant thereafter exercised may receive the aggregate
number and kind of shares of capital stock of the Company that such holder would
have owned immediately following such dividend or distribution if such Warrant
had been exercised immediately prior thereto.
(b) Subject to the last sentence of paragraph (g) of this Section, in case
the Company shall make a dividend or other distribution on the Common Stock
consisting exclusively of, or shall otherwise issue to all holders of the Common
Stock, rights, options or warrants entitling the holders thereof to subscribe
for or purchase Common Stock or securities convertible into or exchangeable for
Common Stock at a price per share (determined on an as converted or as exercised
basis if the rights, options or warrants pertain to securities convertible into
or exchangeable for shares of Common Stock) less than the Current Market Price
(determined as provided in paragraph (h) of this Section) on the date fixed for
the determination of shareholders entitled to receive such rights, options or
warrants, the Number of Shares shall be determined by multiplying the Number of
Shares purchasable immediately prior to the date so fixed by a fraction, of
which the numerator shall be the number of shares of Common Stock outstanding on
the date fixed for determining stockholders entitled to receive such rights,
options or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase, and of which the denominator shall be the number
of shares of Common Stock outstanding on the date fixed for determining
stockholders entitled to receive such rights, options or warrants plus the
number of shares which the aggregate offering price of the total number of
shares of Common Stock so offered would purchase at the Current Market Price;
provided, however, that no further adjustment to the Number of Shares shall be
made upon the subsequent issue or sale of Common Stock pursuant to such options
or warrants. For the purposes of this paragraph (b), the number of shares of
Common Stock at any time outstanding shall not include
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shares held in the treasury of the Company but shall include shares issuable in
respect of scrip certificates issued in lieu of fractions of Common Stock. The
Company shall not issue any rights, options or warrants in respect of Common
Stock held in the treasury of the Company.
(c) [Intentionally Omitted.]
(d) (i) Subject to the last sentence of this paragraph (d) (i) and the
last sentence of paragraph (g) of this Section, in case the Company shall, by
dividend or otherwise, distribute to all holders of Common Stock evidences of
its indebtedness, cash or other assets (including securities, but excluding any
rights, options or warrants referred to in paragraph (b) of this Section,
excluding any dividend or distribution paid exclusively in cash out of
consolidated current or retained earnings as shown on the books of the Company
prepared in accordance with GAAP (other than any Extraordinary Cash Dividend (as
hereinafter defined)) and excluding any dividend or distribution referred to in
paragraph (a) of this Section, the Number of Shares shall be increased by
multiplying the Number of Shares issuable immediately prior to the close of
business on the date fixed for the determination of shareholders entitled to
such distribution by a fraction of which the numerator shall be the Current
Market Price (determined as provided in paragraph (h) of this Section) on such
date and the denominator shall be the Current Market Price on such date less the
fair market value (as determined by the Board of Directors, whose determination
shall be conclusive and described in a resolution of the Board of Directors) on
such date of the portion of the evidences of indebtedness, shares of capital
stock, cash and other assets to be distributed applicable to one share of Common
Stock, such increase to become effective immediately prior to the opening of
business on the day following such date; provided, that, in the event that the
amount of such dividend as so determined is equal to or greater than 100% of
such Current Market Price, in lieu of the foregoing adjustment, adequate
provision shall be made so that the holder of a Warrant shall receive a pro rata
share of such dividend based upon the maximum number of shares of Common Stock,
at the time issuable to such holder (determined without regard to whether the is
exercisable at such time). If the Board of Directors determines the fair market
value of any distribution for purposes of this paragraph (d) (i) by reference to
the actual or when issued trading market for any securities comprising part or
all of such distribution, it must in doing so consider the prices in such market
over the same period used in computing the Current Market Price pursuant to
paragraph (h) of this Section, to the extent possible. For purposes of this
paragraph (d) (i), an "Extraordinary Cash Dividend" shall be that portion, if
any, of the aggregate amount of all cash dividends paid in any fiscal year which
exceed $25,000,000. For purposes of this paragraph (d), any dividend or
distribution that includes Common Stock, rights, options or warrants to
subscribe for or purchase Common Stock or securities convertible into or
exchangeable for Common Stock shall be deemed to be (x) a dividend or
distribution of the evidences of indebtedness, cash, assets or shares of capital
stock other than such Common Stock, such rights, options or warrants or such
convertible or exchangeable securities (making any increase in the Number of
Shares required by this paragraph (d) (i) immediately followed by (y) in the
case of such Common Stock or such rights, options or warrants, a dividend or
distribution thereof (making any further adjustment to the Number of Shares
required by paragraph (a) and (b) of this Section, except any shares of Common
Stock included in such dividend or distribution shall not be deemed "outstanding
at the close of business on the date fixed for such determination" within the
meaning of paragraph (a) of this
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Section), or (z) in the case of such convertible or exchangeable securities, a
dividend or distribution of the number of shares of Common Stock as would then
be issuable upon the exercise or exchange thereof, whether or not the exercise
or exchange of such securities is subject to any conditions (making any further
reduction in Number of Shares required by paragraph (a) of this Section, except
the shares deemed to constitute such dividend or distribution shall not be
deemed "outstanding at the close of business on the date fixed for such
determination" within the meaning of paragraph (a) of this Section).
(ii) In case the Company shall issue Common Stock for a consideration
per share less than the Current Market Price (determined as provided in
paragraph (h) of this Section), the Number of Shares shall be increased by
multiplying the Number of Shares issuable immediately prior to the close of
business on the date on which the Company fixes the offering price of such
additional shares by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding immediately after giving effect to such
issuance and the denominator of which shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus a fraction equal to the aggregate consideration received by
the Company from the issuance of such additional shares of Common Stock over the
Current Market Price on the date on which the Company fixes the offering price
of such additional shares (determined as provided in paragraph (h) of this
Section), and the increase in the Number of Shares provided for in the preceding
sentence shall not apply upon (i) the issuance of securities in transactions
described in paragraphs (a), (b), (d) (i), and d (iii), or (f) of this Section
or pursuant to the exercise, exchange or conversion of any such securities (to
the extent applicable, including the 9% Preferred Stock (as defined below) and
the New Equity (as defined below)); (ii) the issuance of Common Stock upon the
exercise or exchange of securities (including options) convertible or
exchangeable for shares of Common Stock outstanding on the date of this Warrant
Agreement, or issuable pursuant to binding agreements in effect on the date of
this Warrant Agreement as set forth on a schedule to the Indenture, or
subsequently issued by the Company for a consideration per share equal to the
Current Market Price (determined as provided in paragraph (h) of this Section);
(iii) the issuance of Common Stock upon the exercise of options issued to the
Company's directors, officers and employees under bona fide employee benefit
plans adopted by the Board of Directors and approved by the holders of Common
Stock when required by law or otherwise where such issuances have been approved
by the Board of Directors (but only to the extent that the aggregate number of
shares excluded pursuant to this subclause (iii) and issued after the date of
this Warrant Agreement shall not exceed 3% of the Common Stock outstanding at
the time of issuance; provided, that options granted pursuant to this subclause
(iii) exercisable for no more than 2% of such outstanding Common Stock may have
exercise prices less than 50% of the price per share based on a valuation of the
Company of $160,000,000); (iv) the issuance of Common Stock to shareholders of
any person that immediately or subsequently merges with or into the Company or
any subsidiary thereof in proportion to their stock holdings of such person
immediately prior to such merger, upon such merger; (v) the issuance of Common
Stock in a bona fide underwritten public offering; (vi) the issuance of Common
Stock in a bona fide private placement through a placement agent that is a
member firm of the National Association of Securities Dealers, Inc. (except to
the extent that any discount from the Current Market Price (determined as
provided in paragraph (h) of this Section) attributable to restrictions on
transferability of the Common Stock, as determined in good faith
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by the Board of Directors and described in a resolution thereof which shall be
filed with the Warrant Agent, shall exceed 20%), or issuable pursuant to a
binding agreement in effect on the date of this Warrant Agreement; (vii) the
issuance of Common Stock as a dividend on any securities outstanding on the date
of this Warrant Agreement required to be made pursuant to the certificate of
designation pertaining to such securities in effect at the time such securities
were issued; (viii) the issuance of Common Stock upon the conversion of the New
Convertible Notes (as defined below); (ix) the issuance of Common Stock upon the
exercise of warrants (the "Consent Warrants") granted to Merrill Lynch Global
Allocation Fund, Inc. and Merrill Lynch Equity/Convertible Series (Global
Allocation Portfolio) (together "MLAM") pursuant to the Consent Agreement (as
defined in the Indenture); or (x) the issuance of Common Stock upon the exercise
of Warrants.
