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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1997
REGISTRATION NO. 333-16265
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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UNITED USN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4813 36-3947804
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
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10 SOUTH RIVERSIDE PLAZA,
SUITE 401
CHICAGO, ILLINOIS 60606
(312) 906-3600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
---------------
THOMAS A. MONSON, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
UNITED USN, INC.
10 SOUTH RIVERSIDE PLAZA, SUITE 401
CHICAGO, ILLINOIS 60606
(312) 906-3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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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.
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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. [_]
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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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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 28, 1997
PROSPECTUS
UNITED USN, INC.
OFFER TO EXCHANGE ITS
14% SERIES B SENIOR DISCOUNT NOTES DUE 2003 [USN LOGO]
FOR ANY AND ALL OF ITS OUTSTANDING
14% SENIOR DISCOUNT NOTES DUE 2003
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FEBRUARY
, 1997, UNLESS EXTENDED.
United USN, Inc. (the "Company") hereby offers, upon the terms and subject to
the conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (which together constitute the "Exchange Offer"), to exchange
$1,000 principal amount at maturity of 14% Series B Senior Discount Notes due
2003 (the "New Notes") of the Company for each $1,000 principal amount at
maturity of the issued and outstanding 14% Senior Discount Notes due 2003 (the
"Old Notes" and, together with the New Notes, the "Senior Notes") of the
Company from the holders (the "Holders") thereof. As of the date of this
Prospectus, there was $48.5 million aggregate principal amount at maturity of
the Old Notes outstanding. The terms of the New Notes are identical in all
material respects to the Old Notes, except that the New Notes have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and, therefore, will not bear legends restricting their transfer and will not
contain certain terms providing for an increase in the interest rate on the Old
Notes under certain circumstances relating to the timing of the Exchange Offer.
The New Notes will be senior unsecured obligations of the Company that will
rank senior in right of payment to all subordinated indebtedness of the
Company, including $36.0 million in aggregate principal amount at maturity of
9% Convertible Subordinated Discount Notes due 2004 (the "Convertible Notes"
and, together with the Senior Notes, the "Notes") issued by the Company
pursuant to the terms of an indenture, dated as of September 30, 1996 (the
"Convertible Note Indenture"), by and between the Company and Harris Trust and
Savings Bank, as trustee (the "Convertible Note Trustee"). The New Notes will
rank pari passu in right of payment to all existing and future senior
indebtedness of the Company. The New Notes will be effectively subordinated to
all existing and future liabilities and obligations of the Company's
subsidiaries (approximately $5.3 million as of September 30, 1996, excluding
intercompany indebtedness). The Company's subsidiaries have no obligation to
pay amounts due on the New Notes and have not guaranteed the New Notes as of
the date hereof; however, if a subsidiary guarantees any other indebtedness of
the Company, such subsidiary will be obligated to guarantee the New Notes. See
"Description of the Notes--Certain Covenants." The indenture under which the
New Notes are to be issued, dated as of September 30, 1996 (the "Senior Note
Indenture" and, together with the Convertible Note Indenture, the
"Indentures"), between the Company and Harris Trust and Savings Bank (the
"Senior Note Trustee" and, together with the Convertible Note Trustee, the
"Trustees"), will permit the Company and its subsidiaries to incur, under
certain circumstances, additional indebtedness, including indebtedness pursuant
to a Credit Facility (as defined herein) which shall not exceed $45 million in
principal amount at any one time outstanding. See "Description of the Notes."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined herein). Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission") set forth in no-action letters issued to
third parties, 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 in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by any Holder
(cover page continued on next page)
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SEE "RISK FACTORS," BEGINNING ON PAGE 17, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES IN THE
EXCHANGE OFFER.
-----------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
, 1997
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(cover page continued from previous page)
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 herein), 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.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer (which shall
not include the expenses of any Holder in connection with resales of the New
Notes). Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. The Exchange Offer is subject to certain
customary conditions. In the event the Company terminates the Exchange Offer
and does not accept for exchange any Old Notes, the Company will promptly
return the Old Notes to the Holders thereof. The Company will give oral or
written notice of any extension, amendment, non-acceptance or termination of
the Exchange Offer to the Holders of the Old Notes as promptly as practicable,
such notice in the case of any extension to be issued by means of a press
release or other public announcement no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
The Company can, in its sole discretion, extend the Exchange Offer
indefinitely, subject to the Company's obligation to pay Special Interest (as
defined herein) if the Exchange Offer is not consummated by March 29, 1997 and,
under certain circumstances, file a shelf registration statement with respect
to the Old Notes. See "The Exchange Offer."
Prior to the date of this Prospectus, there has been no public market for the
Notes. The Company does not currently intend to list the New Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. Accordingly, there can be no assurance as to the development
or liquidity of any public market for the New Notes.
The Company has been advised by Smith Barney Inc., BT Securities Corporation,
Chase Securities Inc. and CIBC Wood Gundy Securities Corp. (collectively, the
"Initial Purchasers") that they intend to make a market for the Notes, the
Warrants (as defined below) and the Class A Common Stock, par value $.01 per
share (the "Class A Common Stock") of the Company, however the Initial
Purchasers are not obligated to do so. Any market-making may be discontinued at
any time, and there is no assurance that an active public market for the Notes,
the Warrants or the Class A Common Stock will develop or, that if such a market
develops, that it will continue. This Prospectus has been prepared for use by
the Initial Purchasers in connection with offers and sales of the Notes, the
Warrants and the Class A Common Stock which may be made by them from time to
time in market-making transactions at negotiated prices relating to prevailing
market prices at the time of sale. Such Initial Purchasers may act as principal
or agent in such transactions. See "Plan of Distribution."
In connection with the issuance of the Old Notes by the Company on September
30, 1996, the Company also issued and sold (i) warrants to purchase 61,550
shares, subject to adjustment under certain circumstances, of Class A Common
Stock (the "Warrants") and (ii) $36 million in aggregate principal amount at
maturity of
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Convertible Notes. On November 27, 1996, the Company filed with the Commission
a registration statement on Form S-1, pursuant to which the Warrants and the
Convertible Notes, and the shares into which the Warrants and the Convertible
Notes may be converted, will be registered for resale by the Initial
Purchasers.
The Old Notes, the Warrants and the Convertible Notes were sold by the
Company on September 30, 1996 to the Initial Purchasers, who placed the
Securities with an institutional investor. The Initial Purchasers received
customary compensation in connection with such private placement. See "Certain
Relationships and Related Transactions."
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-
4 (the "Exchange Offer Registration Statement") under the Securities Act with
respect to the New Notes being offered by this Prospectus. This Prospectus does
not contain all of the information set forth in the Exchange Offer Registration
Statement and the exhibits and schedules thereto, certain portions of which
have been omitted pursuant to the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
such contract, agreement or other document filed or incorporated by reference
as an exhibit to the Exchange Offer Registration Statement, reference is made
to such exhibit for a more complete description of the matter involved, and
each such statement is qualified in its entirety by such reference.
The Exchange Offer Registration Statement and the exhibits and schedules
thereto may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and will also be available for inspection and
copying at the regional offices of the Commission located at 7 World Trade
Center, New York, New York 10048 and at 500 West Madison Street (Suite 1400),
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy statements and other
information regarding registrants that file electronically with the Commission.
Under the terms of the Indentures pursuant to which the Old Notes and the
Convertible Notes were, and the New Notes will be, issued and the Warrant
Agreement, the Company will be required to file with the Commission, and to
furnish holders of the Notes and the Warrants with, the information, documents
and other reports specified in Sections 13 and 15(d) of the Exchange Act,
including reports on Forms 10-K, 10-Q and 8-K.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and related notes appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information
contained in this Prospectus is presented after giving effect to all
transactions that are described in this Prospectus as occurring prior to or
simultaneously with the closing of the Exchange Offer. Unless the context
indicates otherwise, all references to the Company refer to United USN, Inc.
and its subsidiaries. Please refer to the Glossary for the definitions of
certain capitalized terms used herein and elsewhere in this Prospectus without
definition.
THE COMPANY
United USN, Inc. ("USN" or the "Company") is one of the fastest growing
providers of integrated local and long distance telecommunications services in
the United States. The Company resells telecommunications services of certain
regional Bell operating companies ("RBOCs") and certain long distance carriers
to provide an integrated solution of local and long distance services to the
underserved small and medium-sized business segment. The Company primarily
focuses its marketing efforts on businesses with telecommunications usage of
less than $5,000 per month. The Company's approach simplifies the subscriber's
telecommunications procurement and management tasks and provides for the easy
addition of customized services, such as special local and long distance
pricing and enhanced and other value-added calling and billing features
designed to meet specific subscriber needs.
The Company's goal is to be more flexible, innovative and responsive to the
needs of its subscribers than the RBOCs and the large long distance carriers,
which primarily concentrate their sales and marketing efforts on residential
and large commercial subscribers. Market research combined with the Company's
experience indicates that its target subscribers would prefer a single source
and single bill for all of their telecommunications needs. The Company provides
local service using existing telephone lines obtained from the incumbent RBOCs
at wholesale rates, which allows subscribers to switch to local service
provided by the Company without changing their existing telephone numbers or
adding new facilities or equipment. The Company provides long distance services
by purchasing bulk capacity from long distance carriers and reselling those
services to the Company's subscribers. By providing an integrated, customized
package of local, long distance and enhanced and other value-added services on
a single bill through its proprietary software and responsive subscriber care
systems, the Company believes that it provides a differentiated and competitive
product.
The Company provides its local resold services pursuant to comprehensive
local exchange resale agreements with Ameritech Corporation ("Ameritech") for
the greater metropolitan Chicago area, Ohio and Michigan (collectively, the
"Ameritech Resale Agreements") and with NYNEX Corporation ("NYNEX") for the
state of New York, with the opportunity to expand into the entire territory
served by NYNEX (the "NYNEX Resale Agreement"). The Company has also entered
into a limited service offering ("LSO") agreement with NYNEX for the resale of
Centrex services over a private local network which provides access to the
majority of business lines in Manhattan, New York. After a nine month systems
test period with Ameritech, the Company commenced service in Illinois in August
1996, followed by Ohio in October 1996. The Company completed a systems test
period in New York in October 1996 and started offering service in November
1996. The Company began service in Michigan at the end of 1996. The Company
estimates, based on data compiled by the Federal Communications Commission (the
"FCC"), that the regions covered by the Ameritech Resale Agreements and NYNEX
Resale Agreement include access to over 30 million access lines, including over
10 million business access lines and approximately 20 million residential
access lines. The Company has implemented a resale task force to facilitate the
negotiation and implementation of additional long-term arrangements with other
RBOCs for the resale of telecommunications services. Additionally, the Company
has contracted with a number of long distance carriers, including MCI
Communications Corporation ("MCI"), Sprint Corporation ("Sprint") and WorldCom
Inc.
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("WorldCom"), to provide switching services and network transmission for its
long distance traffic. The Company continuously seeks to enter into agreements
with additional RBOCs, long distance carriers and enhanced and other value-
added service providers in order to aggressively build its subscriber base as
well as to provide additional services to its existing subscribers while
reducing costs.
MARKET OPPORTUNITY
The recently enacted Telecommunications Act of 1996 (the "Telecommunications
Act") is expected to result in a fundamental change in the competitive
structure of the local exchange market, greatly accelerating changes that have
been under way for several years as a result of FCC policy initiatives and
ongoing deregulatory trends at the state level. Specifically, the
Telecommunications Act lifted regulatory barriers to entry into the local
market, required the resale of local services by the RBOCs and put in place
various measures designed to further the development of a competitive market.
The Company believes that these developments will result in significant
opportunities for new entrants offering integrated local and long distance
telecommunications services. Due to the Company's Ameritech Resale Agreements,
the NYNEX Resale Agreement and the LSO agreement, as well as significant time
invested and experience gained in provisioning the resale of local exchange
services under such agreements, the Company believes it enjoys a competitive
advantage over other local service resellers with respect to the provisioning
of local resale services.
The Company estimates, based on industry sources, that in 1995 total revenues
from domestic local and long distance telecommunications services were
approximately $166 billion, of which approximately $96 billion was represented
by local exchange services and approximately $70 billion was represented by
long distance services. Since the divestiture of the Bell operating companies
from AT&T Corp. ("AT&T") in 1984 (the "Divestiture"), competition in the long
distance market has rapidly increased, and by 1995 AT&T had lost approximately
40% of its long distance market share to MCI, Sprint and a number of other long
distance competitors. Although the market for the provision of long distance
service has been open to competition since the Divestiture, the market for
local exchange services has until recently been essentially closed to
competition. The Company believes that competitive providers such as the
Company, by reselling local exchange services, will have the opportunity to
gain market share in the local exchange market just as long distance resellers
have gained market share in the long distance market. The Company believes that
it has several advantages that enable it to compete successfully in the new
competitive local telecommunications marketplace, including (i) locally
oriented marketing and subscriber service focusing on a defined, underserved
market segment, (ii) billing and information systems that have been interfaced
with the RBOCs and (iii) an experienced management team with significant
operational, technical, financial and regulatory expertise in both the local
and long distance telecommunications industry.
The Telecommunications Act has created an additional opportunity for the
Company to establish itself as a provider of integrated telecommunications
services before the RBOCs and the largest long distance carriers can offer
bundled local and long distance services. In order to provide long distance
services in their local service regions under the Telecommunications Act, the
RBOCs must seek FCC approval and comply with a series of regulations including
the requirement that they offer local resale and either enter into
interconnection agreements with at least one facilities-based carrier, or,
under certain circumstances, offer access and interconnection pursuant to
generally available terms and conditions approved by a state commission. Once
an RBOC obtains FCC approval, the RBOC must provide its in-region long distance
services through a separate operating subsidiary, and such subsidiary must,
among other things, maintain separate books, records and accounts, retain
different directors, officers and employees and secure financing independent of
the creditworthiness of the RBOC's local exchange operations for at least three
years. The Telecommunications Act also prevents the largest long distance
carriers from integrating local services resold from an RBOC in a particular
state with their long distance services until the earlier of (i) February 8,
1999 or (ii) the date the RBOCs are allowed to provide in-region long distance
services in that state. While it is probable that the RBOCs will seek and
obtain some long distance authority prior to 1999, the Company believes its
early entry into the RBOC markets may provide the Company with an opportunity
to grow a customer base prior to the RBOC's ability to offer both local and
long distance services.
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In order for facilities-based competitive access providers ("CAPs") to
provide ubiquitous local telecommunications services, such providers must
obtain access to buildings, negotiate complex interconnection agreements with
RBOCs and other local exchange carriers ("LECs"), address complex rate
structure and billing systems, provide directory listings and 911 and 411
services on their own or through the incumbent LECs, secure number portability
and create local marketing and subscriber care programs tailored for each
market. As a non-facilities based provider, the Company will not be required to
address such issues associated with operating as a facilities-based CAP in
order to provide ubiquitous local telecommunications services. As a result, the
Company believes it will be able to build a subscriber base quickly and
efficiently without incurring significant financial and management costs and
the developmental delays inherent in constructing network and transmission
facilities.
GROWTH STRATEGY
The Company's objective is to be a leading provider of integrated local and
long distance services and other telecommunications products to small and
medium-sized businesses. The Company expects to achieve this goal through the
successful implementation of its growth strategy which includes the following:
. Negotiate Attractive Resale Agreements with RBOCs. The Company seeks to
enter into additional local exchange resale agreements with RBOCs which
position it to offer a full range of local service over a broad
geographic area at a competitive cost to its targeted businesses. The
Ameritech Resale Agreements provide pricing protections designed to
maintain the competitiveness of rates and position the Company to
purchase capacity at rates at least as favorable as those of other
potential resellers of Ameritech local services. The NYNEX Resale
Agreement contains similar pricing protections. The Company intends to
negotiate similar pricing protections in all future RBOC resale
agreements. The Company believes the RBOCs will have an incentive to use
a wholesale strategy with respect to small and medium-sized businesses in
order to stabilize this revenue base and deter migration of the current
RBOCs' subscribers to facilities-based CAPs and other new entrant LECs.
. Provide Low-Cost Telecommunications Products and Services. The Company
believes its existing resale agreements will enable it to be among the
lowest cost providers of resold Ameritech and NYNEX local services. By
combining local and long distance services, the Company believes that it
is able to offer rates for integrated local and long distance services
that generally compare favorably with the rates enjoyed by large
commercial subscribers. The Company believes that as a non-facilities-
based telecommunications provider, it is able to build a subscriber base
quickly and efficiently without incurring significant financial and
management costs and the development delays inherent in constructing
network and transmission facilities.
. Focus on Large, Underserved Market. The Company primarily focuses its
marketing efforts on small and medium-sized businesses with
telecommunications usage of less than $5,000 per month. These businesses
generally do not employ in-house telecommunications specialists to manage
their telecommunications services and in most cases obtain services from
various vendors. The Company believes that the gross margins on services
provided to its target market are generally higher than for larger
commercial subscribers. Since the RBOCs and the large long distance
carriers primarily concentrate their sales and marketing efforts on
residential and large commercial subscribers, the Company believes an
opportunity to gain market share exists within its target market. As a
result, the Company plans to generate additional revenue by offering
enhanced and other value-added telecommunications products and services
to these small and medium-sized businesses.
. Rapid Market Entry. The Company intends to continue to be early to market
in providing an integrated package of local and long distance services.
The Company believes it will be able to move into new markets and
generate cash flow quickly because the Company, unlike facilities-based
CAPs, does not face large capital expenditures from building and/or
maintaining transmission facilities. Additionally, providing a ubiquitous
product offering will further enhance the Company's ability to rapidly
build a subscriber base across a large geographic area. Due to the
complexity of the provisioning process, the Company believes that the
RBOCs will have an incentive to work with competitive providers such as
the
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Company which have developed high quality management information and
billing systems that can interface with the RBOCs' systems and have
management teams with significant operational, technical, financial and
regulatory experience in the resale of local exchange service. In order to
develop a subscriber base and create brand awareness, the Company may sell
its long distance services in a new market prior to entering into a resale
agreement with an RBOC.
. Provide an Integrated Telecommunications Solution. The Company believes
that a key element in building its subscriber base while minimizing churn
is the implementation of a marketing and operating strategy which
emphasizes providing an integrated telecommunications solution to its
target market. The Company utilizes a marketing approach which combines
both direct and indirect sales efforts. The Company attracts and retains
subscribers by combining responsive subscriber care with a simple product
and pricing package to provide high-quality service at a cost which is
usually afforded to only large commercial subscribers. Specifically, the
Company will provide a single source and bill for integrated local and
long distance services and enhanced and other value-added
telecommunications services, with a single point of contact for
subscriber service, product inquiries, repairs and billing questions. The
Company believes that this marketing and subscriber service approach
reduces marketing costs, subscriber acquisition costs and churn.
. Capitalize on Experience in Provisioning the Resale of Local Service. The
Company is one of the first competitive providers to resell integrated
local and long distance telecommunications services. In contrast to the
resale of long distance service, providing local exchange service as a
reseller is a highly complex process involving: (i) providing numerous
technical and configuration options; (ii) ensuring number portability;
(iii) providing 911 and 411 services and directory listings; (iv)
providing multiple service options on an uninterrupted basis; and (v)
integrating complex rate structures and billing systems. The Company has
invested significant time in working with certain RBOCs to address these
issues and to develop systems which are designed to allow for the
implementation of its local exchange resale agreements. The Company
believes that its experience both in negotiating these agreements and in
implementing such service offerings will position it to compete
effectively.
. Geographic Market Expansion. The Company is engaged in ongoing
discussions with the RBOCs with regard to the resale of local exchange
services. The Company's decision to enter into a resale agreement with an
RBOC and expand into a new geographic region is based upon a series of
market selection criteria, including product availability, the ability of
the Company to position its products and services, the terms of the
resale agreement, the state of the regulatory environment and the
willingness of an RBOC to provide provisioning support. In an effort to
build its subscriber base and achieve additional economies of scale, the
Company continuously evaluates potential acquisitions, including other
resellers of local and/or long distance service or enhanced and other
value-added services, in both the geographic areas covered by its resale
agreements and new markets.
On September 30, 1996, the Company consummated a private placement (the
"Offering") under Rule 144A of the Securities Act, pursuant to which the
Company issued and sold to Merrill Lynch Global Allocation Fund, Inc. (i)
48,500 Units consisting of $48.5 million aggregate principal amount at maturity
of Senior Notes and warrants (the "Initial Warrants") to purchase 61,550
shares, subject to adjustment under certain circumstances, of Class A common
stock, par value $.01 per share (the "Class A Common Stock"), at an initial
exercise price of $.01 per share, and (ii) $36.0 million in aggregate principal
amount at maturity of Convertible Notes. The aggregate purchase price of the
Units was $30,203,375, and the aggregate purchase price of the Convertible
Notes was $27,644,400. The Senior Notes and the Convertible Notes were issued
pursuant to the terms of the respective Indentures. The Indentures also provide
that (i) in the event that, on or prior to March 30, 1998, the Company does not
consummate a Qualified Public Offering (as defined herein), or has not been
sold pursuant to a Qualified Sale of the Company (as defined herein), the
Company will be obligated to issue to the Holders of the Senior Notes Senior
Note Contingent Warrants (the "Senior Note Contingent Warrants") exercisable
for Class A Common Stock representing up to 3% of the Common Stock of the
Company on a fully diluted basis
8
<PAGE>
after giving effect to the issuance of such Senior Note Contingent Warrants and
(ii) in the event that, on or prior to September 30, 1999, the Company does not
consummate a Qualified Public Offering or has not been sold pursuant to a
Qualified Sale of the Company, the Company will be obligated to issue to the
Holders of the Convertible Notes Convertible Note Contingent Warrants (the
"Convertible Note Contingent Warrants" and, together with the Senior Note
Contingent Warrants, the "Contingent Warrants") exercisable for Class A Common
Stock representing up to 2.5% of the Common Stock of the Company on a fully
diluted basis after giving effect to the issuance of such Convertible Note
Contingent Warrants. The Initial Warrants and the Contingent Warrants are
collectively referred to herein as the "Warrants." In addition, under certain
conditions, if the Company has not consummated a Qualified Public Offering or a
Qualified Public Sale of the Company has not occurred by September 30, 1997,
the Company will be required to offer to Holders of Convertible Notes the right
to acquire additional convertible securities and warrants (the "Additional
Warrants"). See "Description of the Notes."
The Company, a Delaware corporation, was formed and commenced operations in
April 1994. The Company's principal executive office is located at 10 S.
Riverside Plaza, Suite 401, Chicago, Illinois 60606, and its telephone number
is (312) 906-3600.
9
<PAGE>
THE EXCHANGE OFFER
Registration Rights The Old Notes were sold by the Company on September
Agreement................ 30, 1996 to Smith Barney Inc., BT Securities
Corporation, Chase Securities Inc. and CIBC Wood
Gundy Securities Corp. (collectively, the "Initial
Purchasers"), who placed the Old Notes with
institutional investors. In connection therewith,
the Company executed and delivered for the benefit
of the holders of the Old Notes a registration
rights agreement (the "Registration Rights
Agreement") providing, among other things, for the
Exchange Offer.
The Exchange Offer........ New Notes are being offered in exchange for a like
face amount of Old Notes. As of the date hereof,
$48.5 million aggregate principal amount at
maturity of Old Notes are outstanding. The Company
will issue the New Notes to Holders promptly
following the Expiration Date. See "Risk Factors--
Consequences of Failure to Exchange." Holders of
the Old Notes do not have appraisal or dissenter's
rights in connection with the Exchange Offer under
the Delaware General Corporation Law, the governing
law of the state of incorporation of the Company.
Minimum Condition......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered or accepted for exchange.
Expiration Date........... 5:00 p.m., New York City time, on February ,
1997, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended.
Interest on the New Notes
and the Old Notes........
Each New Note will accrete interest at a rate of
14% per annum from its Issue Date (as defined
herein) until March 30, 2000. Thereafter, each New
Note will bear interest at the rate of 14% per
annum which will be payable in cash semiannually on
March 30 and September 30 of each year, commencing
September 30, 2000. Interest on the Old Notes
accepted for exchange will cease to accrete upon
issuance of the New Notes.
Conditions to the The Exchange Offer is subject to certain customary
Exchange Offer........... conditions, which may be waived by the Company. See
"The Exchange Offer--Conditions." The Company
reserves the right to terminate or amend the
Exchange Offer at any time prior to the Expiration
Date upon the occurrence of any such condition. NO
VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED
TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR
PROXY THEREFOR) IS BEING SOUGHT HEREBY.
Procedures for Tendering
OldNotes.................
Each Holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Old Notes and any other required
documentation to the exchange agent (the "Exchange
Agent") at the address set forth
10
<PAGE>
herein. By executing the Letter of Transmittal,
each Holder will represent to the Company, among
other things, that (i) the New Notes acquired
pursuant to the Exchange Offer by the Holder and
any beneficial owners of Old Notes are being
obtained in the ordinary course of business of the
person receiving such New Notes, (ii) neither the
Holder nor such beneficial owner is participating
in, intends to participate in or has an arrangement
or understanding with any person to participate in
the distribution of such New Notes and (iii)
neither the Holder nor such beneficial owner is an
"affiliate," as defined under Rule 405 of the
Securities Act, of the Company. Each broker-dealer
that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were
acquired by such broker or dealer as a result of
market-making activities or other trading
activities (other than
Old Notes acquired directly from the Company), may
participate in the Exchange Offer but may be deemed
an "underwriter" under the Securities Act and,
therefore, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker or dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the
Securities Act. See "The Exchange Offer--Procedures
for Tendering" and "Plan of Distribution."
Special Procedures for
Beneficial Owners........
Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered Holder
promptly and instruct such registered Holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering his Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed
bond power from the registered Holder. The transfer
of registered ownership may take considerable time.
See "The Exchange Offer--Procedures for Tendering."
Guaranteed Delivery Holders of Old Notes who wish to tender their Old
Procedures............... Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date must
tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
See "The Exchange Offer--Withdrawal of Tenders."
Acceptance of Old Notes
and Delivery of New
Notes.................... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
11
<PAGE>
Federal Income Tax The exchange of Old Notes for New Notes by
Consequences............. tendering holders will not be a taxable exchange
for federal income tax purposes, and such holders
will not recognize any taxable gain or loss or any
interest income for federal income tax purposes as
a result of such exchange.
Use of Proceeds........... There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
Effect on Holders of Old As a result of the making of this Exchange Offer,
Notes.................... and upon acceptance for exchange of all validly
tendered Old Notes pursuant to the terms of this
Exchange Offer, the Company will have fulfilled a
covenant contained in the terms of the Old Notes
and the Registration Rights Agreement and,
accordingly, the holders of the Old Notes will have
no further registration or other rights under the
Registration Rights Agreement, except under certain
limited circumstances. Holders of the Old Notes who
do not tender their Old Notes in the Exchange Offer
will continue to hold such Old Notes and will be
entitled to all the rights and limitations
applicable thereto under the Senior Note Indenture.
All untendered, and tendered but unaccepted, Old
Notes will continue to be subject to the
restrictions on transfer provided for in the Old
Notes and the Senior Note Indenture. To the extent
that Old Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for the
Old Notes not so tendered could be adversely
affected. See "Risk Factors--Consequences of
Failure to Exchange Old Notes."
Exchange Agent............ Harris Trust Company of New York is serving as
Exchange Agent in connection with the Exchange
Offer. See "The Exchange Offer--Exchange Agent."
12
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The Exchange Offer applies to $48.5 million aggregate principal amount at
maturity of Old Notes. The terms of the New Notes are identical in all material
respects to the Old Notes, except that the New Notes have been registered under
the Securities Act and, therefore, will not bear legends restricting their
transfer and will not contain certain terms providing for an increase in the
interest rate on the Old Notes under certain circumstances relating to the
timing of the Exchange Offer, which rights will terminate when the Exchange
Offer is consummated. The New Notes will evidence the same debt as the Old
Notes and will be entitled to the benefits of the Senior Note Indenture, under
which both the Old Notes were, and the New Notes will be, issued. See
"Description of the Notes."
The New Notes.............
$48.5 million aggregate principal amount at
maturity of 14% Series B Senior Discount Notes due
2003.
Maturity Date............. September 30, 2003.
Yield..................... 14% per annum (computed on a semi-annual bond
equivalent basis) and calculated from September 30,
1996.
Interest.................. The New Notes offered hereby will accrete interest
at a rate of 14% per annum, compounded
semiannually, to an aggregate principal amount of
$48.5 million by March 30, 2000. Thereafter, the
New Notes will bear interest at the rate of 14% per
annum which will be payable in cash semiannually on
March 30 and September 30 of each year, commencing
September 30, 2000. See "Description of the Notes--
Principal, Maturity and Interest."
Original Issue Discount... For federal income tax purposes, the New Notes will
be treated as having been issued with "original
issue discount" generally equal to the difference
between the issue price of the New Notes and the
sum of all payments (whether designated as
principal or interest) to be made thereon. Each
holder of a New Note must include in gross income
for federal income tax purposes a portion of such
original issue discount for each day during each
taxable year in which a New Note is held. See
"Certain Federal Income Tax Considerations."
Ranking...................
The New Notes are senior and unsecured obligations
of the Company and will rank pari passu in right of
payment with all other unsubordinated and unsecured
indebtedness of the Company. The New Notes will be
effectively subordinated to any secured
indebtedness of the Company to the extent of the
value of the assets securing such indebtedness. As
a holding company that conducts virtually all of
its business through subsidiaries, the Company
currently has no source of operating cash flow
other than dividends and distributions from its
subsidiaries. The Company's subsidiaries will have
no obligation to pay amounts due on the New Notes
and will not guarantee the New Notes; provided,
that if a subsidiary guarantees any Indebtedness
(as defined herein) of the Company, such subsidiary
will be obligated to guarantee the New Notes.
Therefore, the New Notes will be effectively
subordinated to all liabilities of the Company's
subsidiaries, including trade payables. Any rights
of the Company and its creditors, including the
holders of the New Notes, to participate in a
distribution of the
13
<PAGE>
assets of any of the Company's subsidiaries upon
any liquidation or reorganization of any such
subsidiary will be subject to the prior claims of
that subsidiary's creditors (including trade
creditors). See "Risk Factors--Holding Company
Structure; Source of Repayment of Notes; Effective
Subordination of Notes to Indebtedness of
Subsidiaries."
Sinking Fund.............. None.
Optional Redemption....... The New Notes will be redeemable at the option
of the Company, in whole or in part, at any
time on or after September 30, 2001, at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, and
Special Interest, if any, to the date of
redemption. See "Description of the Notes--
Optional Redemption."
In addition, in the event that on or prior to
September 30, 1999, the Company consummates one
or more Public Equity Offerings (as defined
herein) or issues or sells Qualified Stock of
the Company (as defined herein) to a Strategic
Investor (as defined herein), in each case in
an aggregate amount equal to or exceeding $40
million, up to a maximum of 25% of the
aggregate principal amount at Stated Maturity
of the New Notes will be redeemable at the
option of the Company at a redemption price
equal to 114% of the Accreted Value (as defined
herein) thereof plus accrued and unpaid
interest, if any, and Special Interest, if any,
thereon to the date of redemption.
Change of Control......... Upon a Change of Control (as defined in each
Indenture), each holder of New Notes will have
the right to require the Company to repurchase
all or any part of such holder's New Notes, at
101% of the Accreted Value thereof, or, in the
case of any such repurchase on or after March
30, 2000, 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, and
Special Interest, if any, thereon, to the date
of repurchase. There can be no assurance that
the Company will have the financial resources
necessary to repurchase the New Notes upon a
Change of Control. See "Description of the
Notes--Repurchase at the Option of Holders upon
a Change of Control."
Guarantees................ The Senior Note Indenture provides that any
subsidiary that guarantees Indebtedness (as
defined herein) of the Company will guarantee
(a "Senior Note Guarantee") unconditionally, on
a senior basis, the payment of principal,
premium, if any, interest and Special Interest,
if any, on the New Notes and amounts payable
upon a Change of Control or an Asset Sale Offer
(as defined herein). See "Description of the
Notes--Certain Covenants--Limitation on
Issuances of Guarantees by Restricted
Subsidiaries."
Certain Covenants......... The Senior Note Indenture will contain certain
covenants which, among other things, will
restrict the ability of the Company and certain
of its subsidiaries to incur additional
indebtedness, pay dividends or make
distributions in respect of the Company's
capital stock or make certain other restricted
payments, make investments, create restrictions
on the ability of certain subsidiaries to make
distributions on their capital stock or to
issue capital stock, create liens, enter into
transactions with affiliates or related
persons, sell assets, or consolidate, merge or
sell all or substantially all of their assets
and engage in businesses other than the
telecommunications business. These covenants
are subject to important exceptions and
qualifications. See "Description of the Notes--
Certain Covenants."
14
<PAGE>
For additional information concerning the New Notes, see "Description of the
Notes."
RISK FACTORS
Holders of Old Notes should carefully consider the matters set forth under
the caption "Risk Factors" prior to making a decision with respect to the
Exchange Offer.
15
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data for the periods
from inception of the Company in April 1994 to December 31, 1994 and for the
fiscal year ended December 31, 1995 was derived from, and should be read in
conjunction with, the consolidated audited financial statements of the Company
and the related notes thereto included elsewhere in this Prospectus. The
selected financial data as of and for the nine month periods ended September
30, 1996 and 1995, respectively, are derived from, and should be read in
conjunction with the unaudited financial statements of the Company and the
related notes thereto included elsewhere in this Prospectus. However, in the
opinion of management, such interim financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly present the information presented for such periods.
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS ENDED
INCEPTION TO ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------
1994 1995 1995 1996
------------ ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION
AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net service revenue..... $ 1,737 $ 7,884 $ 5,826 $ 7,599
Cost of services........ 1,455 9,076 6,686 6,587
-------- -------- -------- --------
Gross margin............ 282 (1,192) (860) 1,012
Sales and marketing
expense................ 2,869 5,867 4,244 5,837
General and
administrative expense
(1).................... 4,686 11,100 7,366 10,920
Interest expense........ 26 734 500 46
Interest and other
income (2)............. 152 646 423 8,572
Minority interest....... -- 150 -- --
-------- -------- -------- --------
Net loss................ $ (7,147) $(18,097) $(12,547) $ (7,219)
======== ======== ======== ========
Accumulated unpaid
preferred dividends.... $ 707 $ 3,810 $ 2,679 $ --
Net loss to common
shareholder............ $ (7,854) $(21,907) $(15,226) $ (7,219)
Net loss per common
share.................. $ (65.63) $ (72.42) $ (57.82) $ (16.41)
Weighted average shares
outstanding............ 119,678 302,520 263,314 439,877
<CAPTION>
SEPTEMBER 30,
------------------
DECEMBER 31, DECEMBER 31, 1995 1996
1994 1995 -------- --------
<S> ------------ ------------ <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 5,979 $ 13,705 $ 19,239 $ 71,390
Total assets............ 12,747 20,471 35,040 88,083
Long-term debt (net of
current maturities).... 3,176 518 6,761 58,352
Redeemable preferred
stock.................. 15,306 44,396 42,127 9,853
Common stockholders'
equity (deficit)....... (7,830) (28,768) (22,099) 14,022
OTHER DATA:
EBITDA (3).............. $ (7,087) $(15,901) $(11,217) $(14,385)
Cash Flows from
Operating Activities... (6,141) (14,308) (8,554) (14,151)
Cash Flows from
Investing Activities... (1,708) (2,556) (2,499) 7,699
Cash Flows from
Financing Activities... 13,828 24,589 24,312 64,137
Depreciation and
amortization........... 186 2,258 1,253 1,360
Capital expenditures.... 1,728 1,740 1,606 232
Ratio of earnings to
fixed charges (4)...... -- -- -- --
</TABLE>
- --------
(1) General and administrative expense includes amortization of intangibles.
(2) Interest and other income for the nine months ended September 30, 1996
includes a gain of $8.1 million realized on the sale of the Company's
switching facilities in Ohio.
(3) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and minority interest. 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
included because management believes that certain investors find it to be 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.
(4) The ratio of earnings to fixed charges is computed by dividing pretax
income (loss) from operations before interest charges by interest expense.
Earnings were insufficient to cover fixed charges for the periods ended
December 31, 1994 and 1995 by $7.1 million and $17.4 million, respectively,
and for the nine month period ended September 30, 1995 and 1996 by $12.0
million and $7.2 million, respectively.
16
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, before tendering
their Old Notes for the New Notes offered hereby, holders of Old Notes should
consider carefully the following factors, which may be generally applicable to
the Old Notes as well as to the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. Except under certain
limited circumstances, the Company does not currently anticipate that it will
register the Old Notes under the Securities Act. Based on interpretations by
the staff of the Commission set forth in no-action letters issued to third
parties, 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
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. However, the ability of any Holder to resell the
New Notes is subject to applicable state securities laws as described in "Blue
Sky Restrictions on Resale of New Notes" below. To the extent that Old Notes
are tendered and accepted in the Exchange Offer, the trading market, if any,
for the Old Notes not so tendered could be adversely affected. See "The
Exchange Offer."
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer, and avoid the restrictions on transfer
of the Old Notes, Holders of Old Notes must transmit a properly completed
Letter of Transmittal, including all other documents required by such Letter
of Transmittal, to the Exchange Agent at one of the addresses set forth below
under "Exchange Agent" on or prior to the Expiration Date. In addition, either
(i) certificates for such Old Notes must be received by the Exchange Agent
along with the Letter of Transmittal or (ii) a timely confirmation of a book-
entry transfer of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company pursuant to the
procedure for book-entry transfer described herein, must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the Holder must comply
with the guaranteed delivery procedures described herein. See "The Exchange
Offer."
17
<PAGE>
BLUE SKY RESTRICTIONS ON RESALE OF NEW NOTES
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or resold by any Holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration of qualification is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to
register or qualify the resale of the New Notes in any such jurisdictions.
However, an exemption is generally available for sales to registered broker-
dealers and certain institutional buyers. Other exemptions under applicable
state securities laws may also be available.
NEGATIVE CASH FLOW AND OPERATING LOSSES; LIMITED OPERATING HISTORY
The Company has experienced pre-tax operating losses from its inception in
April 1994 through the date of this Prospectus, excluding the effect of a one-
time non-recurring gain, and has, to date, not generated positive cash flow.
For the nine months ended December 31, 1994 and the fiscal year ended December
31, 1995, the Company's pre-tax operating losses were $7.1 million and $18.1
million, respectively. These operating losses were primarily the result of the
one-time installation costs and fixed ongoing costs related to switching
facilities of the Company which were sold in February 1996, and the sales and
marketing and general and administrative expenses required to build the
Company's sales, customer, management information and marketing
infrastructure. Excluding an $8.1 million non-recurring gain on the sale of
such switching facilities, the Company would have lost $8.8 million for the
first nine months of 1996. The Company, following the Exchange Offer, expects
to realize additional operating losses on a consolidated basis while it
continues to expand and develop its service offerings and its subscriber base.
There can be no assurance that the Company will be able to develop or expand
its subscriber base or that it will achieve profitability in future years.
The Company has a limited operating history. Prospective investors,
therefore, have limited historical financial information about the Company
upon which to base an evaluation of its performance and an investment in the
New Notes offered hereby. Given the Company's limited operating history, there
can be no assurance that the Company will be able to achieve or sustain
positive cash flow from operating activities or to implement its growth
strategy.
SUBSTANTIAL LEVERAGE
The Company has and will continue to have consolidated indebtedness that is
substantial in relation to its stockholders' equity. As of September 30, 1996,
the Company had $58.6 million principal amount of long-term debt and $14.0
million of stockholders' equity. See "Capitalization." Pursuant to the terms
of the Indentures, the Company has the ability to issue an additional $72.0
million in aggregate principal amount at maturity of Senior Notes and an
additional $3.1 million in aggregate principal amount at maturity of
Convertible Notes, thus enabling the Company to issue additional indebtedness
in the amount of $75.1 million. As of the date hereof, it cannot be predicted
whether the Company will issue additional Senior Notes or Convertible Notes.
The Company's ability to make cash payments with respect to the Notes, to
repay its obligations on the Notes at maturity and to satisfy its other debt
obligations following the Exchange Offer will depend on its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the
Company's control. The Company believes that the Company's cash flow will be
sufficient to permit the Company to meet its operating expenses and to service
its debt requirements as they become due. Significant assumptions underlie
this belief, including, among other things, that (i) the Company will succeed
in implementing its business strategy and (ii) there will be no material
adverse developments in the business, liquidity or capital requirements of the
Company. However, because the Company currently has a consolidated cash flow
deficit, there can be no assurance that the Company will be able to make cash
interest payments on the Notes commencing in 2000 or to repay its obligations
on the Notes. See "Description of the Notes." The issuance by the Company of
additional Notes would affect the Company's ability to make cash payments with
respect to the Convertible Notes, to repay its obligations on the Convertible
Notes at maturity and to satisfy its other debt obligations. The Senior Note
Indenture will permit the Company
18
<PAGE>
and its subsidiaries to incur additional Indebtedness under certain
circumstances, including up to $45.0 million under a Credit Facility, $30.0
million of which may be secured. If the Company is unable to service its
indebtedness, it will be forced to examine alternative strategies that may
include actions such as reducing or delaying capital expenditures,
restructuring or refinancing its indebtedness, the sale of assets or of the
Company's ownership interest in its subsidiaries or seeking additional equity
and/or debt financing. There can be no assurance that any of these strategies
could be effected on satisfactory terms, if at all. In addition, pursuant to
the terms of the Senior Note Indenture, the ability of the Company to sell
assets is restricted. See "Description of the Notes--Asset Sales."
FUTURE CASH OBLIGATIONS
Since inception, the Company's consolidated cash flow from operations has
been negative. As a result, the Company has financed fixed charges (including
interest on existing indebtedness) and operating expenses with the proceeds
from private sales of its equity securities. Pursuant to the terms of the
Notes, the Company will, at such time as interest is payable on the Notes, be
required to satisfy substantially higher periodic cash debt service
obligations. Commencing September 30, 1999, cash interest on the Convertible
Notes will accrue semiannually at the rate of 9% per annum (approximately $3.2
million per year), and commencing March 30, 2000, cash interest on the Senior
Notes will accrue semiannually at the rate of 14% per annum (approximately
$6.8 million per year). The fully accreted principal amounts of the New Notes
offered hereby of $48.5 million and the Convertible Notes of $36.0 million,
will become due on September 30, 2003 and September 30, 2004, respectively.
Many factors, certain of which are beyond the Company's control, will affect
its performance and, therefore, its ability to meet its ongoing obligations to
repay the Notes and other debt. There can be no assurance that the Company
will be able to generate sufficient cash flow or otherwise obtain funds in the
future to cover interest and principal payments associated with the Notes and
its other debt obligations. See "Dividend Policy."
HOLDING COMPANY STRUCTURE; SOURCE OF REPAYMENT OF NOTES; EFFECTIVE
SUBORDINATION OF NOTES TO INDEBTEDNESS OF SUBSIDIARIES
As a holding company that conducts virtually all of its business through
subsidiaries, the Company has no source of operating cash flow other than from
dividends and distributions from its subsidiaries. In order to pay cash
interest on the Notes and to repay the principal amount of the Notes at
maturity, or to redeem or repurchase the Notes, the Company will be required
to obtain dividends or distributions from its subsidiaries, refinance its
indebtedness or raise funds in a public or private equity or debt offering.
However, the Indentures will limit the Company's ability to incur additional
indebtedness.
If the Company is required to conduct an offering of its capital stock or to
refinance the Notes, its ability to do so on acceptable terms, if at all, will
be affected by several factors, including financial market conditions and the
value and performance of the Company at the time of such offering or
refinancing, which in turn may be affected by many factors, including economic
and industry cycles. There can be no assurance that an offering of the
Company's capital stock or a refinancing of the Notes can or will be completed
on satisfactory terms, that such offering or refinancing would be sufficient
to enable the Company to make any payments with respect to the Notes if
required or that such offering or refinancing would be permitted by the terms
of the debt instruments of the Company and its subsidiaries then in effect.
The Old Notes are and the New Notes will be senior obligations of the
Company, pari passu in right of payment with certain other indebtedness of the
Company and not secured by any assets of the Company or its subsidiaries. The
Convertible Notes are subordinated to the Senior Notes. Otherwise, the
Convertible Notes are pari passu in right of payment with certain other
indebtedness of the Company and are not secured by any assets of the Company
or its subsidiaries. The Senior Note Indenture permits the Company to enter
into a Credit Facility under which the Company may incur up to $45.0 million
of Indebtedness, $30.0 million of which may be secured. If such Indebtedness
is secured, the Notes will be effectively subordinated to such Indebtedness to
the extent of the value of the assets securing such Indebtedness. The
Company's subsidiaries 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
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guarantees any Indebtedness of the Company, such subsidiary will be obligated
to guarantee the Notes. See "Description of the Notes--Certain Covenants" and
"--Limitation on Issuances of Guarantees by Restricted Subsidiaries."