(iii) In case the Company shall issue any securities convertible into
or exchangeable for Common Stock for a consideration per share of Common Stock
(including the minimum consideration per share payable upon exercise or exchange
of any securities convertible into or exchangeable for Common Stock) initially
deliverable upon exercise or exchange of such securities less than the Current
Market Price (determined as provided in paragraph (h) of this Section),
including, but not limited to, the issuance of any equity securities of the
Company after the date of original issuance of the Initial Warrants (the "Issue
Date") and on or prior to September 15, 1997 resulting in net proceeds to the
Company of up to $20,000,000, the Number of Shares shall be increased by
multiplying the Number of Shares issuable immediately prior to the close of
business on the date on which the Company fixes the offering price of such
additional shares by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
securities plus the maximum number of shares of Common Stock deliverable upon
exercise of or in exchange for such securities at the initial exercise or
exchange rate and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to the issuance of such securities
plus a fraction equal to the aggregate consideration received for the issuance
of such securities (including the minimum consideration per share payable upon
exercise or exchange of any securities convertible into or exchangeable for
Common Stock) over the Current Market Price on the date on which the Company
fixes the offering price of such additional shares (determined as provided in
paragraph (h) of this Section). The increase in Number of Shares provided for in
the preceding sentence shall not apply to (i) (A) securities issued in
transactions described in paragraphs (a), (b), (d) (i) and (d) (ii) of this
Section, (B) any shares of 9% Cumulative Convertible PIK Preferred Stock, par
value $1.00 per share (the "9% Preferred Stock"), received as a dividend on the
9% Preferred Stock, or (C) any shares of preferred stock (the "New Equity")
issued to existing stockholders of the Company concurrent with the issuance of
the Notes or received as a dividend thereon or shares issued as a dividend on
the additional equity securities of up to $20,000,000 described in the first
sentence of this clause, provided that such securities are the same securities
as the New Equity; (ii) convertible securities issued to shareholders of any
person that merges into the Company, or with a Subsidiary of the Company, in
proportion to their stock holdings of such person immediately prior to such
merger, upon such merger; (iii) convertible securities issued in a bona fide
underwritten public offering; (iv) convertible securities issued in a bona fide
private placement through a placement agent that is a member firm of the
National Association of Securities Dealers, Inc. (except to the extent that any
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discount from the Current Market Price (determined as provided in paragraph (h)
of this Section) attributable to restrictions on transferability of Common Stock
issuable upon exercise, as determined in good faith by the Board of Directors
and described in a resolution thereof which shall be filed with the Warrant
Agent, shall exceed 20% of the then Current Market Price, or issuable pursuant
to a binding agreement in effect on the date of this Warrant Agreement; (v)
stock options issued to the Company's directors, officers or employees; (vi) the
grant of Contingent Warrants; (vii) convertible notes issuable to MLAM (the "New
Convertible Notes") upon the exercise of an option granted pursuant to the
Consent Agreement; (viii) the grant of Consent Warrants; (ix) the issuance of
warrants excercisable for up to 5% of the Company's Common Stock (on a fully
diluted basis) issued in connection with an offering of the Company's debt
securities; or (x) the grant of any securities convertible into or exchangeable
for Common Stock outstanding on the date of this Warrant Agreement or issuable
pursuant to binding agreements in effect on the date of this Warrant Agreement
as set forth on a schedule to the Indenture.
(e) In case the Company shall, by dividend or otherwise, at any time
distribute to all holders of Common Stock cash (excluding any cash that is
distributed as part of a distribution referred to in paragraph (d) (i) of this
Section or in connection with a transaction to which Section 14 applies) in an
aggregate amount that, together with (i) the aggregate amount of any other
distributions to all holders of Common Stock made exclusively in cash within the
12 months preceding the date fixed for the determination of shareholders
entitled to such distribution and in respect of which no adjustment in the
Number of Shares pursuant to paragraph (d) (i) or this paragraph (e) has been
made previously and (ii) the aggregate of any cash plus the fair market value
(as determined by the Board of Directors, whose determination shall be
conclusive and described in a resolution of the Board of Directors) as of such
date of determination of consideration payable in respect of any tender offer by
the Company or a Subsidiary for all or any portion of the Common Stock, and any
purchase by the Company of Common Stock in the open market, consummated within
the 12 months preceding such date of determination and in respect of which no
adjustment in the Number of Shares pursuant to paragraph (f) of this Section has
been made previously, exceeds 12.5% of the product of the Current Market Price
(determined as provided in paragraph (h) of this Section) on such date of
determination times the number of shares of Common Stock outstanding on such
date, the Number of Shares shall be increased by multiplying the Number of
Shares issuable immediately prior to the close of business on such date of
determination by a fraction of which the numerator shall be such Current Market
Price and the denominator shall be the Current Market Price (determined as
provided in paragraph (h) of this Section) on such date less the amount of cash
to be distributed at such time applicable to one share of Common Stock, such
increase to become effective immediately prior to the opening of business on the
day after such date.
(f) In case a tender or exchange offer made by the Company or any
subsidiary for all or any portion of the Common Stock shall be consummated, or
in case the Company shall purchase Common Stock in the open market, the Number
of Shares shall be increased by multiplying the Number of Shares issuable
immediately prior to the Expiration Time by a fraction of which the numerator
shall be the sum of (A) the fair market value (determined as aforesaid) of the
aggregate consideration payable to shareholders upon consummation of such tender
or exchange offer, or upon such purchase, and (B) the product of such Current
Market
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Price times such number of outstanding shares at the Expiration Time minus the
number of shares accepted for payment in such tender or exchange offer, or so
purchased (the "Purchased Shares") and the denominator shall be the product of
the Current Market Price (determined as provided in paragraph (h) of this
Section) times the number of shares of Common Stock outstanding (including any
Shares of Common Stock tendered or submitted for exchange) at the Expiration
Time. For the purpose of this paragraph, "Expiration Time" means either the last
time that tenders may be made pursuant to a tender offer or exchanges may be
made pursuant to an exchange offer, or the time of an agreement to purchase
shares in the open market, as the case may be. Any increase in the Number of
Shares pursuant to this paragraph shall be made immediately following the close
of business on the last trading day used to compute Current Market Price;
provided, however, that, such increase shall be deemed to have become effective
immediately prior to the opening of business on the day following the Expiration
Time. To the extent that a holder exercises Warrants prior to the conclusion of
the period for which Current Market Price is to be calculated, any adjustment in
the number of shares of Common Stock issuable upon exercise of such Warrant
shall inure to the benefit of the holder of record of such Warrant at the close
of business on the first Trading Day following the Expiration Time. In no event
shall the Number of Shares be reduced as a result of the consummation of any of
the transactions contemplated by this paragraph (f).
(g) The reclassification of any class of Common Stock into securities
which include securities other than such class of Common Stock (other than any
reclassification upon a consolidation or merger to which Section 14 applies)
shall be deemed to involve (i) a distribution of such securities other than such
class of Common Stock to all holders of such class of Common Stock (and the
effective date of such reclassification shall be deemed to be "the date fixed
for the determination of shareholders entitled to such distribution" within the
meaning of paragraph (d) (i) of this Section), and (ii) a subdivision or
combination, as the case may be, of the number of shares of such class of Common
Stock outstanding prior to such reclassification into the number of such class
of Common Stock outstanding immediately thereafter (and the effective date of
such reclassification shall be deemed to be the day upon which such subdivision
becomes effective or the day upon which such combination becomes effective, as
the case may be, and the day upon which such subdivision or combination becomes
effective within the meaning of paragraph (a) of this Section). Rights, options
or warrants issued by the Company to all holders thereof to subscribe for or
purchase Common Stock entitling the holders thereof to subscribe for or purchase
Common Stock (either initially or under certain circumstances), which rights,
options or warrants (i) are deemed to be transferred with such Common Stock,
(ii) are not exercisable and (iii) are also issued in respect of future
issuances of Common Stock, in each case in clauses (i) through (iii) until or
upon the occurrence of a specified event or events ("Trigger Event"), shall for
purposes of this Section 15 not be deemed issued until the occurrence of the
earliest Trigger Event.
(h) For the purpose of any computation under this paragraph and
paragraphs (b), (d) and (e) of this Section, the current market price per share
of Common Stock (the "Current Market Price" per share of Common Stock of the
Company or any other security) on any date shall be deemed to be the average of
the daily Closing Prices for the 30 consecutive trading days commencing 45
trading days before the date in question. For the purpose of any computation
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under paragraph (f) of this Section, the Current Market Price on any date shall
be deemed to be the average of the daily closing prices for the five consecutive
trading days commencing on the first trading day immediately following the
expiration time. Notwithstanding anything to the contrary contained in this
paragraph, (i) the "ex" date for any event (other than the issuance or
distribution requiring such computation) that requires an adjustment to the
conversion price pursuant to paragraph (a), (b), (d) or (e) above occurs on or
after the 15th trading day prior to the date in question and prior to the "ex"
date for the issuance or distribution requiring such computation, the closing
price for each trading day prior to the "ex" date for such other event shall be
adjusted by multiplying such closing price by the same fraction by which the
conversion price is so required to be adjusted as a result of such other event,
(ii) if the "ex" date for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the conversion price
pursuant to paragraph (a), (b), (d), (e) or (f) above occurs on or after the
"ex" date for the issuance or distribution requiring such computation and on or
prior to the date in question, the closing price for each trading day on and
after the "ex" date for such other event shall be adjusted by multiplying such
closing price by the reciprocal of the fraction by which the conversion price is
so required to be adjusted as a result of such other event, and (iii) if the
"ex" date for the issuance or distribution requiring such computation is on or
prior to the date in question, after taking into account any adjustment required
pursuant to clause (ii) of this proviso, the closing price for each trading day
on or after such "ex" date shall be adjusted by adding thereto the amount of any
cash and the fair market value on the date in question (as determined by the
Board of Directors in a manner consistent with any determination of such value
for the purposes of paragraph (d) or (e) of this Section, whose determination
shall be conclusive and described in a resolution of the Board of Directors) of
the evidences of indebtedness, shares of Capital Stock or assets being
distributed applicable to one share of Common Stock of the Company as of the
close of business on the day before such "ex" date. If on any date there has not
been a Public Equity Offering or if there is no closing price available for the
Common Stock of the Company on any date, the Current Market Price shall be
determined in good faith by the Board of Directors of the Company and certified
in a board resolution, based on the most recently completed arms length
transaction between the Company and a person other than an Affiliate (as defined
in Rule 405 of the Securities Act of 1933, as amended) of the Company and the
Closing of which occurs on such date or within such six-month period or (b) if
no such transaction shall have occurred within the six-month period preceding
such date or if such transaction is in excess of $1 million, by an Independent
Financial Expert appointed in the manner provided for in paragraph (i) (i) of
this Section 15.
(i) (i) If any event shall occur as to which the other provisions of
this Section 15 are not strictly applicable but the failure to make any
adjustment would have the effect of depriving holders of the benefit of all or a
portion of the exercise rights in respect of any Warrant in accordance with the
essential intent and principles of this Section 15, then, in each such case, the
Company shall appoint an Independent Financial Expert, which shall give its
opinion upon the adjustment, if any, on a basis consistent with the essential
intent and principles established in this Section 15 necessary to preserve,
without dilution, such exercise rights. Upon receipt of such opinion, the
Company will promptly mail a copy thereof to the holders and shall make the
adjustments described therein. As used herein, an "Independent Financial Expert"
is a firm (a) which does not, and whose directors, officers and employees or
affiliates do not have a direct or
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indirect financial interest in the Company and (b) which, in the judgment of the
Board of Directors, is otherwise independent and qualified to perform the task
for which it is to be engaged.
(ii) The Company will not, by amendment of its articles of
incorporation or through any consolidation, merger, reorganization, transfer of
assets, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of the
Warrants, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holders thereof against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (i) will take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Class A Common Stock on the exercise of the Warrants
from time to time outstanding and (ii) will not take any action which results in
any adjustment of the Number of Shares if the total number of shares of Class A
Common Stock issuable after the action upon the exercise of all of the Warrants
would exceed the total number of shares of Class A Common Stock then authorized
by the Company's certificate of incorporation and available for the purposes of
issue upon such exercise.
(j) The Company may, but shall not be obligated to, make such
increases in the Number of Shares, in addition to those required by paragraphs
(a), (b), (d), (e), (f) and (g) of this Section, 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 shall not be taxable to the recipients or if
that is not possible, to diminish any income taxes that are otherwise payable
because of such event.
(k) No adjustment in the Number of Shares shall be required unless
such adjustment (plus any other adjustments not previously made by reason of
this paragraph (k)) would require an increase or decrease of at least 1% in the
Number of Shares; provided, however, that any adjustments which by reason of
this paragraph (k) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment.
(l) In any case in which this Section 15 shall require that an
adjustment in the Number of Shares be made effective as of or immediately after
a record date for a specified event, the Company may elect to defer until the
occurrence of such event (i) issuing to the holder of any Warrant exercised
after such record date the shares of Common Stock and other capital stock of the
Company, if any, issuable upon such exercise over and above the shares of Common
Stock and other capital stock of the Company, if any, issuable upon such
exercise on the basis of the Number of Shares prior to such adjustment and (ii)
paying to such holder any amount in cash in lieu of a fractional share pursuant
to Section 17 hereof; provided, however, that the Company shall deliver to such
holder a due bill or other appropriate instrument evidencing such holder's right
to receive such additional shares of Common Stock, other capital stock and cash
upon the occurrence of the event requiring such adjustment.
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(m) (i) No adjustment need be made for a transaction referred to in
subsections (a), (b), (e) or (f) of this Section 15 if holders are to
participate in the transaction on a basis and with notice that the Board of
Directors determines to be fair and appropriate in light of the basis and notice
on which holders of shares of Common Stock of the Company participate in the
transaction.
(ii) No adjustment need be made for (x) a transaction referred to
in subsections (b), (d) (ii) or (d) (iii) of this Section 15 if the below market
portion of such issuances, taken together with the below market portion of all
other below market issuances and with the above market portion of all above
market tender or exchange offers described in clause (y) of this paragraph made
on and after the date of this Warrant Agreement, is less than 2.0% of the
product of the Current Market Price and the number of outstanding shares ("Total
Capitalization") of the Company (determined by reference to the sum of the
percentages of Total Capitalization of the Company attributable to each such
transaction on the date thereof) and (y) a transaction referred to in subsection
(f) of this Section 15 if the above market portion of such tender or exchange
offers, taken together with the above market portion of all other above market
tender or exchange offers and with the below market portion of all below market
issuances described in clause (x) of this paragraph made on or after the date of
this Warrant Agreement, is less than 2.0% of the Total Capitalization of the
Company (determined by reference to the sum of the percentages of Total
Capitalization of the Company attributable to each such transaction on the date
thereof).
(i) No adjustment need be made for a change in the par value, or from
par value to no par value, or from no par value to par value, of the Common
Stock.
SECTION 16. [Intentionally Omitted.]
SECTION 17. Fractional Interests. The Company shall not be
required to issue fractional Warrant Shares on the exercise of Warrants. If more
than one Warrant shall be presented for exercise in full at the same time by the
same holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 17,
be issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall notify the Warrant Agent in writing of the amount to be paid in
lieu of the fraction of a Warrant Share and concurrently pay or provide to the
Warrant Agent for payment to the Warrant holder an amount in cash equal to the
product of (i) such fraction of a Warrant Share multiplied by (ii) the
difference of the Current Market Price of Class A Common Stock on the trading
day immediately preceding the date the Warrant is presented for exercise over
the Exercise Price, computed to the nearest whole cent.
SECTION 18. Notices of Adjustments.
----------------------
(a) Whenever the Number of Shares is adjusted as herein provided:
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(i) The Company shall compute the adjusted Number of Shares
in accordance with Section 15 and shall prepare a certificate signed by the
Treasurer or Chief Financial Officer of the Company setting forth the adjusted
Number of Shares and showing in reasonable detail the facts upon which such
adjustment is based, and such certificate shall within 15 days thereafter be
filed (with a copy to the Trustee) at each office or agency maintained for the
purpose of exercise of Warrants pursuant to this Agreement; and
(ii) a notice stating that the Number of Shares has been
adjusted and setting forth the adjusted Number of Shares shall be prepared
within 15 days thereafter, and as soon as practicable after it is prepared, such
notice shall be furnished by the Company to the Trustee and mailed by the
Company at its expense to all registered holders at their last addresses as they
shall appear in the Warrant register.
(b) In case:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable (i) otherwise than exclusively in cash
or (ii) exclusively in cash in an amount that would require an adjustment in the
Number of Shares pursuant to paragraph (e) of Section 15; or
(ii) the Company shall authorize the granting to the
holders of its shares of Common Stock of rights, options or warrants to
subscribe for or purchase any shares of Capital Shares of any class or of any
other rights (excluding shares of Capital Shares or options for Capital Shares
issued pursuant to a benefit plan for employees, officers or directors of the
Company); or
(iii) of any reclassification of the shares of any class of
Common Stock of the Company (other than a subdivision or combination of the
outstanding shares of such class of Common Stock), or of any consolidation,
merger or share exchange to which the Company is a party and for which approval
of any shareholders of the Company is required, or of the sale or transfer of
all or substantially all of the assets of the Company; or
(iv) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(v) the Company or any subsidiary shall commence a
tender or exchange offer for all or a portion of the outstanding shares of
Common Stock (or shall amend any such tender or exchange offer to change the
maximum number of shares being sought or the amount or type of consideration
being offered (including by exchange) therefor); then the Company shall cause to
be filed at each office or agency maintained pursuant to this Agreement, and
shall cause to be mailed to all registered holders at their last addresses as
they shall appear in the Warrant register, at least 21 days (or 11 days in any
case specified in clause (a), (b) or (e) above) prior to the applicable record,
effective or expiration date hereinafter specified, a notice stating (x) the
date on which a record is to be taken for the purpose of such dividend,
distribution
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or granting of rights, options or warrants, or, if a record is not to be taken,
the date as of which the holders of its shares of Common Stock of record who
will be entitled to such dividend, distribution, rights, options or warrants are
to be determined, (y) the date on which such reclassification, consolidation,
merger, share exchange, sale, transfer, dissolution, liquidation or winding up
is expected to become effective, and the date as of which it is expected that
holders of its shares of Common Stock of record shall be entitled to exchange
their shares of Common Stock, for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, share exchange, sale,
transfer, dissolution, liquidation or winding up, or (z) the date on which such
tender or exchange offer (other than an exchange offer contemplated by clause
(y) above) commenced, the date on which such tender or exchange offer is
scheduled to expire unless extended, the consideration offered and the other
material terms thereof (or the material terms of any amendment thereto). Neither
the failure to give any such notice nor any defect therein shall affect the
legality or validity of any action described in clauses (a) through (e) of this
Section 18.
SECTION 19. Warrant Agent. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrants, by their
acceptance thereof, shall be bound.
(a) The statements contained herein and in the Warrant
Certificates shall be taken as statements of the Company. The Warrant Agent
assumes no responsibility for the correctness of any of the same except such as
describe the Warrant Agent or action taken or to be taken by it. The Warrant
Agent assumes no responsibility with respect to the distribution of the Warrant
Certificates except as herein otherwise provided.
(b) The Warrant Agent shall not be responsible for any failure
of the Company to comply with any of the covenants contained in this Agreement
or in the Warrant Certificates to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any holder of
any Warrant Certificate in respect of any action taken, suffered or omitted by
it here under in good faith and in accordance with the opinion or the advice of
such counsel.