Therefore, the Notes, if not guaranteed in the future, will be effectively
subordinated to all existing liabilities of the Company's subsidiaries,
including trade payables. As of September 30, 1996, the total liabilities of
the Company's subsidiaries (after the elimination of loans and advances by the
Company to its subsidiaries) on a combined consolidated basis were
approximately $5.3 million. Pursuant to the Senior Note Indenture, the
Company's subsidiaries will not be able to incur Indebtedness other than $5
million of vendor financing and guarantees of the Credit Facility and the
Company's subsidiaries may guarantee the Company's obligations under the
Credit Facility. Any rights of the Company and its creditors, including the
holders of the Notes, to participate in a distribution of the assets of any of
the Company's subsidiaries upon any liquidation or reorganization of any such
subsidiary will be subject to the prior claims of that subsidiary's creditors,
including trade creditors.
DEPENDENCE ON RELATIONSHIP WITH THIRD PARTY FACILITIES-BASED PROVIDERS
The Company does not own any part of a local exchange network or a long
distance network. As a result, the Company depends entirely on facilities-
based carriers for the transmission of subscriber phone calls. 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. 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 results of operations. In addition, the accurate and prompt billing
of the Company's subscribers is dependent upon the timeliness and accuracy of
call detail records provided by the carriers whose service the Company
resells. There can be no assurance that the current carriers will continue to
provide, or that new carriers will provide, accurate information on a timely
basis, the failure of which could have a material adverse effect on the
Company's results of operations. In particular, there were a number of
provisioning and billing difficulties related to the local and long distance
services provided to business subscribers in Manhattan, New York pursuant to
the NYNEX LSO agreement. The problems included failure to provision
subscribers, losing subscriber traffic information and subscribers receiving
multiple billings for the same service. Much of the difficulty was due to the
nature of the private local network with dedicated facilities designed for
resale purposes. NYNEX required the services of a third party billing vendor
to help implement the billing portion of the arrangement. The Company has now
contracted directly with that vendor for billing and systems support in order
to avoid problems associated with such provisioning. However, because other
RBOCs with which the Company may enter into agreements do not have significant
experience handling large volumes of resold local exchange traffic, there can
be no assurance as to the quality of the service that the Company will receive
or that similar problems will not occur.
In addition, physical damage, power loss and software defects of the RBOCs
may cause interruption in service and/or reduced capacity for the Company's
subscribers. In the event that the Company's long distance carriers are unable
to handle the growth in subscriber usage, the Company could transfer such
traffic to a carrier that had sufficient capacity, but there can be no
assurance that additional capacity will be available. If any of the LECs are
unable to handle the provisioning or growth in subscriber usage, then the
Company would be required to use another local carrier, which could be
difficult in light of the limited development of facilities-based competitive
local exchange networks. In the event the Company otherwise elects to use
other carriers, the charges for such services may exceed those under the
existing contracts, which could have a material adverse effect on the
Company's financial condition and results of operations. See "Business--Vendor
Agreements."
COMPETITION
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. The Company
expects that competition will intensify in the future due to regulatory
changes, including the enactment of the Telecommunications Act and the
increase in the size, resources and
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number of market participants. In each of its markets, the Company faces
competition for local service from larger, better capitalized incumbent
providers, including providers from whom the Company purchases local exchange
and long distance services, many of whom have greater financial resources than
the Company. Additionally, the long distance market is significantly more
competitive than the local exchange market because the RBOC's have
historically had a monopoly position within the local exchange market. The
incumbent LECs have established relationships with their subscribers and
provide those subscribers with various transmission and switching services
that the Company, in many cases, has only recently begun to offer.
In the local exchange market, the Company also faces competition or
prospective competition from one or more CAPs, which have significantly
greater financial resources than the Company, and from other competitive
providers, including non-facilities-based providers like the Company. For
example, AT&T, MCI and Sprint, among other carriers, have each indicated their
intention to begin offering local telecommunications services in major U.S.
markets using their own facilities or by resale of the LECs' or other
providers' services. In fact, certain competitors, including MCI, Sprint and
AT&T, have entered into interconnection agreements with Ameritech with respect
to the States of Illinois and Michigan. These competitors either have begun or
will in the first half of 1997 likely 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 first half of 1997 will likely begin offering local exchange service
in New York, subject to such joint marketing restrictions. In addition to
these long distance service providers, entities potentially capable of
offering competitive switched services include CAPs, cable television
companies, electric utilities, other long distance carriers, microwave
carriers, wireless telephone system operators and large subscribers who build
private networks. Many facilities-based CAPs and long distance carriers, for
example, have committed substantial resources to building their networks. By
building a network, a facilities-based provider can enter the local exchange
market by using its own network or entering into interconnection agreements or
resale agreements with incumbent LECs, including RBOCs. Such additional
alternatives may provide the CAPs with greater flexibility and a lower cost
structure than the Company. In addition, those competitive providers who enter
the local exchange market by successfully negotiating contracts with the RBOCs
may have substantially greater financial resources than the Company.
With respect to wireless telephone system operators, the FCC recently
authorized cellular, personal communications service ("PCS"), and other
commercial mobile radio service ("CMRS") providers to offer wireless services
to fixed locations, rather than just to mobile subscribers, in whatever
capacity such CMRS providers choose. Previously, cellular providers could
provide service to fixed locations only on an ancillary or incidental basis.
This authority to provide fixed as well as mobile services will enable CMRS
providers to offer wireless local loop service and other services to fixed
locations (e.g. office and apartment buildings) in direct competition with the
Company and other providers of traditional fixed telephone service. In
addition, in August 1996 the FCC promulgated regulations that classify CMRS
providers as telecommunications carriers, thus giving them the same rights to
interconnection and reciprocal compensation under the Telecommunications Act
as other non-LEC telecommunications carriers, including the Company.
Under the Telecommunications Act and ensuing federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
availability of broad-based local resale and introduction of facilities-based
local competition are required before the RBOCs may provide in-region
interexchange long distance services in the states where they offer local
telephone service ("in-region long distance authority"). Also, the largest
interexchange carriers (AT&T, MCI, Sprint and any other carrier with 5% or
more of the pre-subscribed access lines) are prevented under the
Telecommunications Act from bundling local services resold from an RBOC in a
particular state with their long distance services until the earlier of (i)
February 8, 1999 or (ii) the date on which the RBOC whose services are being
resold obtains in-region long distance authority in that state. The RBOCs are
currently allowed to offer certain in-region "incidental" long distance
services (such as cellular, audio and visual programming and certain
interactive storage and retrieval functions) and to offer virtually all out-
of-region long distance services.
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In January 1997, Ameritech, the RBOC in several states where the Company
operates, filed an application for in-region long distance authority in
Michigan. The Company anticipates that Ameritech will soon file applications
for most or all of its other states--including Illinois and Ohio. Other RBOCs,
including NYNEX in New York, are expected to file such applications as early as
the first half of 1997. 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 or
planned to be offered by the Company. While new business opportunities will be
made available to the Company through the Telecommunications Act and other
federal and state regulatory initiatives, regulators are likely to provide the
incumbent LECs with an increased degree of flexibility with regard to pricing
of their services as competition increases. Although the Ameritech and NYNEX
Resale Agreements contain certain pricing protections, including adjustments in
the wholesale rates to be consistent with any changes in the Ameritech and
NYNEX retail rates, if the incumbent LECs elect to lower their rates and are
able to sustain lower rates over time, this may adversely affect the revenues
of the Company and place downward pressure on the rates the Company can charge.
While the Ameritech and NYNEX Resale Agreements ensure that the Company will
receive any lower rate provided to any other reseller, under the NYNEX Resale
Agreement if such lower rate is provided to a reseller committing to both a
longer term and a greater volume commitment, the Company receives the lower
rate, but must negotiate with NYNEX a reasonable transition to similar
commitments. If the Company cannot successfully negotiate such a transition
with NYNEX, then the Company may be unable to maintain the lowest rate. The
Company believes the effect of lower rates may be offset by the increased
revenues available by offering new products and services to its target
subscribers, but there can be no assurance that this will occur. In addition,
if future regulatory decisions afford the LECs excessive pricing flexibility or
other regulatory relief, such decisions could have a material adverse effect on
the Company.
Competition for the Company's products and services is based on price,
quality, network reliability, service features and responsiveness to subscriber
needs. While the Company believes that it currently has certain advantages
relating to the timing, ubiquity and cost savings resulting from its resale
agreements, there can be no assurance that the Company will be able to maintain
these advantages. A continuing trend toward business combinations and alliances
in the telecommunications industry may create significant new competitors to
the Company. Many of the Company's existing and potential competitors have
financial, technical and other resources significantly greater than those of
the Company.
ABILITY TO MEET MINIMUM COMMITMENTS; TERMINATION OF AGREEMENTS
Substantially all of the resale agreements between the Company and local
exchange carriers or long distance carriers contain term and volume
commitments. The local exchange resale agreements typically provide a minimum
usage which requires the Company to have a minimum number of lines in place at
the end of the applicable measurement period (typically one year) (each, a
"Minimum Commitment"). The long distance resale agreements typically require
the Company to meet a minimum dollar threshold of usage in order to be eligible
for discounted rates. The inability of the Company to meet its Minimum
Commitments or thresholds may result in substantial underutilization charges,
and, in the case of the long distance agreements, a significant increase in the
rates charged to the Company. The majority of the resale agreements also
contain carryover provisions which permit the Company to carryforward volume
shortfalls and may serve to delay, or possibly eliminate, the payment of a
significant portion of any shortfall the Company may experience. While these
"carryover pools" may provide the Company with some additional time to build
its subscriber base, any underutilization charges or rate increases could have
a material adverse effect on the financial condition and results of operations
of the Company.
Historically, the Company had not met its minimum monthly threshold under its
original agreement with Sprint. As a result, the Company does not receive the
maximum discounted rates available from Sprint and therefore resells Sprint
long distance service at significantly lower margins. In addition, the Company
has not met its Minimum Commitment under the LSO agreement due to NYNEX
provisioning delays. Although the LSO
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agreement provides that provisioning delays allow the Company to postpone its
obligation to meet its commitment, there can be no assurance that the failure
to meet its commitment will not result in a material adverse effect on the
financial condition and results of operations of the Company. See "Business--
Vendor Agreements."
Each of the resale agreements contains termination provisions which, among
other things, require the Company to pay termination charges if the Company
terminates an agreement prior to the end of term. The incurrence of any
termination charges could have a material adverse effect on the Company's
financial condition and results of operations.
LACK OF EXPERIENCE OFFERING ADDITIONAL PRODUCTS AND SERVICES
The Company's strategy includes offering additional telecommunications
products and services, which may include, among others, resold paging and
cellular phone service and Internet access. Entry into new markets entails
risks associated with the state of development of the markets, intense
competition from companies already operating in those markets, potential
competition from companies that may have greater financial resources and
experience than the Company and increased selling and marketing expenses. The
Company has not provided any paging, cellular or Internet products or services
to date. There can be no assurance that the Company's products or services will
receive market acceptance in a timely manner, or at all, or that prices and
demand in new markets will be at a level sufficient to provide profitable
operations. See "Industry Overview: The Local Telecommunications Service
Industry," "Business--Growth Strategy" and "--Competition."
REGULATION AND RISKS OF THE TELECOMMUNICATIONS ACT
The Company is currently subject to federal and state government regulation
of its telecommunications services. The Company is regulated at the federal
level by the FCC. It is required to obtain and maintain an FCC certificate in
connection with its international services, and to file and maintain both
domestic and international tariffs containing the currently effective rates,
terms and conditions of service for its resale long distance services. The FCC
recently issued regulations to eliminate this tariff filing requirement for all
interstate nondominant carriers, except for, under certain circumstances, the
RBOCs, effective in late 1996 or early 1997.
The intrastate long distance telecommunications operations of the Company are
also subject to various state laws and regulations. The Company must obtain and
maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers service. In most states, the
Company must also file and obtain prior regulatory approval of tariffs for
intrastate services. In addition, the Company must update or amend the tariffs
and, in some cases, the certificates of public convenience and necessity, when
rates are adjusted or new products are added to the local and long distance
services offered by the Company. Challenges by third parties to the Company's
tariffs filed with the FCC or the state regulatory commissions could cause the
Company to incur substantial legal and administrative expenses.
The Telecommunications Act has already resulted in comprehensive changes in
the regulatory environment for the telecommunications industry as a whole, and
will have a material impact on the local exchange industry and the competitive
environment in which the Company operates. The Company believes that the speed
with which competition in local exchange services develops will depend on a
number of factors, including the extent to which each incumbent LEC actively
attempts to maintain its local exchange market share or to enter new lines of
business, particularly, in the case of RBOCs, the in-region long distance
business. While each incumbent LEC now has the duty to negotiate on a good-
faith basis access and interconnection agreements with facilities-based
competitors and resale agreements with competitors such as the Company, the
timing and terms of such agreements are at least in part within the control of
the LEC. A LEC that places the highest priority on maintaining its market share
in local exchange service may have less incentive to negotiate such agreements
swiftly or on terms favorable to potential competitors. Indeed, numerous
potential competitors, including AT&T, have requested, under the provisions of
the Telecommunications Act, that various state regulatory authorities mediate
their negotiations with various RBOCs because they have been unable to reach
agreement with those RBOCs for access and interconnection to provide
competitive local exchange services. The speed with which
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competition in local exchange services develops will also depend on the effect
of the rules and policies recently adopted by the FCC and individual states in
implementing the relevant provisions of the Telecommunications Act and on the
outcome of judicial review of those rules and policies. In that event, the
ability of the Company to compete may be adversely affected. In addition,
resale and long distance agreements must be submitted to and approved by the
relevant state public service commission.
The concept of resale of local exchange services is a new development in the
telecommunications industry, and the Company cannot predict how the relevant
provisions of the Telecommunications Act will be interpreted and implemented by
the FCC, state regulators, courts and the incumbent LECs. In August 1996, the
FCC issued regulations that, among other things, established pricing
methodologies and interim default rates for resold incumbent LEC services and
unbundled LEC network elements. A number of parties have filed court appeals
challenging these and other regulations implementing the Telecommunications
Act. All of the court appeals have been consolidated before the U.S. Court of
Appeals for the Eighth Circuit, which has stayed the effect of certain of the
rules (including the provisions establishing pricing methodologies and default
rates for resold services and unbundled network elements). The U.S. Supreme
Court declined to dissolve the stay, and the court of appeals' decision is not
expected before the middle of 1997. Some of the same parties and certain other
parties also have asked the FCC to reconsider these and other regulations
implementing the Telecommunications Act. The Company cannot predict the outcome
of the FCC's reconsideration proceeding or the court appeals, either of which
could have a material adverse impact on the Company. In addition, no assurance
can be given that changes in current federal or state legislation or
regulations would not materially adversely affect the Company. See "Business--
Government Regulation" and "--Competition."
ABILITY TO MANAGE GROWTH; RAPID EXPANSION OF OPERATIONS
The Company's officers have had limited experience in managing companies as
large and as rapidly growing as the Company. Although the Company has not
generated significant revenue from the Ameritech and NYNEX Resale Agreements
since they have only recently been executed, the Company anticipates that such
agreements will constitute a significant source of revenue. The Company's
strategy of continuing its growth and expansion will place additional demands
upon the Company's current management and other resources and will require
additional working capital, information systems and management, operational and
other financial resources. The continued growth of the Company will depend on
various factors, including, among others, federal and state regulation of the
telecommunications industry, competition, and on the ability of LECs, including
the RBOCs, to provision the Company's additional subscribers. In particular,
the Company faced a number of problems with its LSO agreement with NYNEX which
has historically provided a substantial portion of the Company's revenue.
Although the Company believes that the majority of the provisioning and billing
problems have been resolved by replacing the billing vendor, there can be no
assurance that the RBOCs with which the Company has resale agreements will be
able to provision new subscribers or handle the volume of traffic and billing.
Not all of the foregoing factors are within the control of the Company. The
Company's ability to manage growth successfully will require the Company to
continue to enhance its operational, managerial, financial and information
systems and controls. The Company has modified its billing and subscriber 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
business, operating results and financial condition could be materially
adversely affected. Furthermore, there can be no assurance that the growth
experienced by the Company in the past will continue. See "Business--Growth
Strategy."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success will depend to a significant
extent upon the abilities and continued efforts of its senior management,
particularly members of its senior management team. The Company has employment
agreements with many senior management employees but does not maintain key man
life insurance on any of its employees except Mr. J. Thomas Elliott, President
and Chief Executive Officer of the Company. The beneficiaries of such policies
are the Initial Investors (as defined herein). Many of the Company's executive
officers and other key employees have only recently joined the Company. The
loss of the services of any of such individuals could have a material adverse
effect on the Company's results of operations. The success
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of the Company will also depend, in part, upon the Company's ability to find,
hire and retain additional key management personnel, including senior
management, who are also being sought by other businesses. The Company
currently is in the process of selecting a new Chief Financial Officer.
However, there can be no assurance of the success of such selection process.
Competition for qualified personnel in the telecommunications industry is
intense. The inability to find, hire and retain such personnel could have a
material adverse effect on the Company's results of operations. See
"Management--Executive Officers and Directors."
IMPACT OF TECHNOLOGICAL CHANGE
The telecommunications industry has been characterized by rapid technological
change, frequent new service introductions and evolving industry standards. For
example, increases in technological capabilities or efficiencies could create
an incentive for more entities to enter the facilities-based local exchange
business. Similarly, such changes could result in lower retail rates for
telecommunications services, which could have a material adverse effect on the
Company's ability to price its services competitively. Although the effect of
technological change on the future business of the Company cannot be predicted,
it could have a material adverse effect on the Company's business, results of
operations and financial condition.
ORIGINAL ISSUE DISCOUNT; POSSIBLE TAX AND OTHER LEGAL CONSEQUENCES FOR HOLDERS
OF NOTES AND THE COMPANY
The Old Notes and the Convertible Notes were issued at a substantial discount
from their principal amount at maturity. Since the New Notes are treated as a
continuation of the Old Notes for federal income tax purposes, the New Notes
will also be considered to have been issued at a substantial discount. Cash
payments of interest on the Notes will not be paid prior to 2000. However,
original issue discount (i.e., the difference between the "stated redemption
price at maturity" of the Notes and the "issue price" of the Notes) has accrued
from the Issue Date of the Old Notes and the Convertible Notes and will
continue to accrue with respect to the New Notes from the Issue Date of the Old
Notes. Such original issue discount will be includable as interest income
periodically in a holder's gross income for federal income tax purposes in
advance of receipt of the cash payments to which the income is attributable.
See "Certain Federal Income Tax Considerations--Taxation of the Senior Notes--
Original Issue Discount." Similar results may apply under state tax laws.
Furthermore, the Senior Notes are subject to the applicable high-yield discount
obligation rules. Accordingly, the Company will not be able to deduct the
original issue discount attributable to the Senior Notes until paid in cash or
property or, in certain circumstances, at all. In addition, to the extent the
Notes constitute corporate acquisition indebtedness under Section 279 of the
Internal Revenue Code, the maximum amount of interest or original issue
discount the Company can deduct with respect thereto may be limited. See
"Certain Federal Income Tax Considerations--Certain Potential Federal Income
Tax Consequences to the Company and to Corporate Holders." To the extent the
rules applicable to high-yield discount obligations or corporate acquisition
indebtedness apply, the Company's after-tax cash flow may be less than if such
original issue discount were deductible when accrued or the Notes did not
constitute corporate acquisition indebtedness.
If a bankruptcy case were commenced by or against the Company under the
United States Bankruptcy Code after the respective Issue Dates of the Notes,
the claim of a holder of the Notes with respect to the principal amount thereof
may be limited to an amount equal to the sum of (i) the initial offering price
and (ii) that portion of the original issue discount that is not deemed to
constitute "unmatured interest" for purposes of the United States Bankruptcy
Code. Any original issue discount that had not amortized as of the date of any
such bankruptcy filing would constitute "unmatured interest."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The Old Notes and the Convertible Notes are eligible for trading in the
Private Offerings, Resale and Trading through Automated Linkages ("PORTAL")
Market by Qualified Institutional Buyers ("QIBs"). The New Notes will be new
securities for which there currently is no market. There can be no assurance as
to the liquidity of any markets that may develop for the New Notes, the ability
of holders of the New Notes to sell their New Notes, or the price at which
holders would be able to sell their New Notes. Future trading prices of the New
Notes will depend on many factors, including, among other things, prevailing
interest rates, the
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Company's operating results and the market for similar securities. Each of the
Initial Purchasers has advised the Company that it currently intends to make a
market in the New Notes. However, the Initial Purchasers are not obligated to
do so and any market making may be discontinued at any time without notice.
Therefore, there can be no assurance that any active market for the New Notes
will develop. The Company does not intend to apply for listing of the New Notes
on any securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System.
Holders of Old Notes, Convertible Notes, shares of Class A Common Stock
underlying the Convertible Notes, Initial Warrants or shares of Class A Common
Stock underlying the Initial Warrants will be able to sell or transfer such
securities only if a registration statement relating to such securities is then
in effect, or the sale or transfer of such securities is exempt from
qualification under the applicable securities laws of the states in which the
various holders thereof reside. See "Registration Rights."
CONTROL BY EXISTING STOCKHOLDERS; CERTAIN ANTITAKEOVER MATTERS
As of the date of this Prospectus, over 90% of the outstanding Class A Common
Stock is owned by the management of the Company and Chase Capital Partners,
CIBC Wood Gundy Ventures, Inc., Hancock Venture Capital Associates, Northwood
Capital Partners LLC, Northwood Ventures, BT Capital Partners and Enterprises &
Transcommunications, L.P. (collectively, the "Original Purchasers"). Five of
the Original Purchasers have stock 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, as a result of the Offering, Merrill Lynch Global
Allocation Fund, Inc. ("MLGAFI") holds Convertible Notes which were convertible
into 206,179 shares of Class A Common Stock as of September 30, 1996
(representing approximately 17% of the outstanding common stock) and will be
convertible into 268,497 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 [21]% of the
outstanding common stock (on a fully diluted basis) as of the date of this
Prospectus). In addition, MLGAFI holds Warrants which will be exercisable at
any time after March 29, 1997 for 61,550 shares of Class A Common Stock, and,
in certain circumstances, may be issued additional Warrants to purchase Class A
Common Stock, as described herein.
Section 203 ("Section 203") of the Delaware General Corporation Law (the
"DGCL") restricts certain business combinations with any "interested
stockholder," as defined by such statute. The Company has expressly decided not
to be governed by Section 203 but may in the future change such election. In
addition, the Company may adopt certain procedural and other requirements
and/or amend its Certificate of Incorporation and/or By-laws that could further
have the effect of delaying, deterring or preventing a change in control of the
Company and/or make it more difficult for stockholders to effect certain
corporate actions, including the ability to replace incumbent directors and to
accomplish transactions opposed by the incumbent Board of Directors. See
"Description of Capital Stock."
CHANGE OF CONTROL
In the event of a Change of Control, the Company will be required to offer to
repurchase all of the outstanding Notes at 101% of the Accreted Value or 101%
of principal amount, as the case may be, of the Notes plus any accrued and
unpaid interest thereon, and Special Interest, if any, to the date of
repurchase. The exercise by the holders of the Notes of their rights to require
the Company to offer to purchase Notes upon a change of
control could also cause a default under other indebtedness of the Company,
even if the change of control itself does not, because of the financial effect
of such repurchase on the Company. The Company's ability to pay cash to any of
the holders of Notes upon a repurchase may be limited by the Company's then
existing capital resources. There can be no assurance that in the event of a
change of control, the Company will have, or will have access to, sufficient
funds or will be contractually permitted under the terms of outstanding
indebtedness to pay the required purchase price for any Notes. See "Description
of the Notes."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on September 30, 1996 to the Initial
Purchasers, who placed the Old Notes with institutional investors. In
connection therewith, the Company and the Initial Purchasers entered into the
Registration Rights Agreement, pursuant to which the Company agreed, for the
benefit of the holders of the Old Notes, that the Company would, at its sole
cost, (i) within 60 days following the original issuance of the Old Notes,
file with the Commission the Exchange Offer Registration Statement (of which
this Prospectus is a part) under the Securities Act with respect to an issue
of a series of new notes of the Company identical in all material respects to
the series of Old Notes and (ii) use its best efforts to cause such Exchange
Offer Registration Statement to become effective under the Securities Act
within 120 days following the original issuance of the Old Notes. Upon the
effectiveness of the Exchange Offer Registration Statement (of which this
Prospectus is a part), the Company will offer to the holders of the Old Notes
the opportunity to exchange their Old Notes for a like principal amount of New
Notes, to be issued without a restrictive legend and which might be reoffered
and resold by the holder without restrictions or limitations under the
Securities Act. The term "Holder" with respect to the Exchange Offer means any
person in whose name Old Notes are registered on the books of the Company or
any other person who has obtained a properly completed bond power from the
registered holder.
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, 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 broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). The
Company has agreed that, for a period of 180 days after the Expiration Date,
it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
Each Holder of the Old Notes (other than certain specified holders) who
wishes to exchange Old Notes for New Notes in the Exchange Offer will be
required to represent that (i) it is not an affiliate of the Company, (ii) any
New Notes to be received by it were acquired in the ordinary course of its
business and (iii) at the time of commencement of the Exchange Offer, it has
no arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the New Notes. In addition, in connection
with any resales of New Notes, any broker-dealer (an "Exchanging Dealer") who
acquired the Old Notes for its own account as a result of market-making
activities or other trading activities must deliver a prospectus meeting the
requirements of the Securities Act. The Commission has taken the position that
Exchanging Dealers may fulfill their prospectus delivery requirements with
respect to the New Notes (other than a resale of an unsold allotment from the
original sale of the Old Notes) with the prospectus contained in the Exchange
Offer Registration Statement. Under the Registration Rights Agreement, the
Company is required to allow Exchanging Dealers and other persons, if any,
subject to similar prospectus delivery requirements to use the prospectus
contained in the Exchange Offer Registration Statement in connection with the
resale of such New Notes.
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In the event that any changes in law or applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange
Offer, or if for any reason the Exchange Offer Registration Statement is not
declared effective within 120 days following the date of original issuance of
the Old Notes, or upon the request of Smith Barney Inc. under certain
circumstances, the Company will, in lieu of or in addition to effecting the
registration of the New Notes pursuant to the Exchange Offer Registration
Statement and at its expense, (i) as promptly as practicable, file with the
Commission a shelf registration statement (the "Senior Note Shelf Registration
Statement") covering resales of the Senior Notes, (ii) cause the Senior Note
Shelf Registration Statement to be declared effective under the Securities Act
by the 180th day after the original issuance of the Old Notes (or promptly in
the event of a request by an Initial Purchaser) and (iii) keep effective the
Senior Note Shelf Registration Statement until three years after its effective
date. The Company will, in the event of the filing of a Senior Note Shelf
Registration Statement, provide to each holder of Old Notes covered by the
Senior Note Shelf Registration Statement copies of the prospectus which is a
part of the Senior Note Shelf Registration Statement, notify each such holder
when the Senior Note Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of
the Old Notes. A holder of Old Notes that sells such Old Notes pursuant to the
Senior Note Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to the purchaser, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations). In
addition, each holder of Old Notes will be required to deliver information to
be used in connection with the Senior Note Shelf Registration Statement in
order to have its Old Notes included in the Senior Note Shelf Registration
Statement and to benefit from the provisions regarding Special Interest
described in the following paragraph.
If either (i) the Exchange Offer Registration Statement or the Senior Note
Shelf Registration Statement (either, a "Senior Note Registration Statement")
required to be filed is not filed with the Commission on or prior to the date
specified for such filing in the Registration Rights Agreement, (ii) any such
Exchange Offer Registration Statement or Senior Note Registration Statement
has not been declared effective by the Commission on or prior to the date
specified for such effectiveness in the Registration Rights Agreement, (iii)
the Exchange Offer has not been consummated on or prior to the date specified
in the Registration Rights Agreement, or (iv) any Exchange Offer Registration
Statement or Senior Note Registration Statement required by the Registration
Rights Agreement is filed and declared effective but shall thereafter cease to
be effective or fail to be usable for its intended purpose without being
succeeded immediately by a post-effective amendment to such Exchange Offer
Registration Statement or Senior Note Registration Statement that cures such
failure and that is itself declared effective for a period of more than 30
consecutive days (each such event referred to in clauses (i) through (iv), a
"Senior Note Registration Default"), then commencing on the day following the
date on which such Senior Note Registration Default occurs, the Company agrees
to pay to each holder of Old Notes during the first 90-day period immediately
following the occurrence of such Senior Note Registration Default additional
interest at a rate of 0.5% per annum ("Special Interest"). The amount of
Special Interest payable to each holder shall increase by an additional 0.5%
per annum for each subsequent 90-day period up to a maximum rate of 1.5% per
annum. A Senior Note Registration Default shall cease, and Special Interest
shall cease to be payable with respect to such Senior Note Registration
Default (1) upon the filing of the applicable Exchange Offer Registration
Statement or Senior Note Registration Statement in the case of clause (i)
above, (2) upon the effectiveness of the Exchange Offer Registration Statement
or Senior Note Registration Statement in the case of clause (ii) above, (3)
upon the consummation of the Exchange Offer in the case of clause (iii) above,
and (4) when the Exchange Offer Registration Statement or Senior Note
Registration Statement becomes effective or usable in the case of clause (iv)
above. Notwithstanding anything to the contrary, (i) the amount of Special
Interest payable shall not increase because more than one Senior Note
Registration Default has occurred and is pending, (ii) a holder of Old Notes
who is not entitled to the benefits of the Senior Note Shelf Registration
(i.e., such holder has not elected to include information) shall not be
entitled to Special Interest with respect to a Senior Note Registration
Default that pertains to the Senior Note Registration Statement and (iii) a
holder of Old Notes constituting an unsold allotment from the original sale of
the Old Notes or who otherwise is not entitled to participate in the Exchange
Offer shall not be entitled to Senior Note Special Interest by reason of a
Senior Note Registration Default that pertains to an exchange offer.
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<PAGE>
All accrued Special Interest shall be paid to record holders in the same
manner in which payments of interest are made pursuant to the Senior Note
Indenture. See "Description of the Notes--Principal, Maturity and Interest."
Payment of Senior Note Special Interest is the sole remedy available to
holders of Old Notes in the event the Company does not comply with the
deadlines set forth in the Registration Rights Agreement with respect to the
conduct of an exchange offer for the Old Notes or the registration of the Old
Notes for resale under a shelf registration statement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
at maturity of New Notes in exchange for each $1,000 principal amount at
maturity of outstanding Old Notes accepted in the Exchange Offer. Holders may
tender some or all of their Old Notes pursuant to the Exchange Offer. However,
Old Notes may be tendered only in integral multiples of $1,000.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
will have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (ii) the holders of the New Notes
will not be entitled to certain rights under the Registration Rights
Agreement, including the terms providing for an increase in the interest rate
on the Old Notes under certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
consummated. The New Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the Senior Note Indenture under which the
Old Notes were, and the New Notes will be, issued.
As of the date of this Prospectus, $48.5 million aggregate principal amount
at maturity of the Old Notes was outstanding. The Company has fixed the close
of business on January 10, 1997 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus, together with the
Letter of Transmittal, will initially be sent. As of such date, there was one
registered Holder of the Old Notes.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the DGCL or the Senior Note Indenture in connection with the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of
the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
February , 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
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In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof prior to 9:00 a.m., New York City time, on the next
business day after each previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or, if any of the
conditions set forth below under the caption "Conditions" shall not have been
satisfied, to terminate the Exchange Offer, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by a public announcement thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure
to the registered Holders, if the Exchange Offer would otherwise expire during
such five to ten business day period.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes offered hereby will accrete interest at a rate of 14% per
annum from their Issue Date until March 30, 2000. Thereafter, the New Notes
will bear interest at the rate of 14% per annum which will be payable in cash
semiannually on March 30 and September 30 of each year, commencing September
30, 2000. Interest on the Old Notes accepted for exchange will cease to
accrete upon issuance of the New Notes.
PROCEDURES FOR TENDERING
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
A Holder who wishes to tender Old Notes for exchange pursuant to the Exchange
Offer must transmit a properly completed and duly executed Letter of
Transmittal, or a facsimile thereof, including any other required documents,
to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date. In addition, either (i) certificates for such Old Notes must
be received by the Exchange Agent along with the Letter of Transmittal or (ii)
the Holder must comply with the guaranteed delivery procedures described
below. To be tendered effectively, the Old Notes, the Letter of Transmittal
and other required documents must be received by the Exchange Agent at the
address set forth below under "Exchange Agent" prior to 5:00 p.m., New York
City time, on the Expiration Date.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set
forth herein and in the Letter of Transmittal.
The method of delivery of the Old Notes and the Letter of Transmittal and
all other required documents to the Exchange Agent is at the election and risk
of the Holder. Instead of delivery by mail, it is recommended that Holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the Expiration Date.
No Letter of Transmittal or Old Notes should be sent to the Company. Holders
may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transactions for such Holders.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering
such owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or obtain a properly completed
bond power from the registered Holder. The transfer of registered ownership
may take considerable time.
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Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
Holder as such registered Holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Old Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify Holders of defects or irregularities with respect to tenders
of Old Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
By tendering, each Holder will represent to the Company, among other things,
that (i) the New Notes to be acquired by the Holder and any beneficial owners
of Old Notes pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, (ii) the Holder and
each such beneficial owner are not participating, do not intend to participate
and have no arrangement or understanding with any person to participate in the
distribution of such New Notes and (iii) neither the Holder nor any such other
person is an "affiliate," as defined under Rule 405 of the Securities Act, of
the Company. Each broker or dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such broker
or dealer as a result of market-making activities or other trading activities
(other than Old Notes acquired directly from the Company), must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
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(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes and any other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer and all other documents required by
the Letter of Transmittal are received by the Exchange Agent within five
New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes), (iii)
be signed by the Holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Old Notes register the
transfer of such Old Notes into the name of the person withdrawing the tender
and (iv) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. If certificates for Old Notes have been
delivered or otherwise identified to the Exchange Agent, then, prior to the
release of such certificates, the withdrawing Holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such Holder is an Eligible Institution. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company in its sole discretion, which determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer
and no New Notes will be issued with respect thereto unless the Old Notes so
withdrawn are validly retendered. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
payment due to withdrawal, rejection of tender or termination of the Exchange
Offer will be returned as soon as practicable to the Holder thereof without
cost to such Holder.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance
of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company, or
any material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
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(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
(c) any law, statute, rule or regulation is proposed, adopted or enacted,
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company; or
(d) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and
return all tendered Old Notes to the tendering Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of Holders to withdraw such Old
Notes (see "--Withdrawal of Tenders" above) or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
Holders, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
EXCHANGE AGENT
Harris Trust Company of New York has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
By Registered or By Overnight Courier: By Hand:
Certified Mail: Harris Trust Company of New York
Harris Trust Company of New York
Harris Trust Company of New York
77 Water Street, 4th Floor Receive Window
Wall Street Station New York, NY 10005 77 Water Street, 5th
P.O. Box 1010 Floor
New York, NY 10268-1010 New York, NY
By Facsimile:
(212) 701-7636
(212) 701-7637
Confirm by telephone:
(212) 701-7618
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
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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 Senior Note Indenture, except for any such rights under the
Registration Rights Agreement which by their terms terminate or cease to have
further effect as a result of the making of this Exchange Offer. All
untendered Old Notes will continue to be subject to the restrictions on
transfer set forth in the Senior Note Indenture. To the extent that Old Notes
are tendered and accepted in the Exchange Offer, the trading market, if any,
for any remaining Old Notes could be adversely affected. See "Risk Factors--
Consequences of Failure to Exchange."
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes in the Exchange
Offer.
DIVIDEND POLICY
The Company anticipates substantial net losses and negative cash flow for
the foreseeable future. It is anticipated that earnings, if any, which might
be generated from operations of the Company will be used to finance the growth
of the Company and that cash dividends will not be paid to holders of Common
Stock. The Senior Note Indenture will include significant limitations on the
Company's ability to pay dividends to the holders of Common Stock. See
"Description of the Notes." In addition, the terms of the 9% Preferred Stock
and the Purchase Agreements (each as defined herein) entered into in
connection with the sale of Common Stock and Preferred Stock to the Original
Purchasers restrict the payment of dividends. See "Certain Relationships and
Related Transactions."
34
<PAGE>
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company as of September 30, 1996. This table should be
read in conjunction with the consolidated financial statements and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1996
--------------------
(IN THOUSANDS EXCEPT
SHARE INFORMATION)
<S> <C>
Cash and cash equivalents................................. $ 71,390
========
Long term liabilities
14% Senior Discount Notes due 2003....................... $ 48,500
Original Issue Discount--Senior Notes.................... (18,297)
9% Convertible Subordinated Discount Notes due 2004...... 36,000
Original Issue Discount--Convertible Notes............... (8,356)
Notes and leases payable................................. 505
--------
Total long term liabilities........................... 58,352
Redeemable Preferred Stock
9% Preferred Stock, par value $1.00 per share, 30,000
shares authorized; 10,000 shares issued and outstanding;
liquidation value $1,000 per share...................... 10
Additional paid-in capital............................... 9,843
--------
Total Preferred Stock................................. 9,853
Common stockholders' equity (deficit):
Class A Common Stock, $.01 par value, 2,500,000 shares
authorized, 716,525 shares issued and outstanding at
September 30, 1996 (/1/)................................ 7
Class A Common Stock held in Treasury.................... (1)
Additional paid-in capital............................... 54,177
Accumulated deficit...................................... (40,161)
--------
Total common stockholders' equity (deficit)........... 14,022
--------
Total capitalization................................ $ 82,227
========
</TABLE>
- --------
(1) Excludes 78,987 shares reserved for issuance upon exercise of options
outstanding at September 30, 1996, and 61,550 shares reserved for issuance
upon exercise of the Initial Warrants.
35
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents selected historical consolidated financial data
for the period from inception of the Company in April 1994 to December 31,
1994 and for the fiscal year ended December 31, 1995. The data for the periods
ending December 31, 1994 and 1995 has been derived from consolidated financial
statements (including those set forth elsewhere in this Prospectus) which have
been audited by Deloitte & Touche LLP, independent auditors. The selected
financial data as of and for the nine month periods ended September 30, 1996
and 1995, respectively, are derived from, and should be read in conjunction
with the unaudited financial statements of the Company and the related notes
thereto included elsewhere in this Prospectus. However, in the opinion of
management, such interim financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary to fairly present
the information presented for such periods. The information set forth below
with respect to the historical financial statements should be read in
conjunction with the consolidated financial statements of the Company and the
related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR SEPTEMBER 30,
INCEPTION TO ENDED ------------------
DECEMBER 31, DECEMBER 31, ACTUAL ACTUAL
1994 1995 1995 1996
------------ ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION
AND RATIOS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net service revenue............ $ 1,737 $ 7,884 $ 5,826 $ 7,599
Cost of services............... 1,455 9,076 6,686 6,587
-------- -------- -------- --------
Gross margin................... 282 (1,192) (860) 1,012
Sales and marketing expense.... 2,869 5,867 4,244 5,837
General and administrative
expense (1)................... 4,686 11,100 7,366 10,920
Interest expense............... 26 734 500 46
Interest and other income (2).. 152 646 423 8,572
Minority interest.............. -- 150 -- --
-------- -------- -------- --------
Net loss....................... $ (7,147) $(18,097) $(12,547) $ (7,219)
======== ======== ======== ========
Accumulated unpaid preferred
dividends..................... $ 707 $ 3,810 $ 2,679 $ --
Net loss to common
shareholders.................. $ (7,854) $(21,907) $(15,226) $ (7,219)
Net loss per common share...... $ (65.63) $ (72.42) $ (57.82) $ (16.41)
Weighted average shares
outstanding................... 119,678 302,520 263,314 439,877
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------
1994 1995 1995 1996
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 5,979 $ 13,705 $ 19,239 $ 71,390
Total assets................... 12,747 20,471 35,040 88,083
Long-term debt (net of current
maturities)................... 3,176 518 6,761 58,352
Redeemable preferred stock..... 15,306 44,396 42,127 9,853
Common stockholders' equity
(deficit)..................... (7,830) (28,768) (22,099) 14,022
OTHER DATA:
EBITDA (3)..................... $ (7,087) $(15,901) $(11,217) $(14,385)
Cash Flows from Operating
Activities.................... (6,141) (14,308) (8,554) (14,151)
Cash Flows from Investing
Activities.................... (1,708) (2,556) (2,499) 7,699
Cash Flows from Financing
Activities.................... 13,828 24,589 24,312 64,137
Depreciation and amortization.. 186 2,258 1,253 1,360
Capital expenditures........... 1,728 1,740 1,606 232
Ratio of earnings to fixed
charges (4)................... -- -- -- --
</TABLE>
- --------
(1)General and administrative expense includes amortization of intangibles.
(2) Interest and other income for the nine months ended September 30, 1996
includes a gain of $8.1 million realized on the sale of the Company's
switching facilities in Ohio.
(3) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and minority interest. 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
included because management believes that certain investors find it to be
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.
(4) The ratio of earnings to fixed charges is computed by dividing pretax
income (loss) from operations before interest charges by interest expense.
Earnings were insufficient to cover fixed charges for the periods ended
December 31, 1994 and 1995 by $7.1 million and $17.4 million,
respectively, and for the nine month period ended September 30, 1995 and
1996 by $12.0 million and $7.2 million, respectively.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Historical Consolidated Financial and Operating Data" and the
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company commenced operations in April 1994 as a provider of local and
long distance telecommunications services to meet the needs of small and
medium-sized business subscribers, through the purchase of US Network
Corporation ("US Network"). US Network had four months of operations prior to
being acquired by the Company. Operations during this four month period
included limited administrative expenses and no revenues, and assets consisted
primarily of cash and organization costs. Initially, the Company entered the
local telecommunications market as a facilities-based CAP with network
facilities in Ohio. Due to the high costs associated with the initial
construction, installation and expansion of each local network facility,
including right-of-way costs, franchise fees, interconnection charges and
other operating expenses and in light of the recent regulatory developments
under the Telecommunications Act, the Company refocused its operations. The
Company divested its transmission facilities and certain other assets in
February 1996 to pursue a non-facilities-based approach to the local
telecommunications market. The Company consummated various agreements with
certain RBOCs and long distance carriers for the resale of local, long
distance and enhanced and other value-added services and commenced the
marketing and provision 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,
this strategy is expected to have a negative effect on the Company's results
of operations over the short-term. The Company anticipates losses and negative
cash flow for the foreseeable future, attributable in part to significant
investments in operating, sales, marketing, management information systems and
general and administrative expenses. To date, the Company's growth, including
capital expenditures, has been funded primarily by the capital contributions
of Chase Venture Capital Associates, L.P., CIBC Wood Gundy Ventures, Inc.,
Hancock Venture Capital Associates, BT Capital Partners, Inc., Northwood
Capital Partners, LLC, Northwood Ventures and Enterprise &
Transcommunications, L.P.
The Company resells telecommunications services of certain RBOCs and certain
long distance carriers to provide an integrated telecommunications solution of
local and long distance services to the underserved small and medium-sized
business segment. This strategy affords the Company the ability to offer a
broad range of integrated services to virtually any subscriber in the United
States without incurring significant financial and management costs and the
developmental delays inherent in constructing network and transmissions
facilities.
As part of the Company's strategy to refocus its operations, the Company,
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"). In addition, the Company (i) negotiated for
the first broad based resale agreement with Ameritech for local services which
was signed in November 1995; (ii) sold its existing local facilities in Ohio
pursuant to which it transferred its liabilities with respect to those
facilities effective December 1995; and (iii) negotiated with NYNEX for a
comprehensive local resale agreement which was signed in July 1996. The
Company intends to seek other providers of local, long distance and enhanced
and other value-added services in order to increase its subscriber base and
product offerings and reduce expenses.
The Company's net service revenue, which is recognized on a resale basis,
primarily consists of sales revenue from telecommunications services which is
net of the effect of certain adjustments, including unbillable call records.
The Company bills its subscribers for local and long distance usage based on
the type of local service utilized, the number, time and duration of calls,
the geographic location of the terminating phone numbers and the applicable
rate plan in effect at the time of the call. Net service revenue for the Quest
operations, which is recognized on an agency basis, primarily consists of
commissions earned from carriers on telecommunications services provided to
their subscribers.
Cost of services includes the cost of local and long distance services
charged by carriers for recurring charges, per minute usage charges and
feature charges, as well as the cost of fixed facilities for dedicated
services
37
<PAGE>
and special regional calling plans. In 1995, cost of services also included
fixed and one-time charges associated with the Ohio switching facilities owned
by the Company. These costs were transferred to a third party subsequent to
December 31, 1995, when the obligations with respect to the switching
facilities were effectively transferred.
Sales and marketing expense consists of the costs of providing sales and
other support services for subscribers. General and administrative expense
consists of the costs of the billing and information systems and personnel
required to support the Company's operations and growth as well as all
depreciation and amortization expenses.