(d) The Warrant Agent shall incur no liability or responsibility
to the Company or to any holder of any Warrant Certificate for any action taken
in reliance on any Warrant Certificate, certificate of shares, notice,
resolution, waiver, consent, order, certificate, or other paper, document or
instrument believed by it to be genuine and to have been signed, sent or
presented by the proper party or parties. The Warrant Agent shall not be bound
by any notice or demand, or any waiver, modification, termination or revision of
this Agreement or any of the terms hereof, unless evidenced by a writing between
the Company and the Warrant Agent.
(e) The Company agrees to pay to the Warrant Agent such reasonable
compensation from time to time as agreed between the Company and the Warrant
Agent for all
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services rendered by the Warrant Agent hereunder and in connection with the
execution of this Agreement, to reimburse the Warrant Agent for all expenses,
taxes (including withholding taxes and the reasonable fees and expenses of its
counsel and agents) and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent in the execution, delivery and performance
of its responsibilities under this Agreement and to indemnify the Warrant Agent
and save harmless against any and all losses, liabilities, or expenses,
including judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution, delivery and performance of its responsibilities
under this Agreement except as a result of its negligence, willful misconduct or
bad faith. The provisions of this Section 19(e) shall survive termination of
this Agreement and the resignation or removal of the Warrant Agent.
(f) The Warrant Agent shall be under no obligation to institute
any action, suit or legal proceeding or to take any other action likely to
involve expense unless the Company or one or more registered holders of Warrant
Certificates shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as it may
consider proper, whether with or without any such security or indemnity. All
rights of action under this Agreement or under any of the Warrants may be
enforced by the Warrant Agent without the possession of any of the Warrant
Certificates or the production thereof at any trial or other proceeding relative
thereto, and any such action, suit or proceeding instituted by the Warrant Agent
shall be brought in its name as Warrant Agent and any recovery of judgment shall
be for the ratable benefit of the registered holders of the Warrants, as their
respective rights or interests may appear.
(g) Except as required by law, the Warrant Agent, and any
stockholder, director, officer or employee of the Warrant Agent, may buy, sell
or deal in any of the Warrants or other securities of the Company or become
pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to the Company or otherwise act as
fully and freely as though it were not Warrant Agent under this Agreement.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as agent for the
Company, and its duties shall be determined solely by the provisions hereof. The
Warrant Agent shall not be liable for anything which it may do or refrain from
doing in connection with this Agreement except for its own negligence or bad
faith.
(i) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of any Warrant Certificate to make or cause to be
made any adjustment of the Number of Shares or other securities or property
deliverable as provided in this Agreement, or to determine whether any facts
exist which may require any of such adjustments, or with respect to the nature
or extent of any such adjustments, when made, or with respect to the method
employed in making the same. The Warrant Agent shall not be accountable with
respect to the validity or value or the kind or amount of any Warrant Shares or
of any securities or property which may at any time be issued or delivered upon
the exercise of any Warrant or with
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respect to whether any such Warrant Shares or other securities will when issued
be validly issued and fully paid and nonassessable, and makes no representation
with respect thereto.
SECTION 20. Merger, Consolidation or Change of Name of Warrant
Agent. Any corporation into which the Warrant Agent may be merged or with which
it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto; provided that such
corporation would be eligible for appointment as a successor warrant agent under
the provisions of Section 21 hereof. To the extent practicable, the Warrant
Agent shall provide prior written notice to the Company of any such merger,
consolidation, succession or similar change with respect to the Warrant Agent;
provided, however, that the failure to deliver such notice will not affect the
rights of any of the parties hereto. In case at the time such successor to the
Warrant Agent shall succeed to the agency created by this Agreement, and in case
at that time any of the Warrant Certificates shall have been countersigned but
not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent; and in case at that time any of
the Warrant Certificates shall not have been countersigned, any successor to the
Warrant Agent may countersign such Warrant Certificates either in the name of
the predecessor Warrant Agent or in the name of the successor to the Warrant
Agent; and in all such cases such Warrant Certificates shall have the full force
and effect provided in the Warrant Certificates and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrant Certificates shall have been countersigned but
not delivered, the Warrant Agent whose name has been changed may adopt the
countersignature under its prior name, and in case at that time any of the
Warrant Certificates shall not have been countersigned, the Warrant Agent may
countersign such Warrant Certificates either in its prior name or in its changed
name, and in all such cases such Warrant Certificates shall have the full force
and effect provided in the Warrant Certificates and in this Agreement.
SECTION 21. Change of Warrant Agent. If the Warrant Agent shall
become incapable of acting as Warrant Agent or shall resign as provided below,
the Company shall appoint a successor to such Warrant Agent. If the Company
shall fail to make such appointment within a period of 30 days after it has been
notified in writing of such incapacity by the Warrant Agent or by the registered
holders of a majority of Warrant Certificates, then the registered holder of any
Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a successor to the Warrant Agent. Pending appointment of a
successor to such Warrant Agent, either by the Company or by such a court, the
duties of the Warrant Agent shall be carried out by the Company. The holders of
a majority of the unexercised Warrants shall be entitled at any time to remove
the Warrant Agent and appoint a successor to such Warrant Agent. Such successor
to the Warrant Agent need not be approved by the Company or the former Warrant
Agent. After appointment the successor to the Warrant Agent shall be vested with
the same powers, rights, duties and responsibilities as if it had been
originally named as Warrant Agent without further act or deed; but the former
Warrant Agent shall deliver and transfer to the
25
<PAGE>
successor to the Warrant Agent any property at the time held by it hereunder and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Failure to give any notice provided for in Section 21, however, or
any defect therein, shall not affect the legality or validity of the appointment
of a successor to the Warrant Agent.
The Warrant Agent may resign at any time and be discharged from
the obligations hereby created by so notifying the Company in writing at least
30 days in advance of the proposed effective date of its resignation. If no
successor Warrant Agent accepts the engagement hereunder by such time, the
Company shall act as Warrant Agent.
SECTION 22. Notices to the Company and Warrant Agent. Any notice
or demand authorized by this Agreement to be given or made by the Warrant Agent
or by the registered holder of any Warrant Certificate to or on the Company
shall be sufficiently given or made when and if deposited in the mail, first
class or registered, postage prepaid, addressed (until another address is filed
in writing by the Company with the Warrant Agent), as follows:
USN Communications, Inc.
10 Riverside Plaza, Suite 401
Chicago, IL 60606-3709
Attention: General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive, Suite 2300
Chicago, IL 60606
Attention: Gary P. Cullen
Any notice pursuant to this Agreement to be given by the Company or by
the registered holder(s) of any Warrant Certificate to the Warrant Agent shall
be sufficiently given when and if deposited in the mail, first-class or
registered, postage prepaid, addressed (until another address is filed in
writing by the Warrant Agent with the Company) to the Warrant Agent as follows:
Harris Trust and Savings Bank
311 West Monroe
Chicago, Illinois 60603
Attention: Indenture Trust Division
Notice may also be given by facsimile transmission (effective when
receipt is acknowledged) (effective at the time of delivery) or by overnight
delivery service (effective the next business day).
SECTION 23. Supplements and Amendments. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement without the
consent of any
26
<PAGE>
holders of Warrant Certificates in order to cure any ambiguity or to correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provision herein, or to make any other provisions in regard to
matters or questions arising hereunder which the Company and the Warrant Agent
may deem necessary or desirable and which shall not in any way materially
adversely affect the interests of the holders of Warrant Certificates. Any
amendment or supplement to this Agreement that has a material adverse effect on
the interests of holders shall require the written consent of registered holders
of a majority of the then outstanding Warrants. The consent of each holder of a
Warrant affected shall be required for any amendment pursuant to which the
Exercise Price would be increased or the Number of Shares purchasable upon
exercise of Warrants would be decreased (other than in accordance with Sections
15 or 17 hereof). In executing any amendment or supplement, the Warrant Agent
shall be entitled to receive an opinion of counsel to the effect that such
amendment or supplement is authorized and permitted by this Agreement.
SECTION 24. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
SECTION 25. Termination. This Agreement shall terminate at 5:00 p.m.,
New York, New York time on August 15, 2004. Notwithstanding the foregoing, this
Agreement will terminate on such earlier date on which all outstanding Warrants
have been exercised. The provisions of Sections 19 and 27 hereof shall survive
such termination.
SECTION 26. Governing Law; Jurisdiction. This Agreement and each
Warrant Certificate shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and to be performed
in the State of New York. The Company irrevocably consents to the jurisdiction
of any United States or State Court located in the State of New York in any suit
or proceeding based on or arising under this Agreement or the Warrant
Certificates and irrevocably agrees that all claims in respect of such suit or
proceeding may be determined in any such court. The Company irrevocably waives
the defense of an inconvenient forum to the maintenance of such suit or
proceeding. The Company hereby agrees to designate and appoint Corporation
Service Company, 500 Central Avenue, Albany, New York 12210 as an agent upon
whom process may be served in any suit or proceeding based on or arising under
this Agreement. The Company further agrees that service of process upon the
Company, or upon an agent appointed pursuant to the preceding sentence
accompanied with written notice of said service to the Company, as the case may
be, mailed by first class mail shall be deemed in every respect effective
service of process upon the Company in any such suit or proceeding. Nothing
herein shall affect the Warrant Agent's or any Warrant holder's right to serve
process in any other manner permitted by law. The Company agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
SECTION 27. Benefits of This Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company,
the Warrant Agent and the registered holders of the Warrant Certificates any
legal or equitable right, remedy or claim
27
<PAGE>
under this Agreement; but this Agreement shall be for the sole and exclusive
benefit of the Company, the Warrant Agent and the registered holders of the
Warrant Certificates.