The Company has experienced significant growth in the past and, depending on
the extent of its future growth, may experience significant strain on its
management, personnel and information systems. To accommodate this growth, the
Company will continue to implement and improve operational, financial and
management information systems. In an effort to support its growth, the
Company added several senior management positions and approximately 85
employees in 1995. Also, the Company is implementing new information systems
that will provide improved recordkeeping for subscriber information and
management of uncollectible accounts and fraud control.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net service revenue increased to $7.6 million in the first nine months of
1996 from $5.8 million in the first nine months of 1995. The increase in net
service revenue was due primarily to the addition of new subscribers in each
of the Company's geographic markets and the revenues attributable to the Quest
Acquisition which primarily consist of commissions earned from carriers on
telecommunications services provided to their subscribers. Approximately $1.2
million in increased revenues is attributable to the addition of new
customers, primarily in Ohio, and approximately $0.6 million is attributable
to revenues gained from the Quest Acquisition.
Gross margin of $1.0 million for the first nine months of 1996 improved from
last year's negative margin for the same period due primarily to the
elimination of fixed costs upon the sale of the over-provisioned switching
facilities in Ohio and a reduction in the amount of unbillable minutes in New
York.
Sales and marketing expense increased to $5.8 million in the first three
quarters of 1996 from $4.2 million in the first three quarters of 1995.
General and administrative expense increased to $10.9 million in the first
nine months of 1996 from $7.4 million in the first nine months of 1995. These
increases were due to the addition of personnel, information systems and
office facilities, as well as the Quest Acquisition.
Interest and other income increased to $8.6 million in the first three
quarters of 1996 from $423,000 for the first three quarters of 1995 due to an
$8.1 million non-recurring gain on the sale of its switching facilities in
Ohio.
Interest expense decreased to $46,000 in the first three quarters of 1996
from $500,000 in the first three quarters of 1995. This decrease was
attributable to the retirement of capital lease obligations in connection with
the sale of the Company's switching facilities in Ohio.
Year Ended December 31, 1995 versus Inception to December 31, 1994
The results for fiscal 1995 are not comparable with the results for fiscal
1994 as fiscal 1995 represents a full fiscal year and fiscal 1994 represents
nine months of operations since the Company's inception in April 1994.
Net service revenue increased to $7.9 million in fiscal 1995 from $1.7
million in fiscal 1994. This increase was due to a full year of operations and
the addition of new subscribers.
Cost of services increased to $9.1 million in fiscal 1995 from $1.5 million
in fiscal 1994. The increase was due to the one-time installation costs and
fixed ongoing costs related to the Ohio switching facilities, as well as
increased costs associated with an increase in the number of subscribers.
38
<PAGE>
Sales and marketing expense increased to $5.9 million in fiscal 1995 from
$2.9 million in fiscal 1994 due to increased personnel and related expenses and
the inclusion of expenses related to the operations of Quest.
General and administrative expense increased to $11.1 million in fiscal 1995
from $4.7 million in fiscal 1994. Increased general and administrative expenses
were primarily due to depreciation and amortization and other expenses related
to the Quest Acquisition and increased personnel and expenses required to build
the Company's customer service and administrative information systems and
office facilities.
Interest and other income increased to $646,000 in fiscal 1995 from $152,000
in fiscal 1994, due to significantly higher investable cash balances in fiscal
1995 as well as fiscal 1995 being a full year.
Interest expense increased to $734,000 in fiscal 1995 from $26,000 in fiscal
1994. This increase was due to interest expense associated with the capitalized
leases for the Ohio switch sites which began in December 1994.
RECENT DEVELOPMENTS
The Company had cash and cash equivalents of approximately $67.6 million at
October 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through cash
from its investors. As of September 30, 1996, the Company had cash and cash
equivalents of $71.4 million and working capital of $68.6 million. The
Company's operating activities utilized cash of approximately $14.2 million for
the nine months ended September 30, 1996, $14.3 million for the year ended
December 31, 1995 and $6.1 million for the period ended December 31, 1994.
The Company's investing activities have consisted primarily of property and
equipment purchases of $1.7 million each for the year ended December 31, 1995
and for the period ended December 31, 1994. These expenditures were primarily
for fiber optic rings, leasehold improvements and furniture in Ohio that were
sold as of December 31, 1995. In addition, the Company entered into capital
leases of $3.4 million and $3.1 million in 1995 and 1994, respectively, related
to the Ohio switch sites. Effective December 31, 1995 these leases were assumed
by another party in connection with the sale of the Ohio facilities. The
Company remains liable on these leases, but the Company believes that it has
secured adequate protection from the assignee. In February 1996, the Company
received $9.5 million in proceeds from the December 1995 sale of the Ohio
facilities.
In 1994 and 1995, the Company's financing activities consisted primarily of
raising capital in the form of Common Stock and Preferred Stock placements to
venture capital organizations. During 1994 and 1995, the Company raised $14.2
million and $26.3 million, respectively, net of issuance costs. In 1995, the
Company also assumed notes payable to investors in the Quest Acquisition. On
September 30, 1996, the Company raised an additional $10 million through the
sale to Chase Capital Partners, CIBC Wood Gundy Ventures, Inc., Hancock Venture
Capital Associates, Northwood Capital Partners LLC, Northwood Ventures, BT
Capital Partners and Enterprises & Transcommunications, L.P. of 10,000 shares
of the Company's newly created 9% Cumulative Convertible Pay-In-Kind Preferred
Stock (the "9% Preferred Stock"). Also on September 30, 1996, the Company
raised approximately $56 million through the sale to Merrill Lynch Global
Allocation Fund, Inc. of (i) 48,500 Units consisting of $48.5 million in
aggregate principal amount at maturity of Senior Notes and Initial Warrants to
purchase 61,550 shares, subject to adjustment under certain circumstances, of
Class A Common Stock, at an initial exercise price of $.01 per share, and (ii)
$36.0 million in aggregate principal amount at maturity of Convertible Notes.
The aggregate purchase price of the Units was $30,203,375, and the aggregate
purchase price of the Convertible Notes was $27,644,400, generating net
proceeds to the Company that equalled $55,967,722.
The Company believes that the net proceeds from the Offering, together with
the proceeds from the sale of the 9% Preferred Stock, the proceeds of the
December 1995 sale of the Ohio facilities and cash from operations from each of
the Company's operating subsidiaries, will be, in part, sufficient to fund its
capital expenditures, working capital and other cash requirements through the
next 12 months. To the extent that such funds are insufficient to fund the
Company's activities in the long term, the Company may need to raise additional
funds through public or private financing. There can be no assurance that
additional financing will be available or, if available, will be on terms
acceptable to the Company. If, in the future, the Company does not have
revenues
39
<PAGE>
sufficient to service its indebtedness, the Company will be forced to examine
alternative strategies that may include actions such as reducing or delaying
capital expenditures, restructuring or refinancing its indebtedness or the sale
of assets or of the Company's ownership interest in its subsidiaries. The
Company will be required to rely on dividends and other distributions from its
subsidiaries initially and, most likely, into the future in order to pay cash
interest on and repay the principal amount of the Notes. Because all of the
Company's subsidiaries are wholly owned, and given the restrictions in the
Indentures limiting the sale of capital stock of such subsidiaries, the Company
will be able to effectuate and control the dividends and other distributions
from the subsidiaries.
The Company incurred net losses of $18.1 million and $7.1 million in 1995 and
1994, respectively. Accordingly, no provision for current Federal or state
income taxes has been made to the financial statements. At December 31, 1995
and 1994, the Company had net operating loss carry-forwards for income tax
purposes of approximately $24.1 million and $6.9 million, respectively. The
ability of the Company or the Company's subsidiaries, as the case may be, to
utilize their net operating loss carry-forwards to offset future taxable income
may be subject to certain limitations contained in the Internal Revenue Code of
1986, as amended (the "Code"). These operating losses begin to expire in 2009
for Federal income tax purposes. Of the net operating loss carry-forwards
remaining at December 31, 1995, $12.3 million can be applied only against
future taxable income of the Company's subsidiary USN Communications Northeast,
Inc. (formerly United Telemanagement Services, Inc.) ("USNCN"). In addition, if
the Company or the Company's subsidiaries experience an "ownership change"
within the meaning of Section 382 of the Code, the net operating loss carry-
forwards allocable to such entity will be subject to an annual limitation in an
amount generally equal to the value of the entity immediately before the
ownership change at the long-term tax-exempt rate (the "Section 382
limitation"). Any unused Section 382 limitation in one year is added to the
limitation for the next year. Generally, an ownership change occurs with
respect to an entity if the aggregate increase in the percentage stock
ownership (by value) of such entity by one or more of its five-percent
stockholders exceeds 50 percentage points within a testing period. The tax laws
for determining whether an ownership change of an entity has occurred are
complex and subject to differing interpretations in certain respects. It is
possible that the Company or the Company's subsidiaries have experienced an
ownership change under Section 382 of the Code and that the Company or the
Company's subsidiaries may experience an ownership change as a result of the
Company's future transactions including, but not limited to, the issuance of
the Warrants and consummation of one or more public offerings of Common Stock.
In such event, the ability of the Company or the Company's subsidiaries to
utilize their operating loss carry-forwards to offset future taxable income
would be subject to limitations as discussed above.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
New accounting standards have been issued by the Financial Accounting
Standards Board that may apply to the Company in fiscal 1996. Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets," requires a review of long-term tangible and intangible assets
(such as goodwill) for impairment of recorded value and resulting write downs
if value is impaired.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), establishes accounting and disclosure
requirements using a fair value based method of accounting for stock-based
employee compensation plans. Under SFAS 123, the Company may either adopt the
new fair value based method or provide pro forma disclosure of net income
(loss) as if the accounting provisions of SFAS 123 had been adopted. The
Company intends to elect the intrinsic method of accounting for stock-based
employee compensation plans as allowed under SFAS 123 and Accounting Principles
Board No. 25, "Accounting for Stock Issued to Employees."
These statements are not expected to have a material effect on the Company's
financial position or results of operations.
40
<PAGE>
INDUSTRY OVERVIEW:
THE LOCAL TELECOMMUNICATIONS SERVICE INDUSTRY
The current structure of the U.S. telecommunications market resulted largely
from the divestiture of AT&T, then referred to as the "Bell System." Pursuant
to the Divestiture, the RBOCs were separated from the long distance provider
AT&T, resulting in the creation of two distinct industries: local exchange and
interexchange (commonly known as long distance). Following the Divestiture,
each RBOC continued to offer local telephone and other telecommunications
services only within Local Access and Transport Areas ("LATAs"), and was
generally prohibited from providing telecommunications services between LATAs.
Prior to the Divestiture, the Bell operating companies and other LECs not
affiliated with the Bell System had government-regulated monopolies for most
local telephone services. The Divestiture encouraged the growth of competition
for long distance services and terminal network equipment by prohibiting the
RBOCs from entering these markets, but the RBOCs retained monopoly control
over the market for local telephone services. Since the Divestiture in 1984,
competition in the long distance market has rapidly increased, and by 1995
AT&T had lost approximately 40% of its long distance market share to MCI,
Sprint and a number of other long distance competitors.
The Divestiture did not directly provide for competition in local markets.
After the Divestiture, however, a number of factors served to promote
competition in the local telecommunications market, including (i) increasing
subscriber desire for alternatives to the services provided by the LECs,
particularly among business subscribers, prompted in part by competition in
the long distance market; (ii) technological advances in the transmission of
data and video requiring greater capacity and reliability levels than the
existing copper-based LEC networks were able to accommodate; (iii) a monopoly
position and rate of return-based pricing structure which provided little
incentive for the LECs to upgrade their networks or meet specialized
subscriber needs; (iv) the development of fiber optics and digital electronic
technology, which combined the ability to economically build a high-capacity
digital network with the ability to transmit voice, data and video signals at
high speeds; and (v) the significant "access charges" that long distance
carriers were required to pay to originate and terminate long distance
telephone calls on the RBOCs' networks.
The first competitors in the local market were the CAPs, which provided
special access services by installing fiber optic facilities connecting long
distance carriers' "points of presence" (or "POPs") within a metropolitan area
and, in some cases, connecting subscribers (primarily large businesses) to
long distance carriers' POPs. CAPs also provided private line services
connecting multiple locations of a single subscriber within a local market
area with dedicated fiber optic lines. CAPs used the technological advantage
and substantial capacity and economies of scale inherent in fiber optic
technology to offer subscribers service that initially was generally less
expensive and of higher quality than could be obtained from the LECs, due in
part to the LECs' more antiquated copper-based facilities and higher overhead
costs. In addition, CAPs generally offered shorter installation and repair
intervals and improved reliability in comparison to the LECs. In recent years,
the LECs have been steadily upgrading the technology of their networks,
including increasing the amount of fiber used in such networks, thereby
decreasing the competitive advantage held by the CAPs in the special access
and private line markets. As CAPs proliferated during the latter part of the
1980's, federal and some state regulators issued rulings which permitted and
sometimes encouraged local competition and opened some local market segments
to new entrants. However, legal and tariff restrictions historically prevented
entry on a resale basis and limited competitive local entry to facilities-
based providers.
The Telecommunications Act, which was enacted on February 8, 1996, is
considered to be the most comprehensive reform of the nation's
telecommunications laws and will substantially affect the development of
competition for local telecommunications services. Specifically, certain
provisions of the Telecommunications Act provide for: (i) the removal of legal
barriers to entry to the local telecommunications services market; (ii) the
interconnection of incumbent LEC networks with competitors' networks; (iii)
the establishment of procedures and requirements to be followed by the RBOCs,
including the requirement that RBOCs offer local services for resale in order
to enter into the long distance and telecommunications equipment manufacturing
markets; and
41
<PAGE>
(iv) the relaxation of the regulation of certain telecommunications services
provided by LECs and others. The Company believes the Telecommunications Act
will promote significant growth in the local telecommunications market as new
market entrants, including resellers, provide expanded service offerings and
increased levels of subscriber service.
In addition to the Telecommunications Act and other FCC actions and
proposals, an increasing number of states have encouraged competition in
various aspects of the local telecommunications market. While the majority of
state initiatives were originally limited to private line and special access
services, many states are in the process of changing their statutes or
regulations to permit competition for switched services, including basic local
exchange telephone services. By the time the Telecommunications Act was
enacted, approximately half the states had removed legal prohibitions on the
provision of competitive local exchange service. Those states that have not
made these changes are required to do so under the Telecommunications Act. The
Company believes, based on data compiled by the FCC, that the passage of the
Telecommunications Act combined with earlier state regulatory developments,
has expanded the market for competitive local providers from dedicated
services, which was estimated to have been approximately $5 billion in 1995,
to include the local switched access market for business subscribers, which
was estimated to have comprised approximately $55 billion of the approximately
$96 billion represented by local exchange services in 1995.
The Telecommunications Act further increases the opportunities available to
competitive local providers by requiring the RBOCs and other incumbent LECs to
offer various network elements such as switching, transport and loops (i.e.,
the facilities connecting a subscriber's premises to a LEC central office) on
an unbundled and non-discriminatory basis. RBOCs also are required to offer
their retail services at wholesale rates for resale by other companies,
including the Company. By offering such services, the RBOCs are also meeting
certain of the requirements contained in the Telecommunications Act in order
to gain FCC approval to provide in-region long distance services. The Company
believes regulatory reform, together with increased demand from the large
underserved small and medium-sized business market, will provide growth
opportunities for local telecommunications resellers who meet the RBOCs'
requirements for integrated billing and information systems and have
significant management and operational expertise. This new market opportunity
will permit competitive providers who can manage the operational and marketing
implementation to offer a full range of local telecommunications services,
including local calling, custom calling features and intra-LATA toll services
to virtually any subscriber in the United States. The Company believes that
carriers such as the Company reselling local exchange services have the
opportunity to gain market share in the local exchange market just as long
distance resellers have gained market share in the long distance market. In
addition, competitors other than the Company, including the major
interexchange carriers, will be able to take advantage of the unbundling and
resale requirements imposed on the RBOCs and other incumbent LECs under the
Telecommunications Act, thereby facilitating entry of competitors that
previously have not invested in local distribution facilities.
42
<PAGE>
BUSINESS
INTRODUCTION
The Company is one of the fastest growing providers of integrated local and
long distance telecommunications services in the United States. The Company
resells telecommunications services of certain RBOCs and certain long distance
carriers to provide an integrated solution of local and long distance services
to the underserved small and medium-sized business segment. The Company
primarily focuses its marketing efforts on businesses with telecommunications
usage of less than $5,000 per month. The Company's approach simplifies the
subscriber's telecommunications procurement and management tasks and provides
for the easy addition of customized services, such as special local and long
distance pricing and enhanced and other value-added calling and billing
features designed to meet specific subscriber needs.
The Company's goal is to be more flexible, innovative and responsive to the
needs of its subscribers than the RBOCs and the large long distance carriers,
which primarily concentrate their sales and marketing efforts on residential
and large commercial subscribers. Market research combined with the Company's
experience indicates that its target subscribers prefer a single source and
single bill for all of their telecommunications needs. The Company provides
local service using existing telephone lines obtained from the incumbent RBOCs
at wholesale rates, which allows subscribers to switch to local service
provided by the Company without changing their existing telephone numbers or
adding new facilities or equipment. The Company provides long distance
services by purchasing bulk capacity from long distance carriers and reselling
those services to the Company's subscribers. By providing an integrated,
customized package of local, long distance and enhanced and other value-added
services on a single bill through its proprietary software and responsive
subscriber care systems, the Company believes that it provides a
differentiated and competitive product.
The Company obtains its resold local services pursuant to comprehensive
local exchange resale agreements, including the Ameritech Resale Agreements
for the greater metropolitan Chicago area, Ohio and Michigan and the NYNEX
Resale Agreement for the state of New York, with the opportunity to expand
into the entire territory served by NYNEX. The Company has also entered into
an LSO agreement with NYNEX for the resale of Centrex services over a private
local network which provides access to the majority of business lines in
Manhattan, New York. After a nine month systems test period with Ameritech,
the Company commenced service in Illinois in August 1996, followed by Ohio in
October 1996. The Company completed a system test period in New York in
October 1996 and started offering service in November 1996. The Company began
service in Michigan at the end of 1996. The Company estimates, based on data
compiled by the FCC, that the regions covered by the Ameritech Resale
Agreements and the NYNEX Resale Agreement include access to over 30 million
access lines, including over 10 million business access lines and
approximately 20 million residential access lines. The Company has implemented
a resale task force to facilitate the negotiation and implementation of
additional long-term arrangements with other RBOCs for the resale of
telecommunications services. Additionally, the Company has contracted with a
number of long distance carriers, including MCI, Sprint and WorldCom, to
provide switching services and network transmission for its long distance
traffic. The Company continuously seeks to enter into agreements with
additional RBOCs, long distance carriers and enhanced and other value-added
service providers in order to aggressively build its subscriber base as well
as to provide additional services to its existing subscribers while reducing
costs. See "--Vendor Agreements."
MARKET OPPORTUNITY
The recently enacted Telecommunications Act is expected to result in a
fundamental change in the competitive structure of the local exchange market,
greatly accelerating changes that have been under way for several years as a
result of FCC policy initiatives and ongoing deregulatory trends at the state
level. Specifically, the Telecommunications Act lifted regulatory barriers to
entry into the local market, required the resale of local services by the
RBOCs and put in place various measures designed to further the development of
a competitive market. The Company believes that these developments will result
in significant opportunities for new entrants offering integrated local and
long distance telecommunications services. Due to the Company's Ameritech
Resale Agreements, the NYNEX Resale Agreement and the LSO agreement, as well
as significant time invested and experience gained in provisioning the resale
of local exchange services under such agreements, the Company believes it
enjoys a competitive advantage over other local service resellers with respect
to the provisioning of local resale services.
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The Company estimates, based on industry sources, that in 1995 total
revenues from domestic local and long distance telecommunications services
were approximately $166 billion, of which approximately $96 billion was
represented by local exchange services and approximately $70 billion was
represented by long distance services. Since the Divestiture of the Bell
operating companies from AT&T in 1984, competition in the long distance market
has rapidly increased and by 1995 AT&T had lost approximately 40% of its long
distance market share to MCI, Sprint and a number of other long distance
competitors. Although the market for the provision of long distance service
has been open to competition since the Divestiture, the market for local
exchange services has until recently been essentially closed to competition.
The Company believes that competitive providers such as the Company, by
reselling local exchange services, will have the opportunity to gain market
share in the local exchange market just as long distance resellers have gained
market share in the long distance market. The Company believes that it has
several advantages that enable it to compete successfully in the new
competitive local telecommunications marketplace, including (i) locally
oriented marketing and subscriber service focusing on a defined, underserved
market segment, (ii) billing and information systems that have been interfaced
with the RBOCs and (iii) an experienced management team with significant
operational, technical, financial and regulatory expertise in both the local
and long distance telecommunications industry.
The Telecommunications Act created an additional short term opportunity for
the Company to establish itself as a provider of integrated telecommunications
services before the RBOCs and the largest long distance carriers began to
offer bundled local and long distance services. The Company believes that the
steps it has taken position it to take advantage of such opportunity. At the
same time, the Telecommunications Act has also presented various competitors
with the opportunity to begin offering local telecommunications services. Many
of these competitors, which include CAPs and very large IXCs, have more
experienced management, greater financial resources and broader name
recognition than the Company. Some of these competitors have completed
interconnection negotiations with RBOCs and other ILECs, and are beginning to
provide service in selected local exchange markets.
In addition, certain RBOCs may soon be offering other telecommunications
services, including in-region long distance services. In January 1997,
Ameritech filed an application for in-region long distance authority in
Michigan, one of the states where the Company operates. The Company
anticipates that RBOCs will file other such applications, including
applications for New York, Illinois, Ohio and perhaps other states where the
Company operates, as early as the first half of 1997. In order to provide long
distance services in their local service regions under the Telecommunications
Act, the RBOCs must seek FCC approval and comply with a series of regulations
including the requirement that they offer local resale and either enter into
interconnection agreements with at least one facilities-based carrier or,
under certain circumstances, offer access and interconnection pursuant to
generally available terms and conditions approved by a state commission. Once
an RBOC obtains FCC approval, the RBOC must provide its in-region long
distance services through a separate operating subsidiary, and such subsidiary
must, among other things, maintain separate books, records and accounts,
retain different directors, officers and employees and secure financing
independent of the creditworthiness of the RBOC's local exchange operations
for at least three years. The Telecommunications Act also prevents the largest
long distance carriers from jointly marketing local services resold from an
RBOC in a particular state with their long distance services until the earlier
of (i) February 8, 1999 or (ii) the date the RBOCs are allowed to provide in-
region long distance services in that state. While it is probable that the
RBOCs will seek and obtain some long distance authority prior to 1999, the
Company believes its early entry into the RBOC markets may provide the Company
with an opportunity to grow a customer base prior to the RBOC's ability to
offer both local and long distance services.
In order for facilities-based CAPs to provide ubiquitous local
telecommunications services, such providers must obtain access to buildings,
negotiate complex interconnection agreements with RBOCs and other LECs,
address complex rate structure and billing systems, provide directory listings
and 911 and 411 services on their own or through the incumbent LECs, secure
number portability and create local marketing and subscriber care programs
tailored for each market. As a non-facilities-based provider, the Company will
not be required to address such issues associated with operating as a
facilities-based CAP in order to provide ubiquitous local telecommunications
services. As a result, the Company believes it will be able to build a
subscriber base quickly and efficiently without incurring significant
financial and management costs and the developmental delays inherent in
constructing network and transmission facilities.
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GROWTH STRATEGY
The Company's objective is to be a leading provider of integrated local and
long distance services and other telecommunications products to small and
medium-sized businesses. The Company expects to achieve this goal through the
successful implementation of its growth strategy which includes the following:
.Negotiate Attractive Resale Agreements with RBOCs. The Company seeks to
enter into additional local exchange resale agreements with RBOCs which
position it to offer a full range of local service over a broad
geographic area at a competitive cost to its targeted businesses. The
Ameritech Resale Agreements provide pricing protections designed to
maintain the competitiveness of rates and position the Company to
purchase capacity at rates at least as favorable as those of other
potential resellers of Ameritech local services. The NYNEX Resale
Agreement contains similar pricing protections. The Company intends to
negotiate similar pricing protections in all future RBOC resale
agreements. The Company believes the RBOCs will have an incentive to use
a wholesale strategy with respect to small and medium-sized businesses in
order to stabilize this revenue base and deter migration of the current
RBOCs' subscribers to facilities-based CAPs and other new entrant LECs.
.Provide Low-Cost Telecommunications Products and Services. The Company
believes its existing resale agreements will enable it to be among the
lowest cost providers of resold Ameritech and NYNEX local services. By
combining local and long distance services, the Company believes that it
is able to offer rates for integrated local and long distance services
that generally compare favorably with the rates enjoyed by large
commercial subscribers. The Company believes that as a non-facilities-
based telecommunications provider, it is able to build a subscriber base
quickly and efficiently without incurring significant financial and
management costs and the developmental delays inherent in constructing
network and transmission facilities.
.Focus on Large, Underserved Market. The Company primarily focuses its
marketing efforts on small and medium-sized businesses with
telecommunications usage of less than $5,000 per month. These businesses
generally do not employ in-house telecommunications specialists to manage
their telecommunications services and in most cases obtain services from
various vendors. The Company believes that the gross margins on services
provided to its target market are generally higher than for larger
commercial subscribers. Since the RBOCs and the large long distance
carriers primarily concentrate their sales and marketing efforts on
residential and large commercial subscribers, the Company believes an
opportunity to gain market share exists within its target market. As a
result, the Company plans to generate additional revenue by offering
enhanced and other value-added telecommunications products and services
to these small and medium-sized businesses.
.Rapid Market Entry. The Company intends to continue to be early to market
in providing an integrated package of local and long distance services.
The Company believes it will be able to move into new markets and
generate cash flow quickly because the Company, unlike facilities-based
CAPs, does not face large capital expenditures from building and/or
maintaining transmission facilities. Additionally, providing a ubiquitous
product offering will further enhance the Company's ability to rapidly
build a subscriber base across a large geographic area. Due to the
complexity of the provisioning process, the Company believes that the
RBOCs will have an incentive to work with competitive providers such as
the Company which have developed high quality management information and
billing systems that can interface with the RBOCs' systems and have
management teams with significant operational, technical, financial and
regulatory experience in the resale of local exchange service. In order
to develop a subscriber base and create brand awareness, the Company may
sell its long distance services in a new market prior to entering into a
resale agreement with an RBOC.
.Provide an Integrated Telecommunications Solution. The Company believes
that a key element in building its subscriber base while minimizing churn
is the implementation of a marketing and operating strategy which
emphasizes providing an integrated telecommunications solution to its
target market. The Company utilizes a marketing approach which combines
both direct and indirect sales efforts. The Company attracts and retains
subscribers by combining responsive subscriber care with a simple product
and pricing package to provide high-quality service at a cost which is
usually afforded to only large commercial subscribers. Specifically, the
Company will provide a single source and bill for integrated local and
long distance services and enhanced and other value-added
telecommunications services, with a single point of contact for
subscriber service, product inquiries, repairs and billing questions. The
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Company believes that this marketing and subscriber service approach
reduces marketing costs, subscriber acquisition costs and churn.
.Capitalize on Experience in Provisioning the Resale of Local Service. The
Company is one of the first competitive providers to resell integrated
local and long distance telecommunications services. In contrast to the
resale of long distance service, providing local exchange service as a
reseller is a highly complex process involving: (i) providing numerous
technical and configuration options; (ii) ensuring number portability;
(iii) providing 911 and 411 services and directory listings; (iv)
providing multiple service options on an uninterrupted basis; and (v)
integrating complex rate structures and billing systems. The Company has
invested significant time in working with certain RBOCs to address these
issues and to develop systems which are designed to allow for the
implementation of its local exchange resale agreements. The Company
believes that its experience both in negotiating these agreements and in
implementing such service offerings will position it to compete
effectively.
.Geographic Market Expansion. The Company is engaged in ongoing discussions
with the RBOCs with regard to the resale of local exchange services. The
Company's decision to enter into a resale agreement with an RBOC and
expand into a new geographic region is based upon a series of market
selection criteria, including product availability, the ability of the
Company to position its products and services, the terms of the resale
agreement, the state of the regulatory environment and the willingness of
an RBOC to provide provisioning support. In an effort to build its
subscriber base and achieve additional economies of scale, the Company
continuously evaluates potential acquisitions, including other resellers
of local and/or long distance service or enhanced and other value-added
services, in both the geographic areas covered by its resale agreements
and new markets.
SUBSCRIBERS AND MARKETING
The Company's subscribers include small and medium-sized businesses which
principally have telecommunications usage of less than $5,000 per month. The
Company believes that the RBOCs historically have chosen not to concentrate
their sales and marketing efforts on this business segment, which the Company
believes represents a significant portion of the local service market. The
Company has sought to establish itself as a recognized brand name for its
products and services emphasizing responsive subscriber support systems,
competitive product and pricing packages and a targeted marketing strategy.
The Company's services are sold through a multi-channel marketing approach,
which combines both direct and indirect sales efforts. The Company believes
this marketing approach increases market coverage and reduces marketing costs,
subscriber acquisition costs and churn. The Company focuses on the
structuring, management and control of the marketing program which allows the
Company to modify its marketing programs to effectively integrate with the
billing and information systems of the RBOCs.
The Company is building a highly motivated and experienced sales force in
each of the markets in which it operates. The Company recruits salespeople
with experience in selling competitive telecommunications services in the
markets where they are based. The Company's sales force is trained in-house
with a rigorous subscriber-focused training program that promotes activity-
based selling with a scripted 13 step program for subscriber acquisition. The
sales force makes calls to prospective subscribers, conducts an extensive
analysis of their existing bill, calling patterns, contracts and future needs
and prepares and presents a formal recommendation and proposal. Salespeople
are given an incentive through a commission structure, with a target of 40% of
a salesperson's compensation based on such person's performance. Currently,
the Company employs a total of 107 sales and customer service personnel with
approximately 65 dedicated to direct sales, 18 senior salespersons with
management responsibilities, 15 in account development and enhancement and
nine in maintenance and general administrative support. The organizational
structure at each office includes a sales director and three to four sales
managers with sales teams reporting to each sales manager.
The Company also plans to include distributors and resellers in its sales
and marketing program. Distributors will generally enter into agreements
providing for commissions based on the business they generate for the Company.
Typically, such distributors are equipment consultants, distributors of
interconnect equipment or other communications suppliers that have an existing
customer base to which the Company's products and services would appeal (such
as Internet access providers). Resellers of the Company's services will
purchase the Company's products and services on a wholesale basis that will
enable the Company to enter markets with minimal cost or risk where resellers
have already built strong direct relationships with their subscribers.
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MANAGEMENT INFORMATION SYSTEMS
Introduction
The Company is committed to the continued development and successful
implementation of proprietary billing and subscriber care systems that provide
accurate and timely information to both the Company and its subscribers. The
provisioning interface of the Company's management information systems has
been developed in cooperation with Ameritech and NYNEX, with which the Company
has entered into resale agreements. The Company believes this method of
development is a critical element to successfully providing local
telecommunications services and is an advantage, as the RBOCs will have an
incentive to work with resellers that have sophisticated billing and
information systems that can interface with the RBOCs' systems. The Company
believes its experience in developing these systems will allow it to offer
services quickly in new markets. The existing billing and subscriber care
systems have been developed in a client/server environment allowing for
flexibility to accommodate an expanding subscriber base, efficient entry into
new markets and rapid development of additional functionality.
As a result of the Ameritech Resale Agreements and the NYNEX Resale
Agreement, as well as changes in the Company's subscriber base and product
mix, the Company has modified its billing and subscriber care systems. The new
systems were developed to run in a multi-site wide area network configuration
allowing the Company to decentralize data processing and subscriber care
activities as desired. Due to the modular nature of this hardware and software
setup, new servers may be added to the Company's system to meet the increasing
need for processing power in order to accommodate subscriber growth. The
Company believes that its new systems will be a strategic asset to its growth
strategy through their ability to:
. Enhance the Company's ability to serve subscribers in a timely and
efficient manner;
. Provide sophisticated information tailored to subscriber requirements;
. Identify usage patterns and feature availability to reduce churn and
enhance marketing efforts;
. Enable subscriber care representatives to access information on-line; and
. Integrate information across departments and divisions.
The systems are designed to provide access to a broad range of information
on individual subscribers, including their volume, patterns of usage and
billing history. This same information is used by the Company to identify
subscriber trends and will allow for proactive support of the Company's
marketing efforts.
Billing and Management Systems
The Company currently outsources the rating, printing and mailing of
subscriber bills. Since these functions require a high volume of processing in
a limited time frame, the Company has determined that the most economical way
to process bills is to share the hardware resources with others. The
subscriber usage information for billing and the tables and procedures used in
the rating of call records are maintained separately by the Company to manage
the ongoing needs of each subscriber.
Standard management reports are generated for every billing cycle. These
reports cover system status which include statistics of all call records such
as invalid calls, carrier minute records and cost and duplicate records.
Management receives trend reports comparing current to previous months
processing and database matching reports. In order to minimize errors and
subscriber complaints, early "mismatch" reports are generated to identify and
correct potential errors before bills are mailed to subscribers. The Company
also generates account reports which detail payments and adjustments, credit
limits, aging, status, invoice analysis, commission summaries, cash tracking,
traffic and usage reports and rate profiles. Management's receipt of such
detailed and up-to-date information allows for proactive business and
marketing decisions and allows management to better predict and meet
subscriber needs.
Provisioning and Subscriber Information/Subscriber Care
Provisioning of subscribers is accomplished through the Company's
proprietary systems. The new communications gateway systems are designed to
interface with the RBOCs' systems through a variety of delivery mechanisms
including Internet mail, direct connect, fax and network data mover.
Information regarding new subscribers will be electronically requested from
the RBOCs and long-distance carriers, evaluated by the
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Company in terms of credit risk and potential revenue and subsequently
processed into the Company's subscriber care system. In addition, the
Company's information systems generate margin analysis reports on existing
businesses of the Company and accounts receivable information which is posted
to the accounting system for standard general ledger processing. Aging reports
allow the Company to manage 30, 60, 90 and 120 day receivable status and
assign risks to potential new subscribers by building subscriber profiles. The
new systems, when implemented, are designed to assist in the timely posting of
receivable information to each account.
Maintenance and repair information will be contained within the system and
will be linked to the subscriber setup, billing and credit history as well as
past maintenance and repair reports. Maintenance and repair reports will be
generated for all subscriber problems and allow the Company to track the
frequency and type of problems encountered and allow management to improve the
service to the Company's subscribers.
The Company believes there are several benefits to its method of data
processing. Initial access to subscriber information gives the Company the
time to discuss other features that may enhance the subscriber's services.
Information regarding subscriber charges is available for review in order to
highlight new marketing opportunities or potential areas of concern. The
Company believes that this will allow it to market more effectively and cross
sell new or enhanced features. Historical bill images are kept and made
available to the subscriber care advisor, as well as to the subscriber, for
review and adjustments.
VENDOR AGREEMENTS
Introduction
The Company has executed comprehensive local exchange resale agreements,
including the Ameritech Resale Agreements for the greater metropolitan Chicago
area, Ohio and Michigan, and the NYNEX Resale Agreement for the state of New
York, with the opportunity to expand into the entire territory served by
NYNEX. Additionally, the Company has entered into an LSO agreement with NYNEX
for the resale of Centrex over a private local network which provides access
to a majority of the business lines in Manhattan, New York. The Company
estimates, based on data compiled by the FCC, that the regions covered by the
Ameritech Resale Agreements and the NYNEX Resale Agreement include access to
over 10 million business access lines and over 25 million residential access
lines. The Company has implemented a resale task force to facilitate the
negotiation and implementation of long-term arrangements with the RBOCs for
the resale of telecommunications services. The Company continuously seeks to
enter into agreements with additional RBOCs, long distance carriers and
enhanced and other value-added service providers in order to aggressively
build its subscriber base as well as to provide additional services to its
existing subscribers while reducing costs.
The Company currently has long distance resale agreements with MCI, Sprint
and WorldCom. Such agreements allow the Company to offer its subscribers
integrated local and long distance telecommunications services. In addition,
such agreements have allowed the Company to enter and establish itself as a
telecommunications provider in strategically targeted markets prior to
establishing a local exchange resale agreement.
Ameritech Resale Agreements
Pursuant to the Ameritech Resale Agreements, the Company purchases local
exchange services at discounted rates based on a ten-year term. These
agreements contain pricing protections designed to maintain the
competitiveness of the Company's discounted rates and position the Company to
purchase capacity at rates at least as favorable as those of competitors that
may eventually negotiate a resale agreement. The level of discounts of the
resold services provided under these agreements vary based on the state and
the nature of services resold (i.e., access lines, local calls, toll calls or
features).
Services offered for resale include most of the telecommunications products
and services engineered and provided by Ameritech, such as local exchange
calling and attendant features including call waiting, call forwarding, caller
ID and three-way calling. The rates for these services are filed with the
public utilities
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commission of each respective state. The Company also has an agreement with
Ameritech for the resale of certain non-tariffed services to its subscribers,
including inside wire maintenance.
The Ameritech Resale Agreements include a Minimum Commitment of resold
business access lines per region covered. The Minimum Commitment in Illinois
is 150,000 business access lines and in Ohio and Michigan, 100,000 business
access lines and 10,000 residential lines. The Minimum Commitment is not a
limitation on the Company's overall ability to sell access lines at discounted
rates. However, if the Company fails to meet its Minimum Commitment, the
Company is subject to an underutilization charge equal to the number of
unutilized lines multiplied by a fixed average business line rate. The
measurement period of the Minimum Commitment does not commence, however, until
the completion of a three month trial or "beta period" and an 18 month "ramp
up" period which gives the Company the ability to build its subscriber base.
In addition, the Ameritech Resale Agreements provide a "carryforward"
provision designed to minimize the potential for any liability resulting from
a failure to meet the Minimum Commitment by carrying forward underutilization
amounts which may be met in the future. As of the date of this Prospectus, the
Company was still in the "ramp up" period of the Ameritech Resale Agreements,
and, therefore, the Company's obligations with respect to the Minimum
Commitment had not yet arisen.
If the Company does not meet its Minimum Commitment by the end of the ten-
year term with the benefit of the carryforward provision, the Company has the
option to either pay a penalty based on the aggregate number of unutilized
lines or subscribe on a monthly basis to an equivalent number of lines during
the next three-year period. In the event the Company terminates any of the
Ameritech Resale Agreements prior to their expiration, the Company is subject
to a termination charge.
NYNEX Resale Agreement
On July 9, 1996, the Company executed a resale agreement with NYNEX to
provide for the resale of local exchange services for the state of New York,
with the opportunity to expand into the entire territory served by NYNEX, at
discounted rates based on a ten-year term. The NYNEX Resale Agreement contains
pricing protections designed to maintain the competitiveness of discounted
rates provided to the Company. Under the NYNEX Resale Agreement, the Company
receives the lowest rate and/or most favorable term provided to any reseller;
however, if a lower rate is provided to a reseller committing to both a longer
term and a greater volume commitment, the Company receives the lower rate but
must negotiate with NYNEX a reasonable transition to similar commitments. If
the Company cannot successfully negotiate such a transition with NYNEX, then
the Company may be unable to maintain the lowest rate. The level of discounts
of resold services varies based on the nature of the services. The NYNEX
Resale Agreement contains a Minimum Commitment of 100,000 business access
lines. When provisioning is available within the other regions of the NYNEX
territory, the NYNEX Resale Agreement will be amended to reflect the agreed
Minimum Commitment and discount for the new region. All other terms will
remain unchanged. In the event the Company does not satisfy the Minimum
Commitment after a beta period and ramp-up period, the Company is subject to
an underutilization charge. However, the NYNEX Resale Agreement also contains
a carryforward provision designed to minimize the potential of an
underutilization charge.
NYNEX Limited Service Offering
Since 1994, the Company has offered Centrex over a private local network,
which allows the Company to provide integrated local exchange service and long
distance service, on a resale basis to the majority of business lines of
Manhattan, New York. The Company has access to 23 NYNEX switches over a
private local network and dedicated lines at discounted rates based on volume
of traffic. The Company believes the LSO agreement will complement services
provided under the NYNEX Resale Agreement by allowing the Company to package
specifically tailored telecommunications services. The LSO Agreement contains
a Minimum Commitment of 100,000 local exchange access lines. The Company has
not met this Minimum Commitment due to NYNEX provisioning delays. The LSO
Agreement provides that provisioning delays allow the Company to postpone its
obligation to meet the Minimum Commitment.
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Long Distance Agreements
The Company uses a variety of long distance carriers to provide a wide range
of long distance telecommunications services. Services offered for resale
include a variety of inbound, outbound, calling card and international
services. In addition, the Company also resells teleconferencing, debit cards,
branded operator services and private line services. The agreements with long
distance vendors typically contain term and volume commitments in
consideration of the discounts offered to the Company.
The Company's primary long distance carrier agreement is with MCI and
contains a 33-month term. It requires the Company to achieve certain monthly
dollar targets in order to qualify for discounted rates on carrier services.
After a nine-month "ramp-up" period, the agreement provides for an annual
commitment which on a monthly basis exceeds the target required for discounts.
If the Company's usage is less than the monthly target, the Company's usage
for such month will be subject to non-discounted rates and an underutilization
charge equal to 15% of the difference between the monthly commitment and the
Company's usage for such month. As of the date of this Prospectus, the Company
was still in the "ramp up" period of its agreement with MCI, and, therefore,
the Company's obligation with respect to the annual commitment had not yet
arisen. If the Company does not meet its annual commitment during any annual
period of the term, the Company may carryforward up to 10% of the annual
commitment for a period of up to three months in the following annual period.
The Company also has an agreement with WorldCom for the provision of
international service.
Enhanced and Other Value-Added Telecommunications Services
The Company is in the process of negotiating agreements to offer on a resale
basis enhanced and other value-added services such as Internet access, paging,
cellular, 800 follow-me services, voicemail and cellular. In addition, the
Company has entered into a memorandum of understanding for the exclusive
rights to distribute a European Windows-based teleconferencing product which
allows the conference host to conduct a conference call using point and click
graphics directly from a personal computer without having to make
teleconference reservations.
COMPETITION
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. The Company
expects that competition will intensify in the future due to regulatory
changes, including the enactment of the Telecommunications Act and the
increase in the size, resources and number of market participants. In each of
its markets, the Company faces competition for local service from larger,
better capitalized incumbent providers, many of whom have greater financial
resources than the Company. Additionally, the long distance market is already
significantly more competitive than the local exchange market, because the
RBOCs have historically had a monopoly position within the local exchange
market. The incumbent LECs have established relationships with their
subscribers and provide those subscribers with various transmission and
switching services that the Company, in many cases, has only recently begun to
offer.
In the local exchange market, the Company also faces competition or
prospective competition from one or more CAPs, which have significantly
greater financial resources than the Company, and from other competitive
providers, including non-facilities-based providers like the Company. For
example, AT&T, MCI and Sprint, among other carriers, have each indicated their
intention to begin offering local telecommunications services in major U.S.
markets using their own facilities or by resale of the LECs' or other
providers' services. In fact, certain competitors, including MCI, Sprint and
AT&T, have entered into interconnection agreements with Ameritech with respect
to the States of Illinois and Michigan. These competitors either have begun or
will in the first half of 1997 likely 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 first half of 1997 will likely begin offering local exchange service
in New York, subject to such joint marketing restrictions. In addition to
these long distance service providers, entities potentially capable of
offering switched services include CAPs, cable television companies, electric
utilities, other long distance carriers, microwave carriers, wireless
telephone system operators and large subscribers who build private networks.
Many facilities-based CAPs and long distance carriers, for example, have
committed substantial resources to building their networks. By building a
network, a facilities-based provider can enter the local exchange market by
using its own network, or entering into interconnection agreements or resale
agreements with incumbent LECs, including RBOCs. Such additional alternatives
may provide the CAPs with greater flexibility and a lower cost structure than
the Company.
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With respect to wireless telephone system operators, the FCC recently
authorized cellular, PCS, and other CMRS providers to offer wireless services
to fixed locations, rather than just to mobile subscribers, in whatever
capacity such CMRS providers choose. Previously, cellular providers could
provide service to fixed locations only on an ancillary or incidental basis.
This authority to provide fixed as well as mobile services will enable CMRS
providers to offer wireless local loop service and other services to fixed
locations (e.g., office and apartment buildings) in direct competition with the
Company and other providers of traditional fixed telephone service. In
addition, in August 1996 the FCC promulgated regulations that classify CMRS
providers as telecommunications carriers, thus giving them the same rights to
interconnection and reciprocal compensation under the Telecommunications Act as
other non-LEC telecommunications carriers, including the Company.
Under the Telecommunications Act and ensuing federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
availability of broad-based local resale and introduction of facilities-based
local competition are required before the RBOCs may provide in-region
interexchange long distance services. Also, the largest long distance carriers
(AT&T, MCI, Sprint and any other carrier with 5% or more of the pre-subscribed
access lines) are prevented under the Telecommunications Act from bundling
local services resold from an RBOC in a particular state with their long
distance services until the earlier of (i) February 8, 1999 or (ii) the date on
which the RBOC whose services are being resold obtains in-region long distance
authority in that state. The RBOCs are currently allowed to offer certain in-
region "incidental" long distance services (such as cellular, audio and visual
programming and certain interactive storage and retrieval functions) and to
offer virtually all out-of-region long distance services.
In January 1997, Ameritech, the RBOC in several states where the Company
operates, filed an application for in-region long distance authority in
Michigan. The Company anticipates that Ameritech will soon file applications
for most or all of its other states--including Illinois and Ohio. Other RBOCs,
including NYNEX in New York, are expected to file such applications as early as
the first half of 1997. 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 or
planned to be offered by the Company. While new business opportunities will be
made available to the Company through the Telecommunications Act and other
federal and state regulatory initiatives, regulators are likely to provide the
incumbent LECs with an increased degree of flexibility with regard to pricing
of their services as competition increases. Although the Ameritech Resale
Agreements and the NYNEX Resale Agreements contain certain pricing protections,
including adjustments in the wholesale rates to be consistent with any changes
in the Ameritech and NYNEX retail rates, if the incumbent LECs elect to lower
their rates and sustain lower rates over time, this may adversely affect the
revenues of the Company and place downward pressure on the rates the Company
can charge. While the Ameritech and NYNEX Resale Agreements ensure that the
Company will receive any lower rate provided to any other reseller, under the
NYNEX Resale Agreement if such lower rate is provided to a reseller committing
to both a longer term and a greater volume commitment, the Company receives the
lower rate, but must negotiate with NYNEX a reasonable transition to similar
commitments. If the Company cannot successfully negotiate such a transition
with NYNEX, then the Company may be unable to maintain the lowest rate. The
Company believes the effect of lower rates may be offset by the increased
revenues available by offering new products and services to its target
subscribers, but there can be no assurance that this will occur. In addition,
if future regulatory decisions afford the LECs excessive pricing flexibility or
other regulatory relief, such decisions could have a material adverse effect on
the Company.
Competition for the Company's products and services is based on price,
quality, network reliability, service features and responsiveness to subscriber
needs. While the Company believes that it currently has certain advantages
relating to the timing, ubiquity and cost savings resulting from its resale
agreements, there is no assurance that the Company will be able to maintain
these advantages. A continuing trend toward business combinations and alliances
in the telecommunications industry may create significant new competitors to
the Company. Many of the Company's existing and potential competitors have
financial, technical and other resources significantly greater than those of
the Company.
GOVERNMENT REGULATION
The Company is subject to varying degrees of federal, state, local and
international regulation. In the United States, the Company is most heavily
regulated by the states, especially for the provision of local exchange
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services. The Company must be separately certified in each state to offer local
exchange services. No state, however, subjects the Company to price cap or
rate-of-return regulation. FCC approval is required for the resale of
international facilities and services. The FCC has determined that nondominant
carriers, such as the Company, are required to file interstate tariffs on an
ongoing basis, setting forth the Company's rates and operating procedures. Such
tariffs can currently be modified on one day's notice. The FCC recently issued
regulations to eliminate this tariff filing requirement for all nondominant
carriers, such as the Company and all other nondominant interexchange carriers
(except possibly the RBOCs in certain circumstances), effective in late 1996 or
early 1997. The FCC has recently ruled, subject to its consideration of the
issue in another pending FCC proceeding, that RBOCs providing out-of-region
long distance service through separate subsidiaries from their local telephone
operations qualify for nondominant treatment. Out-of-region RBOC services
provided through unseparated entities, however, are subject to full dominant
carrier regulation, including the requirement to submit cost support with
tariffs and to file tariffs on at least 15 to 45 days' notice, depending on
various factors. The FCC has not yet indicated whether RBOC in-region service,
when authorized, will be subject to dominant or nondominant regulatory status.
See "Risk Factors--Regulation and Risks of the Telecommunications Act."
Legislation. On February 8, 1996, President Clinton signed into law the
Telecommunications Act, comprehensive federal telecommunications legislation
affecting all aspects of the telecommunications industry. The
Telecommunications Act establishes a national policy that promotes local
exchange competition. The Telecommunications Act requires that local and state
barriers to entry into the local exchange market be removed and establishes
broad uniform standards under which the FCC and the state commissions are to
implement local competition and co-carrier arrangements in the local exchange
market. Under certain conditions and subject to reasonable exceptions,
incumbent LECs will be required to make available for resale to new entrants
all services offered by the LEC on a retail basis. The Telecommunications Act
also imposes significant obligations on the RBOCs and other incumbent LECs,
including the obligation to interconnect their networks with the networks of
competitors. Each incumbent LEC would be required not only to open its network
but also to "unbundle" the network. The FCC issued regulations in August 1996
defining a minimum set of elements which must actually be unbundled, and each
state may augment this list if it wishes. The pricing of these unbundled
network elements and services will determine whether it is economically
attractive to use these elements.
In addition to the required network unbundling applicable to all incumbent
LECs, the RBOCs have an added incentive to open their local exchange networks
to facilities-based competition because the Telecommunications Act provides for
the removal of the current ban on RBOC provision of in-region inter-LATA toll
service and equipment manufacturing. This ban will be removed only after the
RBOC demonstrates to the FCC, which must consult with the Department of Justice
and the relevant state commissions, that the RBOC has (1) met the requirements
of the Telecommunications Act's 14-point competitive checklist and (2) entered
into an approved interconnection agreement with at least one unaffiliated,
facilities-based competitor in some portion of the state pursuant to which such
competitor provides both business and residential service (or that by a date
certain no such competitors have "requested" interconnection as defined in the
Telecommunications Act). RBOC in-region services must be provided through a
separate subsidiary for three years, unless extended by the FCC. In January
1997, Ameritech, the RBOC in several states where the Company operates, filed
an application for in-region long distance authority in Michigan. The Company
anticipates that Ameritech will soon file applications for most or all of its
other states--including Illinois and Ohio. Other RBOCs, including NYNEX in New
York, are expected to file such applications as early as the first half of
1997. If the FCC determines that the RBOC's entry into in-region provision of
long distance in that state is in the public interest, it must authorize the
RBOC to provide such services.
Under the 14-point competitive checklist, in order to obtain in-region long
distance authority an RBOC must first demonstrate to the FCC, among other
things, that, within a particular state, it offers competing LECs the
following: interconnection as required under the Telecommunications Act; non-
discriminatory access to unintegrated network elements at just and reasonable
rates; non-discriminatory access to its poles, ducts, conduits, and rights-of-
way; unintegrated local loop transmission, unintegrated local transport, and
unintegrated local switching; non-discriminatory access to 911 services;
directory assistance, operator call completion services, and white pages
directory listings for competing local carriers' subscribers; non-
discriminatory access to call routing databases; number portability (i.e., the
ability of a subscriber to keep the same telephone number
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when switching local telephone service providers); dialing parity (i.e., the
ability of subscribers of one telephone service provider to call subscribers of
other providers without dialing access codes); reciprocal compensation
arrangements for the termination of calls between competing local networks; and
permitting resale of its telecommunications services.
While state-by-state regulatory activity has to date brought resale co-
carrier arrangements or initiatives to various degrees of completion in
approximately 25 states, the Telecommunications Act is intended to accelerate
the process and create a competitive environment in all markets, eliminating
state and local statutory and regulatory barriers to entry. This preemption of
state laws barring local competition and the relaxation of regulatory
restraints should enhance the Company's ability to expand its service offerings
nationwide. In contrast, by removing barriers to entry into the local exchange
market and at the same time enabling multiple carriers to compete with the
Company in the provision of local and long distance services, ultimately
allowing the RBOCs and large interexchange carriers to offer their own packages
of single-source local/long distance services, the Telecommunications Act will
substantially increase the competition the Company will face.
The Company, as a multi-market competitive provider already active in
emerging resale environments, is now given legislative support to complement
its expansion of services in markets across the country. In addition to
providing the Company with a national framework to achieve local exchange
resale carrier status in local exchange markets, the Telecommunications Act
permits the Company, as a telecommunications carrier with less than 5% of
nationwide presubscribed access lines, to continue to offer single-source
combined packages of local and long distance services. In contrast, AT&T, MCI
and Sprint may not bundle in an RBOC's territory their local services resold
from an RBOC and in-region long distance service until the earlier of (i)
February 8, 1999 or (ii) the date the RBOC is authorized to enter the inter-
LATA long distance market in that state.
The Telecommunications Act also creates a new Federal-State Joint Board for
the purpose of making recommendations to the FCC regarding the implementation
of a largely revised universal service program. All telecommunications
carriers, including the Company, that provide interstate services are required
to contribute, on an equitable and nondiscriminatory basis, to the preservation
and advancement of universal service pursuant to a specific and predictable
universal service mechanism to be established by the FCC. The Federal-State
Joint Board issued recommendations regarding the scope and funding of universal
service in December 1996, but those recommendations are not binding. The FCC
may exempt certain classes of carriers from having to contribute to the
universal service fund. The Company is unable to predict the final formula for
universal service contribution or its own level of contribution.
Federal Regulation. The Telecommunications Act in some sections is self-
executing, but in most cases the FCC must issue regulations that identify
specific requirements before the Company and its competitors can proceed to
implement the changes the Telecommunications Act prescribes. The FCC already
has commenced several of these rulemaking proceedings. The outcome of these
various ongoing FCC rulemaking proceedings could materially affect the
Company's operations.
The Company actively monitors all pertinent FCC proceedings and has
participated in some of these proceedings. The Telecommunications Act provides
that individual state utility commissions can, consistent with FCC regulations,
prohibit resellers from reselling a particular service to specific categories
of subscribers to whom the incumbent LEC does not offer that service at retail.
In August 1996, the FCC issued detailed regulations providing that many such
limitations are presumptively unreasonable and that states may enact such
prohibitions on resale only in certain limited circumstances. In particular,
the FCC concluded that while it would be permissible to prohibit the resale of
certain residential or other subsidized services to end users that would be
ineligible to receive such services directly from the LEC, all other "cross-
class" selling restrictions, including those on volume discount and flat-rated
offerings to business customers, would be presumed unreasonable. An incumbent
LEC may rebut this presumption, however, by demonstrating that the class
restriction is reasonable and nondiscriminatory. The FCC also rejected claims
by several incumbent LECs to provide for several exceptions to the general
resale obligation. For instance, it refused to create a general exception for
all promotional or discounted offerings, including contract and customer-
specific offerings. The FCC did, however, conclude that short-term promotional
prices (i.e., those offered for 90 days or less) are not "retail rates" and
thus are not subject to the wholesale rate obligation. Incumbent LECs may not
offer consecutive 90-day promotions to avoid these resale obligations.
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The Telecommunications Act also provides that state commissions shall be
given an opportunity to determine the wholesale rates for local
telecommunications services (i.e., the rates charged by incumbent LECs to
resellers such as the Company) on the basis of retail rates less "avoided
costs," i.e., marketing, billing, collection and other administrative costs
avoided by the incumbent LEC when it sells at wholesale. In August 1996 the FCC
issued detailed regulations identifying such avoided costs, and also included
in such category "avoidable" costs. To determine the specific value of avoided
and avoidable costs applicable to each service of a particular incumbent LEC,
the FCC required the state public service commissions to conduct detailed cost
studies consistent with the FCC regulations governing what constitutes avoided
and avoidable costs. Until such time that these costs studies are completed,
the FCC established an interim default discount of between 17% and 25%.
Accordingly, until such time that a state determines the actual level of
avoided and avoidable costs pursuant to the FCC's regulations, it may require
incumbent LECs to discount their retail offerings by 17% to 25%, provided that
actual cost studies are completed within a reasonable time. The
Telecommunications Act also provides that state commissions shall determine the
rates charged for unintegrated elements of the incumbent LEC's network on the
basis of cost plus a reasonable profit. In August 1996, the FCC declined to
issue detailed regulations governing the relationship between these two pricing
standards, leaving the interpretation and implementation of the two standards
to the states. The Company is unable to predict the final form of such state
regulation, or its potential impact on the Company or the local exchange market
in general.
In August 1996, the FCC also issued regulations that, among other things, set
minimum standards governing the terms and prices of interconnection and access
to unbundled incumbent LEC network elements. These regulations indirectly
affect the price at which the Company's new facilities-based competitors may
ultimately provide service. At the same time, the FCC imposed minimum
obligations regarding the duty of incumbent LECs to negotiate interconnection
or resale arrangements in good faith.
A number of RBOCs, state regulatory commissions and other parties have filed
requests for reconsideration by the FCC of various parts of the rules announced
by the FCC in August 1996, including those provisions (a) limiting competitors'
ability to purchase for resale certain types of service that the RBOC is no
longer marketing to new customers ("grandfathered services"), and (b)
establishing pricing methodologies and interim default rates for resold
services and unbundled network elements. The FCC is conducting a proceeding to
consider the various petitions for reconsideration, and a decision is expected
in the first half of 1997. In addition, many of the same parties and certain
other parties have filed court appeals challenging the same FCC rules. All the
court appeals have been consolidated before the Eighth Circuit Federal Court of
Appeals, which has stayed the effect of certain parts of the rules (including
the provisions establishing pricing methodologies and default rates for resold
services and unbundled network elements) pending its decision in the appeals.
The U.S. Supreme Court declined to dissolve the stay, and the court of appeals'
decision is not expected before the middle of 1997. The Company cannot predict
at this time the outcome of the appeals or reconsideration processes. The
outcome of either process could materially affect the Company's business.
In July 1996, the FCC mandated that over the course of the next year
responsibility for administering and assigning local telephone numbers be
transferred from the RBOCs and a few other LECs to a neutral entity. In August
1996, the FCC issued regulations which address certain of these issues, but
leave others for decision by the states and the still-to-be selected neutral
numbering plan administrator. The new FCC numbering regulations (a) prohibit
states from creating new area codes that could unfairly hinder LEC competitors
(including the Company) by requiring their customers to use 10 digit dialing
while existing incumbent LEC customers use 7 digit dialing, and (b) prohibit
incumbent LECs (which are still administering central office numbers pending
selection of the neutral administrator) from charging "code opening" fees to
competitors (such as the Company) unless they charge the same fee to all
carriers including themselves. In addition, each carrier is required to
contribute to the cost of numbering administration through a formula based on
net telecommunications revenues. In July 1996, the FCC released rules to permit
both residential and business consumers to retain their telephone numbers when
switching from one local service provider to another (known as "number
portability"). LECs are required to implement number portability in the top 100
markets by October 1, 1997 and to complete it by December 31, 1998. In smaller
markets, LECs must implement within six months of a request therefor commencing
December 31, 1998. In addition, the FCC recently authorized cellular and other
CMRS to provide for other wireless services to fixed locations (rather than to
mobile subscribers), including offering wireless local loop service, in
whatever capacity such provider determines. Previously, many CMRS providers
could provide
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fixed services on only an ancillary or incidental basis. In addition, in August
1996 the FCC promulgated regulations that classify CMRS providers as
telecommunications carriers, thus giving them the same rights to
interconnection and reciprocal compensation under the Telecommunications Act as
other non-LEC telecommunications carriers, including the Company.
State Regulation. Historically, certain of the Company's resold local and
long distance services were classified as intrastate and therefore subject to
state regulation. As its local service business and product lines expand, the
Company will be offering more intrastate service and will increasingly be
subject to state regulation. The Telecommunications Act maintains the authority
of individual state utility commissions to impose their own regulation of local
exchange services so long as such regulation is not inconsistent with the
requirements of the Telecommunications Act. In all states where certification
is required, the Company's operating subsidiaries are certificated as common
carriers. In all states, the Company believes that it operates with the
appropriate state regulatory authorization. The Company currently is authorized
to provide intrastate toll or a combination of local and intrastate toll
service in more than 35 states. These authorizations vary in the scope of the
intrastate services permitted.
The Telecommunications Act provides that the Company's resale agreements must
be submitted to the applicable state utility commission for approval, and it
places strict limitations on the bases on which a state commission can reject
such an agreement. If the state commission does not act within 90 days after
the agreement is submitted for approval, then the agreement is deemed approved.
In addition, if a state commission fails to act to enforce an agreement, the
FCC can (upon request of a party) take jurisdiction over the matter. A state
commission's decisions regarding implementation and enforcement of an agreement
are appealable to the federal district court in that state.
PROPERTIES
The Company leases a number of facilities, principally sales facilities, in
the cities within its operating markets, including: Boston and Newton,
Massachusetts, Chicago, Illinois, Detroit, Michigan, Cleveland and Columbus,
Ohio and New York City. The Company maintains its corporate headquarters in
Chicago, Illinois. Although the Company's facilities are adequate at this time,
the Company believes that it may have to lease additional facilities,
particularly in new metropolitan areas where the Company enters RBOC resale
agreements.
On December 29, 1995, the Company entered into an agreement to sell its
switch-based facilities in Ohio for $9.5 million plus the assumption of
approximately $8.2 million of capital and operating leases. Pursuant to the
terms of this agreement, the Company remains contingently liable on the assumed
leases. The Company does not presently expect to become liable pursuant to the
assumed leases. However, depending on the amount and timing of any claim
thereunder, such liability, if any were to arise, could have a material adverse
effect on the results of operations, financial condition and liquidity of the
Company at such time.
EMPLOYEES
As of October 31, 1996, the Company employed over 250 people. The Company's
employees are not unionized, and the Company believes its relations with its
employees are good. In connection with its marketing and sales efforts and the
conduct of its other business operations, the Company uses third party
contractors, some of whose employees may be represented by unions or collective
bargaining agreements. The Company believes that its success will depend in
part on its ability to attract and retain highly qualified employees.
LEGAL MATTERS
From time to time the Company is party to routine litigation and proceedings
in the ordinary course of its business. The Company and its subsidiaries are
not aware of any current or pending litigation that the Company believes would
have a material adverse effect on the Company's results of operations or
financial condition. The Company and its subsidiaries continue to participate
in regulatory proceedings before the FCC and state regulatory agencies
concerning the authorization of services and the adoption of new regulations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides certain information regarding the executive
officers, directors and certain key personnel of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Richard J. Brekka....... 35 Chairman of the Board
J. Thomas Elliott....... 49 President, Chief Executive Officer and Director
Ronald W. Gavillet...... 37 Executive Vice President, Strategy & External Affairs
Gerald J. Sweas......... 49 Executive Vice President and Chief Financial Officer
Ryan Mullaney........... 40 Executive Vice President, Sales
Steven J. Parrish....... 40 Executive Vice President, Operations of USNCN
Thomas A. Monson........ 36 Vice President, General Counsel and Secretary
Thad J. Pellino......... 34 Vice President, Marketing
Neil A. Bethke.......... 36 Vice President, Information Systems
Eric G. Roden........... 40 Regional General Manager--Operations, NYNEX Region
Donald J. Hofmann, Jr... 38 Director
Paul S. Lattanzio....... 33 Director
William P. Glasgow...... 38 Director
William A. Johnston..... 45 Director
Eugene A. Sekulow....... 65 Director
</TABLE>
Each director serves until his successor is duly elected and qualified.
Officers serve at the discretion of the Board of Directors.
Richard J. Brekka, Chairman of the Board, has been a director of the Company
since April 1994. He is a Managing Director of CIBC Wood Gundy Capital, the
merchant banking division of Canadian Imperial Bank of Commerce, and is a
director and the President of CIBC Wood Gundy Ventures, Inc. ("CIBC"), an
indirect wholly owned subsidiary of Canadian Imperial Bank of Commerce. Mr.
Brekka joined CIBC in February 1992. Prior to joining CIBC, Mr. Brekka was an
officer of Chase Manhattan's merchant banking group from February 1988 until
February 1992. Currently, Mr. Brekka serves on the board of directors of Orion
Network Systems, Inc., MultiTechnology Corp., Telesystem International
Wireless N.V., and Epoch Networks, Inc. (formerly HLC-Internet, Inc.), and on
the Board of Advisors of Telecom Partners L.P. Mr. Brekka received a B.S. in
finance from the University of Southern California, and an M.B.A. from the
University of Chicago.
J. Thomas Elliott, President and Chief Executive Officer, has been the Chief
Executive Officer since April 1996. Mr. Elliott joined the Company in 1995 as
a result of the acquisition of certain assets and assumption of certain
liabilities of Quest, a company which he co-founded. From 1991 to 1993, Mr.
Elliott was Senior Vice-President of Sales and Marketing of Wiltel
Communications Systems. From 1990 to 1991, Mr. Elliott was President and Chief
Executive Officer of Call Net Inc. (Canada's first alternative long distance
company) and Lightel Inc., its affiliate fiber optic facility provider.
Subsequently, these companies were combined to form Sprint Canada. Prior to
1990, Mr. Elliott was Chairman and Chief Executive Officer of
TIE/Telecommunications Canada Ltd., a telephone equipment manufacturing
company. Mr. Elliott holds a bachelor's and master's degree in economics from
the University of Windsor.
Ronald W. Gavillet, Executive Vice President, 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. While at MCI, Mr. Gavillet developed and implemented
the firm's regulatory policies in Illinois, Indiana, Michigan, Ohio and
Wisconsin and negotiated sales agreements with national accounts. From 1987 to
1992, Mr. Gavillet was an attorney with the law firms of Skadden, Arps, Slate,
Meagher & Flom and Hopkins & Sutter (where he was a partner). His practice
primarily focused on providing counsel to competitive
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telecommunications entrants. Mr. Gavillet holds a B.A. and B.S. from Southern
Illinois University, a J.D. from Catholic University of America's Columbus
School of Law and a Master of Management degree from Northwestern University's
Kellogg School of Management and serves on the Telecommunications Resellers
Association Local Services Council.
Gerald J. Sweas, Executive Vice President and Chief Financial Officer,
joined the Company in November 1996. From 1989 to 1996, Mr. Sweas was Vice
President Finance and Administration, Treasurer and Chief Financial Officer of
Norand Corporation, a wireless data communications networks company. From 1985
to 1988, Mr. Sweas was Vice President Finance, Treasurer and Chief Financial
Officer of Sargent-Welch Scientific Company and from 1978 to 1985 served as
Controller and Assistant Secretary of that company. Mr. Sweas holds a B.B.A.
from Loyola University in Chicago, Illinois and an M.B.A. from the University
of Wisconsin, Madison and is a Certified Public Accountant.
Ryan Mullaney, Executive Vice President, Sales, joined the Company in
October 1996. From 1995 to 1996, Mr. Mullaney served as Vice President, Sales,
USA West for Citizens Telecom, a medium-sized telecommunications company,
where he managed sales in 13 states. From 1993 to 1995, Mr. Mullaney was
Director of Member Development for McLeod Telemanagement Organization, where
his duties included management of the company's field sales and service
organization. From 1991 to 1993, Mr. Mullaney was National Sales Director of
Centex Telemanagement, responsible for developing sales in the national
market. Prior to 1991, Mr. Mullaney worked for various telecommunications
companies, including two companies which he owned and at which he served as
President. Mr. Mullaney has a B.A. from the University of Nevada, Las Vegas.
Steven J. Parrish, Executive Vice President, Operations of USNCN, joined the
Company in January 1996 initially as a consultant and assumed a full-time
position. Prior to joining the Company, Mr. Parrish spent more than 12 years
with Illinois Bell in various planning and operations positions. Mr. Parrish
moved to Ameritech in 1991 where he helped start the Information Industry
Services business unit as Vice President of Business Development and Vice
President of Marketing and Sales for Network Providers. Mr. Parrish holds a
bachelor's degree in electrical engineering from the University of Illinois
and an MBA from the Illinois Institute of Technology.
Thomas A. Monson, Vice President, General Counsel and Secretary, joined the
firm 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. from the
University of Illinois and a J.D. 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. from the University of Wisconsin.
Eric G. Roden, Regional General Manager--Operations, NYNEX Region, joined
the Company in August 1996. From 1995 until joining the Company, Mr. Roden was
Vice President, Operations/Engineering of MFS Telecom, Inc. From 1993 to 1995,
Mr. Roden was Vice President, Operations/Engineering of Northeast Networks,
Inc. and from 1989 to 1993, Mr. Roden was Director, Network
Services/Engineering of Eastern Telelogic Corp.
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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.
Paul S. Lattanzio, Director, was appointed a director of the Company in
August 1995. Currently, Mr. Lattanzio is a Managing Director of BT Capital
Partners, Inc., an affiliate of Bankers Trust New York Corp. Mr. Lattanzio has
been employed by BT Capital Partners, Inc. or an affiliate since 1984. Mr.
Lattanzio received his B.S. in economics from the University of Pennsylvania's
Wharton School of Business.
William P. Glasgow, Director, was appointed a director of the Company in
August 1995. Currently, Mr. Glasgow is President of Prime Management Group.
Prior to joining Prime Management in 1983, Mr. Glasgow was Marketing
Consultant for Mid-Coast Cable Television. Mr. Glasgow is a graduate of
Vanderbilt University and the University of Texas Graduate School of Business.
William A. Johnston, Director, was elected a director of the Company in June
1994. Mr. Johnston is a general partner of the funds managed by Hancock
Venture Partners, Inc. Mr. Johnston joined Hancock Venture Partners, Inc. in
1983 after working in the John Hancock Corporate Finance Department.
Currently, Mr. Johnston serves on the advisory boards of The Centennial Funds,
Austin Ventures, and Highland Capital Partners, as well as on the board of
directors of Centennial Security, Inc., HLC-Internet, Inc., MultiTechnology
Corp., The Marks Group, Inc., and Masada Security Corporation.
Internationally, he serves on the board of directors of Telesystem
International Wireless Corporation and Esprit Telecom. Mr. Johnston received a
bachelor's degree from Colgate University and a master's degree from Syracuse
University School of Management.
Eugene A. Sekulow, Director, was elected a director of the Company in August
1995. Mr. Sekulow served as Executive Vice President of NYNEX International
Corporation from December 1991 to 1993. From 1986 to 1991, he served as
President of NYNEX International Company. Since his retirement from NYNEX in
1993, Mr. Sekulow has founded his own telecommunications consultancy where he
has been retained by European, U.S., Japanese, Southeast Asian and Canadian
companies. Mr. Sekulow attended the University of Stockholm and the University
of Oslo. He earned an M.A. in political science and economics and a Ph.D. from
Johns Hopkins University.
The Board of Directors of the Company consists of nine persons, including
one outside director, one appointed by each of the Initial Investors, one
appointed by BT and one appointed by Enterprises. In connection with the
consummation of the Offering, the Company agreed to nominate, and to take all
reasonable actions to cause to be elected, within 120 days of the consummation
of the Offering, an additional director of the Company who has experience in
the telecommunications industry.
DIRECTORS' COMPENSATION
The Company's policy is not to pay compensation to its directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established an Audit Committee and a Compensation and Stock
Option Committee. Each of these committees is responsible to the full Board of
Directors, and its activities are therefore subject to approval of the Board
of Directors. The functions performed by these committees are summarized
below.
The Audit Committee is responsible for reviewing the Company's internal
accounting controls, meeting and conferring with the Company's certified
public accountants, and reviewing the results of the accountants' auditing
engagement.
The Compensation and Stock Option Committee determines base compensation and
discretionary cash bonuses for the Company's senior executives. These
determinations are subject to the approval or ratification of the full Board
of Directors. The Compensation and Stock Option Committee also determines the
number and terms of stock options to be granted to employees, directors and
consultants of the Company under the Company's stock option plans. See "--
Benefit Plans."
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Stock Option Committee consists of Messrs. Brekka,
Hofmann and Johnston, none of whom is currently an employee or officer of the
Company. No executive officer of the Company served during fiscal year 1995 as
a member of a compensation committee or as a director of any entity of which
any of the Company's directors serves as an executive officer.
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 and to the four 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
SALARY BONUS COMPENSATION
-------- ------- ------------
<S> <C> <C> <C>
Thomas C. Brandenburg
Former Chief Executive Officer.................. $190,000 -- --
J. Thomas Elliott
President and Chief Executive Officer .......... 182,480 -- --
Ronald W. Gavillet
Executive Vice President, Strategy & External
Affairs ........................................ 167,634 $50,000 --
Kevin J. Burke
Former Vice President, Network Engineering and
Technical Support............................... 100,980 -- --
Thad J. Pellino
Vice President, Marketing....................... 96,683 27,500 --
Robert J. Luth
Former Chief Financial Officer.................. 150,000 37,500 $26,000
</TABLE>
OPTION GRANTS
There were no grants of stock options to any of the Named Executive Officers
during the year ended December 31, 1995.
On June 28, 1996, Mr. Elliott was granted 11,000 shares of restricted Common
Stock (the "Restricted Stock"), of which one-third vests immediately, one-
third vests in January 1997 and one-third vests in January 1998. Also on such
date Mr. Elliott was granted 7,500 options, Mr. Gavillet was granted 6,150
options, Mr. Parrish was granted 3,850 options, Messrs. Pellino and Bethke
were each granted 2,000 options, and certain other employees were granted a
total of 3,250 options. In connection with the conversion of the Series A
Preferred Stock and Series A-2 Preferred Stock, Messrs. Elliott, Gavillet,
Parrish, Pellino and Bethke were granted 11,691, 9,863, 2,275, 1,182 and 1,182
options, respectively, and certain other employees were granted a total of
4,208 options. All options described in this paragraph give the holder the
right to purchase a corresponding number of shares of Class A Common Stock at
an exercise price of $1.50 per share and were granted pursuant to the 1994
Plan (as defined herein). See "Certain Relationships and Related
Transactions--Recapitalization."
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In connection with the employment of Mr. Sweas in November 1996, Mr. Sweas
was granted 5,000 options with an exercise price of $1.50 per share, 2,000
options with an exercise price not to exceed approximately $67.00 per share
and 4,000 options with an exercise price not to exceed approximately $134.00
per share. In connection with the employment of Mr. Mullaney in October 1996,
Mr. Mullaney was granted 4,000 options with an exercise price of $1.50 per
share and 3,500 options with an exercise price not to exceed approximately
$134.00 per share. In connection with the employment of Mr. Monson in January
1997, Mr. Monson was granted 5,000 options with an exercise price not to
exceed approximately $134.00 per share. All of the 23,500 options described in
this paragraph give the holder the right to purchase a corresponding number of
shares of Class A Common Stock.
In connection with the issuance of the 9% Preferred Stock (as defined
herein) and the consummation of the Offering, Messrs. Elliott, Gavillet,
Parrish, Pellino and Bethke were granted 18,234, 11,996, 600, 312 and 312
additional options, respectively, and certain other employees were granted a
total of 1,111 additional options, to purchase a corresponding number of
shares of Class A Common Stock at an exercise price of $1.50 per share. Such
options are exercisable only upon conversion from time to time of the 9%
Preferred Stock, in the case of all such employees, or, as the case may be
with respect to Messrs. Elliott and Gavillet, of the Convertible Notes, into
shares of Class A Common Stock.
As of October 31, 1996, options to purchase 8,613 shares of Class A Common
Stock at an exercise price of $1.10 per share, issued pursuant to the 1994
Stock Option Plan, were exercisable.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth the information with respect to the Named
Executive Officers concerning the exercise of options during fiscal year 1995
and unexercised options held as of December 31, 1995.
<TABLE>
<CAPTION>
OPTION EXERCISES DURING 1995
-------------------------------------------------
NUMBER OF EXERCISABLE
OPTIONS AT FISCAL YEAR-
SHARES END
ACQUIRED ON VALUE -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald W. Gavillet......... 0 0 1,925 1,925
Robert J. Luth (1)......... 0 0 1,925 1,925
</TABLE>
- --------
(1) On March 31, 1996, Robert J. Luth exercised options for 2,000 shares at an
exercise price of $1.10 per share.
BENEFIT PLANS
1994 Stock Option Plan
In September 1994, the Board of Directors adopted the 1994 Stock Option Plan
(the "1994 Plan"), which was subsequently approved by the stockholders in
September 1994. A total of 54,551 shares of Class A Common Stock have been
reserved for issuance under the 1994 Plan. The purposes of the 1994 Plan are
to attract and retain qualified personnel, to provide additional incentives to
employees, officers and directors of the Company and its affiliates and to
promote the success of the Company's business. Under the 1994 Plan, the
Company may grant incentive or non-qualified stock options to employees,
officers and directors. However, to the extent that the aggregate fair market
value of the Class A Common Stock issued to any person exceeds $100,000, such
options must be treated as nonqualified stock options. In connection with the
Recapitalization and the conversion of the Series A Preferred Stock and Series
A-2 Preferred Stock, as described above, an additional 24,436 shares of Class
A Common Stock were reserved for issuance under the 1994 Plan, bringing the
total number of reserved shares to 78,987.
Options granted under the 1994 Plan generally become exercisable six months
after the date of the grant at a rate of 25% of the shares subject to the
option and thereafter, at a rate of 25% at the end of each six month period
for a total of two years. The maximum term of a stock option under the 1994
Plan is ten years. If an
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optionee terminates his or her service for reasons other than death,
disability, retirement, resignation or discharge for cause, the optionee may
exercise only those option shares vested as of the date of termination. If,
however, an optionee retires without prior Board of Directors approval or is
terminated for cause, all options previously not exercised expire and are
forfeited. In addition, the Company has the option to repurchase all or any
part of the shares issued or issuable upon exercise, if an optionees
employment terminates for any reason whatsoever.
The 1994 Plan may be amended at any time by the Board of Directors, although
certain amendments require the consent of the participants of the 1994 Plan.
The 1994 Plan will terminate in September 2004, unless earlier terminated by
the Board of Directors.
401(k) Plan
In January 1995, the Company adopted the Employee 401(k) Profit Sharing Plan
(the "401(k) Plan") covering all of the Company's employees. Pursuant to the
401(k) Plan, employees may elect to reduce their current compensation by up to
the lesser of 15% of eligible compensation or the statutorily prescribed
annual limit ($9,500 in 1996) and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional contributions to the 401(k) Plan by the Company on behalf of all
participants. The Company has not made any contributions to date. The 401(k)
Plan is intended to qualify under Section 401 of the Code so that
contributions by employees or by the Company to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn,
and contributions by the Company, if any, will be deductible by the Company
when made.
EMPLOYMENT AGREEMENTS
In July 1996, Messrs. J. Thomas Elliott, President and Chief Executive
Officer and Ronald W. Gavillet, Executive Vice President, Strategy & External
Affairs, entered into employment agreements with the Company. In November
1996, Mr. Gerald Sweas entered into an agreement with the Company pursuant to
which he became the Company's Executive Vice President and Chief Financial
Officer. The terms of such agreements are for a period of three years subject
to automatic one-year renewals at each anniversary unless otherwise notified
by the Company. The agreements establish a base salary to be paid each year
which may be increased annually at the discretion of the Board of Directors.
The annual base salaries of Messrs. Elliott, Gavillet and Sweas are $195,000,
$185,000 and $150,000, respectively. In addition, subject to the attainment of
certain performance objectives, each is entitled to an annual bonus. With
respect to Messrs. Elliott and Gavillet, the agreements provide certain
preemptive rights such that, if the Company raises capital by selling shares
of any class of stock, each executive will have a right to purchase a certain
percentage (3.8% for Mr. Elliott and 2.5% for Mr. Gavillet) of such shares on
the same terms and conditions as the shares are being sold to others. Each of
Messrs. Elliott's and Gavillet's agreements also provides that if the current
shareholders sell any of their shares of Company stock to a third party under
certain circumstances, each executive has a right to sell the same percentage
of his shares of Company stock as the percentage of their shares that the
current shareholders are selling, on the same terms and for the same
consideration. With respect to each of Messrs. Elliott and Gavillet, if his
employment is terminated by the Company without "Cause" or by the executive
with "Good Reason" or during a "Window Period" (each as defined in the
respective agreement): (i) all amounts earned, accrued or owing to the
executive shall be paid as soon as practicable, (ii) the Company must pay a
lump sum equal to one year's base salary and, if the executive complies with
the noncompete and nonsolicitation provisions of the agreement for the two-
year period following termination, will pay the executive an additional one
year's base salary in equal installments over that two-year period, and (iii)
the Company must maintain in full force and effect all employee benefit plans
for the benefit of the executive for the longer of a two-year period or the
remaining term of the executive's agreement. With respect to Mr. Sweas, if his
employment is terminated by the Company without "Cause" or by him with "Good
Reason" (each as defined in his agreement): (i) all amounts earned, accrued or
owing to him shall be paid as soon as practicable; (ii) the Company must pay a
lump sum equal to the sum of (A) any annual bonus paid to Mr. Sweas for a
fiscal year completed prior to the date of termination, plus (B) a pro rata
portion of the annual bonus that would have been payable to Mr. Sweas in the
year of such termination, assuming the
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achievement of all performance goals, plus (C) if Mr. Sweas complies with the
noncompete and nonsolicitation provisions of his agreement for the 18-month
period following termination, the greater of the amount of Mr. Sweas' highest
annual base salary during the term of his agreement or the aggregate amount of
base salary payable to Mr. Sweas through the end of the term of such
agreement; and (iii) the Company must maintain in full force and effect all
employee benefit plans for the benefit of Mr. Sweas for the longer of a one-
year period or the remaining term of his agreement. If the executive's
employment is terminated under any other circumstances, the executive will not
receive any of the above-described severance pay and benefits. With respect to
Messrs. Elliott and Gavillet, upon a Change in Control the executive's options
will become exercisable and the restrictions on Mr. Elliott's Restricted
Shares will lapse. With respect to Mr. Sweas, upon a Change of Control the
Company shall pay, in exchange for the cancellation of any options and the
surrender of any shares held by him, an amount equal to the fair market value
of the shares held by Mr. Sweas or issuable upon exercise of any such options
(less the applicable exercise price). Upon a Change of Control, the Company
shall pay to each of Messrs. Elliott, Gavillet and Sweas, within the 10-day
period following such Change of Control, an amount equal to the pro rata
portion of the annual bonus that would have been payable to such executive
during such year, assuming the achievement of all performance goals. Under
each employment agreement, a "Change in Control" occurs if (i) a person or
entity becomes the beneficial owner of 35% or more of the combined voting
power of the Company's securities, (ii) the current directors, or individuals
who are approved by two-thirds of the current directors, cease to constitute a
majority of the board of the Company or (iii) certain mergers or liquidations
of the Company occur. Messrs. Elliott and Gavillet have agreed not to compete
with the Company in the network telecommunications services business or to
solicit customers or employees of the Company for their term of employment
with the Company and for an additional period of two years thereafter and Mr.
Sweas has agreed to similar restrictions for the term of his employment with
the Company and for an additional period of 18 months thereafter.
In January 1997, Mr. Ryan Mullaney entered into an employment agreement with
the Company. Mr. Mullaney's agreement provides for a base salary of $125,000
and an annual bonus (targeted at $75,000) based upon certain performance
standards established by the Board of Directors of the Company. The agreement
also provides that Mr. Mullaney will be entitled to receive certain payments
in the event that his employment is terminated other than for cause. Mr.
Mullaney has agreed not to compete with the Company during the term of his
employment and for a specified period thereafter.
Each of the other key employees (including Steven J. Parrish, Executive Vice
President, Operations, Thomas A. Monson, Vice President, General Counsel and
Secretary, Thad J. Pellino, Vice President of Marketing and Neil A. Bethke,
Vice President of Information Systems) have also entered into employment
agreements with the Company as of July 18, 1996 with respect to Messrs.
Parrish, Pellino and Bethke, and as of January 6, 1997 with respect to Mr.
Monson. The terms of the employment agreements are for a period of two years
subject to automatic one-year renewal upon each anniversary unless otherwise
notified by the Company. Each agreement specifies the base salary to be
received by the executive, and provides for annual adjustment of base salary
by the Board of Directors. The following annual base salaries were approved
effective July 31, 1996: Mr. Parrish - $140,000, Mr. Bethke - $125,000 and Mr.
Pellino - $110,000. The annual base salary for Mr. Monson, provided in his
employment agreement, is $143,000. Each executive is also entitled to annual
bonuses in the range of 15% to 30% of base salary, subject to the attainment
of certain performance objectives. If the Company terminates the employment of
any such officer without "Cause" or, if, the officer terminates his employment
with "Good Reason" (both as defined in the respective agreements), the officer
is entitled to receive benefits and payments similar to those discussed above
for Messrs. Elliott and Gavillet. No "Window Period" will apply to such
officers. Upon a Change in Control, the executive's options will become
exercisable. Each officer has agreed not to compete with the Company in the
network telecommunications services business or to solicit customers or
employees of the Company during the term of his employment and for a period of
one year following voluntary or involuntary termination.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FORMATION OF THE COMPANY
The Company was incorporated in April 1994. On April 20, 1994, Chase Capital
Partners ("Chase") and CIBC became principal investors in the Company pursuant
to a stock purchase agreement (as amended, the "Purchase Agreement") whereby
the Company sold each investor 2,475 shares of Series A Preferred Stock at a
price of $1,000 per share and 25,000 shares of Common Stock at a price of
$1.00 per share. On June 10, 1994, Hancock Venture Capital Associates
("Hancock," and together with Chase and CIBC the "Initial Investors") became
party to the Purchase Agreement as a purchaser of 2,475 shares of Series A
Preferred Stock at a price of $1,000 per share and 23,210 shares of Common
Stock at a price of $1.077 per share. See "Description of Capital Stock--
Common Stock" and "--Preferred Stock."
On November 2, 1994, an additional 7,425 shares of the Company's Series A
Preferred Stock and 69,630 shares of the Company's Common Stock were issued to
the Initial Investors for a total purchase price of $7,500,000, on the same
terms.
Pursuant to the Purchase Agreement, the Initial Investors are entitled to
certain contractual preemptive rights and registration rights. Except for the
issuances of Common Stock pursuant to (i) options granted to senior
management, (ii) an acquisition of another business or (iii) a public offering
of equity securities under the Securities Act, if the Company authorizes the
issuance of any equity securities or any securities containing options or
rights to acquire such securities (other than stock dividends), the Company is
required first to offer a portion of such securities to each Initial Investor.
The Company must offer such securities in an amount equal to the total number
of shares purchased by the Initial Investors pursuant to the Purchase
Agreement (including any shares derived therefrom) divided by the total number
of shares outstanding, at the most favorable price and term at which such
securities are offered to any party ("Preemptive Rights").
For so long as any Original Purchaser owns any Investor Preferred Stock or
Investor Common Stock (as such terms are defined in the Purchase Agreement),
the Company is precluded from, without obtaining the prior approval of Initial
Investors holding at least 66 2/3% of the outstanding Investor Common Stock,
among other things, (i) issuing notes, debt securities or equity securities of
the Company's subsidiaries other than Preferred Stock ranking junior to the
Series A Preferred Stock; (ii) merging, selling or effecting a
recapitalization of the Company; (iii) making or permitting any subsidiary to
make certain loans, advances or guarantees; (iv) directly or indirectly
declaring or paying any dividends or distributions except for dividends and
distributions on the Preferred Stock pursuant to the Certificate of
Designation or for dividends on the Common Stock which are payable in shares
of Common Stock; and (v) directly or indirectly redeeming, purchasing or
acquiring any Common Stock, warrants, options or other rights except for the
puts described in this paragraph. In addition, in the event of a change of
control (as defined in the Purchase Agreement) or at any time five years after
the initial investments, the Original Purchasers holding 30% of the Investor
Common Stock have a put right and a call right which requires the Company to
buy or sell, as the case may be, 25% or more of the Investor Preferred Stock
or Investor Common Stock; provided, that pursuant to the Recapitalization, no
such put or call right shall be exercisable so long as any of the Notes are
outstanding.
Pursuant to a Registration Agreement dated April 20, 1994, as amended and
restated on June 22, 1995 (the "Investors Registration Agreement"), Original
Purchasers holding at least 33 1/3% of the equity securities of the Company
subject to the Investors Registration Agreement may, subject to certain
limitations, require the Company to register all or part of their Common Stock
for public resale. These holders have the right to request (i) up to four
registrations on Form S-1 or any similar form (provided that each such
offering must equal at least $10 million) and (ii) an unlimited number of
"short-form" registrations on Form S-2 or S-3 or any similar form (provided
that each such offering must equal the lesser of $5 million or 20% of the
Registrable Securities (as defined in the Purchase Agreement) then
outstanding); and, in addition, these holders have the right to include their
shares, subject to certain limitations, in any registration of shares of
Common Stock by the Company under the Securities Act (collectively, the
"Registration Rights"). The Company is required to bear all registration
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<PAGE>
expenses, other than underwriters' discounts and commissions, for all Company-
initiated registrations and for demand registrations if certain minimum
offering requirements exist. The Investors Registration Agreement provides for
standard cutback and holdback provisions regarding the shares held by the
Original Purchasers.
In connection with the Offering, the Original Purchasers, by the requisite
vote, waived their Preemptive Rights and Registration Rights.
On April 20, 1994, the Company also entered into ancillary agreements with
the Initial Investors and USNCN. The stockholders agreement with the Initial
Investors as amended on June 10, 1994 (the "Stockholders Agreement") generally
restricts, among other things, the transfer of the Common Stock and Preferred
Stock owned by the parties with the exception of stock sold: (i) in an initial
public offering pursuant to an effective registration statement under the
Securities Act, or (ii) in the public market pursuant to Rule 144 under the
Securities Act. The Stockholders Agreement further provides the stockholders
with rights of first refusal in the case of sales of stock of the Company
initiated by stockholders of the Company that are parties to the Stockholders
Agreement ("Rights of First Refusal").
On June 13, 1995, the Company purchased certain assets and assumed certain
liabilities (the "Quest Purchase") of Quest with the consent of Edward H.