SECTION 28. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
SECTION 29. Further Assurances. From time to time on and after the
date hereof, the Company shall deliver or cause to be delivered to the Warrant
Agent such further documents and instruments and shall do and cause to be done
such further acts as the Warrant Agent shall reasonably request (it being
understood that the Warrant Agent shall have no obligation to make such request)
to carry out more effectively the provisions and purposes of this Agreement, to
evidence compliance herewith or to assure itself that it is protected hereunder.
28
<PAGE>
IN WITNESS WHEREOF, the parties here to have caused this Agreement to
be duly executed, as of the day and year first above written.
USN COMMUNICATIONS, INC.
By:
---------------------------------
Name:
Title:
HARRIS TRUST AND SAVINGS
BANK, as Warrant Agent
By:
---------------------------------
Name:
Title:
29
<PAGE>
EXHIBIT A
Form of Warrant Certificate
Face
No. _____
CUSIP 90336N113
Warrant Certificate
USN COMMUNICATIONS, INC.
This Warrant Certificate certifies that ___________, or its registered
assigns, is the registered holder of __________ warrants expiring August 15,
2004 (the "Warrants") to purchase _____________ shares of Class A Common Stock,
par value $.01 per share (the "Class A Common Stock"), of USN Communications,
Inc. ("the Company"). Each Warrant entitles the holder upon exercise to receive
from the Company, at any time on or after 9:00 a.m., New York time on or after
the date of the occurrence of an Exercise Event (as defined in the Warrant
Agreement, dated as of August 15, 1997 (the "Warrant Agreement"), by and between
USN Communications, Inc. and Harris Trust and Savings Bank) and prior to the
close of business on a date seven years following the date of the Warrant
Agreement, 0.134484 fully paid and nonassessable shares ("Number of Shares") of
Class A Common Stock (each a "Warrant Share") at the initial exercise price (the
"Exercise Price") of $.01 per share payable in the form of cash or certified
check, official bank check or bank cashier's check payable to the order of the
Company, upon surrender of this Warrant Certificate and payment of the aggregate
Exercise Price at the office or agency of the Warrant Agent, but only subject to
the conditions set forth herein and in the Warrant Agreement referred to herein.
The and number of Warrant Shares issuable upon exercise of the Warrants is
subject to adjustment upon the occurrence of certain events set forth in the
Warrant Agreement. All capitalized terms not defined herein shall have the
meaning assigned to such terms in the Warrant Agreement.
No Warrant may be exercised after 5:00 p.m., New York time on August
15, 2004, and to the extent not exercised by such time such Warrants shall
become void.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by
the Warrant Agent, as such term is used in the Warrant Agreement.
This Warrant Certificate shall be governed and construed in accordance
with the internal laws of the State of New York.
A-1
<PAGE>
IN WITNESS WHEREOF, USN Communications, Inc. has caused this Warrant
Certificate to be signed by its Chief Executive Officer and by its Secretary and
has caused its corporate seal to be affixed hereunto or imprinted hereon.
Dated:
USN COMMUNICATIONS, INC.
By:
-------------------------------
Chief Executive Officer
By:
-------------------------------
Secretary
(seal)
Countersigned:
HARRIS TRUST AND SAVINGS BANK,
as Warrant Agent
By:
--------------------
Authorized Signatory
A-2
<PAGE>
Form of Warrant Certificate
Reverse
UNLESS THIS WARRANT IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY (THE "DEPOSITARY") TO THE COMPANY OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY WARRANT ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY OR SUCH OTHER
REPRESENTATIVE OF THE DEPOSITARY OR SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT HEREON IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF
FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY
SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET
FORTH IN SECTION 7 OF THE WARRANT AGREEMENT.
UNTIL THE EARLIEST TO OCCUR OF (I) FEBRUARY 15, 1998, (II) THE
OCCURRENCE OF AN EXERCISE EVENT (AS DEFINED IN THE WARRANT AGREEMENT, DATED
AS OF AUGUST 15, 1997, BETWEEN USN COMMUNICATIONS, INC. (THE "COMPANY") AND
HARRIS TRUST AND SAVINGS BANK, AS WARRANT AGENT (THE "WARRANT AGREEMENT")),
(III) THE OCCURRENCE OF AN EVENT OF DEFAULT (AS DEFINED IN THE INDENTURE
RELATING TO 14 5/8% SENIOR DISCOUNT NOTES DUE 2004 (THE "NOTES") OF THE
COMPANY), (IV) THE DATE ON WHICH A REGISTRATION STATEMENT WITH RESPECT TO
THE NOTES OR AN EXCHANGE OFFER RELATING TO THE NOTES IS DECLARED EFFECTIVE,
OR (V) SUCH EARLIER DATE AS DETERMINED BY MERRILL LYNCH, PIERCE, FENNER AND
SMITH INCORPORATED IN ITS SOLE DISCRETION, THE WARRANTS EVIDENCED HEREBY
MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED TO ANY PERSON UNLESS,
SIMULTANEOUSLY WITH SUCH TRANSFER, THE HOLDER HEREOF TRANSFERS TO SUCH
TRANSFEREE $1,000 PRINCIPAL AMOUNT AT STATED MATURITY OF NOTES AND TEN
INITIAL WARRANTS, EACH INITIAL WARRANT
A-3
<PAGE>
ENTITLING THE HOLDER THEREOF TO PURCHASE 0.134484 SHARES OF CLASS A COMMON
STOCK OF THE COMPANY (SUBJECT TO ADJUSTMENT UNDER SECTION 15 OF THE WARRANT
AGREEMENT) SO TRANSFERRED.
THE WARRANTS REPRESENTED HEREBY ("WARRANTS") AND, AS OF THE DATE THIS
WARRANT CERTIFICATE WAS ORIGINALLY ISSUED, THE SHARES OF CLASS A COMMON
STOCK, $.01 PAR VALUE PER SHARE, PURCHASABLE UPON THEIR EXERCISE (THE
"WARRANT SHARES" AND, TOGETHER WITH THE WARRANTS, THE "SECURITY"), HAVE NOT
BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER
THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF
IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT
FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, (1) REPRESENTS
THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER
THE SECURITIES ACT ("RULE 144A"), (2) AGREES THAT IT WILL NOT PRIOR TO (X)
THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY
RULE 144(k) UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER)
AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF
THIS SECURITY) OR THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE
COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY
AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE
"RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER
THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B)
PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE
UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A
"QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR
ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE
144A OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH
PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO
A-4
<PAGE>
THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF
THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
By accepting a Warrant Certificate bearing the legend above, each holder shall
be bound by all of the terms and provisions of the Warrant Agreement (a copy of
which is available on request to the Company or the Warrant Agent) as fully and
effectively as if such holder had signed the same.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring August 15, 2004, each entitling the holder
upon exercise to receive 0.314484 shares of Class A Common Stock, and are issued
pursuant to the Warrant Agreement, duly executed and delivered by the Company to
the Warrant Agent which Warrant Agreement is hereby incorporated by reference in
and made a part of this instrument and is hereby referred to for a description
of the rights, limitation of rights, obligations, duties and immunities
thereunder of the Warrant Agent, the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants.
Warrants may be exercised at any time on or after 9:00 a.m., New York
time on or after the occurrence of an Exercise Event (as defined in the Warrant
Agreement) and prior to the close of business on August 15, 2004. The holder of
Warrants evidenced by this Warrant Certificate may exercise them by surrendering
this Warrant Certificate, with the form of election to purchase set forth hereon
properly completed and executed, together with payment of the Exercise Price in
the form of cash or certified or official bank check or official bank cashier's
check payable to the order of the Company, at the office of the Warrant Agent.
In the event that upon any exercise of Warrants evidenced hereby the number of
Warrants exercised shall be less than the total number of Warrants evidenced
hereby, there shall be issued to the holder hereof or his assignee a new Warrant
Certificate evidencing the number of Warrants not exercised.
The Warrant Agreement provides that upon the occurrence of certain
events the Number of Shares set forth on the face hereof may, subject to certain
conditions, be adjusted. No fractional shares of Class A Common Stock will be
issued upon the exercise of any Warrant, but the Company will pay the cash value
thereof determined as provided in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Warrant
Agent by the registered holder thereof in person or by a legal representative or
attorney duly authorized in writing, may be exchanged, in the manner and subject
to the limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Warrant Agent a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in
A-5
<PAGE>
exchange for this Warrant Certificate, subject to the limitations provided in
the Warrant Agreement, without charge except for any tax or other governmental
charge imposed in connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder(s) thereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, of any distribution to the
holder(s) hereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.
A-6
<PAGE>
Election to Purchase
(To Be Executed Upon Exercise Of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive _______ shares of Class A
Common Stock and herewith tenders payment for such shares to the order of USN
Communications, Inc. in the amount of $____ in accordance with the terms hereof.
The undersigned requests that a certificate for such shares be
registered in the name of ___________________, whose address is
_________________ and that such shares be delivered to __________________,
whose address is _______________.
If said number of shares is less than all of the shares of Common
Stock purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the remaining balance of such shares be registered in
the name of __________________, whose address is _______________ and that such
Warrant Certificate be delivered to _________________, whose address is
__________________.
Date: _____________
Your Signature:___________________
(Sign exactly as your name appears on the face of this Warrant)
Signature Guarantee:
TRANSFER NOTICE
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- ---------------------------
- ---------------------------
Please print or typewrite name and address including zip code of assignee
- ----------------------------------------------------------
the within Warrant Certificate and all rights thereunder, hereby irrevocably
constituting and appointing
- ---------------------------
attorney to transfer the Warrants evidenced by said Warrant Certificate (the
"Warrants") on the books of the Company with full power of substitution in the
premises.
In connection with any transfer of the Warrants occurring prior to the
date which is the earlier of (i) the date of an effective registration statement
or (ii) three years after the later
<PAGE>
of the original issuance of the Warrants or the last date on which the Warrants
were held by an affiliate of the Company, the undersigned confirms, that without
utilizing any general solicitation or general advertising:
Check One
[_] (a) the Warrants are being transferred in compliance with the exemption
from registration under the Securities Act of 1933, as amended,
provided by Rule 144A thereunder.
or
[_] (b) the Warrants are being transferred other than in accordance with (a)
above and documents are being furnished which comply with the
conditions of transfer set forth in this Warrant Certificate and the
Warrant Agreement.
If none of the foregoing boxes is checked, the Warrant Agent shall not be
obligated to register the Warrants in the name of any Person other than the
holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 7 (c) of the Warrant Agreement
shall have been satisfied.
Date: NOTICE: The signature to this assignment must correspond with
the name as written upon the face of the within mentioned
instrument in every particular, without alteration or any
change whatsoever.
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Warrant for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Dated:
NOTICE: To be executed by an executive officer
A-8
<PAGE>
EXHIBIT B
FORM OF WARRANT SHARES LEGEND
THE SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE (THE
"SECURITY"), HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS.
NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF
THIS SECURITY, BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR
SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT
OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE
DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH
THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR
ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE
REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER,
SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY
SUBSIDIARY THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES
ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY
BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT
PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL
BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH
PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER
THE RESALE RESTRICTION TERMINATION DATE.
B-1
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Income (loss) before cumulative effects of
accounting changes.................................. $(7,146,789) $(18,097,026) $(25,046,591) $(7,219,144) $(73,637,428)
Income tax expense (benefit).......................... -- -- -- -- --
----------- ------------ ------------ ----------- ------------
Income (loss) before income taxes..................... (7,146,789) (18,097,026) (25,046,591) (7,219,144) (73,637,428)
Fixed charges inlcuded in income:
Interest and related charges on debt................ 9,379 132,095 1,751,373 19,893 8,481,913
Portion of rentals deemed to be interest............ 16,731 601,471 45,739 26,064 91,039
----------- ------------ ------------ ----------- ------------
Total fixed charges included in income................ 26,110 733,566 1,797,112 45,957 8,572,952
----------- ------------ ------------ ----------- ------------
Earnings available for fixed charges.................. $(7,120,679) $(17,363,460) $(23,249,479) $(7,173,187) $(65,064,476)
=========== ============ ============ =========== ============
Fixed Charges:
Fixed charges included in income.................... $ 26,110 $ 733,566 $ 1,797,112 $ 45,957 $ 8,572,952
Interest capitalized in the period.................. -- -- -- -- --
----------- ------------ ------------ ----------- ------------
Total fixed charges................................... $ 26,110 $ 733,566 $ 1,797,112 $ 45,957 $ 8,572,952
=========== ============ ============ =========== ============
Ratio of earnings to fixed charges.................... -- -- -- -- --
=========== ============ ============ =========== ============
</TABLE>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No. 333-
37621 of USN Communications, Inc. on Form S-4 of our report dated March 14, 1997
(September 4, 1997 as to Note 22), which expresses an unqualified opinion and
includes an explanatory paragraph concerning substantial doubt about the
entity's ability to continue as a going concern appearing in the Prospectus,
which is a part of such Registration Statement, and to the reference to us under
the headings "Selected Historical Consolidated Financial and Operating Data" and
"Independent Auditors" in the Prospectus.
DELOITTE & TOUCHE LLP
November 21, 1997
Chicago, Illinois
<PAGE>
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
14 5/8% SENIOR DISCOUNT NOTES DUE 2004
OF
USN COMMUNICATIONS, INC.
PURSUANT TO THE PROSPECTUS DATED , 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
TO: HARRIS TRUST COMPANY OF NEW YORK, AS EXCHANGE AGENT
By Registered or By Overnight Courier: By Hand:
Certified Mail: Harris Trust Company of New York
Harris Trust Company of
Harris Trust Company of New York
New York Wall Street Station Receive Window
Wall Street Station 88 Pine Street, 19th Floor
New York, NY 10005
P.O. Box 1010 Wall Street Station
New York, NY 10268-1010 88 Pine Street, 19th
Floor
New York, NY
By Facsimile:
(212) 701-7636
(212) 701-7637
Confirm by telephone:
(212) 701-7618
Delivery of this instrument to an address other than as set forth above or
transmission of instructions via a facsimile number other than the one listed
above will not constitute a valid delivery. The instructions accompanying this
Letter of Transmittal should be read carefully before this Letter of
Transmittal is completed.
The undersigned acknowledges that he or she has received the Prospectus,
dated , 1997 (the "Prospectus"), of USN Communications, Inc. (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together constitute the Company's offer (the "Exchange Offer") to exchange its
14 5/8% Series B Senior Discount Notes due 2004 (the "New Notes") for an equal
principal amount of its 14 5/8% Senior Discount Notes due 2004 (the "Old
Notes" and, together with the New Notes, the "Notes"). The terms of the New
Notes are identical in all material respects to the Old Notes, except that the
New Notes have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and, therefore, will not bear legends restricting
their transfer and will not contain certain provisions relating to an increase
in the interest rate which were included in the Old Notes under certain
circumstances relating to the timing of the Exchange Offer. The term
"Expiration Date" shall mean 5:00 p.m., New York City time, on ,
1998, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term shall mean the latest date and time to which the
Exchange Offer is extended. Capitalized terms used but not defined herein have
the meaning given to them in the Prospectus.
The Letter of Transmittal is to be used by Holders of Old Notes if
certificates are to be forwarded herewith. Holders of Old Notes whose
certificates are not immediately available, or who are unable to deliver their
certificates and all other documents required by this Letter of Transmittal to
the Exchange Agent on or prior to the Expiration Date, must tender their Old
Notes according to the guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. See
Instruction 1.
<PAGE>
The term "Holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with
respect to the Exchange Offer. Holders who wish to tender their Old Notes must
complete this Letter of Transmittal in its entirety.
The undersigned acknowledges that if it is a broker-dealer holding Old Notes
acquired for its own account as a result of market-making activities or other
trading activities (other than Old Notes acquired directly from the Company),
such Holder may be deemed to be an "Underwriter" within the meaning of the
Securities Act and, therefore, must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of New Notes
received in respect of such Old Notes pursuant to the Exchange Offer.
Notwithstanding the foregoing, the undersigned shall not be deemed to admit
that it is an "Underwriter" within the meaning of such term under the
Securities Act.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THE LETTER OF TRANSMITTAL
DESCRIPTION OF 14 5/8% SENIOR DISCOUNT NOTES DUE 2004
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL AMOUNT
PRINCIPAL TENDERED (MUST
NAMES AND ADDRESS(ES) OF AMOUNT BE IN INTEGRAL
REGISTERED HOLDER(S) CERTIFICATE REPRESENTED BY MULTIPLES
(PLEASE FILL IN, IF BLANK) NUMBER(S) CERTIFICATE(S) OF $1,000)*
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Total
- -----------------------------------------------------------------------------------------------
</TABLE>
*Unless indicated in the column labeled "Principal Amount Tendered," any
tendering Holder of 14 5/8% Senior Discount Notes due 2004 will be deemed to
have tendered the entire aggregate principal amount represented by the
column labeled "Aggregate Principal Amount Represented by Certificate(s)."
If the space provided above is inadequate, list the certificate numbers and
principal amounts on a separate signed schedule and affix the list to this
Letter of Transmittal.
The minimum permitted tender is $1,000 in principal amount. All other tenders
must be integral multiples of $1,000.
[_]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING (SEE INSTRUCTION 1):
Name(s) of Registered Holder(s) ____________________________________________
Window Ticket Number (if any) ______________________________________________
Date of Execution of Notice of Guaranteed Delivery _________________________
Name of Institution which Guaranteed Delivery ______________________________
[_]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
----------------------------------------------------------------------
2
<PAGE>
SPECIAL REGISTRATION INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6) (SEE INSTRUCTIONS 4, 5 AND 6)
To be completed ONLY if To be completed ONLY if
certificates for Old Notes in a certificates for Old Notes in a
principal amount not tendered, or principal amount not tendered, or
New Notes issued in exchange for New Notes issued in exchange for
Old Notes accepted for exchange, Old Notes accepted for exchange,
are to be issued in the name of are to be sent to someone other
someone other than the than the undersigned, or to the
undersigned. undersigned at an address other
than that shown above.
Issue certificate(s) to:
Deliver certificate(s) to:
Name: _____________________________
(Please Print) Name: _____________________________
(Please Print)
Address: __________________________
Address: __________________________
-----------------------------------
(Include Zip Code) -----------------------------------
(Include Zip Code)
-----------------------------------
(Tax Identification or Social -----------------------------------
Security No.) (Tax Identification or Social
Security No.)