Lavin and J. Thomas Elliott, the majority stockholders of the managing general
partners of Quest.
On June 22, 1995, the Initial Investors, together with Northwood Capital
Partners LLC ("Northwood LLC"), Northwood Ventures (together with Northwood
LLC, the "Northwood Entities") and BT Capital Partners, Inc. ("BT") purchased
from the Company 23,760 shares of Series A-2 Preferred Stock at a price of
$1,000 per share and 123,078 shares of Class A Common Stock at a price of
$1.95 per share for an aggregate purchase price for both classes of
$24,000,003 (including, in the case of the Northwood Entities, the retirement
of certain debt of Quest assumed by the Company). On July 21, 1995,
Enterprises & Transcommunications, L.P. ("Enterprises") purchased 2,475 shares
of Series A-2 Preferred Stock at a price of $1,000 per share and 12,821 shares
of Class A Common Stock at a price of $1.95 per share for an aggregate
purchase price of $2,500,000.95 (the Initial Investors, the Northwood
Entities, BT and Enterprises are collectively referred to as the "Original
Purchasers"). Both equity purchases were made under similar terms as the
Purchase Agreement, including Preemptive Rights and Registration Rights.
Pursuant to the Stockholders Agreement, as amended (including, in such
amendment, the addition of all Original Purchasers as parties thereto), the
Board of Directors of the Company consists of nine persons, including one
outside director, two appointed by Mr. Thomas Brandenburg, one appointed by
each of the Initial Investors, one appointed by BT and one appointed by
Enterprises. The Stockholders Agreement between the Company and the Original
Purchasers terminates on April 20, 2004, unless certain minimum stock
ownership requirements are not satisfied or unless the agreement is otherwise
extended by the parties.
In March 1996, the Company caused a recapitalization pursuant to which the
Company (i) issued an aggregate of an additional 110,157 shares of Common
Stock to the Original Purchasers for no consideration in order to settle a
dispute relating to the price per share of the Common Stock paid by the
Original Purchasers stemming from, in part, the Company's operating
performance following the June 22, 1995 investment by the Initial Investors,
the Northwood Entities and BT as compared with the operating performance
projected by the Company at the time of such investment; (ii) caused the
Series A-2 Preferred Stock to be senior to the Series A Preferred Stock with
respect to redemption, dividends and liquidation in further settlement of the
dispute referred to in (i) above; and (iii) increased the number of directors
of the Company to nine in order to permit the addition of an outside member (a
director who is not an employee of the Company and who is not affiliated with
an Original Purchaser) to the board.
In connection with the Offering, BT Securities Corporation, Chase Securities
Inc. and CIBC Wood Gundy Securities Corp. purchased securities from the
Company which were immediately resold to Merrill Lynch Global Allocation Fund,
Inc. pursuant to Rule 144A of the Securities Act. BT Securities Corporation,
Chase Securities Inc. and CIBC Wood Gundy Securities Corp. are affiliates of
BT Capital Partners, Inc., Chase Venture Capital
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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., in connection with
the Offering, each received commissions of approximately $188,000 of the
$1,880,053 paid to the Initial Purchasers.
In January 1995, the Company executed a consulting agreement with Eugene A.
Sekulow, a director of the Company, for the period ending December 31, 1996.
Pursuant to the agreement, Mr. Sekulow is entitled to a consulting fee of
$48,000, payable in twelve monthly installments and $2,500 per day if Mr.
Sekulow devotes more than two days per month to the Company. The Company paid
Mr. Sekulow $58,625 for the period ending December 31, 1995 and as of June
1996 has paid Mr. Sekulow $24,000.
In December 1995, Mr. J. Thomas Elliott, President and Chief Executive
Officer of the Company, executed a 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.
On July 18, 1996 the Company agreed with Mr. Stephen C. Schwartz, the
founder and former director and officer of USNCN, to repurchase Mr. Schwartz's
interest in USNCN, among other things, for $1.7 million. Upon the closing of
such agreement, the Company acquired the 439,160 shares of common stock of
USNCN, $.01 par value ("USNCN Common Stock") formerly held by Mr. Schwartz.
In January 1996, the Company executed a consulting agreement with Edward H.
Lavin for the period ending January 1, 1997 pursuant to which Mr. Lavin
received 11,000 Restricted Shares of the Common Stock (now Class A Common
Stock) in exchange for consulting services with respect to all matters
relating to the business and marketing of the Company. The Company, which will
also provide certain cash compensation to Mr. Lavin for such services, may
renew the agreement for three month periods; however the maximum term of the
agreement is two years.
RECAPITALIZATION
In connection with the consummation of the Offering, the Certificate of
Incorporation of the Company was amended to provide for the authorization of
two classes of Common Stock, Class A Common Stock and Class B Common Stock
(collectively, the "Common Stock"). The rights of such classes are identical,
except that Class A Common Stock is entitled to one vote per share, while
Class B Common Stock is not entitled to any voting rights, except as required
by law. In addition, each outstanding share of Common Stock of the Company
existing on the date of the Offering was converted into one share of Class A
Common Stock. See "Description of Capital Stock--Common Stock."
As described above, by requisite vote, the Original Purchasers waived their
Preemptive Rights and Registration Rights with respect to the Offering. The
Original Purchasers also approved, and the Company took all necessary action
to effect prior to the consummation of the Offering, the amendment of the
terms of the Series A Preferred Stock and Series A-2 Preferred Stock to
provide for and effectuate the conversion of the shares of each such series of
Preferred Stock into newly issued shares of Class A Common Stock, which
conversion was consummated on September 30, 1996.
Also in connection with the Offering, the Original Purchasers purchased from
the Company shares of its newly created 9% Cumulative Convertible PIK
Preferred Stock, par value $1.00 per share (the "9% Preferred Stock"), for an
aggregate purchase price of $10 million. For a description of certain of the
terms of the 9% Preferred Stock, see "Description of Capital Stock--Preferred
Stock."
The events described under this heading "--Recapitalization" are
collectively referred to as the "Recapitalization."
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<PAGE>
STOCK OWNERSHIP
The following table sets forth as of October 31, 1996, the number of shares
of Class A Common Stock and the percentage of the outstanding shares of such
class that are beneficially owned by (i) each person that is the beneficial
owner of more than 5% of the outstanding shares of Class A Common Stock, (ii)
each of the directors and the Named Executive Officers of the Company and
(iii) all of the current directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK (2)
---------------------
NUMBER OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OWNED OF CLASS
- --------------------------------------- ------------ --------
<S> <C> <C>
BT Capital Partners, Inc. (3) ........................... 129,123 16.28%
130 Liberty Street
New York, New York 10017-2070
Chase Venture Capital Associates, L.P. (3)............... 174,308 21.97%
380 Madison Ave., 12th Floor
New York, New York 10017-2070
CIBC Wood Gundy Ventures, Inc. (3) ...................... 174,308 21.97%
425 Lexington Avenue
New York, New York 10017-3903
Hancock Venture Partners IV (3).......................... 172,084 21.69%
One Financial Center, 44th Floor
New York, New York 10017-3903
Enterprises & Transcommunications, L.P. (3) ............. 42,917 5.41%
600 Congress Suite 3000
One American Center
Austin, Texas 78701
Thomas C. Brandenburg (4)(5)(6).......................... 22,216 2.80%
Richard J. Brekka (4)(6)................................. 174,308 21.97%
J. Thomas Elliott (4).................................... 11,000 1.39%
Ronald W. Gavillet (4)(7)................................ 2,888 *
William P. Glasgow (4)(6)................................ 42,917 5.41%
Donald J. Hofmann, Jr. (8)(9)............................ 174,308 21.97%
William A. Johnston (4)(6)............................... 172,084 21.69%
Paul S. Lattanzio (4)(6)................................. 129,123 16.28%
Eugene A. Sekulow........................................ -- --
All directors and executive officers of the Company as a
group (9 persons)....................................... 728,844 91.87%
</TABLE>
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment
power with respect to the shares.
(2) Excludes shares underlying the Initial Warrants issued in connection with
the Offering.
(3) BT Capital Partners, Inc., Chase Venture Capital Associates, L.P., CIBC
Wood Gundy Ventures, Inc., Hancock Venture Partners IV and Enterprises &
Transcommunications, L.P. are affiliates of Bankers Trust New York
Corporation, Chase Manhattan Corporation, Canadian Imperial Bank of
Commerce, Hancock Venture Partners, Inc. and Prime Cable Income Partners
LP, respectively.
(4) The address of the beneficial owners is the address of the Company listed
elsewhere in this Prospectus.
(5) Includes 10,000 shares subject to a voting trust for David Montville. Mr.
Brandenburg, as the voting trust agent, disclaims beneficial ownership
with respect to the shares held in trust.
(6) Each director disclaims beneficial ownership of any shares of Common Stock
or Preferred Stock which it does not directly own.
(7) These shares are subject to exercisable options held by Mr. Gavillet.
(8) The address of Mr. Hofmann is the address of Chase Venture Capital
Associates, L.P. listed above.
(9) These shares are owned of record by Chase Venture Capital Associates, L.P.
66
<PAGE>
DESCRIPTION OF THE NOTES
On September 30, 1996, the Company consummated a private placement of (i)
48,500 Units consisting of $48.5 million in aggregate principal amount at
maturity of Senior Notes and warrants to purchase 61,550 shares, subject to
adjustment under certain circumstances, of Class A Common Stock, and (ii)
$36.0 million in aggregate principal amount at maturity of Convertible Notes.
As described elsewhere in this Prospectus, in connection with the Offering the
Company undertook to consummate the Exchange Offer, pursuant to which the
Holders of Old Notes would be entitled to exchange such Old Notes for New
Notes. The following is a description of the Old Notes, the New Notes and the
Convertible Notes.
GENERAL
The Old Notes were and the New Notes will be issued under the Senior Note
Indenture. The Convertible Notes were issued pursuant to the Convertible Note
Indenture. For purposes of this Description of the Notes, the term "Company"
refers to United USN, Inc. and does not include its subsidiaries except for
purposes of financial data determined on a consolidated basis.
The terms of the Senior Notes include those stated in the Senior Note
Indenture and those made a part of the Senior Note Indenture by reference to
the Trust Indenture Act of 1939 as in effect on the date of the Indenture (the
"Trust Indenture Act"). Similarly, the terms of the Convertible Notes include
those stated in the Convertible Note Indenture and those made a part of the
Convertible Note Indenture by reference to the Trust Indenture Act. The
following summaries of certain provisions of the Indentures do not purport to
be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Indentures. The Notes are subject to all
such terms, and holders of the Notes are referred to the applicable Indenture
and the Trust Indenture Act for a complete statement of such terms. Copies of
the Indentures are available from the Company on request. The statements and
definitions of terms under this caption relating to the Notes and the
Indentures are summaries and do not purport to be complete. Such summaries
make use of certain terms defined in the Indentures and are qualified in their
entirety by express reference to the Indentures. Certain terms used herein are
defined below under "--Certain Definitions."
The Old Notes were and the New Notes will be general unsecured obligations
of the Company limited in aggregate principal amount at Stated Maturity to
$137 million and will rank pari passu in right of payment with all existing
and future senior unsecured indebtedness of the Company, and will be senior in
right of payment to all existing and future subordinated indebtedness of the
Company. The Convertible Notes are general unsecured obligations of the
Company limited in aggregate principal amount at Stated Maturity to $46
million, are subordinated in right of payment to the Senior Notes, and rank
pari passu in right of payment with all other existing and future senior
unsecured indebtedness of the Company. The Notes are effectively subordinated,
however, to secured indebtedness of the Company to the extent of the assets
securing that indebtedness (including up to $30 million of indebtedness under
a future Credit Facility). The Company's Subsidiaries will have no direct
obligation to pay amounts due on the Notes and did not and will not guarantee
the Notes on their respective Issue Dates; however, if a Restricted Subsidiary
guarantees any Indebtedness of the Company, such Restricted Subsidiary will be
obligated to guarantee the Senior Notes on a senior basis and the Convertible
Notes on a senior subordinated basis. See "--Certain Covenants--Limitation on
Issuances of Guarantees by Restricted Subsidiaries." As a result, the Notes
effectively will be subordinated to all existing and future third-party
indebtedness and other liabilities of the Company's Subsidiaries (including
trade payables). As of September 30, 1996, the total outstanding indebtedness
and other liabilities (including trade payables and other non-debt
obligations) of the Company that would rank pari passu in right of payment
with the Notes was approximately $5.8 million. As of September 30, 1996, the
total outstanding indebtedness and other liabilities (including trade payables
and other non-debt obligations) of the Company's Subsidiaries on a combined
consolidated basis (after the elimination of loans and advances by the
Company) was approximately $5.3 million. Of that amount, approximately $0.6
million in indebtedness was secured by Liens on the assets of the borrowing
Subsidiaries.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. Any rights (other than claims based upon
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<PAGE>
valid pari passu loans and advances made by the Company) of the Company and
its creditors, including the holders of Notes, to participate in the
distribution of the assets of any of the Company's Subsidiaries upon any
liquidation or reorganization of any such Subsidiary will be subject to the
prior claims of that Subsidiary's creditors (including trade creditors).
Accordingly, the Company anticipates that the primary source of cash to pay
the Company's obligations under the Notes will be derived from the operations
of the Restricted Subsidiaries. The Indentures permit under limited
circumstances the creation of, or the designation of existing Restricted
Subsidiaries as, Unrestricted Subsidiaries. Such Unrestricted Subsidiaries
will not generally be subject to the covenants applicable to the Company and
the Restricted Subsidiaries. See "Risk Factors--Substantial Leverage" and "--
Holding Company Structure; Source of Repayment of Notes; Effective
Subordination of Notes to Indebtedness of Subsidiaries."
The Convertible Note Indenture does not contain any restrictions on the
payment of dividends or the making of distributions, investments or certain
other restricted payments or any financial covenants and contains no covenants
or other provisions against a dramatic decline in credit quality of the
Convertible Notes, except as described below in "--Right to Require Repurchase
of Convertible Notes Upon a Termination of Trading."
The Old Notes and the Convertible Notes have been designated for trading in
the PORTAL Market.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes are limited in aggregate principal amount at Stated
Maturity to $137 million and will mature on September 30, 2003. The Old Notes
were issued at a discount to their aggregate principal amount to generate
gross proceeds to the Company of approximately $30 million. In addition to the
Old Notes issued as of September 30, 1996, an additional $72 million aggregate
principal amount at Stated Maturity of Senior Notes may be issued pursuant to
the Senior Note Indenture. The Senior Notes will accrete interest at the rate
of 14% per annum, compounded semiannually, to an aggregate principal amount of
$48.5 million by March 30, 2000. Although for U.S. federal income tax purposes
a significant amount of original issue discount, taxable as ordinary income,
will be recognized by a holder as such discount accrues from the Issue Date of
the Senior Notes, no interest will be payable on the Senior Notes prior to
March 30, 2000. See "Certain Federal Income Tax Considerations--Taxation of
the Notes--Original Issue Discount." From and after March 30, 2000, interest
on the Senior Notes will accrue at the rate of 14% per annum and will be
payable in cash semiannually on March 30 and September 30, commencing
September 30, 2000, to the holders of record of Senior Notes at the close of
business on March 15 and September 15 immediately preceding such interest
payment date. Interest on the Senior Notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from
March 30, 2000. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The Convertible Notes are limited in aggregate principal amount at Stated
Maturity to $46 million and will mature on September 30, 2004. The Convertible
Notes were issued at a discount to their aggregate principal amount to
generate gross proceeds to the Company of approximately $28 million. In
addition to the Convertible Notes issued as of September 30, 1996, an
additional $3.1 million aggregate principal amount at Stated Maturity of
Convertible Notes may be issued pursuant to the Convertible Note Indenture.
The Convertible Notes will accrete interest at the rate of 9% per annum,
compounded semiannually, to an aggregate principal amount of $36.0 million by
September 30, 1999. Although for U.S. federal income tax purposes a
significant amount of original issue discount, taxable as ordinary income,
will be recognized by a holder as such discount accretes from the Issue Date
of the Convertible Notes, no interest will be payable on the Convertible Notes
prior to September 30, 1999. See "Certain Federal Income Tax Considerations--
Taxation of the Notes--Original Issue Discount." From and after September 30,
1999, interest on the Convertible Notes will accrue at the rate of 9% per
annum and will be payable in cash semiannually on March 30 and September 30,
of each year commencing March 30, 2000, to the holders of record of
Convertible Notes at the close of business on March 15 and September 15
immediately preceding such interest payment date. Interest on the Convertible
Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from September 30, 1999. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
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<PAGE>
If the Company does not comply with certain deadlines set forth in the
Registration Rights Agreement with respect to the conduct of the Exchange
Offer or the registration of either the Senior Notes or the Convertible Notes
for resale under a shelf registration statement, holders of the Senior Notes
and/or the Convertible Notes will be entitled to Special Interest. See
"Registration Rights."
Principal of, premium, if any, and interest and Special Interest, if any, on
the Old Notes and the Convertible Notes is, and on the New Notes will be,
payable, and the Notes may be presented for registration of transfer or
exchange, at the office or agency of the Company maintained for such purpose,
which office shall be maintained in the Borough of Manhattan, The City of New
York. At the option of the Company, interest and Special Interest may be paid
by check mailed to the registered holders at their registered addresses. The
Old Notes and the Convertible Notes were, and the New Notes will be, issued
without coupons and in fully registered form only, in denominations of $1,000
and integral multiples thereof.
CONVERSION RIGHTS OF CONVERTIBLE NOTES
The Convertible Notes are convertible into the Convertible Note Shares, at
the option of the holders of Convertible Notes, at any time after the 60th day
following the date of original issuance of the Convertible Notes and prior to
redemption or final maturity of the Convertible Notes, initially at a
conversion price of $134.08 per share, subject to adjustment (the "Conversion
Price") as described below and as described in "--Additional Invested Equity."
The right to convert Convertible Notes which have been called for redemption
will terminate at the close of business on the business day preceding the
redemption date. In the event that the Company consummates a sale or sales of
any class of Capital Stock for an amount, individually or in the aggregate, in
excess of $5,000,000 (each, a "Reset Event") and at the time of such sale or
sales, the equity valuation of the Company based upon such sale or sales (as
evidenced by a Board Resolution delivered to the Convertible Note Trustee) is
less than $122,500,000, then on the date of the consummation of any such Reset
Event (the "Reset Date"), the Conversion Price shall be adjusted (the
"Conversion Reset") to equal 115% of the price (the "Conversion Reset Price")
at which such sale or sales were consummated; provided, that if such sale or
sales are consummated more than nine months after a Qualified Public Offering
at a total equity valuation of the Company of at least $122,500,000, then no
Conversion Reset will be required. In the event that the Conversion Price
before such calculation shall be equal to or less than the Conversion Reset
Price, then no additional adjustment to the Conversion Price shall be made.
Subject to certain exceptions, the Conversion Price will be subject to
adjustment on the occurrence of certain events including: (i) the payment by
the Company of dividends (or the making of other distributions) with respect
to any class of Capital Stock payable in Common Stock or other shares of the
Company's Capital Stock, (ii) subdivisions, combinations and reclassifications
of Common Stock, (iii) the issuance to all holders of Common Stock of rights,
options or warrants entitling them to subscribe for Common Stock, or of
securities convertible into or exchangeable for shares of Common Stock, in
either case for consideration per share of Common Stock which is less than the
Current Market Price per share of Common Stock (determined as provided in the
Convertible Note Indenture), (iv) the issuance or sale of shares of Common
Stock, or securities convertible into or exchangeable for shares of Common
Stock, for consideration per share of Common Stock which is less than the
Current Market Price per share of Common Stock (determined as provided in the
Convertible Note Indenture), other than the Warrants, (v) the distribution to
all holders of Common Stock of any of the Company's assets, debt securities or
any rights or warrants to purchase securities (excluding those rights and
warrants referred to in clause (iii) above and excluding cash dividends or
other cash distributions from current or retained earnings) and (vi) certain
other events which could have the effect of depriving holders of the
Convertible Notes of all or any of the conversion rights in respect of any
Convertible Note.
No adjustment in the Conversion Price will be required unless such
adjustment would require an increase or decrease of at least 1.0% in the
Conversion Price; provided, that any adjustment which is not made will be
carried forward and taken into account in any subsequent adjustment.
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<PAGE>
In addition to the foregoing adjustments, the Company will be permitted to
reduce the Conversion Price as it considers to be advisable in order that any
event treated for United States federal income tax purposes as a dividend of
stock or stock rights will not be taxable to the holders of the Common Stock
or, if that is not possible, to diminish any income taxes that are otherwise
payable because of such event. In the case of any consolidation or merger of
the Company with any other Person (other than one in which no change is made
in the Common Stock), or any sale or transfer of all or substantially all of
the assets of the Company, the holder of any Convertible Note then outstanding
will have the right thereafter to convert such Convertible Note only into the
kind and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock into which such Convertible Note might have been converted
immediately prior to such consolidation, merger, sale or transfer; and
adjustments will be provided for events subsequent thereto that are as nearly
equivalent as practical to the Conversion Price adjustments described above.
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon the then
Closing Price (determined as provided in the Convertible Note Indenture) at
the close of business on the day of conversion. If any Convertible Notes are
surrendered for conversion during the period from the close of business on any
regular record date through and including the next succeeding interest payment
date (except any such Convertible Notes called for redemption), such
Convertible Notes when surrendered for conversion must be accompanied by
payment in next day funds of an amount equal to the interest thereon which the
registered Holder on such record date is to receive. Except as described in
the preceding sentence, no interest will be payable by the Company on
converted Convertible Notes with respect to any interest payment date
subsequent to the date of conversion. No other payment or adjustment for
interest or dividends is to be made upon conversion.
SUBORDINATION OF CONVERTIBLE NOTES
The payment of the principal of and premium, if any, and interest (including
Special Interest, if any) on the Convertible Notes will, to the extent set
forth in the Convertible Note Indenture, be subordinated in right of payment
to the prior payment in full of the Senior Notes and all other obligations of
the Company and the Guarantors, if any, under the Senior Notes, the Senior
Note Guarantees, if any, and the Senior Note Indenture (the "Senior
Indebtedness"). If there is a payment or distribution of assets to creditors
upon any liquidation, dissolution, winding up, reorganization, assignment for
the benefit of creditors, marshalling of assets or any bankruptcy, insolvency
or similar proceedings of the Company or a Guarantor, as applicable, the
holders of all Senior Indebtedness will be entitled to receive payment in full
of all amounts due or to become due thereon or provision for such payment in
money or money's worth must be made before the holders of the Convertible
Notes will be entitled to receive any payment in respect of the principal of
or premium, if any, or interest (including Special Interest, if any) on the
Convertible Notes. In the event of the acceleration of the Maturity of the
Convertible Notes, the holders of all Senior Indebtedness will first be
entitled to receive payment in full in cash of all amounts due thereon or
provision for such payment in money or money's worth before the holders of the
Convertible Notes will be entitled to receive any payment for the principal of
or premium, if any, or interest (including Special Interest, if any) on the
Convertible Notes. No payments on account of principal of or premium, if any,
or interest (including Special Interest, if any) on the Convertible Notes or
on account of the purchase or acquisition of Convertible Notes may be made if
there has occurred and is continuing a default in any payment with respect to
Senior Indebtedness, any acceleration of the maturity of any Senior
Indebtedness or if any judicial proceeding is pending with respect to any such
default.
ADDITIONAL INVESTED EQUITY
If the Company does not achieve consolidated total revenues (calculated in
accordance with GAAP) of at least $8.5 million for the period from June 1,
1997 through June 30, 1997 and if, by September 30, 1997, the Company has not
either (i) consummated a Qualified Public Offering or (ii) been sold pursuant
to a Qualified Sale of the Company, the Company shall by such date be required
to either (A) obtain $10.0 million of
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<PAGE>
Additional Invested Equity or (B) (i) grant to the holders of the Convertible
Notes the right to purchase for $10.0 million additional convertible
securities of the Company convertible into 16 2/3% of the Common Stock on a
fully diluted basis (subject to certain exceptions) after giving effect to the
issuance of such additional convertible securities, (ii) grant to the holders
of the Convertible Notes the right to purchase warrants (the "Additional
Warrants") exercisable for Common Stock representing up to 5% of the Common
Stock of the Company at a purchase price of $.01 per share (subject to certain
adjustments, if required) on a fully diluted basis (subject to certain
exceptions) after giving effect to the issuance of such warrants, and (iii)
adjust the Conversion Price for the Convertible Notes shall be adjusted by
dividing the Conversion Price in effect immediately prior to the issuance of
such convertible securities and warrants by 1.15.
OPTIONAL REDEMPTION
The Old Notes are not and the New Notes will not be redeemable at the option
of the Company prior to September 30, 2001, subject to provisions of the
following paragraph. Thereafter, the Senior Notes will be subject to
redemption at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount at Stated Maturity thereof) set forth below,
plus accrued and unpaid interest (if any) and Special Interest (if any), if
redeemed during the twelve months beginning September 30 of each year
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................... 109.0%
2002........................................................... 104.5%
</TABLE>
Notwithstanding the foregoing, in the event that on or prior to September
30, 1999, the Company consummates one or more Public Equity Offerings of its
Common Stock or issues or sells Qualified Stock of the Company to a Strategic
Investor, in each case in an aggregate amount equal to or exceeding $40
million, up to a maximum of 25% of the aggregate principal amount at Stated
Maturity of the Senior Notes will be redeemable at the option of the Company
out of the net proceeds of such sale or sales to the extent that such proceeds
consist of cash or cash equivalents. Such Senior Notes will be redeemable on
not less than 30 nor more than 60 days' prior notice at a redemption price
equal to 114% of the Accreted Value of the Senior Notes to be redeemed on the
redemption date plus accrued and unpaid interest, if any, and Special
Interest, if any, to the redemption date. Any such redemption shall occur
within 90 days after (but not before) such sale or last such sale in the case
of a series of related transactions; provided, that immediately after giving
effect to such redemption not less than 75% of the aggregate principal amount
at Stated Maturity of the Senior Notes originally issued remain outstanding.
The Convertible Notes are not redeemable prior to September 30, 2000. During
the period from September 30, 2000 to September 30, 2002 the Company may
redeem all but not less than all of the Convertible Notes, upon not less than
30 nor more than 60 days' notice, if the Closing Price (as defined in the
Convertible Note Indenture) of the Common Stock is at least 150% of the
Conversion Price for thirty consecutive days, at a redemption price equal to
100% of the principal amount at Stated Maturity thereof plus accrued and
unpaid interest, if any, and Special Interest, if any; provided, that if the
Common Stock is not traded on a U.S. national securities exchange or approved
for trading on an established automated over-the-counter trading market in the
United States and not quoted on a consolidated transaction reporting tape, the
Convertible Notes will not be redeemable during such period. On or after
September 30, 2002, the Convertible Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 nor more 60
days' notice, at 100% of the principal amount thereof at Stated Maturity, plus
accrued and unpaid interest, if any, and Special Interest, if any.
MANDATORY REDEMPTION
Except as set forth under "--Repurchase at the Option of Holders upon a
Change of Control,"
"--Asset Sales," and "--Right to Require Repurchase of Convertible Notes Upon
a Termination of Trading," the Company is not required to make mandatory
redemption payments or sinking fund payments with respect to the Notes.
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<PAGE>
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes shall have
the right to require the Company to repurchase all or any part (equal to
$1,000 principal amount or an integral multiple thereof) of such holder's
Notes pursuant to an irrevocable and unconditional offer described below (the
"Change of Control Offer") at a purchase price (the "Change of Control
Purchase Price") equal to 101% of the Accreted Value of such Notes (or
portions thereof) on any Change of Control Payment Date (as defined herein)
occurring prior to March 30, 2000, plus accrued and unpaid interest, if any,
and Special Interest, if any, thereon to such Change of Control Payment Date,
or 101% of the principal amount at Stated Maturity of such Notes (or portions
thereof), on any Change of Control Payment Date occurring on or after March
30, 2000 plus accrued and unpaid interest, if any, and Special Interest, if
any, to such Change of Control Payment Date.
Within 30 days following any Change of Control, the Company or the
applicable Trustee (at the expense of the Company) shall mail a notice to each
holder stating, among other things: (1) that a Change of Control Offer is
being made pursuant to the covenant in the applicable Indenture entitled
"Repurchase at the Option of Holders upon a Change of Control" and that all
Notes properly tendered will be accepted for payment; (2) the Change of
Control Purchase Price and the purchase date (the "Change of Control Payment
Date"), which shall be no earlier than 30 days nor later than 60 days from the
date such notice is mailed; (3) that any Notes or portions thereof not
properly tendered will continue to accrete in value or accrue interest, as the
case may be, and accrue Special Interest, if applicable; (4) that, unless the
Company defaults in the payment of the Change of Control Purchase Price, all
Notes or portions thereof accepted for payment pursuant to the Change of
Control Offer shall cease to accrete in value or accrue interest, as the case
may be, and accrue Special Interest, if applicable, from and after the Change
of Control Payment Date; (5) that holders electing to have any Notes or
portions thereof purchased pursuant to a Change of Control Offer will be
required to surrender the Notes, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Notes completed, to a paying agent (the
"Paying Agent") at the address specified in the notice prior to the close of
business on the third Business Day preceding the Change of Control Payment
Date; (6) that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the holder, the
principal amount of Notes delivered for purchase, and a statement that such
holder is withdrawing his election to have such Notes or portions thereof
purchased; (7) that holders whose Notes are being purchased only in part will
be issued new Notes equal in principal amount to the unpurchased portion of
the Note or Notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount at Stated Maturity or an integral multiple thereof;
and (8) the instructions and any other information necessary to enable holders
to accept a Change of Control Offer or effect withdrawal of such acceptance.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of
Notes pursuant to a Change of Control Offer.
On the Change of Control Payment Date, the Company will (1) accept for
payment Notes or portions thereof properly tendered pursuant to the Change of
Control Offer, (2) deposit with the Paying Agent in immediately available
funds an amount equal to the Change of Control Purchase Price in respect of
all Notes or portions thereof so tendered, including accrued and unpaid
interest, if any, and Special Interest, if any, thereon and (3) deliver, or
cause to be delivered, to the applicable Trustee the Notes so accepted
together with an Officers' Certificate listing the Notes or portions thereof
tendered to the Company and accepted for payment. The Paying Agent shall
promptly mail to each holder of Notes so accepted payment in an amount equal
to the Change of Control Purchase Price, including interest and Special
Interest, if applicable, for such Notes and the applicable Trustee shall
promptly authenticate and mail to each holder a new Note equal in principal
amount at Stated Maturity to any unpurchased portion of the Notes surrendered,
if any; provided, that each such new Note shall be in a principal amount at
Stated Maturity of $1,000 or any integral multiple thereof. The Company will
announce publicly the results of a Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
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<PAGE>
The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase Notes upon a Change of Control may deter
a third party from acquiring the Company in a transaction that constitutes a
Change of Control. If a Change of Control Offer is made, there can be no
assurance that the Company will have sufficient funds to pay the Change of
Control Purchase Price for all Notes tendered by holders seeking to accept the
Change of Control Offer. In addition, instruments governing other Indebtedness
of the Company may prohibit the Company from purchasing any Notes prior to
their Stated Maturity, including pursuant to a Change of Control Offer. In the
event that a Change of Control Offer occurs at a time when the Company does
not have sufficient available funds to pay the Change of Control Purchase
Price for all Notes tendered pursuant to such offer or at a time when the
Company is prohibited from purchasing the Notes (and the Company is unable
either to obtain the consent of the holders of the relevant Indebtedness or to
repay such Indebtedness), an Event of Default (as defined herein) would occur
under the Indentures. In addition, one of the events that constitutes a Change
of Control under the Indentures is a sale, conveyance, transfer or lease of
all or substantially all of the assets of the Company or of the Company and
its Restricted Subsidiaries taken as a whole. The Indentures will be governed
by New York law, and there is no established quantitative definition under New
York law of "substantially all" of the assets of a corporation. Accordingly,
if the Company and/or its Restricted Subsidiaries were to engage in a
transaction in which it or they disposed of less than all of the assets of the
Company or less than all of the assets of the Company and its Restricted
Subsidiaries taken as a whole, a question of interpretation could arise as to
whether such disposition was of "substantially all" of its or their assets, as
the case may be, and whether the Company was required to make a Change of
Control Offer.
Except as described herein with respect to a Change of Control and, except
with regard to the Convertible Notes, the covenant described below in "--Right
to Require Repurchase of Convertible Notes Upon a Termination of Trading,"
neither Indenture contains any other provisions that permit holders of Notes
to require that the Company repurchase or redeem Notes in the event of a
takeover, recapitalization or similar restructuring. The foregoing provisions
may not necessarily afford the holders of the Notes protection in the event of
a highly leveraged transaction, including a reorganization, restructuring,
merger or other similar transaction involving the Company, that may adversely
affect the holders because (i) such transactions may not involve a shift in
voting power or beneficial ownership or, even if they do, may not involve a
shift of the magnitude required under the definition of Change of Control to
require the Company to make a Change of Control Offer or (ii) such
transactions may include an actual shift in voting power or beneficial
ownership to a Strategic Investor or to a Permitted Holder which is excluded
under the definition of Change of Control from the amount of shares involved
in determining whether or not the transaction involves a shift of the
magnitude required to trigger the provisions.
ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale (as defined herein) unless (i) no Event of Default
under the Indentures shall have occurred and be continuing or shall occur as a
consequence thereof; (ii) the Company or such Restricted Subsidiary, as the
case may be, receives net consideration at the time of such Asset Sale at
least equal to the Fair Market Value (as evidenced by a Board Resolution of
the Company delivered to the applicable Trustee) of the Property or assets
sold or otherwise disposed of; (iii) at least 75% of the consideration
received by the Company or such Restricted Subsidiary for such Property or
assets consists of Cash Proceeds; and (iv) the Company or such Restricted
Subsidiary, as the case may be, uses the Net Cash Proceeds from such Asset
Sale in the manner set forth below.
Within 270 days after any Asset Sale, the Company or such Restricted
Subsidiary, as the case may be, may at its option reinvest an amount equal to
the Net Cash Proceeds (or any portion thereof) from such Asset Sale in
Telecommunications Assets and/or (ii) apply an amount equal to such Net Cash
Proceeds (or remaining Net Cash Proceeds) to the permanent reduction of
Indebtedness of the Company (other than Indebtedness to a Restricted
Subsidiary) that is pari passu in right of payment with the Notes or to the
permanent reduction of Indebtedness of any Restricted Subsidiary that is pari
passu in right of payment with such Restricted Subsidiary's Guarantee, if
applicable (other than Indebtedness to the Company or another Restricted
Subsidiary). Any Net Cash Proceeds
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from any Asset Sale that are not used to reinvest in Telecommunications Assets
and/or reduce pari passu Indebtedness of the Company or Indebtedness of its
Restricted Subsidiaries shall constitute Excess Proceeds.
If at any time the aggregate amount of Excess Proceeds calculated as of such
date exceeds $5 million, the Company shall, on a date (the "Asset Sale Payment
Date") which shall be no earlier than 30 days nor later than 40 days
subsequent to the date on which the Company sends notice to Holders of the
Asset Sale Offer, which shall be within 30 days of the date on which such
Excess Proceeds exceed $5 million, use such Excess Proceeds to make offers (A)
to purchase (each an "Asset Sale Offer") (i) first, on a pro rata basis from
all holders of Senior Notes in an aggregate principal amount equal to the
maximum principal amount that may be purchased out of the then-existing Excess
Proceeds, at a purchase price (the "Asset Sale Purchase Price") in cash equal
to 100% of the Accreted Value of such Senior Notes on any Asset Sale Payment
Date occurring prior to March 30, 2000, plus accrued and unpaid interest, if
any, and Special Interest, if any, to the Asset Sale Payment Date, or 100% of
the principal amount at Stated Maturity of such Senior Notes on any Asset Sale
Payment Date occurring on or after March 30, 2000, plus accrued and unpaid
interest, if any, and Special Interest, if any, to such Asset Sale Payment
Date, and (ii) thereafter, if any Excess Proceeds remain upon completion of
such purchases of the Senior Notes, on a pro rata basis from all holders of
Convertible Notes, in an aggregate principal amount equal to the maximum
principal amount that may be purchased out of Excess Proceeds, at an Asset
Sale Purchase Price in cash equal to 100% of the Accreted Value of such
Convertible Notes on any Asset Sale Payment Date occurring prior to September
30, 1999, plus accrued and unpaid interest, if any, and Special Interest, if
any, to the Asset Sale Payment Date, or 100% of the principal amount at Stated
Maturity of such Convertible Notes on any Asset Sale Payment Date occurring on
or after September 30, 1999, plus accrued and unpaid interest, if any, and
Special Interest, if any, to such Asset Sale Payment Date, in accordance with
the procedures set forth in the applicable Indenture and (B) to the
substantially concurrent repayment or redemption of Pari Passu Indebtedness
(if any) if required by the instruments relating to such Pari Passu
Indebtedness (which repayment or redemption, in the case of a revolving credit
arrangement or multiple advance arrangement, reduces the commitment
thereunder). The Excess Proceeds to be so applied may be applied such that the
portion to be applied to the repayment or redemption of Pari Passu
Indebtedness shall not exceed an amount equal to the product obtained by
multiplying such Excess Proceeds by a fraction, the numerator of which is the
outstanding principal amount of Pari Passu Indebtedness that, pursuant to the
instruments relating thereto, is required to be repaid or redeemed with
proceeds from such Asset Sale or Asset Sales and the denominator of which is
the sum of the (i) aggregate principal amount of the Senior Notes then
outstanding plus (ii) the aggregate principal amount of outstanding Pari Passu
Indebtedness that, pursuant to the instruments relating thereto, is required
to be repaid or redeemed with proceeds from such Asset Sale or Asset Sales.
Upon completion of any Asset Sale Offer (including payment of the Asset Sale
Purchase Price), any surplus Excess Proceeds that were the subject of such
offer shall cease to be Excess Proceeds, and the Company may then use such
amounts for general corporate purposes.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of
Notes pursuant to an Asset Sale Offer.
RIGHT TO REQUIRE REPURCHASE OF CONVERTIBLE NOTES UPON A TERMINATION OF TRADING
In the event of any Termination of Trading occurring after the Issue Date
and on or prior to Maturity, each holder of Convertible Notes will have the
right, at the holder's option, to require the Company to repurchase all or any
part of such holder's Convertible Notes on the date (the "Repurchase Date")
that is 30 days after the date the Company gives notice of the Termination of
Trading as described below at a price (the "Repurchase Price") equal to 100%
of the Accreted Value of such Convertible Notes on any Repurchase Date
occurring prior to September 30, 1999, together with accrued and unpaid
interest, if any, and Special Interest, if any, thereon to the Repurchase
Date, or 100% of the principal amount at Stated Maturity of such Convertible
Notes on any Repurchase Date occurring on or after September 30, 1999,
together with accrued and unpaid interest, if any, and Special Interest, if
any, thereon to the Repurchase Date. On or prior to the Repurchase Date, the
Company shall deposit with the Convertible Note Trustee or a Paying Agent an
amount of money sufficient to pay the Repurchase Price of the Convertible
Notes which are to be repaid on or promptly following the Repurchase Date.
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Failure by the Company to provide timely notice of a Termination of Trading,
as provided for below, or to repurchase the Convertible Notes when required
under the preceding paragraph will result in an Event of Default under the
Convertible Note Indenture whether or not such repurchase is permitted by the
subordination provisions of the Convertible Note Indenture.
On or before the 15th day after the occurrence of a Termination of Trading,
the Company is obligated to mail to all holders of Convertible Notes a notice
of the occurrence of such Termination of Trading, the Repurchase Date, the
date by which the repurchase right must be exercised, the Repurchase Price for
Convertible Notes and the procedures which the holder must follow to exercise
this right. To exercise the repurchase right, the holder of a Convertible Note
must deliver, on or before the close of business on the Repurchase Date,
irrevocable written notice to the Company (or an agent designated by the
Company for such purpose) and to the Convertible Note Trustee of the holder's
exercise of such right, together with the certificates evidencing the
Convertible Notes with respect to which the right is being exercised, duly
endorsed for transfer. Such written notice is irrevocable.
A "Termination of Trading," shall occur if the Common Stock (or other common
stock into which the Convertible Notes are then convertible) had been listed
for trading on a U.S. national securities exchange or approved for trading on
an established automated over-the-counter trading market in the United States
and are thereafter neither so listed nor so approved.
The right to require the Company to repurchase Convertible Notes as a result
of the occurrence of a Termination of Trading could create an Event of Default
under the Senior Note Indenture, as a result of which any repurchase could,
absent a waiver, be blocked by the subordination provisions of the Convertible
Notes. Failure by the Company to repurchase the Convertible Notes when
required will result in an Event of Default under the Convertible Note
Indenture whether or not such repurchase is permitted by the subordination
provisions. The Company's ability to pay cash to the holders of Convertible
Notes upon a repurchase may be limited by certain financial covenants
contained in the other then existing Indebtedness of the Company.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of
Convertible Notes pursuant to an offer to repurchase upon a Termination of
Trading.
The foregoing provisions would not necessarily afford holders of the
Convertible Notes protection in the event of highly leveraged or other
transactions involving the Company or the Restricted Subsidiaries that may
adversely affect such holders. In addition, the foregoing provisions may
discourage open market purchases of the Common Stock or a non-negotiated
tender or exchange offer for such Common Stock and, accordingly, may limit a
stockholder's ability to realize a premium over the market price of the Common
Stock in connection with any such transaction.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Senior Note Indenture
and, where expressly indicated, the Convertible Note Indenture. Certain terms
capitalized below but not defined shall have the meanings ascribed to them
under the caption "Certain Definitions."
Limitation on Indebtedness
Pursuant to the terms of the Senior Note Indenture, the Company will not,
and will not permit its Restricted Subsidiaries to, directly or indirectly,
incur any Indebtedness (including Acquired Indebtedness), and the Company will
not issue any Disqualified Stock or permit any of its Restricted Subsidiaries
to issue any Disqualified Stock; provided, that the Company may incur
Indebtedness or issue Disqualified Stock if, after giving effect to such
issuance or incurrence on a pro forma basis, the Indebtedness to Operating
Cash Flow Ratio of the Company does not exceed 5 to 1.0.
The foregoing limitation will not apply to: (a) Indebtedness existing under
the Credit Facility; provided, that the aggregate principal amount of all such
Indebtedness under the Credit Facility, when taken together with
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all Indebtedness of the Company then outstanding which was permitted to have
been incurred under clause (j) below, shall not exceed $45 million at any one
time outstanding, up to $30 million of which may be secured; (b) the Existing
Indebtedness; (c) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness owing to any of its respective
Wholly-Owned Restricted Subsidiaries; provided, that any such Indebtedness is
junior and subordinate to the Notes and Guarantees, if any, and such
Indebtedness is held at all times by the Company or a Wholly-Owned Restricted
Subsidiary of the Company; (d) Indebtedness of any Restricted Subsidiary to
the Company or a Wholly-Owned Restricted Subsidiary of the Company; (e) the
incurrence by the Company or any of its Restricted Subsidiaries of Interest
Hedging Obligations with respect to any floating rate Indebtedness that is
permitted by the covenant described in this paragraph; (f) the incurrence by
the Company or any of its Restricted Subsidiaries of Indebtedness evidenced by
the Senior Notes or Senior Note Guarantees, if any, issued pursuant to the
Senior Note Indenture and by the Convertible Notes or Convertible Note
Guarantees, if any, issued pursuant to the Convertible Note Indenture; (g)
Indebtedness in respect of performance, surety or appeal bonds provided by the
Company in the ordinary course of business; (h) Vendor Financing not to exceed
an aggregate principal amount of $5 million at any one time outstanding; (i)
the incurrence by the Company or any of its Restricted Subsidiaries of
Refinancing Indebtedness issued in exchange for, or the proceeds of which are
used to refinance, repurchase, replace, refund or defease ("Refinance" and
correlatively, "Refinanced" and "Refinancing") Indebtedness permitted pursuant
to clause (b) or (f) of this paragraph; provided, that (i) the amount of such
Refinancing Indebtedness shall not exceed the principal amount of, premium, if
any, and accrued interest (and Special Interest on the Notes) on the
Indebtedness so Refinanced (or if such Indebtedness was issued with original
issue discount, the original issue price plus amortization of the original
issue discount at the time of the repayment of such Indebtedness) plus the
fees, expenses and costs of such Refinancing and reasonable prepayment
premiums, if any, in connection therewith, (ii) such Refinancing Indebtedness
shall have a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being Refinanced, (iii) such Refinancing Indebtedness shall have
an Average Life equal to or greater than the Average Life of the Indebtedness
being Refinanced, (iv) if the Indebtedness being Refinanced is subordinated in
right of payment to the Senior Notes, such Refinancing Indebtedness shall be
subordinate in right of payment to the Senior Notes on terms at least as
favorable to the Holders of Senior Notes as those contained in the
documentation governing the Indebtedness being so Refinanced, and (v) no
Restricted Subsidiary shall incur Refinancing Indebtedness to Refinance
Indebtedness of the Company or another Subsidiary; and (j) Indebtedness of the
Company not otherwise permitted to be incurred pursuant to the covenant
described in this paragraph in an amount which shall not exceed $5 million at
any one time outstanding and which amount shall reduce the amount permitted to
be incurred under clause (a) above.