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company the principal amount of Old Notes indicated
above. Subject to and effective upon the acceptance for exchange of the
principal amount of Old Notes tendered in accordance with this Letter of
Transmittal, the undersigned sells, assigns and transfers to, or upon the
order of, the Company all right, title and interest in and to the Old Notes
tendered hereby. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent its agent and attorney-in-fact (with full knowledge that
the Exchange Agent also acts as the agent of the Company) with respect to the
tendered Old Notes with full power of substitution to (i) deliver certificates
for such Old Notes to the Company and deliver all accompanying evidences of
transfer and authenticity to, or upon the order of, the Company and (ii)
present such Old Notes for transfer on the books of the Company and receive
all benefits and otherwise exercise all rights of beneficial ownership of such
Old Notes, all in accordance with the terms of the Exchange Offer. The power
of attorney granted in this paragraph shall be deemed to be irrevocable and
coupled with an interest.
The undersigned hereby represents and warrants that he or she has full power
and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim, when the same are acquired by the Company. The
undersigned and any beneficial owner of Old Notes hereby further represent
that any New Notes acquired in exchange for Old Notes tendered hereby will
have been acquired in the ordinary course of business of the undersigned and
any such beneficial owner of Old Notes receiving such New Notes, that neither
the Holder nor any such beneficial owner is participating in, intends to
participate in or has an arrangement or understanding with any person to
participate in the distribution of such New Notes and that neither the Holder
nor any such beneficial owner is an "affiliate," as defined in Rule 405 under
the Securities Act, of the Company. The undersigned and each beneficial owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the New Notes must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any secondary resale transactions of the New Notes acquired by such person and
may not rely on the position of the Staff of the Securities and Exchange
Commission set forth in the no-action letters discussed in the Prospectus
under the caption "The Exchange Offer." If the undersigned is not a broker-
dealer, the undersigned represents that it is
3
<PAGE>
not engaged in, and does not intend to engage in, a public distribution of New
Notes. The undersigned and each beneficial owner will, upon request, execute
and deliver any additional documents deemed by the Exchange Agent or the
Company to be necessary or desirable to complete the assignment, transfer and
purchase of the Old Notes tendered hereby.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
or written notice thereof to the Exchange Agent.
If any tendered Old Notes are not accepted for exchange pursuant to the
Exchange Offer for any reason, certificates for any such unaccepted Old Notes
will be returned, without expense, to the undersigned at the address shown
below or at a different address as may be indicated herein under "Special
Delivery Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer, subject only to withdrawal of
such tenders on the terms set forth in the Prospectus under the caption "The
Exchange Offer--Withdrawal of Tenders."
Unless otherwise indicated under "Special Registration Instructions," please
issue the certificates representing the New Notes issued in exchange for the
Old Notes accepted for exchange and any certificates for Old Notes not
tendered or not exchanged, in the name(s) of the undersigned. Similarly,
unless otherwise indicated under "Special Delivery Instructions," please send
the certificates representing the New Notes issued in exchange for the Old
Notes accepted for exchange and any certificates for Old Notes not tendered or
not exchanged (and accompanying documents, as appropriate) to the undersigned
at the address shown below the undersigned's signature(s). In the event that
both "Special Registration Instructions" and "Special Delivery Instructions"
are completed, please issue the certificates representing the New Notes issued
in exchange for the Old Notes accepted for exchange in the name(s) of, and
return any certificates for Old Notes not tendered or not exchanged to, the
person(s) so indicated. The undersigned understands that the Company has no
obligation pursuant to the "Special Registration Instructions" and "Special
Delivery Instructions" to transfer any Old Notes from the name of the
registered Holder(s) thereof if the Company does not accept for exchange any
of the Old Notes so tendered.
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their certificates and all other
documents required by this Letter of Transmittal to the Exchange Agent prior
to the Expiration Date, may tender their Old Notes according to the guaranteed
delivery procedures set forth in the Prospectus under the caption "The
Exchange Offer--Guaranteed Delivery Procedures." See Instruction 1 regarding
the completion of this Letter of Transmittal printed below.
4
<PAGE>
PLEASE SIGN HERE WHETHER OR NOT
OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
X Date:____________________
--------------------------------------------------
X Date:____________________
--------------------------------------------------
Signature(s) of Registered Holder(s) or Authorized Signatory
Area Code and Telephone Number: _____________________________________________
The above lines must be signed by the registered holder(s) as their
name(s) appear(s) on the Old Notes or by person(s) authorized to become
registered holder(s) by a properly completed bond power from the registered
holder(s), a copy of which must be transmitted with this Letter of
Transmittal. If the Old Notes to which this Letter of Transmittal relate are
held of record by two or more joint holders, then all such holders must sign
this Letter of Transmittal. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, then such person
must (i) set forth his or her full title below and (ii) unless waived by the
Company, submit evidence satisfactory to the Company of such person's
authority so to act. See Instruction 4 regarding the completion of this
Letter of Transmittal printed below.
Name(s): ____________________________________________________________________
(Please Print)
-----------------------------------------------------------------------------
Capacity: ___________________________________________________________________
Address: ____________________________________________________________________
(Include Zip Code)
Signature(s) Guaranteed by an Eligible Institution:
(If required by Instruction 4)
-----------------------------------------------------------------------------
(Authorized Signature)
-----------------------------------------------------------------------------
(Title)
-----------------------------------------------------------------------------
(Name of Firm)
Date: ___________________
5
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES; GUARANTEED DELIVERY
PROCEDURES. The tendered Old Notes as well as a properly completed and duly
executed copy of this Letter of Transmittal or facsimile hereof and any other
documents required by this Letter of Transmittal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. The method of delivery of the tendered Old
Notes, this Letter of Transmittal and all other required documents to the
Exchange Agent is at the election and risk of the Holder and, except as
otherwise provided below, the delivery will be deemed made only when actually
received by the Exchange Agent. Instead of delivery by mail, it is recommended
that the Holder use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure timely delivery. No Letter of
Transmittal or Old Notes should be sent to the Company.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter
of Transmittal or any other documents required hereby to the Exchange Agent
prior to the Expiration Date must tender their Old Notes according to the
guaranteed delivery procedures set forth in the Prospectus. Pursuant to such
procedure: (a) such tender must be made by or through an Eligible Institution
(defined below); (b) prior to the Expiration Date, the Exchange Agent must
have received from the Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile transmission, mail or
hand delivery) setting forth the name and address of the Holder, the
certificate number or numbers of such Old Notes and the principal amount of
Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days after the
Expiration Date, this Letter of Transmittal (or facsimile hereof) together
with the certificate(s) representing the Old Notes and any other required
documents will be deposited by the Eligible Institution with the Exchange
Agent; and (c) such properly completed and executed Letter of Transmittal (or
facsimile hereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer and all other documents required by this
Letter of Transmittal must be received by the Exchange Agent within three New
York Stock Exchange trading days after the Expiration Date, all as provided in
the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures." Any Holder who wishes to tender his or her Old Notes pursuant to
the guaranteed delivery procedures described above must ensure that the
Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m.,
New York City time, on the Expiration Date. Upon request to the Exchange
Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to
tender their Old Notes according to the guaranteed delivery procedures set
forth above.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes, and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
irregularities or conditions of tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in this Letter of Transmittal) shall be firm and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor shall any of them
incur any liability for failure to give such notification. Tenders of Old
Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.
6
<PAGE>
2. TENDER BY HOLDER. Only a Holder of Old Notes may tender such Old Notes in
the Exchange Offer. Any beneficial owner of Old Notes who is not the
registered holder and who wishes to tender should arrange with such registered
holder to execute and deliver this Letter of Transmittal on such owner's
behalf or must, prior to completing and executing this Letter of Transmittal
and delivering his or her Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's name or obtain a properly
completed bond power from the registered holder.
3. PARTIAL TENDERS. Tenders of Old Notes will be accepted only in integral
multiples of $1,000. If less than the entire principal amount of any Old Notes
is tendered, the tendering Holder should fill in the principal amount tendered
in the fourth column of the box entitled "Description of 14 5/8% Senior
Discount Notes due 2004" above. The entire principal amount of any Old Notes
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated. If the entire principal amount of all Old Notes is not
tendered, then Old Notes for the principal amount of Old Notes not tendered
and a certificate or certificates representing New Notes issued in exchange
for any Old Notes accepted will be sent to the Holder at his or her registered
address, unless a different address is provided in the appropriate box on this
Letter of Transmittal, promptly after the Old Notes are accepted for exchange.
4. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile hereof)
is signed by the registered holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered holder or holders of Old Notes tendered and the certificate or
certificates for New Notes issued in exchange therefor is to be issued (or any
untendered principal amount of Old Notes is to be reissued) to the registered
holder and neither the "Special Delivery Instructions" nor the "Special
Registration Instructions" has been completed, then such holder need not and
should not endorse any tendered Old Notes, nor provide a separate bond power.
In any other case, such holder must either properly endorse the Old Notes
tendered or transmit a properly completed separate bond power with this Letter
of Transmittal with the signatures on the endorsement or bond power guaranteed
by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered holder or holders of any Old Notes listed, such Old
Notes must be endorsed or accompanied by appropriate bond powers in each case
signed as the name of the registered holder or holders appears on the Old
Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, evidence satisfactory to the Company of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 4 must be guaranteed by an Eligible Institution which is a member
of (a) the Securities Transfer Agents Medallion Program, (b) the New York
Stock Exchange Medallion Signature Program or (c) the Stock Exchange Medallion
Program.
Except as otherwise provided below, all signatures on this Letter of
Transmittal must be guaranteed by a firm that is a member of a registered
national securities exchange or the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934,
as amended (an "Eligible Institution"). Signatures on this Letter of
Transmittal need not be guaranteed if (a) this Letter of Transmittal is signed
by the registered holder(s) of the Old Notes tendered herewith and such
holder(s) have not completed the box set forth herein entitled "Special
Registration Instructions" or the box entitled "Special Delivery Instructions"
or (b) such Old Notes are tendered for the account of an Eligible Institution.