In the event that the Company or any Restricted Subsidiary has incurred
Indebtedness pursuant to clause (c) of the second paragraph of this covenant
owing to a Restricted Subsidiary and that Restricted Subsidiary thereafter
does not remain a "Restricted Subsidiary" as defined in the Senior Note
Indenture, the aggregate principal amount of such Indebtedness of the Company
or a Restricted Subsidiary, as applicable, owing to such Person at the time of
such a change in Restricted Subsidiary status that was at any time incurred
pursuant to clause (c) of the second paragraph of this covenant, shall be
deemed to be Indebtedness incurred by the Company or a Restricted Subsidiary,
as the case may be, at the time of such change in Restricted Subsidiary
status.
Indebtedness incurred by any Person that is not a Restricted Subsidiary of
the Company, which Indebtedness is outstanding at the time such Person becomes
a Restricted Subsidiary of the Company, or is merged into or consolidated
with, the Company or a Restricted Subsidiary shall be deemed to have been
incurred, at the time such Person becomes a Restricted Subsidiary, or is
merged into or consolidated with the Company or a Restricted Subsidiary. A
guarantee permitted by this covenant to be incurred by the Company or a
Restricted Subsidiary of Indebtedness otherwise permitted to be incurred
pursuant to this covenant is not considered a separate incurrence for purposes
of this covenant.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Indentures provide that the Company may not permit any Restricted
Subsidiary, directly or indirectly, to guarantee any Indebtedness of the
Company ("Guaranteed Indebtedness") unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Senior
Note Indenture providing
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for a Guarantee of payment of the Senior Notes by such Restricted Subsidiary
(a "Senior Note Guarantee") and a supplemental indenture to the Convertible
Note Indenture providing for a Guarantee of payment of the Convertible Notes
by such Restricted Subsidiary (a "Convertible Note Guarantee") and (ii) such
Restricted Subsidiary waives and will not in any manner whatsoever claim or
take the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Guarantee, provided, that any Restricted Subsidiary may guarantee any Credit
Facility so long as such Restricted Subsidiary enters into a Guarantee ranking
pari passu with its guarantee under such Credit Facility. If the Guaranteed
Indebtedness is pari passu with the Notes, then the guarantee of such
Guaranteed Indebtedness shall be pari passu with or subordinated to the
Guarantee; and if the Guaranteed Indebtedness is subordinated to the Notes,
then the guarantee of such Guaranteed Indebtedness shall be subordinated to
the Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes. In addition, each Convertible Note Guarantee of a
Restricted Subsidiary will be subordinated to the Senior Note Guarantee of
such Restricted Subsidiary.
Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary
shall provide by its terms that it shall be automatically and unconditionally
released and discharged upon the release or discharge of the guarantee which
resulted in the creation of such Restricted Subsidiary's Guarantee, except a
discharge or release by, or as a result of, payment under such guarantee.
Limitation on Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, create, incur, assume or suffer to
exist any Liens of any kind, other than Permitted Liens, on or with respect to
any of its Property or assets now owned or hereafter acquired, or any interest
therein or any income or profits therefrom, without effectively providing that
the Notes shall be secured equally and ratably with or prior to (and provided
that the Senior Notes shall be secured prior to any secured obligation that is
subordinated in right of payment to the Senior Notes) the obligations so
secured for so long as such obligations are so secured.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, assume, guarantee or otherwise become
liable with respect to any Sale and Leaseback Transaction, unless (i) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale and Leaseback Transaction at least
equal to the Fair Market Value (as evidenced by a Board Resolution delivered
to the Trustee) of the Property or assets subject to such transaction; (ii)
the Attributable Indebtedness of the Company or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted to be
incurred by the covenant described under "--Limitation on Indebtedness" and
any Liens granted thereby would be permitted by the covenant described under
"--Limitation on Liens;" and (iii) the Net Cash Proceeds from such transaction
are applied in accordance with the provisions described under "--Asset Sales"
as if such proceeds resulted from an Asset Sale.
Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, make any Restricted Payment unless, at the time of
and after giving effect to such proposed Restricted Payment (i) no Default or
Event of Default under the Senior Note Indenture shall have occurred and be
continuing or shall occur as a consequence thereof; (ii) after giving effect,
on a pro forma basis, to such Restricted Payment and the incurrence of any
Indebtedness the net proceeds of which are used to finance such Restricted
Payment, the Company could incur at least $1.00 of additional Indebtedness
pursuant to the first paragraph of "--Limitation on Indebtedness;" and (iii)
after giving effect to such Restricted Payment on a pro forma basis, the
aggregate amount expended or declared for all Restricted Payments after the
Issue Date does not exceed the sum of (A) 50% of the Consolidated Net Income
of the Company (or, if Consolidated Net Income shall be a deficit, minus 100%
of such deficit) for the period (taken as one accounting period) beginning on
the last day of the fiscal
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quarter immediately preceding the Issue Date and ending on the last day of the
fiscal quarter immediately preceding the date of such Restricted Payment, plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company subsequent
to the Issue Date from the issuance or sale (other than to a Subsidiary) of
shares of its Qualified Stock, including Qualified Stock issued upon the
conversion of convertible debt (other than any conversion of the Convertible
Notes) or the exercise of options, warrants or rights to purchase Qualified
Stock, plus (C) 100% of the amount of any Indebtedness of the Company or any
of its Restricted Subsidiaries (as expressed on the face of a balance sheet in
accordance with GAAP), or the carrying value of any Disqualified Stock, which
has been converted into, exchanged for or satisfied by the issuance of shares
of Qualified Stock of the Company subsequent to the Issue Date, less the
amount of any cash or the value of any other Property distributed by the
Company or its Restricted Subsidiaries upon such conversion, exchange or
satisfaction, plus (D) 100% of the net reduction in Investments, subsequent to
the Issue Date, in any Person, resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers
of Property (but only to the extent such interest, dividends, repayments or
other transfers of Property are not included in the calculation of
Consolidated Net Income), in each case to the Company or any Restricted
Subsidiary from any Person (including, without limitation, from Unrestricted
Subsidiaries) or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed in the case of any Person the amount of
Investments previously made by the Company or any Restricted Subsidiary in
such Person and in each such case which was treated as a Restricted Payment,
minus (E) 100% of the amount of Investments made pursuant to clauses (v),
(vi), (vii) and (viii) of the following paragraph subsequent to the Issue
Date.
The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the Senior Note Indenture; (ii) retiring (A) any Capital
Stock of the Company or any Restricted Subsidiary of the Company or (B)
Indebtedness of the Company that is subordinated in right of payment to the
Notes or (C) Indebtedness of a Restricted Subsidiary of the Company, in
exchange for, or out of the proceeds of the substantially concurrent sale of
Qualified Stock of the Company; (iii) so long as no Default or Event of
Default under the Senior Note Indenture shall have occurred and be continuing
or shall occur as a consequence thereof, retiring any Indebtedness of the
Company subordinated in right of payment to the Notes in exchange for, or out
of the proceeds of, the substantially concurrent incurrence of Indebtedness of
the Company (other than Indebtedness to a Subsidiary of the Company);
provided, that such new Indebtedness (A) is subordinated in right of payment
to the Notes at least to the same extent as, (B) has an Average Life at least
as long as, and (C) has no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal under the Indebtedness so
retired; (iv) so long as no Default or Event of Default under the Senior Note
Indenture shall have occurred and be continuing or shall occur as a
consequence thereof, retiring any Indebtedness of a Restricted Subsidiary of
the Company in exchange for, or out of the proceeds of, the substantially
concurrent incurrence of Indebtedness of the Company or any Restricted
Subsidiary that is permitted under the covenant described under "--Limitation
on Indebtedness" and that (A) is not secured by any assets of the Company or
any Restricted Subsidiary to a greater extent than the retired Indebtedness
was so secured, (B) has an Average Life at least as long as the retired,
purchased, redeemed or acquired Indebtedness and (C) is subordinated in right
of payment to the Notes or the Guarantees, as applicable, at least to the same
extent as the retired Indebtedness; (v) so long as no Default or Event of
Default under the Senior Note Indenture shall have occurred and be continuing
or shall result as a consequence thereof, purchasing, redeeming, retiring or
acquiring any Capital Stock of the Company or any Restricted Subsidiary of the
Company held by any member or former member of the Company's (or any of its
Subsidiaries') management pursuant to any management agreement or stock option
plan if in effect on the Issue Date or upon the death, disability, retirement
or termination of employment of such members; provided, that the aggregate
price paid for all such retired Common Stock shall not exceed, in the
aggregate, the sum of $1 million plus the aggregate Cash Proceeds received by
the Company from any reissuance of such Common Stock by the Company to members
of management of the Company and its Subsidiaries; (vi) so long as no Default
or Event of Default under the Senior Note Indenture shall have occurred and be
continuing or shall occur as a consequence thereof, making loans to
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members of management of the Company as required pursuant to employment
agreements with such members, in an aggregate principal amount not to exceed
$1 million; provided, that any repayment of such loans (but only to the extent
such payments are not included in the calculation of Consolidated Net Income
of the Company) shall reduce the amount of such Investments; (vii) so long as
no Default or Event of Default under the Senior Note Indenture shall have
occurred and be continuing or shall occur as a consequence thereof, making
Investments in Joint Ventures in an aggregate amount not to exceed $10
million; provided, that any repayment of loans or advances, return of capital
or other transfer of Property (but only to the extent such distributions are
not included in the calculation of Consolidated Net Income of the Company)
shall reduce the amount of such Investments; and (viii) so long as no Default
or Event of Default under the Senior Note Indenture shall have occurred and be
continuing, the Company may redeem Convertible Notes pursuant to the terms of
the Convertible Note Indenture or repurchase Convertible Notes pursuant to a
Change of Control Offer, an Asset Sale Offer or a repurchase offer upon a
Termination of Trading of the Common Stock pursuant to the terms of the
Convertible Note Indenture.
Not later than the date of making of any Restricted Payment or any
Investment made pursuant to clause (vii) of the previous paragraph, the
Company shall deliver to the Senior Note Trustee an Officers' Certificate
stating that such Restricted Payment or Investment is permitted and setting
forth the basis upon which the required calculations were computed, which
calculations may be based upon the Company's latest available financial
statements.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective or enter
into an encumbrance or restriction (other than pursuant to law or regulation)
on the ability of any Restricted Subsidiary (i) to pay dividends or make any
other distributions in respect of its Capital Stock or pay any Indebtedness or
other obligation owed to the Company or any Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any Restricted
Subsidiary of the Company; or (iii) to transfer any of its Property or assets
to the Company or any other Restricted Subsidiary of the Company, except: (a)
any encumbrance or restriction existing as of the Issue Date pursuant to the
Senior Note Indenture or the Convertible Note Indenture or the Existing
Indebtedness; (b) any encumbrance or restriction pursuant to an agreement
relating to an acquisition of assets or Property, so long as the encumbrances
or restrictions in any such agreement relate solely to the assets or Property
so acquired (and are not or were not created in anticipation of or in
connection with the acquisition thereof); (c) any encumbrance or restriction
relating to any Indebtedness of any Restricted Subsidiary existing on the date
on which such Restricted Subsidiary is acquired by the Company or any
Restricted Subsidiary (other than Indebtedness incurred by such Restricted
Subsidiary in connection with or in anticipation of its acquisition); (d)
customary provisions restricting subletting or assignment of any lease
governing a leasehold interest of the Company or any Restricted Subsidiary or
customary provisions in any telecommunications resale agreements (including,
without limitation, the existing Ameritech Resale Agreements, the NYNEX Resale
Agreement and the long distance agreements of the Company), license agreements
or similar agreements that restrict the assignment of such agreement or any
rights thereunder; (e) any temporary encumbrance or restriction with respect
to a Restricted Subsidiary pursuant to an agreement that has been entered into
for the sale or disposition of all or substantially all of the Capital Stock
of, or Property and assets of, such Restricted Subsidiary; (f) any restriction
on the sale or other disposition of assets or Property securing Indebtedness
as a result of a Permitted Lien on such assets or Property permitted by the
covenant described under "--Limitation on Liens;" and (g) any encumbrance or
restriction that amends, extends, refinances, refunds, renews or replaces any
agreement described in clauses (a) through (c) whether or not among the same
parties, provided, that the terms and conditions of any such encumbrance or
restriction are no less favorable to the holders of the Senior Notes than
those under or pursuant to the agreement amended, extended, refinanced,
refunded, renewed or replaced.
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Company (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Restricted Subsidiary and (ii)
shall not permit any Person other than the Company or a Restricted Subsidiary
to own any Capital Stock of any Restricted Subsidiary other than directors
qualifying shares, except
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for (a) a sale of 100% of the Capital Stock of a Restricted Subsidiary sold in
a transaction not prohibited by the covenant described under "--Asset Sales";
(b) Capital Stock of a Restricted Subsidiary issued and outstanding on the
Issue Date and held by Persons other than the Company or any Restricted
Subsidiary; (c) Capital Stock of a Restricted Subsidiary issued and
outstanding prior to the time that such Person becomes a Restricted Subsidiary
so long as such Capital Stock was not issued in contemplation of such Person's
becoming a Restricted Subsidiary or otherwise being acquired by the Company;
(d) not more than ten percent of the Common Stock of USN Solutions, Inc. on a
fully diluted basis issued pursuant to the exercise of the option (the "USN
Solutions Option") contemplated by that certain Memorandum of Understanding,
dated July 3, 1996, by and between USN Solutions, Inc. and Genesys SA; and (e)
any Disqualified Stock permitted to be issued under the covenant described
under "--Limitation on Indebtedness."
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, sell, lease, transfer, or otherwise dispose of,
any of its Property or assets to, or purchase any Property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that would have been obtained in a comparable arm's-length transaction
by the Company or such Restricted Subsidiary with a Person that is not an
Affiliate and (b) the Company delivers to the Senior Note Trustee (i) with
respect to any Affiliate Transaction involving aggregate payments in excess of
$1 million, a Board Resolution certifying that such Affiliate Transaction
complies with clause (a) above and that such Affiliate Transaction has been
approved by a majority of the disinterested directors who have determined that
such Affiliate Transaction is in the best interests of the Company or such
Restricted Subsidiary and (ii) with respect to any Affiliate Transaction
involving aggregate payments in excess of $5 million, an opinion as to the
fairness from a financial point of view to the Company or such Restricted
Subsidiary issued by an investment banking firm of national standing, or in
the case of a transaction involving a sale or transfer of assets subject to
valuation such as real estate, an appraisal issued by a nationally recognized
appraisal firm, together with an Officers' Certificate to the effect that such
opinion complies with this clause (ii); provided, that the following shall not
be deemed Affiliate Transactions: (i) any employment agreement or consulting
agreement (including stock options) entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
industry practice; (ii) any agreement or arrangement with respect to the
compensation of a director of the Company or any Restricted Subsidiary
approved by the Board of Directors and consistent with industry practice;
(iii) transactions between or among the Company, its Wholly-Owned Restricted
Subsidiaries or a majority-owned Restricted Subsidiary (so long as no minority
interest is owned by a Person which is otherwise an Affiliate); (iv)
transactions constituting Restricted Payments permitted by the covenant
described under "--Restricted Payments"; (v) transactions pursuant to
contracts existing on the Issue Date and disclosed in a schedule attached to
the Senior Note Indenture; (vi) making loans or advances to officers,
employees or consultants of the Company and its Subsidiaries (including travel
and moving expenses) in the ordinary course of business not to exceed $1
million; and (vii) the issuance of stock options for Common Stock of the
Company pursuant to any plan approved by the Board of Directors.
Restricted and Unrestricted Subsidiaries
The Indentures provide that the Company may designate a Subsidiary
(including a newly formed or newly acquired Subsidiary) of the Company or any
of its Restricted Subsidiaries as an Unrestricted Subsidiary; provided, that
so long as the Senior Notes remain outstanding and the Senior Note Indenture
has not been satisfied or discharged, (i) immediately after giving effect to
the transaction, the Company could incur $1.00 of additional Indebtedness
pursuant to the first paragraph of "--Limitation on Indebtedness" and (ii)
such designation is at the time permitted under "--Restricted Payments."
Notwithstanding any provisions of this covenant all Subsidiaries of an
Unrestricted Subsidiary will be Unrestricted Subsidiaries. As of the date
hereof, all of the Company's Subsidiaries are Restricted Subsidiaries and,
accordingly, are subject to all of the covenants described herein relating to
Restricted Subsidiaries.
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The Senior Note Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, take any action or enter into
any transaction or series of transactions that would result in a Person (other
than a newly formed Subsidiary having no outstanding Indebtedness (other than
Indebtedness to the Company or a Restricted Subsidiary) at the date of
determination) becoming a Restricted Subsidiary (whether through an
acquisition, the redesignation of an Unrestricted Subsidiary or otherwise)
unless, after giving effect to such action, transaction or series of
transactions on a pro forma basis, (i) the Company could incur at least $1.00
of additional Indebtedness pursuant to the first paragraph of "--Limitation on
Indebtedness" and (ii) no Default or Event of Default would occur or be
continuing.
Subject to the preceding paragraph, an Unrestricted Subsidiary may be
redesignated as a Restricted Subsidiary. The designation of a Subsidiary as an
Unrestricted Subsidiary or the designation of an Unrestricted Subsidiary as a
Restricted Subsidiary in compliance with the preceding paragraph shall be made
by the Board of Directors pursuant to a Board Resolution delivered to the
Trustees and shall be effective as of the date specified in such Board
Resolution, which shall not be prior to the date such Board Resolution is
delivered to the Trustees.
Limitations on Line of Business
The Senior Note Indenture provides that neither the Company nor any of its
Restricted Subsidiaries will directly or indirectly engage to any substantial
extent in any line or lines of business activity other than the
Telecommunications Business.
Issuance of Contingent Warrants
The Senior Note Indenture provides that the Company will be obligated to
issue to holders of the Senior Notes Senior Note Contingent Warrants,
exercisable for Class A Common Stock representing up to 3% of the Common Stock
on a fully diluted basis as of the date of such issuance (without including
(i) Common Stock issued for fair market value subsequent to the Closing Date
(as determined in the Warrant Agreement), (ii) Common Stock issuable pursuant
to any options, or shares of Common Stock granted to or purchased by
management of the Company, pursuant to agreements or stock plans existing on
the date of the Senior Note Indenture and either disclosed in a schedule
attached thereto or described herein, or (iii) certain additional shares of
Common Stock issuable pursuant to options, or shares of Common Stock issuable
pursuant to agreements or stock plans, as disclosed in a schedule attached to
the Senior Note Indenture) after giving effect to the issuance of such Senior
Note Contingent Warrants, in the event that, on or prior to March 30, 1998,
the Company does not effect a Qualified Public Offering or has not been sold
pursuant to a Qualified Sale of the Company. The Convertible Note Indenture
provides that, in the event that the Company has not, on or prior to September
30, 1999, (i) consummated a Qualified Public Offering or (ii) been sold
pursuant to a Qualified Sale of the Company, the Company will be obligated to
issue to the holders of the Convertible Notes Convertible Note Contingent
Warrants exercisable for Class A Common Stock representing up to 2.5% of the
Common Stock of the Company on a fully diluted basis (subject to the
exceptions set forth in clauses (i), (ii) and (iii) of the immediately
preceding sentence) after giving effect to the issuance of such Convertible
Note Contingent Warrants. All Contingent Warrants will be issued pursuant to
the Warrant Agreement with the same rights thereunder as the Initial Warrants,
and holders will have the benefit of the Registration Rights Agreement.
Waiver of Certain Covenants
The Company may omit in respect of any Senior Notes, in any particular
instance, to comply with the provisions of any covenant or condition described
under "Description of the Notes--Certain Covenants," if before or after the
time for such compliance the holders of at least a majority in principal
amount at Stated Maturity of the outstanding Senior Notes (75% in principal
amount at Stated Maturity for the covenant described under "--Issuance of
Contingent Warrants") either waive such compliance in such instance or
generally waive compliance with such covenant or condition, but no such waiver
shall extend to or affect such covenant or condition except to the extent so
expressly waived and, until such waiver shall become effective, the
obligations of the Company and the duties of the Senior Note Trustee in
respect of any such covenant or condition shall remain in full force and
effect.
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Reports
The Senior Note Indenture and the Convertible Note Indenture each provide
that, whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the Commission the annual reports, quarterly reports and other documents which
the Company would have been required to file with the Commission pursuant to
such Section 13(a) or 15(d) or any successor provision thereto if the Company
were subject thereto, such documents to be filed with the Commission on or
prior to the respective dates (the "Required Filing Dates") by which the
Company would have been required to file them. The Company shall also (whether
or not it is required to file reports with the Commission), within 30 days of
each Required Filing Date, (i) transmit by mail to all holders of Notes, as
their names and addresses appear in the applicable Security Register, without
cost to such holders or Persons, and (ii) file with the Trustees, copies of
the annual reports, quarterly reports and other documents (without exhibits)
which the Company has filed or would have filed with the Commission pursuant
to Section 13(a) or 15(d) of the Exchange Act, any successor provisions
thereto or this covenant. The Company shall not be required to file any report
with the Commission if the Commission does not permit such filing.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Senior Note Indenture and the Convertible Note Indenture each provide
that the Company will not, in any transaction or series of transactions,
consolidate with, or merge with or into, any other Person or permit any other
Person to merge with or into the Company (other than a merger of a Restricted
Subsidiary into the Company in which the Company is the continuing
corporation), or sell, convey, assign, transfer, lease or otherwise dispose of
all or substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) the Company shall be the continuing corporation or (b) the
corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole (such corporation or Person, the
"Surviving Entity"), shall be a corporation organized and validly existing
under the laws of the United States of America, any political subdivision
thereof, any state thereof or the District of Columbia, and shall expressly
assume, by a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest and Special Interest, if
any, on all the related Notes and the performance of the Company's
covenants and obligations under the applicable Indenture;
(ii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Default or
Event of Default under the Senior Note Indenture or the Convertible Note
Indenture, as applicable, shall have occurred and be continuing or would
result therefrom;
(iii) in the case of the Senior Note Indenture only, immediately after
giving effect to such transaction or series of transactions on a pro forma
basis (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such
transaction or series of transactions) the Company (or the Surviving
Entity, if the Company is not continuing) would be permitted to incur $1.00
of additional Indebtedness pursuant to the first paragraph of "--Limitation
on Indebtedness"; and
(iv) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, the Company (or the Surviving Entity, if
the Company is not continuing) shall have a Consolidated Net Worth equal to
or greater than the Consolidated Net Worth of the Company immediately prior
to such transaction.
The provision of clause (iii) shall not apply to any merger or consolidation
into or with, or any such transfer of all of the Property and assets of the
Company and the Restricted Subsidiaries into, the Company.
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In connection with any consolidation, merger, transfer of assets or other
transactions contemplated by this provision, the Company shall deliver, or
cause to be delivered, to the applicable Trustee, in form and substance
reasonably satisfactory to such Trustee, an Officers' Certificate and an
opinion of counsel, each stating that such consolidation, merger, sale,
assignment, conveyance or transfer and the supplemental indenture in respect
thereto comply with the provisions of the applicable Indenture and that all
conditions precedent in the applicable Indenture relating to such transactions
have been complied with.
Upon any transaction or series of transactions that are of the type
described in, and are effected in accordance with, the foregoing paragraphs,
the Surviving Entity shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under the applicable Indenture
and the related Notes with the same effect as if such Surviving Entity had
been named as the Company in the applicable Indenture; and when a Surviving
Person duly assumes all of the obligations and covenants of the Company
pursuant to the applicable Indenture and the related Notes, except in the case
of a lease, the predecessor Person shall be relieved of all such obligations.
EVENTS OF DEFAULT
Each of the following is an "Event of Default" under the Indentures (except
where otherwise expressly indicated):
(a) default in the payment of interest (or Special Interest, if any) on
any Note issued pursuant to such Indenture when the same becomes due and
payable, and the continuance of such default for a period of 30 days;
(b) default in the payment of the principal of (or premium, if any, on)
any Note issued pursuant to such Indenture at its maturity, upon optional
redemption, required repurchase (including pursuant to a Change of Control
Offer, an Asset Sale Offer, or, in the case of the Convertible Note
Indenture, a repurchase offer upon a Termination of Trading of the Common
Stock) or otherwise or the failure to make an offer to purchase any such
Note as required;
(c) in the case of the Senior Note Indenture, the Company fails to comply
with any of its covenants or agreements contained in "--Limitation on
Indebtedness," "--Limitation on Sale and Leaseback Transactions" or "--
Restricted Payments," in the case of both Indentures, fails to perform or
comply with the provisions described under "--Repurchase at the Option of
the Holders upon a Change of Control," "--Asset Sales," "--Issuances of
Contingent Warrants" or "--Consolidation, Merger, Conveyance, Lease or
Transfer" or in the case of the Convertible Note Indenture, fails to
perform or comply with the provisions described under "--Right to Require
Repurchase of Convertible Notes upon a Termination of Trading" or "--
Additional Invested Equity;"
(d) default in the performance, or breach, of any covenant or warranty of
the Company in such Indenture (other than a covenant or warranty addressed
in (a), (b) or (c) above) and continuance of such Default or breach for a
period of 45 days after written notice thereof has been given to the
Company by the applicable Trustee or to the Company and the applicable
Trustee by holders of at least 25% of the aggregate principal amount at
Stated Maturity of the outstanding applicable Notes;
(e) Indebtedness of the Company or any Restricted Subsidiary is not paid
when due within the applicable grace period, if any, or is accelerated by
the holders thereof and, in either case, the principal amount of such
unpaid or accelerated Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more final
nonappealable judgments against the Company or any Restricted Subsidiary in
an uninsured or unindemnified aggregate amount in excess of $10 million
which is not discharged, waived, appealed, stayed, bonded or satisfied for
a period of 60 consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency, or other similar law or
(ii) a decree or order adjudging the Company or any
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Significant Restricted Subsidiary a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment
or composition of or in respect of the Company or any Significant
Restricted Subsidiary under U.S. bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state or foreign bankruptcy,
insolvency, or similar law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of
the Company or any Significant Restricted Subsidiary or of any substantial
part of the Property or assets of the Company or any Significant Restricted
Subsidiary, or ordering the winding up or liquidation of the affairs of the
Company or any Significant Restricted Subsidiary, and the continuance of
any such decree or order for relief or any such other decree or order
unstayed and in effect for a period of 60 consecutive days;
(h) (i) the commencement by the Company or any Significant Restricted
Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent
by the Company or any Significant Restricted Subsidiary to the entry of a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency or other similar law or
to the commencement of any bankruptcy or insolvency case or proceeding
against the Company or any Significant Restricted Subsidiary; or (iii) the
filing by the Company or any Significant Restricted Subsidiary of a
petition or answer or consent seeking reorganization or relief under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law; or
(iv) the consent by the Company or any Significant Restricted Subsidiary to
the filing of such petition or to the appointment of or taking possession
by a custodian, receiver, liquidator, assignee, trustee, sequestrator or
similar official of the Company or any Significant Restricted Subsidiary or
of any substantial part of the Property or assets of the Company or any
Significant Restricted Subsidiary, or the making by the Company or any
Significant Restricted Subsidiary of an assignment for the benefit of
creditors; or (v) the admission by the Company or any Significant
Restricted Subsidiary in writing of its inability to pay its debts
generally as they become due; or (vi) the taking of corporate action by the
Company or any Significant Restricted Subsidiary in furtherance of any such
action; or
(i) in the case of the Convertible Note Indenture, the occurrence and
continuation of an Event of Default under the Senior Note Indenture for a
period of 30 consecutive days after written notice of the occurrence of
such Event of Default has been given to the Company by the Convertible Note
Trustee or a holder or holders of Convertible Notes, which notice states
that such an event constitutes a Default under the Convertible Note
Indenture.
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
applicable Trustee or the holders of not less than 25% of the outstanding
aggregate principal amount at Stated Maturity of the Senior Notes or the
Convertible Notes, as the case may be, may declare the Default Amount,
premium, if any, and any accrued and unpaid interest (and Special Interest, if
any) on all such Notes then outstanding to be immediately due and payable by a
notice in writing to the Company (and to the applicable Trustee if given by
holders of such Notes), and upon any such declaration all amounts payable in
respect of the Senior Notes and the Convertible Notes, as the case may be,
will become and be immediately due and payable. If any Event of Default
specified in clause (g) or (h) above occurs, the Default Amount, premium, if
any, and any accrued and unpaid interest (and Special Interest, if any) on the
Senior Notes or the Convertible Notes, as the case may be, then outstanding
shall become immediately due and payable without any declaration or other act
on the part of the applicable Trustee or any holder of such Notes. In the
event of a declaration of acceleration because an Event of Default set forth
in clause (e) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied, or cured or waived by the holders of the relevant Indebtedness
within 60 days after such event of default; provided, that no judgment or
decree for the payment of the money due on the Notes has been obtained by the
applicable Trustee as provided in the applicable Indenture. In the event of a
declaration of acceleration because an Event of Default set forth in
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clause (i) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled (A) if the Senior
Notes have been repaid, (B) if the Event of Default under the Senior Note
Indenture triggering such Event of Default pursuant to clause (i) above shall
be remedied or cured, or waived by the holders of the Senior Notes, or (C) if
the Senior Notes have been accelerated, then the acceleration of the Senior
Notes shall have been rescinded within 60 days of the occurrence of such Event
of Default under the Senior Note Indenture, and, in the case of clauses (A),
(B) or (C) above, the Senior Note Trustee so certifies to the Convertible Note
Trustee, provided that any such event described in clause (A), (B) or (C)
above must occur prior to the commencement of enforcement proceedings with
respect to the Convertible Note Indenture. Until September 30, 1999, the
"Default Amount" shall equal the Accreted Value of the Senior Notes and the
Accreted Value of the Convertible Notes, as applicable. From September 30,
1999 to March 30, 2000 the Default Amount shall equal the Accreted Value of
the Senior Notes and 100% of principal amount at Stated Maturity of the
Convertible Notes, as applicable. Thereafter, the Default Amount shall equal
100% of the principal amount at Stated Maturity of the Senior Notes and the
Convertible Notes, as applicable. Under certain circumstances, the holders of
a majority in principal amount at Stated Maturity of the outstanding Senior
Notes or the Convertible Notes, as applicable, by notice to the Company and
the applicable Trustee may rescind an acceleration and its consequences.
Subject to all provisions of the applicable Indenture and applicable law, the
holders of a majority in aggregate principal amount at Stated Maturity of the
Senior Notes or the Convertible Notes, as the case may be, at the time
outstanding have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the applicable Trustee, or
exercising any trust or power conferred on such Trustee.
The holders of a majority in aggregate principal amount at Stated Maturity
of the Senior Notes or the Convertible Notes, as the case may be, then
outstanding by notice to the applicable Trustee may on behalf of the holders
of all such Notes waive any existing Default or Event of Default and its
consequences under the applicable Indenture except a continuing Default or
Event of Default in the payment of interest (and Special Interest, if any) on,
premium, if any on or the principal of, such Notes. Subject to the provisions
of the applicable Indentures relating to the duties of the applicable Trustee,
the applicable Trustee is under no obligation to exercise any of its rights or
powers under the applicable Indenture at the request, order or direction of
any of the holders, unless such holders have offered to such Trustee
reasonable security or indemnity. Subject to the provisions of the Senior Note
Indenture or the Convertible Note Indenture, as the case may be, and
applicable law, the holders of a majority in aggregate principal amount at
Stated Maturity of the Senior Notes or the Convertible Notes, as applicable,
at the time outstanding have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the applicable Trustee,
or exercising any trust or power conferred upon such Trustee.
The Company is required to deliver to each Trustee annually a statement
regarding compliance with the applicable Indenture, and the Company is
required within five Business Days after becoming aware of any Default or
Event of Default, to deliver to the applicable Trustee a statement describing
such Default or Event of Default, its status and what action the Company is
taking or proposes to take with respect thereto.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Senior Note Trustee or the Convertible Note Trustee, as
applicable, may, at any time and from time to time, without notice to or
consent of any holder of Senior Notes or any holder of Convertible Notes, as
applicable, enter into one or more indentures supplemental to the Senior Note
Indenture or the Convertible Note Indenture, as the case may be, (i) to
evidence the succession of another Person to the Company and the assumption by
such successor of the covenants and obligations of the Company in such
Indenture and such Notes; (ii) to add to the covenants of the Company, for the
benefit of the holders, or to surrender any right or power conferred upon the
Company by such Indenture; (iii) to add any additional Events of Default; (iv)
to provide for uncertificated Notes in addition to or in place of certificated
Notes; (v) to evidence and provide for the acceptance of appointment under
such Indenture of a successor Trustee; (vi) to cure any ambiguity in such
Indenture, to correct or supplement any provision in such Indenture which may
be inconsistent with any other provision therein or to add any other
provisions with respect to matters or questions arising under such Indenture;
provided, that such actions shall not adversely affect the interests of the
holders in any material respect; (vii) to
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secure such Notes; (viii) to provide for Guarantees as required under the
applicable Indenture; (ix) to make provision with respect to the conversion
rights of the holders of Convertible Notes in the event of a consolidation,
merger or sale of assets involving the Company as required by the Convertible
Note Indenture; or (x) to comply with the requirements of the Commission in
order to effect or maintain the qualification of such Indenture under the
Trust Indenture Act.
With the consent of the holders of not less than a majority in aggregate
principal amount at Stated Maturity of the outstanding Senior Notes or
Convertible Notes, as the case may be, the Company and the Senior Note Trustee
or the Convertible Note Trustee, as applicable, may enter into one or more
indentures supplemental to the Senior Note Indenture or the Convertible Note
Indenture for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of such Indenture or modifying in
any manner the rights of the holders; provided, that no such supplemental
indenture shall, without the consent of the holder of each outstanding Senior
Note or Convertible Note: (i) change the Stated Maturity of the principal of,
or any installment of interest (including Special Interest, if any) on, any
Senior Note or Convertible Note, or reduce the Accreted Value or principal
amount thereof at Stated Maturity (or premium, if any), or the interest
thereon that would be due and payable upon Stated Maturity thereof, or reduce
the Default Amount that would be due and payable upon Stated Maturity thereof,
or change the place of payment where, or the coin or currency in which, any
Senior Note or Convertible Note, as the case may be, or any premium or
interest (including Special Interest, if any) thereon is payable, or impair
the right to institute suit for the enforcement of any such payment on or
after the Stated Maturity thereof; (ii) reduce the percentage in principal
amount of the outstanding Senior Notes or Convertible Notes, as the case may
be, the consent of whose holders is necessary for any such supplemental
indenture or required for any waiver of compliance with certain provisions of
the Senior Note Indenture or any Senior Note Guarantees or the Convertible
Note Indenture or any Convertible Note Guarantees or certain Defaults
thereunder; (iii) subordinate in right of payment, or otherwise subordinate,
the Senior Notes or any Senior Note Guarantees to any other Indebtedness; (iv)
make any changes in the subordination provisions of the Convertible Notes or
any Convertible Note Guarantees that would adversely affect the holders of the
Convertible Notes; (v) modify the obligations of the Company to make offers to
purchase Notes upon a Change of Control or from the proceeds of Asset Sales
or, in the case of a Termination of Trading of the Common Stock, the
obligation of the Company pursuant to the Convertible Note Indenture to
repurchase the Convertible Notes; or (vi) modify any provision of this
paragraph (except to increase any percentage set forth herein).
The holders of not less than a majority in aggregate principal amount at
Stated Maturity of the outstanding Senior Notes or Convertible Notes, as the
case may be, may, on behalf of the holders of all such Notes, waive any past
Default under the applicable Indenture and its consequences, except Default in
the payment of the principal of (or premium, if any) or interest on any Note,
or in respect of a covenant or provision hereof which under the proviso to the
prior paragraph cannot be modified or amended without the consent of the
holder of each outstanding Senior Note or Convertible Note affected.
The holders of not less than 75% in aggregate principal amount at Stated
Maturity of the outstanding Senior Notes may, on behalf of the holders of all
such Senior Notes, waive any right to require the Company to issue to the
holders of the Senior Notes Senior Note Contingent Warrants. The holders of
not less than 75% in aggregate principal amount at Stated Maturity of the
outstanding Convertible Notes may, on behalf of the holders of all such
Convertible Notes, waive any right to require the Company to issue to the
holders of the Convertible Notes either Convertible Note Contingent Warrants
or Additional Warrants.
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
The Company may terminate its obligations under the Senior Notes and the
Senior Note Indenture when (i) either (A) all outstanding Senior Notes have
been delivered to the Senior Note Trustee for cancellation or (B) all such
Senior Notes not theretofore delivered to the Senior Note Trustee for
cancellation have become due and payable, will become due and payable within
one year or are to be called for redemption within one year under irrevocable
arrangements satisfactory to the Senior Note Trustee for the giving of notice
of redemption by the Senior Note Trustee in the name and at the expense of the
Company, and the Company has irrevocably deposited or caused to be deposited
with the Senior Note Trustee funds or U.S. Government Obligations in an amount
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sufficient to pay and discharge the entire indebtedness on the Senior Notes
not theretofore delivered to the Senior Note Trustee for cancellation, for
principal of (premium, if any, on) and interest (including Special Interest,
if any) to the date of deposit or maturity or date of redemption; (ii) the
Company has paid or caused to be paid all sums then due and payable by the
Company under the Senior Note Indenture; and (iii) the Company has delivered
an Officers' Certificate and an Opinion of Counsel relating to compliance with
the conditions set forth in the Senior Note Indenture. The Company may also
terminate its obligations under the Convertible Notes and the Convertible Note
Indenture when (i) either (A) all outstanding Convertible Notes have been
delivered to the Convertible Note Trustee for cancellation or (B) all such
Convertible Notes not theretofore delivered to the Convertible Note Trustee
for cancellation have become due and payable within one year or are to be
called for redemption within one year under irrevocable arrangements
satisfactory to the Convertible Note Trustee for the giving of notice of
redemption by the Convertible Note Trustee in the name and at the expense of
the Company, and the Company has irrevocably deposited or caused to be
deposited with the Convertible Note Trustee funds or U.S. Government
Obligations in an amount sufficient to pay and discharge the entire
indebtedness on the Convertible Notes not theretofore delivered to the
Convertible Note Trustee for cancellation, for principal of (premium, if any,
on) and interest (including Special Interest, if any) to the date of deposit
or maturity or date of redemption; (ii) the Company has paid or caused to be
paid all sums then due and payable by the Company under the Convertible Note
Indenture; and (iii) the Company has delivered an Officers' Certificate and an
Opinion of Counsel relating to compliance with the conditions set forth in the
Convertible Note Indenture; provided, that notwithstanding the provisions
above, the holders of Convertible Notes will retain their conversion rights
until the applicable redemption date.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Senior Notes or the Convertible Notes, as the case
may be, and the respective Indentures shall cease to be of further effect as
to all outstanding Senior Notes or all outstanding Convertible Notes, as the
case may be (except as to (i) rights of registration of transfer, substitution
and exchange of Senior Notes or the Convertible Notes, as the case may be, and
the Company's right of optional redemption, (ii) rights of holders to receive
payments of principal of, premium, if any, and interest (including Special
Interest, if applicable) on the Senior Notes or the Convertible Notes, as the
case may be, (but not the Change of Control Purchase Price or the Asset Sale
Purchase Price) and any rights of the holders with respect to such amounts,
(iii) the rights, obligations and immunities of the applicable Trustee under
the applicable Indenture, (iv) conversion rights under the Convertible Note
Indenture, and (v) certain other specified provisions in the applicable
Indenture) or (b) cease to be under any obligation to comply with certain
restrictive covenants including those described under "--Certain Covenants,"
after the irrevocable deposit by the Company with the applicable Trustee, in
trust for the benefit of the holders, at any time prior to the Stated Maturity
of the Senior Notes or the Convertible Notes, as the case may be, of (A) money
in an amount, (B) U.S. Government Obligations which through the payment of
interest and principal will provide, not later than one day before the due
date of payment in respect of such Notes, money in an amount, or (C) a
combination thereof sufficient to pay and discharge the principal of, and
interest (including Special Interest, if applicable) on, such Notes then
outstanding on the dates on which any such payments are due in accordance with
the terms of the applicable Indenture and of such Notes. Such defeasance or
covenant defeasance shall be deemed to occur only if certain conditions are
satisfied, including, among other things, delivery by the Company to the
applicable Trustee of an opinion of outside counsel acceptable to such Trustee
to the effect that (i) such deposit, defeasance and discharge will not be
deemed, or result in, a taxable event for federal income tax purposes with
respect to the holders; and (ii) the Company's deposit will not result in such
trust or such Trustee being subject to regulation under the Investment Company
Act of 1940.
THE TRUSTEE
Harris Trust and Savings Bank is the Trustee under each Indenture and its
current address is 111 West Monroe, Chicago, Illinois 60603.
The holders of not less than a majority in aggregate principal amount at
Stated Maturity of the outstanding Senior Notes or Convertible Notes, as the
case may be, have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the applicable Trustee,
subject to certain
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exceptions. Except during the continuance of an Event of Default under the
Indentures, the Trustees will perform only such duties as are specifically set
forth in the Indentures. Each Indenture provides that in case an Event of
Default shall occur (which shall not be cured or waived), the applicable
Trustee will be required, in the exercise of its rights and powers under such
Indenture, to use the degree of care of a prudent person in the conduct of
such person's own affairs. Subject to such provisions, each Trustee will be
under no obligation to exercise any of its rights or powers under the
applicable Indenture at the request of any of the holders of the Senior Notes
or Convertible Notes, as the case may be, unless such holders shall have
offered to the applicable Trustee indemnity satisfactory to it against any
loss, liability or expense.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indentures or for any claim based on, in respect of, or by reason
of, such obligations or their creation, solely by reason of its status as a
director, officer, employee, incorporator or stockholder of the Company.
Pursuant to the terms of the Indentures, by accepting a Note each holder
waives and releases all such liability (but only such liability). The
Indentures provide that 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 as expressed in
the Securities Act and is therefore unenforceable.
GOVERNING LAW
The Senior Note Indenture and the Convertible Note Indenture and the Senior
Notes and the Convertible Notes are governed by the laws of the State of New
York, without regard to principles of conflicts of law.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the applicable
Indenture. The Company, the Registrars and the Trustees may require a holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a holder to pay any taxes and fees required by law
or permitted by the applicable Indenture.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indentures. Reference is made to the Indentures for the full definition of all
such terms, as well as any capitalized terms used herein for which no
definition is provided.
"Accreted Value" means, (A) with respect to the Senior Notes, for any
Specified Date, the amount provided below for each $1,000 principal amount at
Stated Maturity of the Senior Notes:
(a) If the Specified Date occurs on one of the following dates (each a
"Senior Note Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Senior Note Semi-Annual Accrual Date:
SEMI-
ANNUAL
ACCRUAL ACCRETED
DATE VALUE
------- --------
March 30,
1997..... $ 666.34
September
30, 1997. 712.99
March 30,
1998..... 762.90
September
30, 1998. 816.30
March 30,
1999..... 873.44
September
30, 1999. 934.58
March 30,
2000..... 1,000.00
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(b) if the Specified Date occurs before the first Senior Note Semi-Annual
Accrual Date, the Accreted Value will equal the sum of (i) $622.75 and (ii)
an amount equal to the product of (y) the Accreted Value of the first
Senior Note Semi-Annual Accrual Date less the original issue price
multiplied by (z) a fraction, the numerator of which is the number of days
from the Issue Date to the Specified Date, using a 360-day year of twelve
30-day months, and the denominator of which is the number of days elapsed
from the Issue Date to the first Senior Note Semi-Annual Accrual Date,
using a 360-day year of twelve 30-day months;
(c) if the Specified Date occurs between two Senior Note Semi-Annual
Accrual Dates, the Accreted Value will equal the sum of (i) the Accreted
Value for the Senior Note Semi-Annual Accrual Date immediately preceding
such Specified Date and (ii) an amount equal to the product of (y) the
Accreted Value for the immediately following Senior Note Semi-Annual
Accrual Date less the Accreted Value for the immediately preceding Senior
Note Semi-Annual Accrual Date multiplied by (z) a fraction, the numerator
of which is the number of days from the immediately preceding Senior Note
Semi-Annual Accrual Date to the Specified Date, using a 360-day year of
twelve 30-day months, and the denominator of which is 180; or
(d) if the Specified Date occurs after the last Senior Note Semi-Annual
Accrual Date, the Accreted Value will equal $1,000.