7
<PAGE>
5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering Holders should
indicate, in the applicable box or boxes, the name and address to which New
Notes or substitute Old Notes for principal amounts not tendered or not
accepted for exchange are to be issued or sent, if different from the name and
address of the person signing this Letter of Transmittal. In the case of
issuance in a different name, the taxpayer identification or social security
number of the person named must also be indicated.
6. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are
to be registered in the name of, any person other than the registered holder
of the Old Notes tendered hereby, or if tendered Old Notes are registered in
the name of any person other than the person signing this Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Old Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or on any other
persons) will be payable by the tendering Holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with this Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering Holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
7. WAIVER OF CONDITIONS. The Company reserves the right, in its sole
discretion, to amend, waive or modify specified conditions in the Exchange
Offer in the case of any Old Notes tendered.
8. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus or this Letter
of Transmittal may be directed to the Exchange Agent at the address specified
in the Prospectus. Holders may also contact their broker, dealer, commercial
bank, trust company or other nominee for assistance concerning the Exchange
Offer.
(DO NOT WRITE IN SPACE BELOW)
<TABLE>
<CAPTION>
CERTIFICATE
SURRENDERED OLD NOTES TENDERED OLD NOTES ACCEPTED
- ------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------
</TABLE>
Delivery Prepared by Checked by Date
8
<PAGE>
USN COMMUNICATIONS, INC.
NOTICE OF GUARANTEED DELIVERY
OF
14 5/8% SENIOR DISCOUNT NOTES DUE 2004
As set forth in the Prospectus, dated , 1997 (as the same may be
amended from time to time, the "Prospectus"), of USN Communications, Inc. (the
"Company") under the caption "The Exchange Offer--Guaranteed Delivery
Procedures," this form or one substantially equivalent hereto must be used to
accept the Company's offer (the "Exchange Offer") to exchange its 14 5/8%
Series B Senior Discount Notes due 2004 (the "New Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), for an equal principal amount of its 14 5/8% Senior Discount Notes due
2004 (the "Old Notes"), if (i) certificates representing the Old Notes to be
exchanged are not lost but are not immediately available or (ii) time will not
permit all required documents to reach the Exchange Agent prior to the
Expiration Date. This form may be delivered by an Eligible Institution by mail
or hand delivery or transmitted, via facsimile, to the Exchange Agent at its
address set forth below not later than 5:00 p.m., New York City Time, on
, 1998. All capitalized terms used herein but not defined herein
shall have the meanings ascribed to them in the Prospectus.
The Exchange Agent is:
HARRIS TRUST COMPANY OF NEW YORK
By Registered or By Overnight Courier: By Hand:
Certified Mail: Harris Trust Company of New York
Harris Trust Company of
Harris Trust Company of New York
New York Wall Street Station Receive Window
Wall Street Station 88 Pine Street, 19th Floor
New York, NY 10005
P.O. Box 1010 Wall Street Station
New York, NY 10268-1010 88 Pine Street, 19th
Floor
New York, NY
By Facsimile:
(212) 701-7636
(212) 701-7637
Confirm by telephone:
(212) 701-7618
DELIVERY, OR TRANSMISSION VIA FACSIMILE, OF THIS INSTRUMENT TO AN ADDRESS
OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
The undersigned hereby tender(s) for exchange to the Company, upon the terms
and subject to the conditions set forth in the Prospectus and Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes set forth below pursuant to the guaranteed delivery procedures set
forth in the Prospectus under the caption "The Exchange Offer--Guaranteed
Delivery Procedures."
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on , 1998, unless extended
by the Company. With respect to the Exchange Offer, "Expiration Date" means
such time and date, or if the Exchange Offer is extended, the latest time and
date to which the Exchange Offer is so extended by the Company.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Notice of Guaranteed
Delivery shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
<PAGE>
Principal Amount of Old Notes
Exchanged: $ ________________________
SIGNATURES
Certificate Nos. of Old Notes (if
available)
-----------------------------------
Signature of Owner
-------------------------------------
-----------------------------------
Signature of Owner (if more than -------------------------------------
one)
Total $ _____________________________
Dated:
IF OLD NOTES WILL BE DELIVERED BY
Name(s): __________________________ BOOK-ENTRY TRANSFER, PROVIDE THE DE-
POSITORY TRUST COMPANY ("DTC") AC-
COUNT NO.:
----------------------------
(Please Print)
Account No.: ________________________
Address: __________________________
-----------------------------
-----------------------------
(Include Zip Code)
Area Code and
Telephone No. _____________________
Capacity (full title), if signing
in a
representative capacity____________
Taxpayer Identification or
Social Security No.: ______________
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., or is a commercial bank or trust company having an office or
correspondent in the United States, or is otherwise an "eligible guaranteed
institution" within the meaning of Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended, guarantees deposit with the Exchange Agent of the
Letter of Transmittal (or facsimile thereof), together with the Old Notes
tendered hereby in proper form for transfer (or confirmation of the book-entry
transfer of such Old Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility described in the Prospectus under the caption "The Exchange
Offer--Guaranteed Delivery Procedures" and in the Letter of Transmittal) and
any other required document, all by 5.00 p.m., New York City time, on the
third New York Stock Exchange trading day following the Expiration Date.
Name of Firm: _______________________ -------------------------------------
Authorized Signature
Address: ____________________________
Name: _______________________________
- -------------------------------------
Title: ______________________________
Area Code and Telephone No.: ________
Date: _______________________________
NOTE: DO NOT SEND OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF OLD NOTES
MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, THE LETTER OF TRANSMITTAL.
2
<PAGE>
USN COMMUNICATIONS, INC.
OFFER TO EXCHANGE ITS
14 5/8% SERIES B SENIOR DISCOUNT NOTES DUE 2004
FOR ANY AND ALL OF ITS OUTSTANDING
14 5/8% SENIOR DISCOUNT NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998 UNLESS EXTENDED.
To Brokers, Dealers, Commercial Banks, , 1997
Trust Companies and Other Nominees:
USN Communications, Inc., a Delaware corporation, (the "Company") is
offering upon the terms and conditions set forth in the Prospectus, dated
, 1997 (as the same may be amended from time to time, the
"Prospectus"), and in the related Letter of Transmittal enclosed herewith, to
exchange (the "Exchange Offer") its 14 5/8% Series B Senior Discount Notes due
2004 (the "New Notes") for an equal principal amount of its 14 5/8% Senior
Discount Notes due 2004 (the "Old Notes" and together with the New Notes, the
"Notes"). As set forth in the Prospectus, the terms of the New Notes are
identical in all material respects to the Old Notes, except for certain
transfer restrictions relating to the Old Notes and except that the New Notes
will not contain certain provisions relating to an increase in the interest
rate which were included in the Old Notes under certain circumstances relating
to the timing of the Exchange Offer. Old Notes may only be tendered in
integral multiples of $1,000.
THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE "THE EXCHANGE
OFFER--CONDITIONS" IN THE PROSPECTUS.
Enclosed herewith for your information and forwarding to your clients are
copies of the following documents:
1. The Prospectus, dated , 1997.
2. The Letter of Transmittal to exchange Notes for your use and for the
information of your clients. Facsimile copies of the Letter of Transmittal
may be used to exchange Notes.
3. A form of letter which may be sent to your clients for whose accounts
you hold Old Notes registered in your name or in the name of your nominee,
with space provided for obtaining such client's instructions with regard to
the Exchange Offer.
4. A Notice of Guaranteed Delivery.
5. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9.
6. A return envelope addressed to Harris Trust Company of New York, the
Exchange Agent.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS
PROMPTLY AS POSSIBLE. PLEASE NOTE THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED. PLEASE FURNISH
COPIES OF THE ENCLOSED MATERIALS TO THOSE OF YOUR CLIENTS FOR WHOM YOU HOLD
OLD NOTES REGISTERED IN YOUR NAME OR IN THE NAME OF YOUR NOMINEE AS QUICKLY AS
POSSIBLE.
In all cases, exchanges of Old Notes accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(a) certificates representing such Old Notes, (b) the Letter of Transmittal
(or facsimile thereof) properly completed and duly executed with any required
signature guarantees, and (c) any other documents required by the Letter of
Transmittal.
<PAGE>
If holders of Old Notes wish to tender, but it is impracticable for them to
forward their certificates for Old Notes prior to the expiration of the
Exchange Offer or to comply with the book-entry transfer procedures on a
timely basis, a tender may be offered by following the guaranteed delivery
procedure described in the Prospectus under "The Exchange Offer--Guaranteed
Delivery Procedures."
The Exchange Offer is not being made to (nor will tenders be accepted from
or on behalf of) holders of Old Notes residing in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
The Company will not pay any fees or commissions to brokers, dealers or
other persons for soliciting exchanges of Notes pursuant to the Exchange
Offer. The Company will, however, upon request, reimburse you for customary
clerical and mailing expenses incurred by you in forwarding any of the
enclosed materials to your clients. The Company will pay or cause to be paid
any transfer taxes payable on the transfer of Notes to it, except as otherwise
provided in Instruction 6 of the Letter of Transmittal.
Questions and requests for assistance with respect to the Exchange Offer or
for copies of the Prospectus and Letter of Transmittal may be directed to the
Exchange Agent at its address set forth in the Prospectus or at (212) 701-
7624.
Very truly yours,
USN Communications, Inc.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE COMPANY, OR ANY AFFILIATE THEREOF, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENT OR USE ANY DOCUMENT ON
BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED
DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
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