(B) with respect to the Convertible Notes, for any Specified Date, the
amount provided below for each $1,000 principal amount at Stated Maturity of
the Convertible Notes:
(a) If the Specified Date occurs on one of the following dates (each a
"Convertible Note Semi-Annual Accrual Date"), the Accreted Value will equal
the amount set forth below for such Convertible Note Semi-Annual Accrual
Date:
SEMI-
ANNUAL
ACCRUAL ACCRETED
DATE VALUE
------- ---------
March 30,
1997..... $ 802.45
September
30, 1997. 838.56
March 30,
1998..... 876.30
September
30, 1998. 915.73
March 30,
1999..... 956.94
September
30, 1999. 1,000.00
(b) if the Specified Date occurs before the first Convertible Note Semi-
Annual Accrual Date, the Accreted Value will equal the sum of (i) $767.90
and (ii) an amount equal to the product of (y) the Accreted Value of the
first Convertible Note Semi-Annual Accrual Date less the original issue
price multiplied by (z) a fraction, the numerator of which is the number of
days from the Issue Date to the Specified Date, using a 360-day year of
twelve 30-day months, and the denominator of which is the number of days
elapsed from the Issue Date to the first Convertible Note Semi-Annual
Accrual Date, using a 360-day year of twelve 30-day months;
(c) if the Specified Date occurs between two Convertible Note Semi-Annual
Accrual Dates, the Accreted Value will equal the sum of (i) the Accreted
Value for the Convertible Note Semi-Annual Accrual Date immediately
preceding such Specified Date and (ii) an amount equal to the product of
(y) the Accreted Value for the immediately following Convertible Note Semi-
Annual Accrual Date less the Accreted Value for the immediately preceding
Convertible Note Semi-Annual Accrual Date multiplied by (z) a fraction, the
numerator of which is the number of days from the immediately preceding
Convertible Note Semi-Annual Accrual Date to the Specified Date, using a
360-day year of twelve 30-day months, and the denominator of which is 180;
or
(d) if the Specified Date occurs after the last Convertible Note Semi-
Annual Accrual Date, the Accreted Value will equal $1,000.
"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,
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including Indebtedness incurred in connection with, or in contemplation of,
such other Person merging with or into or becoming a Subsidiary of such
specified Person, but excluding Indebtedness which is extinguished, retired or
repaid in connection with such other Person merging with or into or becoming a
Subsidiary of such specified Person.
"Additional Invested Equity" means the net cash proceeds from the sale to
Persons, other than holders of the Convertible Notes, of Capital Stock not
maturing and not redeemable prior to September 30, 2004; provided, that the
terms of any such Capital Stock do not provide for any redemption or
repurchase, whether pursuant to a sinking fund or otherwise, or permit any
cash dividend prior to the Stated Maturity of the Convertible Notes.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by,
such Person; provided that each Unrestricted Subsidiary shall be deemed to be
an Affiliate of the Company and of each other Subsidiary of the Company;
provided that any lender under a Credit Facility shall not be deemed to be an
Affiliate solely as the result of the Credit Facility; and provided, further,
that neither the Company nor any of its Wholly-Owned Restricted Subsidiaries
shall be deemed to be Affiliates of each other. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "under common control with" and "controlled by"), and as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of Voting Stock, by agreement or
otherwise; provided, that beneficial ownership of 10% or more of the Voting
Stock of a Person (on a fully diluted basis) shall be deemed to be control.
"Asset Sale" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, dispositions
pursuant to any consolidation or merger) by such Person or any of its
Restricted Subsidiaries to any Person other than to such Person or a
Restricted Subsidiary of such Person, in one transaction or a series of
related transactions (each hereinafter referred to as a "Disposition"), of (a)
Capital Stock of or other equity interests in any Restricted Subsidiary (other
than director's qualifying shares) except as provided in clause (iv) of this
definition, (b) all or substantially all of the assets of any division or line
of business of such Person or of any of the Restricted Subsidiaries or (c)
Property or assets of such Person or any of its Restricted Subsidiaries, the
Fair Market Value of which exceeds $500,000, other than (i) a Disposition of
Property in the ordinary course of business and consistent with industry
practice, (ii) a Disposition of Eligible Cash Equivalents, (iii) a Disposition
of an Investment that constitutes a Restricted Payment under the Senior Note
Indenture permitted under the first paragraph of the covenant described in "--
Restricted Payments," (iv) a Disposition of no more than ten percent of the
Common Stock of USN Solutions, Inc. on a fully diluted basis pursuant to the
exercise of the USN Solutions Option, (v) a Disposition by the Company in
connection with a transaction permitted under "--Consolidation, Merger,
Conveyance, Lease or Transfer" and (vi) contribution of assets to any
Unrestricted Subsidiary constituting an Investment permitted by the Indenture.
"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).
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"Board Resolution" means a duly adopted resolution of the Board of Directors
in full force and effect at the time of determination and certified as such.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability
on the face of a balance sheet of such Person in accordance with GAAP and the
stated maturity thereof shall be the date of the last payment of rent or any
amount due under such lease prior to the first date upon which such lease may
be terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however
designated) in such Person and any rights (other than Indebtedness convertible
into an equity interest), warrants or options to acquire an equity interest in
such Person.
"Cash Proceeds" means, with respect to any Asset Sale or issuance or sale of
Capital Stock by any Person, the aggregate consideration received in respect
of such sale or issuance by such Person in the form of cash or Eligible Cash
Equivalents; provided that with regard to an Asset Sale, any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance
sheet or in the notes thereto) of the Company or any Restricted Subsidiary
(other than liabilities that are by their terms subordinated to the Notes or
Guarantees, if any) which are assumed by the transferee of any such assets and
from which the Company and such Restricted Subsidiary are completely released
shall be deemed Cash Proceeds.
"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer, or lease (other than to the Company or any Wholly-Owned Restricted
Subsidiary of the Company), whether direct or indirect, of all or
substantially all of the assets of the Company or of the Company and its
Restricted Subsidiaries taken as a whole to any "person" or "group" (within
the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any
successor provision to either of the foregoing, including any group acting for
the purpose of acquiring, holding or disposing of securities within the
meaning of Rule 13d-5(b)(i) under the Exchange Act) shall have occurred; (ii)
any "person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2)
of the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing
of securities within the meaning of Rule 13d-5(b)(i) under the Exchange Act),
other than any Permitted Holder or Permitted Holders, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of
the total voting power of all classes of the Voting Stock of the Company
(including any warrants or options or rights to acquire such Voting Stock),
calculated on a fully diluted basis, and such voting power percentage is
greater than or equal to the total voting power percentage then beneficially
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
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credit, bankers' acceptances or similar facilities) paid or accrued, or
scheduled to be paid or accrued, during such period; (ii) dividends or
distributions with respect to Preferred Stock or Disqualified Stock of such
Person (and of its Restricted Subsidiaries if paid to a Person other than such
Person or its Restricted Subsidiaries) declared and payable in cash; (iii) the
portion of any rental obligation of such Person or its Restricted Subsidiaries
in respect of any Capital Lease Obligation allocable to interest expense in
accordance with GAAP; (iv) the portion of any rental obligation of such Person
or its Restricted Subsidiaries in respect of any Sale and Leaseback
Transaction allocable to interest expense (determined as if such were treated
as a Capital Lease Obligation); and (v) to the extent any Indebtedness of any
other Person is guaranteed by such Person or any of its Restricted
Subsidiaries, the aggregate amount of interest paid or accrued, or scheduled
to be paid or accrued, by such other Person during such period attributable to
any such Indebtedness, less (B) to the extent included in (A) above,
amortization or write-off of deferred financing costs of such Person and its
Restricted Subsidiaries during such period and any charge related to any
premium or penalty paid in connection with redeeming or retiring any
Indebtedness of such Person and its Restricted Subsidiaries prior to its
Stated Maturity; in the case of both (A) and (B) above, after elimination of
intercompany accounts among such Person and its Restricted Subsidiaries and as
determined in accordance with GAAP. For purposes of clause (ii) above,
dividend requirements attributable to any Preferred Stock or Disqualified
Stock shall be deemed to be an amount equal to the amount of dividend
requirements on such Preferred Stock or Disqualified Stock times a fraction,
the numerator of which is the amount of such dividend requirements, and the
denominator of which is one minus the applicable combined federal, state,
local and foreign income tax rate of the Company and its Restricted
Subsidiaries (expressed as a decimal), on a consolidated basis, for the fiscal
year immediately preceding the date of the transaction giving rise to the need
to calculate Consolidated Interest Expense.
"Consolidated Net Income" of any Person means, for any period, the aggregate
net income (or net loss) of such Person and its Restricted Subsidiaries for
such period on a consolidated basis determined in accordance with GAAP;
provided that there shall be excluded therefrom, without duplication, (i) all
items classified as extraordinary, unusual or nonrecurring, (ii) the net
income of any Person that is not a Restricted Subsidiary or that is accounted
for by the equity method of accounting which shall be included only to the
extent of the amount of dividends or distributions paid to such Person or its
Restricted Subsidiaries, (iii) the net income of any Person acquired by such
Person or any of its Restricted Subsidiaries in a pooling-of-interests
transaction for any period prior to the date of the related acquisition, (iv)
any gain or loss, net of taxes, realized on the termination of any employee
pension benefit plan, (v) net gains (but not net losses) in respect of Asset
Sales by such Person or its Restricted Subsidiaries, (vi) the net income (but
not net loss) of any Restricted Subsidiary of such Person to the extent that
the payment of dividends or other distributions to such Person is restricted
by the terms of its charter or any agreement, instrument, contract, judgment,
order, decree, statute, rule, governmental regulation or otherwise, except for
any dividends or distributions actually paid by such Restricted Subsidiary to
such Person, and (vii) with regard to a non-Wholly-Owned Restricted
Subsidiary, any aggregate net income (or loss) in excess of such Person's or
such Restricted Subsidiary's pro rata share of such non-Wholly-Owned
Restricted Subsidiary's net income (or loss).
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person and its Restricted Subsidiaries, as determined on a
consolidated basis in accordance with GAAP, less amounts attributable to
Disqualified Stock of such Person.
"Credit Facility" means one or more credit agreements, loan agreements or
similar agreements providing for working capital advances, term loans, letter
of credit facilities or similar advances, loans or facilities to the Company,
which may, pursuant to the terms of the Senior Note Indenture, be guaranteed
by the Restricted Subsidiaries, with a bank or syndicate of banks or other
financial institutions, as such may be amended, renewed, extended,
supplemented, refinanced and replaced or refunded from time to time; provided,
that for purposes of the Senior Note Indenture, the aggregate principal amount
of Indebtedness under the Credit Facility shall not exceed $45 million at any
one time outstanding less the amount of any mandatory or permitted principal
payments or payments from the proceeds of Asset Sales made under the Credit
Facility that, in each case, permanently reduce the borrowing capacity of the
Company thereunder.
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"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the date on
which the Convertible Notes mature.
"EBITDA" means, with respect to any Person for any period, the sum for such
Person for such period of Consolidated Net Income plus, to the extent
reflected in the income statement of such Person for such period from which
Consolidated Net Income is determined, without duplication, (i) Consolidated
Interest Expense, (ii) income tax expense of such Person and its consolidated
Subsidiaries, (iii) depreciation expense, (iv) amortization expense, (v) any
non-cash expense related to the issuance to employees of such Person of
options to purchase Capital Stock of such Person and (vi) any charge related
to any premium or penalty paid in connection with redeeming or retiring any
Indebtedness prior to its Stated Maturity and minus, to the extent reflected
in such income statement, any noncash credits that had the effect of
increasing Consolidated Net Income of such Person for such period. This
definition of EBITDA is used only for the purpose of this Description of the
Notes and the Senior Note Indenture.
"Eligible Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits,
certificates of deposit or Eurodollar deposits of any commercial bank
organized in the United States having capital and surplus in excess of $500
million with a maturity date not more than one year from the date of
acquisition, (iii) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause (ii)
above, (iv) direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing, or subject to tender at the option of the
holder thereof within ninety days after the date of acquisition thereof and,
at the time of acquisition, having a rating of A or better from Standard &
Poor's or A-2 or better from Moody's, (v) commercial paper issued by the
parent corporation of any commercial bank organized in the United States
having capital and surplus in excess of $500 million and commercial paper
issued by others having one of the two highest ratings obtainable from either
of Standard & Poor's or Moody's and in each case maturing within 270 days
after the date of acquisition, (vi) overnight bank deposits and bankers'
acceptances at any commercial bank organized in the United States having
capital and surplus in excess of $500 million, (vii) deposits available for
withdrawal on demand with a commercial bank organized in the United States
having capital and surplus in excess of $500 million and (viii) investments in
money market funds substantially all of whose assets comprise securities of
the types described in clauses (i) through (vi).
"Exchange Rate Obligation" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Existing Indebtedness" means Indebtedness outstanding on the date of the
Senior Note Indenture and disclosed in a schedule attached to the Senior Note
Indenture.
"Fair Market Value" means, with respect to any asset or Property, the sale
value that could be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy, as determined in good faith by the
Board of Directors of the Company or a Restricted Subsidiary, as applicable.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified
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Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board, or in such other statements by such other entity
as may be approved by a significant segment of the accounting profession of
the United States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the Indentures shall utilize GAAP as in effect on the Issue
Date.
"guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"guaranteed," "guaranteeing" and "guarantor" shall have meanings correlative
to the foregoing).
"Guarantee" means a guarantee of the payment of the Senior Notes and/or the
Convertible Notes, as applicable, executed and delivered by a Restricted
Subsidiary as required by the covenant described under
"--Limitation on Issuances of Guarantees by Restricted Subsidiaries" and
"Guarantees" means, collectively, the Senior Note Guarantees and the
Convertible Note Guarantees, if any.
"Guarantor" means a Restricted Subsidiary that executes and delivers a
Guarantee.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, guarantee or otherwise become liable in respect of such Indebtedness
or other obligation or the recording, as required pursuant to GAAP or
otherwise, of any such Indebtedness or obligation on the balance sheet of such
Person (and "incurrence," "incurred," "incurrable" and "incurring" shall have
meanings correlative to the foregoing); provided that a change in GAAP that
results in an obligation of such Person that exists at such time becoming
Indebtedness shall not be deemed an incurrence of such Indebtedness.
Indebtedness otherwise incurred by a Person before it becomes a Restricted
Subsidiary of the Company shall be deemed to have been incurred at the time at
which it becomes a Restricted Subsidiary.
"Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with acquisition of Property,
assets or businesses, excluding trade accounts payable made in the ordinary
course of business which are not more than 90 days overdue or which are being
contested in good faith and by appropriate proceedings, (iii) any
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (iv) any obligation of such Person issued or assumed as the deferred
purchase price of Property, assets or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business,
which in either case are not more than 90 days overdue or which are being
contested in good faith and by appropriate proceedings, and for which adequate
reserves are being maintained on the books of the Company in accordance with
GAAP), (v) any Capital Lease Obligation of such Person, (vi) the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person and, to
the extent held by other Persons, the maximum fixed redemption or repurchase
price of Disqualified Stock of such Person's Restricted Subsidiaries, at the
time of determination, (vii) the notional amount of any Interest Hedging
Obligations or Exchange Rate Obligations of such Person at the time of
determination, (viii) any Attributable Indebtedness with respect to any Sale
and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has guaranteed or is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise. For purposes of the preceding sentence, the maximum fixed
repurchase price of any Disqualified Stock that does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were repurchased on any date
on which Indebtedness shall be required to be determined pursuant to the
Senior Note Indenture; provided that if such Disqualified Stock is not then
permitted to be repurchased, the repurchase price shall be the book value of
such Disqualified Stock. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and the maximum liability of any guarantees at such date;
provided, that for purposes of calculating the amount of Notes
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outstanding at any date, the amount of such Notes shall be the Accreted Value
thereof as of such date, unless cash interest has commenced to accrue pursuant
to the applicable Indenture, in which case the amount of such Notes
outstanding will be the aggregate principal amount thereof at Stated Maturity;
and provided, further, that for purposes of calculating the amount of any non-
interest bearing or other discount security (other than the Notes), such
Indebtedness shall be deemed to be the principal amount thereof that would be
shown on the balance sheet of the issuer dated such date prepared in
accordance with GAAP but that such security shall be deemed to have been
incurred only on the date of the original issuance thereof.
"Indebtedness to Operating Cash Flow Ratio" means, as at any date of
determination, the ratio of (i) the aggregate amount of Indebtedness of the
Company and its Restricted Subsidiaries on a consolidated basis as of the date
of determination to (ii) the aggregate amount of EBITDA of the Company and its
Restricted Subsidiaries for the four preceding fiscal quarters for which
financial information is available immediately prior to the date of
determination; provided that any Indebtedness incurred or retired by the
Company or any of its Restricted Subsidiaries during the fiscal quarter in
which the date of determination occurs shall be calculated as if such
Indebtedness was so incurred or retired on the first day of the fiscal quarter
in which the date of determination occurs; and provided, further, that (x) if
the transaction giving rise to the need to calculate the Indebtedness to
Operating Cash Flow Ratio would have the effect of increasing or decreasing
Indebtedness or EBITDA in the future, Indebtedness or EBITDA shall be
calculated on a pro forma basis as if such transaction had occurred on the
first day of such four fiscal quarter period preceding the date of
determination, and (y) if during such four fiscal quarter period, the Company
or any of its Restricted Subsidiaries shall have engaged in any Asset Sale,
EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive), or increased by an amount equal to the EBITDA (if negative),
directly attributable to the assets which are the subject of such Asset Sale
and any related retirement of Indebtedness as if such Asset Sale and related
retirement of Indebtedness had occurred on the first day of such four fiscal
quarter period or (z) if during such four fiscal quarter period the Company or
any of its Restricted Subsidiaries shall have acquired any material assets
outside the ordinary course of business, EBITDA shall be calculated on a pro
forma basis as if such asset acquisition and related financing had occurred on
the first day of such four fiscal quarter period.
"Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement,
interest rate cap, collar or floor agreement or other similar agreement or
arrangement designed to protect against or manage such Person's or any of its
Restricted Subsidiaries' exposure to fluctuations in interest rates.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) acquisition of any shares of Capital
Stock, bonds, notes, debentures or other securities of such Person, or (iii)
acquisition, by purchase or otherwise, of all or substantially all of the
business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude accounts receivable and other
extensions of trade credit on commercially reasonable terms in accordance with
normal trade practices. The amount of an Investment shall be the original cost
of such Investment, plus the cost of all additions thereto and minus the
amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property or assets other
than cash, such Property or assets shall be valued at its Fair Market Value at
the time of such transfer. The Company shall be deemed to make an "Investment"
in the amount of the Fair Market Value of the assets of a Subsidiary at the
time that such Subsidiary is designated as an Unrestricted Subsidiary.
"Issue Date" means the date on which the Old Notes or the Convertible Notes
were, or the New Notes are, first authenticated and delivered under the Senior
Note Indenture or Convertible Note Indenture.
"Joint Venture" means a Telecommunications Company of which less than 50
percent of the Voting Stock is held by the Company; provided that the
management and operations of such Person are controlled by a Strategic
Investor or by the Company pursuant to (i) the charter documents of such
Person, or (ii) an agreement
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among the holders of the Voting Stock of such Person, or (iii) a management
agreement between the Company and such Person.
"Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement,
security interest, lien (statutory or other), charge, easement, encumbrance,
preference, priority or other security or similar agreement or preferential
arrangement of any nature whatsoever on or with respect to such Property or
other asset (including, without limitation, any conditional sale or title
retention agreement having substantially the same economic effect as any of
the foregoing).
"Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
applicable Indenture, whether at Stated Maturity, on the Change of Control
Payment Date or purchase date established pursuant to the terms of the
applicable Indenture with regard to a Change of Control Offer, an Asset Sale
Offer or an offer to repurchase upon a Termination of Trading of the Common
Stock of the Company, as applicable, or by declaration of acceleration, call
for redemption or otherwise.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or
such Restricted Subsidiary incurred in connection with such sale, including,
without limitation, all legal, title and recording tax expenses, commissions
and other fees and expenses incurred (but excluding any finder's fee or
broker's fee payable to any Affiliate of such Person) and all federal, state,
foreign and local taxes arising in connection with such sale that are paid or
required to be accrued as liability under GAAP by such Person or its
Restricted Subsidiaries, (ii) all payments made or required to be made by such
Person or its Restricted Subsidiaries on any Indebtedness which is secured by
such Properties or other assets in accordance with the terms of any Lien upon
or with respect to such Properties or other assets or which must, by the terms
of such Lien, or in order to obtain a necessary consent to such transaction or
by applicable law, be repaid in connection with such sale and (iii) all
contractually required distributions and other payments made to minority
interest holders (but excluding distributions and payments to Affiliates of
such Person) in Restricted Subsidiaries of such Person as a result of such
transaction; provided that, in the event that any consideration for a
transaction (which would otherwise constitute Net Cash Proceeds) is required
to be held in escrow pending determination of whether a purchase price
adjustment will be made, such consideration (or any portion thereof) shall
become Net Cash Proceeds only at such time as it is released to such Person or
its Restricted Subsidiaries from escrow; provided, further, that any non-cash
consideration received in connection with any transaction, which is
subsequently converted to cash, shall be deemed to be Net Cash Proceeds at
such time, and shall thereafter be applied in accordance with the Indentures.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President, the Chief Executive
Officer, the Chief Operating Officer or a Vice President, and by the Chief
Financial Officer, the Chief Accounting Officer, the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary of the Company or a
Restricted Subsidiary and delivered to the Trustee, which shall comply with
the applicable Indenture.
"Pari Passu Indebtedness" means any Indebtedness (secured or unsecured) of
the Company or any Guarantor that ranks pari passu in right of payment with
the Senior Notes or the Senior Note Guarantees, as applicable.
"Permitted Holders" means Thomas C. Brandenburg, J. Thomas Elliott and
Ronald W. Gavillet and Chase, CIBC, Hancock, BT, the Northwood Entities,
Enterprise and Merrill Lynch Global Allocation Fund, Inc., and any of their
respective Subsidiaries (or a wholly-owned Subsidiary of the sole stockholder
of any of the foregoing Persons).
"Permitted Investments" means (i) Eligible Cash Equivalents; (ii)
Investments in Property used in the ordinary course of business; (iii)
Investments in the Company or in any Restricted Subsidiary or any Person as a
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result of which such Person becomes a Restricted Subsidiary in compliance with
the Senior Note Indenture; (iv) Investments pursuant to certain agreements or
obligations of the Company or a Restricted Subsidiary, in effect on the Issue
Date, to make such Investments, and disclosed in a schedule attached to the
Senior Note Indenture; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and workers' compensation,
performance and other similar deposits; (vi) Interest Hedging Obligations with
respect to any floating rate Indebtedness that is permitted by the terms of
the Senior Note Indenture to be outstanding; (vii) bonds, notes, debentures or
other debt securities received as a result of Asset Sales permitted under the
covenant described under "--Asset Sales;" (viii) Investments in existence on
the Issue Date; and (ix) Investments in securities of trade creditors,
wholesalers or customers received pursuant to any plan of reorganization or
similar arrangements.
"Permitted Liens" means (i) Liens created by the Senior Note Indenture or
that otherwise secure the payment of the Senior Notes or the Senior Note
Guarantees, if any, and Liens created by the Convertible Note Indenture or
which otherwise secure the payment of the Convertible Notes or the Convertible
Note Guarantees, if any; (ii) Liens on Property or assets of a Person existing
at the time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary of the Company or becomes a Restricted Subsidiary of the
Company, provided that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not secure any Property or assets of
the Company or any of its Restricted Subsidiaries other than the Property or
assets subject to the Liens prior to such merger or consolidation; (iii) Liens
on Property or assets existing at the time of acquisition thereof by the
Company or any Restricted Subsidiary, provided that such Liens were not given
in contemplation of such acquisition; (iv) Liens to secure the payment of all
or a part of the purchase price or construction cost of Property or assets
acquired or constructed in the ordinary course of business after the Issue
Date, provided that the Indebtedness secured by such Liens shall not exceed
the lesser of 100% of the cost or the Fair Market Value of the Property or
assets acquired or constructed and such Liens shall not extend to any other
Property or assets; (v) Liens incurred or deposits made to secure the
performance of tenders, bids, leases not constituting Capitalized Lease
Obligations, statutory or regulatory obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the
ordinary course of business consistent with industry practice; (vi) Liens
existing as of the Issue Date and disclosed in a schedule attached to the
Senior Note Indenture; (vii) any Lien on Property of the Company in favor of
the United States of America or any state thereof, or any instrumentality of
either, to secure certain payments pursuant to any contract or statute; (viii)
any Lien for taxes or assessments or other governmental charges or levies not
then due and payable (or which, if due and payable, are being contested in
good faith and for which adequate reserves are being maintained, to the extent
required by GAAP); (ix) easements, rights-of-way, licenses and other similar
restrictions on the use of Properties or minor imperfections of title that, in
the aggregate, are not material in amount and do not in any case materially
detract from the Properties subject thereto or interfere with the ordinary
conduct of the business of the Company or its Restricted Subsidiaries; (x) any
Lien to secure obligations under workers' compensation laws or similar
legislation, including any Lien with respect to judgments which are not
currently dischargeable; (xi) any statutory warehousemen's, materialmen's or
other similar Liens for sums not then due and payable (or which, if due and
payable, are being contested in good faith and with respect to which adequate
reserves are being maintained, to the extent required by GAAP); (xii) Liens in
favor of the Company; (xiii) Liens on Property or assets of the Company
securing not more than $30 million aggregate principal amount at any one time
outstanding of Indebtedness incurred under clause (a) of the second paragraph
of the covenant described under "--Limitation on Indebtedness"; (xiv) Liens
securing any Vendor Financing, provided that such Liens do not extend to any
Property or assets other than the Property or assets the acquisition of which
was financed by such Indebtedness; (xv) Liens securing reimbursement
obligations with respect to letters of credit that encumber documents and
other Property relating to such letters of credit and the products and
proceeds thereof; and (xvi) Liens to secure any permitted extension, renewal,
refinancing or refunding (or successive extensions, renewals, refinancings or
refundings), in whole or in part, of any Indebtedness secured by Liens
referred to in the foregoing clauses (ii), (iii) and (xiv), provided that such
Liens do not extend to any other Property or assets and the principal amount
of the Indebtedness secured by such Liens is not increased.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, trust, unincorporated organization or government or
any agency or political subdivision thereof or other entity.
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"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, excluding Capital Stock in any other Person.
"Public Equity Offering" means an underwritten public offering of Capital
Stock (other than Disqualified Stock) of the Company pursuant to an effective
registration statement filed under the Securities Act.
"Qualified Public Offering" means a Public Equity Offering resulting in net
proceeds to the Company of at least $35 million.
"Qualified Sale of the Company" means a sale of the Capital Stock or a
merger or consolidation involving the Company, pursuant to which the holders
of Capital Stock of the Company receive cash proceeds and/or publicly traded
securities having a fair market value in each case of at least $122,500,000 in
the aggregate, or a sale of assets of the Company pursuant to which the
Company receives net cash proceeds and/or publicly traded securities having a
fair market value of at least $122,500,000 in the aggregate.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Refinancing Indebtedness" means any Indebtedness incurred in connection
with the Refinancing of other Indebtedness.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than to the
Company or any Restricted Subsidiary of the Company on the Capital Stock of
any Restricted Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or
such Restricted Subsidiary (and other than pro rata dividends, distributions
or payments declared or paid on the Common Stock of USN Solutions, Inc. to any
Person not otherwise an Affiliate of the Company holding such Common Stock as
a result of the exercise of the USN Solutions Option; provided, that the
Company shall receive pro rata dividends, distributions or payments at the
same time and in the same form and composition of consideration as the
dividends, distributions or payments paid to such minority stockholders), (ii)
a payment made by the Company or any of its Restricted Subsidiaries (other
than to the Company or any Restricted Subsidiary of the Company) to purchase,
redeem, acquire or retire any Capital Stock of the Company or of a Restricted
Subsidiary of the Company, (iii) a payment made by the Company or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock
of the Company) to redeem, repurchase, defease (including an in-substance or
legal defeasance) or otherwise acquire or retire for value (including pursuant
to mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of the Company or
such Restricted Subsidiary which is subordinate (whether pursuant to its terms
or by operation of law) in right of payment to the Notes, or any Guarantees,
as applicable, or (iv) an Investment in any Person, including an Unrestricted
Subsidiary or the designation of a Subsidiary as an Unrestricted Subsidiary,
other than a Permitted Investment.
"Restricted Subsidiary" means (i) with respect to any Person other than the
Company and its Subsidiaries, a Subsidiary of such Person and (ii) with
respect to the Company and its Subsidiaries, any Subsidiary of the Company
that has not been classified as an "Unrestricted Subsidiary."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or
transferred by such Person or a Restricted Subsidiary of such Person and is
thereafter leased back from the purchaser or transferee thereof by such Person
or one of its Restricted Subsidiaries.
"Significant Restricted Subsidiary" means a Restricted Subsidiary that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act and the Exchange Act.
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"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred), and, when used with respect
to any installment of interest on such security, the fixed date on which such
installment of interest is due and payable.
"Strategic Investor" means, with respect to any relevant transaction, a
Telecommunications Company which, both as of the Business Day immediately
before the day of the closing of such transaction and the Business Day
immediately after the day of closing of such transaction, has, or whose parent
has, an equity market capitalization, a net asset value or annual revenues of
at least $2 billion on a consolidated basis. For purposes of this definition,
the term "parent" means any Person of which the relevant Strategic Investor is
a Subsidiary.
"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50%
of the outstanding partnership or similar interests of which are owned,
directly or indirectly, by such Person, or by one or more other Subsidiaries
of such Person, or by such Person and one or more other Subsidiaries of such
Person and (iii) any limited partnership of which such Person or any
Subsidiary of such Person is a general partner.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses to use
copyrighted material) that are utilized by such Person, directly or
indirectly, for the design, development, construction, installation,
integration, operation, management or provision of telecommunications systems
and/or services, including without limitation, any businesses or services in
which the Company is currently engaged and including any computer systems used
in a Telecommunications Business. Telecommunications Assets shall also include
stock, joint venture or partnership interests in another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided, further, that if such stock, joint
venture or partnership interests are held by the Company or a Restricted
Subsidiary, such other Person either is, or immediately following the relevant
transaction shall become, a Restricted Subsidiary of the Company pursuant to
the applicable Indenture unless such Person is a Joint Venture. The
determination of what constitutes Telecommunication Assets shall be made by
the Board of Directors and evidenced by a Board Resolution delivered to the
applicable Trustee.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) creating, developing or
marketing communications related network equipment, software and other devices
for use in (i) above or (iii) evaluating, participating or pursuing any other
activity or opportunity that is related to those specified in (i) or (ii)
above and includes, without limitation, any business in which the Company and
its Restricted Subsidiaries are currently engaged.
"Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.
"U.S. Government Obligations" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii)
obligations of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S.
Government Obligation which is so specified and held, provided that (except as
required by
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law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by
the custodian in respect of the U.S. Government Obligation or the specific
payment of principal or interest of the U.S. Government Obligation evidenced
by such depository receipt.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the
Indentures.
"Vendor Financing" means, with respect to any Person, an obligation owed by
such Person to a vendor of Telecommunications Assets solely in respect of the
purchase price of such assets, provided that the amount of such Indebtedness
does not exceed the Fair Market Value of such assets, and provided, further,
that such Indebtedness is incurred within 90 days of the acquisition of such
assets.
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or at the times that such class of Capital Stock has voting power
by reason of the happening of any contingency) to vote in the election of
members of the Board of Directors or comparable body of such Person.
"Wholly-Owned Restricted Subsidiary" means any Restricted Subsidiary, all of
the outstanding Capital Stock (other than directors' qualifying shares) of
which is owned, directly or indirectly, by the Company; provided, that for
purposes of the Senior Note Indenture, other than for purposes of the
definition of "Consolidated Net Income," USN Solutions, Inc. shall not cease
to be a Wholly-Owned Restricted Subsidiary merely as a result of the exercise
of the USN Solutions Option.
DESCRIPTION OF THE WARRANTS
In connection with a private placement of the Units on September 30, 1996,
the Company issued Initial Warrants to purchase 61,550 shares of Class A
Common Stock and undertook to issue, under certain circumstances, to holders
of the Old Notes and holders of the New Notes Senior Note Contingent Warrants
and to holders of the Convertible Notes Convertible Note Contingent Warrants
and Additional Warrants. The following is a description of all such Warrants.
GENERAL
On September 30, 1996, the Company issued Initial Warrants to purchase
61,550 shares of Class A Common Stock to the purchasers of the Units. The
Initial Warrants were and the Contingent Warrants will be issued pursuant to a
Warrant Agreement, dated as of September 30, 1996 (the "Warrant Agreement"),
between the Company and Harris Trust and Savings Bank, as Warrant Agent (the
"Warrant Agent"). The Initial Warrants are and the Contingent Warrants will be
subject to all terms in the Warrant Agreement and holders of Warrants are
referred to the Warrant Agreement, a copy of which is available from the
Company on request, for a complete statement of such terms. The statements and
definitions of terms under this caption relating to the Warrants are summaries
and do not purport to be complete. Such summaries make use of certain terms
defined in the Warrant Agreement and are qualified in their entirety by
express reference to the Warrant Agreement.
Each Initial Warrant is evidenced by a Warrant Certificate and entitles the
holder thereof to purchase 1.269311203 shares of Class A Common Stock (each a
"Warrant Share") from the Company at a price (the "Exercise Price") of $.01
per share, subject to adjustment as described below. Subject to certain
limitations, the Initial Warrants may be exercised at any time beginning 180
days from the date of original issuance thereof and on or prior to the close
of business on a date eight years following the Issue Date (the "Expiration
Date"). Initial Warrants that are not exercised by the Expiration Date will
expire. The Company will give notice of expiration not less than 90 nor more
than 120 days prior to the Expiration Date to registered holders of the then
outstanding Initial Warrants.
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The aggregate number of Warrant Shares issuable upon exercise of the Initial
Warrants is equal to approximately 12% of the outstanding shares of Common
Stock, on a fully diluted basis as of the date of the issuance of the Units.
In addition, the Company will be obligated pursuant to the Senior Note
Indenture to issue to holders of the Senior Notes Senior Note Contingent
Warrants, exercisable for Class A Common Stock representing up to 3% of the
Common Stock on a fully diluted basis as of the date of such issuance (subject
to certain exceptions) after giving effect to the issuance of such Contingent
Warrants, in the event that on, or prior to March 30, 1998, the Company does
not effect a Qualified Public Offering or has not been sold pursuant to a
Qualified Sale of the Company. In addition, in the event that the Company has
not, on or prior to September 30, 1999, (i) consummated a Qualified Public
Offering or (ii) been sold pursuant to a Qualified Sale of the Company, the
Company will be obligated pursuant to the Convertible Note Indenture to issue
to the holders of the Convertible Notes Convertible Note Contingent Warrants
exercisable for Class A Common Stock representing up to 2.5% of the Common
Stock of the Company on a fully diluted basis (subject to certain exceptions)
after giving effect to the issuance of such Contingent Warrants. All
Contingent Warrants will be issued pursuant to the Warrant Agreement with the
same rights thereunder as the Initial Warrants, and holders will have the
benefit of the Registration Rights Agreement. See "Description of the Notes--
Certain Covenants--Issuance of Contingent Warrants."
Under certain conditions, if the Company has not consummated a Qualified
Public Offering or a Qualified Sale of the Company has not occurred by
September 30, 1997, the Company will be required to offer to holders of
Convertible Notes the right to acquire additional convertible securities and
warrants. See "Description of the Notes--Additional Invested Equity."
CERTAIN TERMS
Exercise
In order to exercise all or any of the Warrants represented by a Warrant
Certificate, the holder thereof is required to surrender to the Warrant Agent
the Warrant Certificate, a duly executed copy of the subscription form set
forth in the Warrant Certificate and payment in full of the Exercise Price for
each Warrant Share or other security as to which a Warrant is being exercised.
Payment for securities upon exercise of a Warrant may be made in cash or by
certified check, official bank check or bank cashier's check payable to the
order of the Company. Upon the exercise of any Warrant in accordance with the
Warrant Agreement, the Warrant Agent shall instruct the Company to transfer
promptly to, or upon the written order of, the holder of such Warrant
appropriate evidence of ownership of any Warrant Share or other securities or
property to which such holder is entitled, registered or otherwise placed in
such name or names as such holder may direct in writing, and the Company shall
deliver such evidence of ownership to the person or persons entitled to
receive the same, including, without limitation, any cash payable to adjust
for fractional interests in Warrant Shares issuable upon such exercise. If
less than all of the Warrants evidenced by a Warrant Certificate are to be
exercised, a new Warrant Certificate will be issued for the remaining number
of Warrants. All Warrant Shares or other securities issuable by the Company
upon the exercise of the Warrants shall be validly issued, fully paid and
nonassessable.
No fractional Warrant Shares will be issued upon exercise of the Warrants.
If any fraction of a Warrant Share would, except for the foregoing provision,
be issuable upon the exercise of any Warrants (or specified portion thereof),
the Company will pay an amount in cash equal to the Current Market Price (as
defined in the Warrant Agreement) per share of Class A Common Stock, as
determined on the trading day immediately preceding the date the Warrant is
presented for exercise, multiplied by such fraction, computed to the nearest
whole cent.
Certificates for Warrants will be issued in global form or registered form
as definitive warrant certificates and no service charge will be made for
registration of transfer or exchange upon surrender of any Warrant Certificate
at the office of the Warrant Agent maintained for that purpose. The Company
may require payment
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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 Initial
Warrants, the Contingent Warrants and Additional Warrants and conversion of
the Convertible Notes, the Exercise Price and the number of Warrant Shares
issuable upon exercise of the Warrants will be subject to adjustment on the
occurrence of certain events including: (i) the payment by the Company of
dividends (or the making of other distributions) with respect to Common Stock
payable in Common Stock or other shares of the Company's capital stock, (ii)
subdivisions, combinations and reclassifications of Common Stock, (iii) the
issuance to all holders of Common Stock of rights, options or warrants
entitling them to subscribe for Common Stock, or of securities convertible
into or exchangeable for shares of Common Stock, in either case for
consideration per share of Common Stock which is less than the Current Market
Price per share of Common Stock, (iv) the issuance or sale of shares of Common
Stock for consideration per share of Common Stock which is less than the
Current Market Price per share of Common Stock and (v) the distribution to all
holders of Common Stock of any of the Company's assets, debt securities or any
rights or warrants to purchase securities (excluding those rights and warrants
referred to in clause (iii) above and excluding cash dividends or other cash
distributions from current or retained earnings).
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least 1.0% in the Exercise Price;
provided, that any adjustment which is not made will be carried forward and
taken into account in any subsequent adjustment.
Mergers, Consolidations and Certain Other Transactions
Except as otherwise provided herein, in the event the Company consolidates
with, merges with or into, or sells all or substantially all of its property
and assets to another Person, each Warrant thereafter shall entitle the holder
thereof to receive upon exercise thereof the number of shares of capital stock
or other securities or property which the holder of a share of Common Stock is
entitled to receive upon completion of such consolidation, merger or sale of
assets. If the Company merges or consolidates with, or sells all or
substantially all of its property and assets to, another Person and, in
connection therewith, consideration to the holders of Common Stock in exchange
for their shares is payable solely in cash, or in the event of the
dissolution, liquidation or winding-up of the Company, then the holders of the
Warrants will be entitled to receive distributions on an equal basis with the
holders of Common Stock or other securities issuable upon exercise of the
Warrants, as if the Warrants had been exercised immediately prior to such
event, less the Exercise Price. Upon receipt of such payment, if any, the
Warrants will expire and the rights of the holders thereof will cease.
In case of any such merger, consolidation or sale of assets, the surviving
or acquiring Person and, in the event of any dissolution, liquidation or
winding-up of the Company, the Company, shall deposit promptly with the
Warrant Agent the funds or other consideration, if any, necessary to pay the
holders of the Warrants. After such funds and the surrendered Warrant
Certificate are received, the Warrant Agent shall make payment by delivering a
check in such amount as is appropriate (or, in the case of consideration other
than cash, shall transfer such other consideration as is appropriate) to such
Person or Persons as it may be directed in writing by the holders surrendering
such Warrants.
No Rights as Stockholders
The holders of unexercised Warrants are not entitled, as such, to receive
dividends or other distributions with respect to the Common Stock, receive
notice of any meeting of the stockholders of the Company, consent
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to any action of the stockholders of the Company, receive notice of any other
stockholder meetings, or to any other rights as stockholders of the Company.
RESERVATION OF SHARES
The Company has authorized and reserved for issuance such number of shares
of Common Stock as shall be issuable upon the exercise of all outstanding
Warrants. Such shares of Class A Common Stock, when paid for and issued, will
be duly and validly issued, fully paid and non-assessable, free of preemptive
rights and free from all taxes, liens, charges and security interests with
respect to the issue thereof.
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including, without limitation, curing defects or
inconsistencies or making any change that does not materially adversely affect
the rights of any holder. Any amendment or supplement to the Warrant Agreement
that has a material adverse effect on the interests of the holders of the
Warrants shall require the written consent of the holders of a majority of the
then outstanding Warrants. The consent of each holder of the Warrants affected
shall be required for any amendment pursuant to which the Exercise Price would
be increased or the number of Warrant Shares purchasable upon exercise of
Warrants would be decreased (other than pursuant to adjustments provided in
the Warrant Agreement).
REGISTRATION RIGHTS
With respect to the Notes, the Warrants, the Warrant Shares and the
Convertible Note Shares, the Company has entered into a registration rights
agreement with the Initial Purchasers, dated as of September 30, 1996 (the
"Registration Rights Agreement"), for the benefit of the holders of the Notes
and the Warrants. The summary herein of certain provisions of the Registration
Rights Agreement relating to the Convertible Notes and the Warrants does not
purport to be complete and is subject to all the provisions of the
Registration Rights Agreement, which is available upon request from the
Company.
CONVERTIBLE NOTES
Registration of the Convertible Notes. The Company is required, under the
terms of the Registration Rights Agreement, to (i) file a shelf registration
statement with respect to resale of the Convertible Notes by the holders
thereof (the "Convertible Note Shelf Registration Statement") with the
Commission within 60 days after the date of original issuance of the
Convertible Notes; (ii) cause the Convertible Note Shelf Registration
Statement to be declared effective under the Securities Act within 120 days
after the date of original issuance of the Convertible Notes; and (iii)
maintain the effectiveness of the Convertible Note Shelf Registration
Statement until the earlier of (a) such time as all Convertible Notes have
been sold thereunder or otherwise or exercised and (b) three years after its
effective date. The Company will provide to each holder of Convertible Notes
covered by the Convertible Note Shelf Registration Statement copies of the
prospectus which is a part of the Convertible Note Shelf Registration
Statement, notify each such holder when the Convertible Note Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Convertible Notes. A holder
of Convertible Notes that sells such Convertible Notes pursuant to the
Convertible Note Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to the purchaser, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations).
If either (i) the Convertible Note Shelf Registration Statement has not been
declared effective by the Commission on or prior to the date specified for
such effectiveness in the Registration Rights Agreement, or (ii)
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any Convertible Note Shelf Registration Statement required by the Registration
Rights Agreement is filed and declared effective but shall thereafter cease to
be effective or fail to be usable for its intended purpose without being
succeeded immediately by a post-effective amendment to such Convertible Note
Shelf Registration Statement that cures such failure and that is itself
declared effective for a period of more than 30 consecutive business days
(each such event referred to in clauses (i) and (ii), a "Convertible Note
Registration Default"), then commencing on the day following the date on which
such Convertible Note Registration Default occurs, the Company agrees to pay
to each holder of the Convertible Notes during the first 90-day period
immediately following the occurrence of such Convertible Note Registration
Default Special Interest. The amount of Special Interest payable to each
holder shall increase by an additional 0.5% per annum for each subsequent 90-
day period up to a maximum rate of 1.5% per annum. A Convertible Note
Registration Default shall cease, and Special Interest shall cease to be
payable with respect to such Convertible Note Registration Default, (1) upon
the effectiveness of the Convertible Note Shelf Registration Statement in the
case of clause (i) above, or (2) when the Convertible Note Shelf Registration
Statement becomes effective or usable in the case of clause (ii) above.
Notwithstanding the foregoing, (i) the amount of Special Interest payable
shall not increase because more than one Convertible Note Registration Default
has occurred and is pending and (ii) a holder of Convertible Notes who is not
entitled to the benefits of the Convertible Note Shelf Registration Statement
(i.e., such holder has not elected to include information) shall not be
entitled to Special Interest with respect to a Convertible Note Registration
Default that pertains to the Convertible Note Shelf Registration Statement.
All accrued Special Interest shall be paid to record holders in the same
manner in which payments of interest are made pursuant to the Convertible Note
Indenture. See "Description of the Notes--Principal, Maturity and Interest."
Payment of Special Interest is the sole remedy available to holders of
Convertible Notes in the event the Company does not comply with the deadlines
set forth in the Registration Rights Agreement with respect to the
registration of the Convertible Notes for resale under a shelf registration
statement.
Holders of Convertible Notes will be able to convert their Convertible Notes
only if a registration statement relating to the Convertible Note Shares is
then effective under, or the conversion of the Convertible Notes is exempt
from the registration requirements of, the Securities Act.
Registration of Convertible Note Shares. The Company is required, under the
terms of the Registration Rights Agreement, to (i) file a shelf registration
statement with respect to the Company's issuance of the Convertible Note
Shares to holders upon exercise of the Convertible Notes (the "Convertible
Note Shares Shelf Registration Statement") with the Commission within 60 days
after the date of original issuance of the Convertible Notes, (ii) cause the
Convertible Note Shares Shelf Registration Statement to be declared effective
under the Securities Act within 120 days after the date of original issuance
of the Convertible Notes and (iii) keep effective the Convertible Note Shares
Shelf Registration Statement (or a successor registration statement thereto)
until eight years after the Issue Date of the Convertible Notes or such
shorter period that will terminate when all the Convertible Note Shares
covered by such Convertible Note Shares Shelf Registration Statement have been
sold pursuant to such Convertible Note Shares Shelf Registration Statement or
otherwise.
The Company will provide to each holder of Convertible Note Shares copies of
the prospectus which is a part of the Convertible Note Shares Shelf
Registration Statement, notify each such holder when the Convertible Note
Shares Shelf Registration Statement has become effective and take certain
other actions, subject to compliance by such holder with certain conditions in
the Registration Rights Agreement, as are required to permit unrestricted
resales of the Convertible Note Shares.
Each holder of Convertible Note Shares that sells such Convertible Note
Shares pursuant to the Convertible Note Shares Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to the purchaser, will be
subject to certain of the civil liability provisions under the Securities Act
in connection with such shares and will be bound by certain provisions of the
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations).
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WARRANTS
Registration of the Warrants. The Company is required, under the terms of
the Registration Rights Agreement, to (i) file a shelf registration statement
with respect to resale of the Warrants by the holders thereof (the "Warrant
Shelf Registration Statement") with the Commission within 60 days after the
date of original issuance of the Initial Warrants; (ii) cause the Warrant
Shelf Registration Statement to be declared effective under the Securities Act
within 120 days after the date of original issuance of the Initial Warrants;
and (iii) keep effective the Warrant Shelf Registration Statement until the
earlier of (A) such time as all Initial Warrants have been sold thereunder or
otherwise or exercised and (B) three years after its effective date; provided,
however, that in the event the Company is required to issue Contingent
Warrants or Additional Warrants, the Company shall amend the Warrant Shelf
Registration Statement to include the Contingent Warrants and the time period
shall be three years after the issuance of the Contingent Warrants or
Additional Warrants, as the case may be.
The Company will provide to each holder of Warrants copies of the prospectus
which is a part of the Warrant Shelf Registration Statement, notify each such
holder when the Warrant Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of
the Warrants.
Each holder of Warrants that sells such Warrants pursuant to the Warrant
Shelf Registration Statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus
to the purchaser, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by
certain provisions of the Registration Rights Agreement which are applicable
to such holder (including certain indemnification obligations).
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares is then effective under,
or the exercise of such Warrants is exempt from the registration requirement
of, the Securities Act.
Registration of the Warrant Shares. The Company also is required, under the
terms of the Registration Agreement, to (i) file a shelf registration
statement with respect to the Company's issuance of the Warrant Shares to
holders upon exercise of the Warrants (the "Warrant Shares Shelf Registration
Statement") with the Commission within 270 days after the date of original
issuance of the Initial Warrants, (ii) cause the Warrant Shares Shelf
Registration Statement to be declared effective under the Securities Act
within 360 days after the date of original issuance of the Initial Warrants
and (iii) keep effective the Warrant Shares Shelf Registration Statement (or a
successor registration statement thereto) until eight years after the Issue
Date of the Convertible Notes or such shorter period that will terminate when
all the Warrant Shares covered by such Warrant Shares Shelf Registration
Statement have been sold pursuant to such Warrant Shares Shelf Registration
Statement or otherwise.
The Company will, upon the filing of the Warrant Shares Shelf Registration
Statement, provide to each holder of Warrant Shares copies of the prospectus
which is a part of the Warrant Shares Shelf Registration Statement, notify
each such holder when the Warrant Shares Shelf Registration Statement has
become effective and take certain other actions, subject to compliance by such
holder with certain conditions in the Registration Rights Agreement, as are
required to permit unrestricted resales of the Warrant Shares.
Each holder of Warrant Shares that sells such Warrant Shares pursuant to the
Warrant Shares Shelf Registration Statement generally will be required to be
named as a selling securityholder in the related prospectus and to deliver a
prospectus to the purchaser, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such shares and will be
bound by certain provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations). In
addition, each holder of Warrant Shares will be required to deliver
information to be used in connection with the Warrant Shares Shelf
Registration Statement in order to have its Warrant Shares included in the
Warrant Shares Shelf Registration Statement.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 2,650,000 shares of
capital stock, consisting of 2,550,000 shares of Common Stock, par value $.01
per share, of which 2,500,000 shares are designated as Class A Common Stock
and 50,000 shares are designated as Class B Common Stock, and 100,000 shares
are designated as Preferred Stock, par value $1.00 per share.
COMMON STOCK
The holders of Common Stock are entitled to receive dividends when and as
dividends are declared by the Board of Directors of the Company out of funds
legally available therefor, provided that if any shares of Preferred Stock are
at the time outstanding, the payment of dividends on the Common Stock or other
distributions may be subject to the declaration and payment of full cumulative
dividends on outstanding shares of Preferred Stock. If stock dividends are
declared, holders of Class A Common Stock will receive shares of Class A
Common Stock and holders of Class B Common Stock will receive shares of Class
B Common Stock.
Except for matters where applicable law requires the approval of one or both
classes of Common Stock voting as separate classes, holders of Class A Common
Stock are entitled to one vote per share on all matters submitted to a vote of
the stockholders, including the election of directors. Unless required by law,
holders of Class B Common Stock are not entitled to voting rights.
Shares of Class A Common Stock are convertible into Class B Common Stock on
a one-to-one basis at any time at the option of the holders thereof.
Upon any liquidation, dissolution or winding up of the affairs of the
Company, whether voluntary or involuntary, any assets remaining after the
satisfaction in full of the prior rights of creditors and the aggregate
liquidation preference of any Preferred Stock then outstanding will be
distributed to the holders of Class A Common Stock and Class B Common Stock,
ratably as a single class in proportion to the number of shares held by them.
In the event of a reorganization, consolidation or merger of the Company,
each holder of a share of Class A Common Stock shall be entitled to receive
the same kind and amount of property receivable by a holder of a share of
Class B Common Stock and each holder of a share of Class B Common Stock shall
be entitled to receive the same kind and amount of property receivable by a
holder of Class A Common Stock.
TRANSFER AGENT AND REGISTRAR OF CLASS A COMMON STOCK
The transfer agent and registrar for the Class A Common Stock is Harris
Trust and Savings Bank.
PREFERRED STOCK
The authorized but unissued Preferred Stock may be issued by the Board of
Directors of the Company from time to time in one or more series with such
preferences, terms and rights as the Board of Directors may determine without
further action by the stockholders of the Company. Accordingly, the Board of
Directors has the power to fix the dividend rate and to establish the
provisions, if any, relating to dividends, voting rights, redemption rates,
sinking funds, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future. Currently, the Company has 30,000 shares
of Preferred Stock authorized for issuance, all of which has been designated
as 9% Cumulative Convertible PIK Preferred Stock (the "9% Preferred Stock").
In connection with the Offering, the Company issued 10,000 shares of its 9%
Preferred Stock. The 9% Preferred Stock has a liquidation preference and
stated value of $1,000 per share. Dividends will accrue semiannually at a rate
of 9% per annum and be fully cumulative. Dividends are payable in additional
shares of 9% Preferred Stock. In the event of any liquidation, dissolution or
winding up of the Company, holders of the
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9% Preferred Stock will be entitled to receive their full liquidation
preference per share, together with accrued and unpaid dividends, prior to the
distribution of any assets of the Company to holders of Common Stock.
Shares of 9% Preferred Stock are not redeemable at the option of the
Company, but are subject to mandatory redemption in 2006 at the stated value,
together with all accrued and unpaid dividends to the redemption date.
The shares of 9% Preferred Stock are convertible into shares of Class A
Common Stock, at any time, in whole or from time to time in part, at the
option of the holders thereof.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Company's
management. The issuance of shares of the Preferred Stock pursuant to the
Board of Directors' authority described above may adversely affect the rights
of the holders of Common Stock. For example, Preferred Stock issued by the
Company may rank prior to the Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
LIMITATION OF LIABILITY OF DIRECTORS
The Certificate of Incorporation provides that a director of the Company
will not be personally liable for monetary damages to the Company or its
stockholders for breach of fiduciary duty as a director, except for liability,
(i) for any breach of the director's duty of loyalty to such corporation or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemption as
provided in Section 194 of the Delaware General Corporation Law (the "DGCL")
or (iv) for any transaction from which the director derived an improper
personal benefit.
This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of
care by a director. As a result of the inclusion of such a provision,
stockholders may be unable to recover monetary damages against directors for
actions taken by them that constitute negligence or gross negligence or that
are otherwise in violation of their fiduciary duty of care, although it may be
possible to obtain injunctive or other equitable relief with respect to such
actions. If equitable remedies are found not to be available to stockholders
in any particular situation, stockholders may not have an effective remedy
against a director in connection with such conduct.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws provide that directors and officers of the Company shall be
indemnified against liabilities arising from their service as directors and
officers. Additionally, the Company has entered into indemnification
agreements with each of its executive officers and directors to reimburse them
for certain liabilities incurred in connection with the performance of their
fiduciary duties. Section 145 of the DGCL ("Section 145") empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that he is or was a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
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Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of
the capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the
corporation unless, and only to the extent that, the Court of Chancery or the
court in which such action was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
Section 145 further provides that to the extent that a director or officer
of a corporation has been successful in the defense of any action, suit or
proceeding referred to above or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 145 shall not be deemed exclusive of
any other rights to which the indemnified party may be entitled; and that the
corporation is empowered to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him in any such capacity, or arising out of his status as such, whether or not
the corporation would have the power to indemnify him against such liabilities
under Section 145.
There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of
the Company which could give rise to an indemnification obligation on the part
of the Company. In addition, except as described herein, the Board of
Directors is not aware of any threatened litigation or proceeding which may
result in a claim for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes 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 and does not deal with special
situations, such as those of foreign persons, dealers in securities, financial
institutions, life insurance companies, holders whose "functional currency" is
not the U.S. dollar, or special rules with respect to integrated transactions
of which the ownership of common stock is a part (such as certain hedging
transactions), or certain "straddle" transactions. Furthermore, the discussion
below is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed,
revoked or modified so as to result in federal income tax consequences
different from those discussed below. HOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSIDERATIONS THAT MAY BE SPECIFIC
TO THEM OF THE EXCHANGE OF OLD NOTES FOR NEW NOTES AND THE OWNERSHIP OF THE
NEW NOTES, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER
TAXING JURISDICTION.
EXCHANGE OF SENIOR NOTES
There should be no federal income tax consequences to holders exchanging Old
Notes for New Notes pursuant to the Exchange Offer since the Exchange Offer
will be by operation of the original terms of the Old Notes, pursuant to a
unilateral act by the Company and will not result in any material alteration
in the terms of the Old Notes. Each exchanging holder will have the same
adjusted tax basis and holding period in the New Notes as it had in the Old
Notes immediately before the exchange.
TAXATION OF THE SENIOR NOTES
Original Issue Discount. Because the Old Notes were issued with original
issue discount ("OID"), the New Notes will also bear OID that holders
generally will be required to include in income as it accrues on a yield-to-
maturity basis over the term of the New Notes in advance of cash payments
attributable to such income (regardless of whether the holder is a cash or
accrual basis taxpayer). The amount of OID with respect to a New Note will be
the excess of the stated redemption price at maturity of such New Note over
its issue price. The stated redemption price at maturity will include all
payments required to be made on the New Notes whether denominated as principal
or interest (other than payments subject to remote or incidental
contingencies). The Company intends to treat the payment of Special Interest
and the issuance of Contingent Warrants as subject to such contingencies,
which treatment is binding on holders unless a holder explicitly discloses on
its tax return for the taxable year that includes the acquisition date of Old
Notes that its treatment is different. The Company's treatment is not,
however, binding on the Internal Revenue Service (the "IRS").
The issue price of the New Notes is equal to the issue price of the Old
Notes. The issue price of the Old Notes, which is the same as the issue price
of the New Notes, was determined by allocating the issue price of the Units
between the Old Notes and the Warrants based on their relative fair market
values. For this purpose, the issue price of a Unit was the initial price at
which a substantial portion of the Units were sold (not including sales to
bond houses, brokers or similar persons or organizations acting in the
capacity of underwriters or wholesalers). With respect to the approximately
$31.9 million in aggregate proceeds received from the offering of the Units,
the Company allocated approximately $25.9 million to the Old Notes and
approximately $6.0 million to the Initial Warrants. This allocation reflected
the Company's judgment as to the relative values of those instruments at the
time of issuance. The allocation is binding on a holder unless such holder
explicitly discloses on its tax return for the taxable year that includes the
acquisition date of the Unit that its allocation is different from that of the
Company. The allocation is not, however, binding on the IRS.
109
<PAGE>
A holder of a debt instrument that bears OID is required to include in gross
income an amount equal to the sum of the daily portions of OID for each day
during the taxable year in which the debt instrument is held. The daily
portions of OID are determined by allocating to each day in an accrual period
the pro rata portion of the OID that is allocable to the accrual period. The
amount of OID that is allocable to an accrual period with respect to the New
Notes is generally equal to the product of the adjusted issue price of the New
Notes at the beginning of the accrual period (the issue price of the New Notes
determined as described above, generally increased by all prior accruals of
OID with respect to the Old Notes and the New Notes) and the New Notes' yield-
to-maturity (the discount rate, which, when applied to all payments under the
Old Notes and the New Notes, results in a present value equal to the issue
price of the New Notes). In the case of the final accrual period, the
allocable OID generally is the difference between the amount payable at
maturity and the adjusted issue price at the beginning of the accrual period.
The Company will furnish annually to the IRS and to holders (other than with
respect to certain exempt holders, including, in particular, corporations)
information with respect to the OID accruing while the Senior Notes were held
by the holders.
Premium. If a holder purchased an Old Note for an amount that is greater
than such Note's stated redemption price at maturity, such holder will be
considered to have purchased such Note with "amortizable bond premium" equal
in amount to such excess, and generally will not be required to include OID in
income. A holder may elect to amortize such premium, using a constant yield
method, over the remaining term of such Note with reference to either the
amount payable on maturity or, if it results in a smaller premium attributable
to the period through the earlier call date, with reference to the amount
payable on the earlier call date. An election to amortize bond premium applies
to all taxable debt obligations then owned and thereafter acquired by the
holder and may be revoked only with the consent of the IRS.
If a holder of a New Note (including an original purchaser of an Old Note)
purchased the Old Note exchanged therefor for an amount greater than the Old
Note's adjusted issue price but less than such Note's stated redemption price
at maturity, then the holder will be required to include annual accruals of
OID in gross income in accordance with the rules described above; however, the
amount of OID includable in income will be reduced to reflect such acquisition
premium. The includable OID (as otherwise determined) will be reduced by an
amount equal to the OID multiplied by a fraction, the numerator of which is
such excess and the denominator of which is the OID for the period from the
date of acquisition until the maturity date.
Convertible Note Contingent Warrants. In the event that the Company does not
effect a Qualified Public Offering within 18 months following the date of the
original issuance of the Old Notes, the Senior Note Indenture will require the
Company to issue Senior Note Contingent Warrants to the holders of the Senior
Notes. The issuance of the Contingent Warrants should not result in a deemed
taxable exchange of the Senior Notes for federal income tax purposes. The
Company intends to treat the issuance of Contingent Warrants, if any, as
interest for federal income tax purposes in an amount equal to their fair
market value on the date of issuance.
Disposition of New Notes. A holder will generally recognize gain or loss
upon the sale, exchange, retirement or other disposition of New Notes equal to
the difference between the amount realized on the disposition and the holder's
adjusted tax basis in the New Notes. A holder's adjusted tax basis in a New
Note will generally be the cost of the Old Note, increased by any OID
previously included in income by such holder and decreased by the amount of
any deductions for amortizable bond premium. Such gain or loss generally would
be capital gain or loss and would be long-term if the holding period for the
New Notes (which includes the holding period of the Old Notes) is more than
one year.
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
110
<PAGE>
certain circumstances, to provide a certified statement, signed under penalty
of perjury, that the TIN provided is his or her correct number and that he or
she is not subject to backup withholding. Any amount withheld from a payment
to a holder under the backup withholding rules is allowable as a credit
against such holder's federal income tax liability, provided that the required
information is furnished to the IRS. Certain holders (including, among others,
corporations and foreign individuals who comply with certain certification
requirements) are not subject to backup withholding. Holders should consult
their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption.
CERTAIN POTENTIAL FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND TO
CORPORATE HOLDERS.
The Senior Notes will constitute applicable high yield discount obligations
("AHYDOs") if their yield-to-maturity is greater than the sum of the relevant
applicable Federal rate (the "AFR") plus five percentage points and the Senior
Notes were issued with significant OID. In such event, the Company will not be
entitled to deduct OID that accrues with respect to such Notes until amounts
attributable to such OID are paid. In addition, if the Senior Notes are AHYDOs
and the yield-to-maturity of the Senior Notes exceeds the sum of the relevant
AFR plus six percentage points (the "Excess Yield"), the Company's deduction
for the "disqualified portion" of the OID accruing on the Senior Notes will be
disallowed. In general, the "disqualified portion" of the OID for any accrual
period will be equal to the product of (i) the Excess Yield divided by the
yield-to-maturity on the Senior Notes, and (ii) the OID for the accrual
period. Subject to otherwise applicable limitations, holders that are U.S.
corporations will be entitled to a dividends-received deduction (generally at
a current rate of 70%) with respect to any disqualified portion of the accrued
OID to the extent that the Company has sufficient current or accumulated
earnings and profits. If the disqualified portion exceeds the Company's
current and accumulated earnings and profits, the excess will continue to be
taxed as ordinary OID income in accordance with the rules described above in
"Original Issue Discount."
It is also possible that some or all of the Notes may constitute "corporate
acquisition indebtedness" if, among other things, the proceeds of the Notes
are used to pay for the purchase of stock or at least two-thirds of the
operating assets of another corporation. To the extent the Notes constitute
corporate acquisition indebtedness, under Section 279 of the Code the maximum
amount of interest or original issue discount the Company can deduct with
respect thereto in any taxable year is $5 million, reduced by any interest
incurred on indebtedness to acquire stock or operating assets but which does
not qualify as corporate acquisition indebtedness.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, 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 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. In addition, until March , 1997 (90 days from the date
of this Prospectus), all dealers effecting transactions in the New Notes may
be required to deliver a prospectus.
111
<PAGE>
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver, and by delivering, a prospectus as required, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days from the Expiration Date, the Company will send a
reasonable number of additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company will pay all the expenses
incident to the Exchange Offer (which shall not include the expenses of any
Holder in connection with resales of the New Notes). The Company has agreed to
indemnify the Initial Purchasers and any broker-dealers participating in the
Exchange Offer against certain liabilities, including liabilities under the
Securities Act.
This Prospectus has been prepared for use by the Initial Purchasers in
connection with offers and sales of the Notes, the Warrants and the Class A
Common Stock underlying the Warrants and the Convertible Notes, in market-
making transactions at negotiated prices related to prevailing market prices
at the time of sale. The Initial Purchasers may act as principal or agent in
such transactions. The Initial Purchasers have advised the Company that they
currently intend to make a market in the Notes, the Warrants and the Class A
Common Stock but they are not obligated to do so and may discontinue any such
market-making at any time without notice. Accordingly, no assurance can be
given that an active trading market will develop for or as to the liquidity of
the Notes, the Warrants or the Class A Common Stock.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Skadden, Arps, Slate, Meagher & Flom (Illinois).
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1994 and for the fiscal years then ended included in this Prospectus and
the related financial statement schedules included elsewhere in this
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and elsewhere in this
Registration Statement, and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
112
<PAGE>
GLOSSARY
ACCESS CHARGES--The fees paid by IXCs to LECs for originating and
terminating long distance calls on their local networks.
CAP (Competitive Access Provider)--A company that provides its subscribers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs) and metropolitan
area network providers (MANs) and were formerly referred to as alternative
access vendors (AAVs).
CENTRAL OFFICES--The switching centers or central switching facilities of
the LECs.
CENTREX--Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the
carrier's premises and not at the premises of the subscriber. These features
include direct dialing within a given phone system, direct dialing of incoming
calls, and automatic identification of outbound calls. This is a value added
service that carriers can provide to a wide range of subscribers who do not
have the size or the funds to support their own on-site PBX.
CHURN--The effect of a subscriber electing an alternative telecommunications
provider after having been provided with the telecommunications services of
the Company.
CO-CARRIER STATUS--A relationship between competitive local exchange
carriers ("CLECs") that affords the same access to and rights on each other's
networks, and that provides access and services on an equal basis.
COLLOCATION--The ability of a CLEC such as the Company to connect its
network to the LEC's central offices. Physical collocation occurs when a CLEC
places its network connection equipment inside the LEC's central offices.
Virtual collocation is an alternative to physical collocation pursuant to
which the LEC permits a CLEC to connect its network to the LEC's central
offices at competitive prices, even though the CLEC's network connection
equipment is not physically located inside the central offices.
DEDICATED LINES--Telecommunications lines dedicated or reserved for use
exclusively by particular subscribers along predetermined routes (in contrast
to telecommunications lines within the LEC's public switched network).
DEDICATED SERVICES--Special access, switched transport and private line
services generally offered by CLECs, including the Company.
DIVESTITURE--In 1982, the Department of Justice and AT&T entered into the
Modified Final Judgment (the "MFJ") which resulted in the break-up of AT&T's
monopoly over local and long distance services. This judgment established
seven separate regionally based local switched bell operating companies and
essentially laid the ground work for intense competition in the newly defined
long distance segment of the telecommunications market.
FCC--Federal Communications Commission.
FIBER OPTICS--Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. A strand of
fiber optic cable is as thick as a human hair yet is said to have more
bandwidth capacity than copper cable the size of a telephone pole.
FRAME RELAY--Frame Relay is a high-speed data packet switching service used
to transmit data between computers. Frame Relay supports data units of
variable lengths at access speeds ranging from 56kbs to 1.5 mbs. This service
is ideal for connecting LANS, but is not appropriate for voice and video
applications due to the variable delays that can occur. Frame Relay was
designed to operate at higher speeds on modern fiber optic networks.
113
<PAGE>
INTERCONNECTION DECISIONS--Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC central offices to any CLEC, long distance carrier or
end user seeking such interconnection for the provision of interstate special
access and switched access transport services.
INTEREXCHANGE CARRIERS OR IXCS--See Long Distance Carrier.
LANS (Local Area Networks)--The interconnection of computers for the purpose
of sharing files, programs and various devices such as work stations, printers
and high-speed modems. LANs may include dedicated computers or file servers
that provide a centralized source of shared files and programs.
LATAS (Local Access and Transport Areas)--The geographically defined areas
in which LECs are authorized by the MFJ to provide local switched services.
LECS (Local Exchange Carriers)--Companies providing local telephone
services.
LOCAL EXCHANGE AREAS--A geographic area determined by the appropriate state
regulatory authority in which local calls generally are transmitted without
toll charges to the calling or called party.
LONG DISTANCE CARRIERS OR INTEREXCHANGE CARRIERS--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis.
A long distance carrier may offer services over its own or another carrier's
facilities. Long distance carriers include, among others, AT&T, MCI, Sprint
and WorldCom, as well as resellers of long distance capacity.
POPS (Point of Presence)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PRIVATE LINE--A private, dedicated telecommunications line connecting
different locations (excluding long distance carrier POPs).
PROVISIONING--The process of initiating a carrier's service to a subscriber.
RBOCS (Regional Bell Operating Companies)--The seven local telephone compa-
nies established by the MFJ. These RBOCs are prohibited from providing inter-
LATA services and from manufacturing telecommunications equipment.
RESELLER--A company which does not own its own transmission facilities and
contracts with facilities-based carriers for the transmission of its
subscribers' long distance calls. In essence, a reseller buys excess capacity
(in minutes) from large facilities-based carriers at volume discounts and
sells services (minutes) to subscribers at reduced cost.
SPECIAL ACCESS SERVICES--The lease of private, dedicated telecommunications
lines or "circuits" along the network of a LEC or a CLEC (such as the
Company), which lines or circuits run to or from the long distance carrier
POPs. Examples of special access services are telecommunications lines running
between POPs of a single long distance carrier, from one long distance carrier
POP to the POP of another long distance carrier or from a subscriber to its
long distance carrier POP. Special access services do not require the use of
switches.
SWITCH--A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits
or selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
SWITCHED ACCESS SERVICES--The origination or termination of long distance
traffic between a customer premise and an IXC POP via shared local trunks
using a local switch.
SWITCHED TRANSPORT SERVICES--Transportation of switched traffic along
dedicated lines between the LEC central offices and interexchange POPs.
SWITCHED TRAFFIC--Telecommunications traffic along a switched network.
TELECOMMUNICATIONS ACT--The Telecommunications Act of 1996.
114
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED USN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Consolidated Financial Statements for the periods ended December
31, 1994 and 1995:
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Redeemable Preferred Stock and Common
Stockholders' Equity.................................................. F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
Unaudited Condensed Consolidated Financial Statements for the nine months
ended
September 30, 1995 and 1996:
Condensed Consolidated Balance Sheets.................................. F-15
Condensed Consolidated Statements of Operations........................ F-16
Condensed Consolidated Statements of Cash Flows........................ F-17
Notes to Condensed Consolidated Financial Statements................... F-18
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
United USN, Inc.
Chicago, Illinois
We have audited the accompanying consolidated financial statements of United
USN, Inc. and subsidiaries (the "Company") as of December 31, 1995 and 1994,
and for the year ended December 31, 1995 and the period from April 20, 1994
(inception) to December 31, 1994, listed in the table of contents. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 1995 and 1994, and the results of their operations
and their cash flows for the year ended December 31, 1995 and the period from
April 20, 1994 (inception) to December 31, 1994, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 15, 1996
F-2
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------ ------------ -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $ 13,705,025 $ 5,979,222
Accounts receivable (net of allowance for doubtful
accounts:
1995--$192,652; 1994--$81,330)..................... 1,184,453 862,208
Prepaid expenses.................................... 171,111 125,543
Note receivable..................................... 76,204
Interest receivable................................. 61,015
Net assets held for sale............................ 1,453,699
------------ -----------
Total current assets.............................. 16,575,303 7,043,177
Property and Equipment--net........................... 1,214,647 4,749,728
Other Assets.......................................... 2,681,255 954,368
------------ -----------
Total assets...................................... $ 20,471,205 $12,747,273
============ ===========
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON
STOCKHOLDERS' EQUITY
--------------------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 2,734,122 $ 1,155,365
Accrued expenses and other liabilities.............. 1,106,010 782,802
Current maturities on notes payable................. 409,348 63,670
Capital lease obligations--current.................. 75,192 93,958
------------ -----------
Total current liabilities......................... 4,324,672 2,095,795
Capital Lease Obligations--Noncurrent................. 81,391 3,026,430
Notes Payable......................................... 436,825 149,708
------------ -----------
Total liabilities................................. 4,842,888 5,271,933
Redeemable Preferred Stock:
Series A 10% Senior Cumulative preferred stock: par
value $1;
1995: 20,000 shares authorized; 16,200 shares
outstanding;
1994: 50,000 shares authorized; 16,200 shares
outstanding; liquidation value $1,000 per share.... 16,200 16,200
Series A-2 10% Senior Cumulative preferred stock:
par value $1; 1995:
30,000 shares authorized; 26,235 shares
outstanding; liquidation value $1,000 per share.... 26,235
Accumulated unpaid dividends........................ 3,810,000 707,000
Additional paid-in capital.......................... 40,543,605 14,582,350
------------ -----------
Total redeemable preferred stock.................. 44,396,040 15,305,550
Common Stockholders' Equity:
Common stock: par value $.01:
1995--500,000 shares authorized; 313,739 shares
outstanding;
1994--200,000 shares authorized; 177,840 shares
outstanding........................................ 3,137 1,778
Additional paid-in capital.......................... 282,955 21,801
Accumulated deficit................................. (29,053,815) (7,853,789)
------------ -----------
Total common stockholders' equity................. (28,767,723) (7,830,210)
------------ -----------
Total Liabilities, Redeemable Preferred Stock and
Common Stockholders' Equity...................... $ 20,471,205 $12,747,273
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Net service revenue................................. $ 7,883,890 $ 1,737,461
Cost of services.................................... 9,075,749 1,454,882
------------ -----------
Gross margin.................................... (1,191,859) 282,579
------------ -----------
Expenses:
Sales and marketing............................... 5,867,200 2,869,463
General and administrative........................ 10,131,390 4,685,894
Amortization of intangibles....................... 969,271
------------ -----------
Operating loss...................................... (18,159,720) (7,272,778)
------------ -----------
Other income (Expense):
Interest income................................... 586,946 152,099
Interest expense.................................. (733,566) (26,110)
Other income...................................... 59,314
------------ -----------
Other income--net............................... (87,306) 125,989
------------ -----------
Net loss before minority interest................... (18,247,026) (7,146,789)
Minority interest share in loss of USNCN............ 150,000
------------ -----------
Net loss............................................ $(18,097,026) $(7,146,789)
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK COMMON STOCKHOLDERS' EQUITY
------------------------------------------- ----------------------------------
SERIES
SERIES A A-2 ACCUMULATED ADDITIONAL ADDITIONAL
PREFERRED PREFERRED UNPAID PAID-IN- PAID-IN ACCUMULATED
STOCK STOCK DIVIDENDS CAPITAL PAR VALUE CAPITAL DEFICIT
--------- --------- ----------- ----------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 20, 1994.
Issuance of 16,200
shares of Series A
10% Senior Cumulative
preferred stock...... $16,200 $15,212,824
Issuance of 177,840
shares of common
stock................ $1,778 $ 236,661
Costs incurred related
to issuance of stock. (630,474) (214,860)
Accumulated unpaid
preferred dividends.. $ 707,000 $ (707,000)
Net loss.............. (7,146,789)
------- ---------- ----------- ------ --------- ------------
Balance, December 31,
1994................... 16,200 707,000 14,582,350 1,778 21,801 (7,853,789)
Issuance of 26,235
shares of Series A-2
10% Senior Cumulative
preferred stock...... $26,235 26,208,765
Issuance of 135,899
shares of common
stock................ 1,359 263,644
Costs incurred related
to issuance of stock. (247,510) (2,490)
Accumulated unpaid
preferred dividends.. 3,103,000 (3,103,000)
Net loss.............. (18,097,026)
------- ------- ---------- ----------- ------ --------- ------------
Balance, December 31,
1995................... $16,200 $26,235 $3,810,000 $40,543,605 $3,137 $ 282,955 $(29,053,815)
======= ======= ========== =========== ====== ========= ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(18,097,026) $(7,146,789)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization................... 1,288,991 159,685
Amortization of organization costs and
intangibles.................................... 969,271 26,376
Allowance for doubtful accounts................. 111,322 81,330
Loss on disposal of assets...................... (16,274)
Changes in:
Accounts receivable........................... (433,567) (943,538)
Prepaid expenses.............................. 13,082 (37,624)
Interest receivable........................... (61,015)
Account payable............................... 1,578,757 953,465
Accrued expenses and other liabilities........ 338,412 766,532
------------ -----------
Net cash flows from operating activities.... (14,308,047) (6,140,563)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment................ (1,739,542) (1,728,327)
Purchase of subsidiary............................ (892,287)
Organization costs................................ (161,702)
Cash acquired from purchase of subsidiaries....... 331,975
Issuance of noncurrent notes receivable........... (150,000)
Proceeds from note receivable..................... 76,204
------------ -----------
Net cash flows from investing activities.... (2,555,625) (1,708,054)
------------ -----------
Cash flows from financing activities:
Issuance of preferred stock....................... 26,235,000 14,850,000
Issuance of common stock.......................... 265,003 150,000
Costs incurred related to issuance of stock....... (250,000) (845,334)
Deposits.......................................... (20,855) (555,270)
Proceeds from borrowings.......................... 180,000
Payments on assumed Quest indebtedness............ (1,459,458)
Proceeds from notes payable....................... 46,645 73,504
Repayment of notes payable........................ (71,588) (8,330)
Repayment of capital lease obligation............. (155,272) (16,731)
------------ -----------
Net cash flows from financing activities.... 24,589,475 13,827,839
------------ -----------
Net increase in cash................................ 7,725,803 5,979,222
Cash and cash equivalents--Beginning of period...... 5,979,222
------------ -----------
Cash and cash equivalents--End of period............ $ 13,705,025 $ 5,979,222
============ ===========
Supplemental cash flow information--See Note 3
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
1. ORGANIZATION AND ACQUISITIONS
United USN, Inc. ("United") was incorporated under the laws of the State of
Delaware on April 20, 1994 and was initially funded in 1994 through capital
contributions totaling $15 million in cash, before financing costs. In June
1995, United received additional capital contributions of approximately $26
million. United holds controlling investments in two companies: US Network
Corporation and United Telemanagement Services, Inc.
On April 20, 1994, United purchased US Network Corporation ("US Network")
and its 100% subsidiary, FoneNet/Ohio, Inc. ("FoneNet"), in exchange for 1,350
shares of United's preferred stock and 31,500 shares of its common stock. This
transaction was accounted for as a purchase and was valued at US Network's net
book value of approximately $467,000 as acquired assets consisted primarily of
cash and certain organization costs, net of current liabilities. US Network
provides a broad range of telecommunication services in the central business
districts of major cities in Ohio. The 1994 consolidated statement of income
includes the results of operations of US Network since April 20, 1994.
In July 1994, United purchased a 50.1% ownership interest in USN
Communications Northeast, Inc. ("USNCN") for approximately $2 million. Based
in New York City, USNCN provides a broad range of telecommunications services
to business customers primarily in Manhattan. United has had substantive
control of USNCN since its inception. Therefore, the consolidated financial
statements include the results of operations for USNCN since its commencement
of operations in 1994 and no goodwill has been recorded. In December 1995,
United's ownership in USNCN increased to 83.9% as a result of the conversion
of demand notes and other indebtedness totaling $9.4 million, of which $1.5
million was outstanding at December 31, 1994, into Company common and
preferred stock.
In June 1995, USNCN (through a newly formed subsidiary, Quest United, Inc.)
purchased specific assets and assumed certain liabilities of an independent
telephone services company Quest America Management L.P. ("Quest"), for cash
of $950,000 and notes payable to investors of Quest of $842,985 (the
"Acquisition"). The Acquisition has been accounted for as a purchase, and such
assets and liabilities were recorded at their then fair values (which
approximated their historical cost bases) as of the Acquisition date. The
excess of the cost of the Acquisition over the net assets acquired has been
ascribed to various intangible assets (principally customer lists, employment
contracts and work force in place). Although, the consummation of the
Acquisition was subject to regulatory approval, USNCN had assumed substantive
control of Quest's operations as of the date of the Acquisition through the
infusion of equity and debt financing to Quest. Accordingly, the consolidated
statement of operations for the year ended December 31, 1995 include Quest's
revenues and expenses from the Acquisition date forward.
2. SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows:
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of United USN, Inc. and its subsidiaries (the
"Company"). Significant intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition--The Company recognizes revenues in the period in which
telephone services are provided. Revenues for Quest are recorded at the net
commissions earned. If Quest's revenues had been recorded
F-7
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
assuming a resale business, where revenues are recorded at the resale value
and gross margins are equal to the net commissions earned, the following would
have been recorded in 1995:
<TABLE>
<CAPTION>
CONSOLIDATED PROFORMA
AS STATED ADJUSTMENTS CONSOLIDATED
------------ ----------- ------------
<S> <C> <C> <C>
Net service revenue................ $ 7,883,890 $3,374,075 $11,257,965
Cost of services................... 9,075,749 3,374,075 12,449,824
----------- ---------- -----------
Gross margin................... $(1,191,859) $ -- $(1,191,859)
=========== ========== ===========
</TABLE>
Recourse Provisions--USNCN utilizes a third-party billing and collection
agency (the "Agency") to process and factor its accounts receivable, yet
retains the risk of loss on amounts that are deemed to be uncollectible in the
normal course of business. The Agency charges USNCN an allowance for estimated
bad debts on factored accounts receivable, subject to the recourse provisions,
using prior collection experience and industry statistics. Adjustments are
made between actual loss experience and estimated bad debt expenses on a
periodic basis by the Agency. At December 31, 1995, factored receivables of
approximately $828,000 are subject to such adjustment.
Cash and Cash Equivalents--Cash and cash equivalents are defined as cash in
banks, time deposits and highly liquid short-term investments with initial
maturities of three months or less.
Property and Equipment--Purchases of property and equipment are carried at
cost. Depreciation is provided on the straight-line basis. Furniture and
fixtures are depreciated over five years. Leasehold improvements and assets
leased under capital leases are amortized over the shorter of the related
lease term or the estimated useful life of the asset.
Intangible Assets--Costs incurred in the formation of the Company are being
amortized over five years. The intangible assets associated with the
acquisition of Quest are being amortized on a straight-line basis over two
years.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Capital lease obligations incurred (Notes 9 and
17).............................................. $3,398,105 $3,137,119
========== ==========
Fair value of US Network's noncash assets
acquired......................................... $ 623,659
Common and preferred stock issued in connection
with acquisition (Note 1)........................ 467,463
----------
Liabilities assumed........................... $ 156,196
==========
Fair value of Quest America Management L.P.
noncash assets acquired in 1995.................. $ 414,726
Consideration incurred in connection with the
Acquisition (including $950,000 in cash advances)
(Note 3)......................................... 3,104,588
----------
Liabilities assumed........................... $2,689,862
==========
Note payable to USNCN minority shareholder (Note
4)............................................... $ 149,708
Proceeds received upon issuance of note payable... (73,504)
----------
Note receivable from USNCN minority
shareholder (Note 4)......................... $ 76,204
==========
Note payable incurred to finance insurance
policies (Note 8)............................ $ 58,650 $ 72,000
========== ==========
</TABLE>
F-8
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash paid for interest in 1995 was approximately $613,000. No cash was paid
in 1994 for interest and in 1995 and 1994 for income taxes.
4. RELATED PARTY TRANSACTIONS
Note receivable of $76,204 at December 31, 1994 represents amounts due to
United from a minority stockholder of USNCN, at an interest rate of 9%, which
was paid during the first quarter of 1995.
Note payable of $149,708 at December 31, 1994 represents amounts due from a
minority stockholder of USNCN at an interest rate of 10%, which was exchanged
for an increased equity interest in USNCN in December 1995.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Furniture and equipment......................... $1,364,479 $ 629,865
Leasehold improvements.......................... 117,902 1,296,148
Switching equipment............................. 2,984,045
---------- ----------
1,482,381 4,910,058
Less accumulated depreciation................... (267,734) (160,330)
---------- ----------
Total....................................... $1,214,647 $4,749,728
========== ==========
</TABLE>
6. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Intangibles (net of accumulated amortization
of $923,850)................................. $2,001,985 $ --
Deposits...................................... 426,902 605,270
Organization costs (net of accumulated
amortization:
1995--$73,432; 1994--$28,011)................ 153,677 199,098
Notes receivable.............................. 150,000
Other......................................... 98,691
---------- --------
Total..................................... $2,681,255 $954,368
========== ========
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Payroll and benefits............................ $ 548,775 $427,312
Professional services........................... 163,540 244,636
Excise taxes.................................... 117,812 57,462
Interest payable................................ 21,764
Rent............................................ 4,380 29,819
Other........................................... 249,739 23,573
---------- --------
Total....................................... $1,106,010 $782,802
========== ========
</TABLE>
F-9
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. NOTES PAYABLE
The Company issued notes payable of $58,650 and $72,000, in 1995 and 1994,
respectively, to finance insurance policies. The notes are payable in nine
monthly installments through August 1996 and 1995, respectively. Interest is
payable at 8.15% and 6.45%, respectively. The outstanding principal balance at
December 31, 1995 and 1994 was $52,308 and $63,670, respectively.
In 1995, the Company issued a note payable of $46,353 to finance
improvements to an office space. The note requires monthly principal payments
of $831 through July 2001. Interest is payable at 8%. At December 31, 1995,
the outstanding principal balance was $44,777.
In connection with the acquisition of Quest, USNCN assumed notes payable to
investors of Quest. The notes bear interest at 8% and the balances outstanding
at December 31, 1995 total $749,088. The notes require quarterly principal and
interest payments in 1996 and 1997 and in the first quarter of 1998.
Maturities on long-term debt are as follows:
<TABLE>
<S> <C>
1996............................ $409,348
1997............................ 386,474
1998............................ 27,152
1999............................ 8,418
2000............................ 9,117
Thereafter...................... 5,664
--------
Total....................... $846,173
========
</TABLE>
9. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under capital leases, at December 31,
1995 and 1994, as follows:
<TABLE>
<CAPTION>
1995 1994
-------- ----------
<S> <C> <C>
Switching equipment................................. $ -- $2,984,045
Computer equipment.................................. 221,855 153,074
-------- ----------
221,855 3,137,119
Less accumulated amortization....................... (73,003) (68,635)
-------- ----------
Total........................................... $148,852 $3,068,484
======== ==========
</TABLE>
Future minimum lease payments at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................ $ 91,445
1997............................ 64,916
1998............................ 21,151
1999............................ 3,339
--------
Total minimum lease
payments................... 180,851
Less imputed interest........... 24,268
--------
Present value of minimum
lease payments............. $156,583
========
</TABLE>
F-10
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Future minimum lease commitments under noncancelable operating leases
as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.......................... $1,014,766
1997.......................... 1,080,878
1998.......................... 810,608
1999.......................... 424,991
2000.......................... 329,180
Thereafter.................... 193,599
----------
Total..................... $3,854,022
==========
</TABLE>
Rent expense for the year ended December 31, 1995 and the period from April
20, 1994 to December 31, 1994 was approximately $867,000 and $214,000,
respectively.
11. COMMITMENTS
USNCN has executed an exclusive agreement with an independent
telecommunications company ("TelCo One"), whereby TelCo One will allow USNCN
to establish a local private network on its infrastructure in which to provide
service to customers. All of USNCN's local service customers are provided
access to this network and, accordingly, a substantial portion of USNCN's
revenue is earned through the use of these access rights. Under this
agreement, TelCo One provides network maintenance, access to telephone
switches, and billing and collection services. The initial term of the
agreement expires in 2004. USNCN is entitled to renew such agreement for up to
ten years following its initial expiration.
On October 31, 1995, US Network entered into an agreement with an
independent telecommunications company ("TelCo Two") to allow US Network to
resell TelCo Two's local telephone service. The agreement is for a term of ten
years and contains a minimum purchase commitment of 150,000 business access
lines, which is measured by the number of lines in place on the last day of
each 12-month period. The agreement allows for an 18-month period before any
commitment levels are required to be met. At the end of the 18-month period,
US Network must pay, on an annual basis, for any cumulative shortfall of the
commitment amount (net of any cumulative excess over the commitment amount)
which exceeds 300,000 lines ("Shortfall Amount"). The amount to be paid is
calculated as the Shortfall Amount multiplied by $168. Even if no lines were
sold by US Network, the earliest required payment for the shortfall amount is
in 1999. So long as US Network maintains a cumulative net shortfall lower than
300,000 lines, no payments will be due to TelCo Two other than for normal
usage. At the end of the term, US Network will be required to pay for any
remaining cumulative net shortfall at an annual rate of $168 per line. If
there is no cumulative net shortfall at the end of the term, no additional
amount will be required to be paid by US Network. US Network can extend the
term for up to an additional three years to reduce the cumulative net
shortfall to zero before a payment would be required.
12. INCOME TAXES
The Company incurred net losses of $18,097,026 and $7,146,789 in 1995 and
1994, respectively. Accordingly, no provision for current Federal or state
income taxes has been made to the financial statements.
At December 31, 1995 and 1994, the Company had net operating loss carry-
forwards for income tax purposes of approximately $24,129,000 and $6,875,000,
respectively. The expiration periods for utilizing these operating losses
begin in 2009 for Federal tax purposes. Of the net operating loss carry-
forwards remaining at December 31, 1995, $12,286,000 can be applied only
against future taxable income of USNCN.
F-11
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's deferred tax asset components at December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net operating loss carry-forwards.............. $(9,121,000) $(2,555,000)
Accrued liabilities and asset valuation
reserves...................................... (195,000) (106,000)
Amortization of intangibles.................... (309,000)
----------- -----------
Subtotal................................... (9,625,000) (2,661,000)
Valuation allowance............................ 9,625,000 2,661,000
----------- -----------
Total...................................... $ -- $ --
=========== ===========
</TABLE>
As of December 31, 1995 and 1994, the Company had not recognized deferred
income tax assets related to deductible temporary differences and cumulative
net operating losses. The ability of the Company to fully realize deferred tax
assets in future years is contingent upon its success in generating sufficient
levels of taxable income before the statutory expiration periods for utilizing
such net operating losses lapses. After an assessment of all available
evidence, including historical and projected operating trends, the Company was
unable to conclude that realization of such deferred tax assets in the near
future was more likely than not. Accordingly, a valuation allowance was
recorded to offset the full amount of such assets.
13. MINORITY INTEREST IN USNCN
At December 31, 1995 and 1994, no minority interest in USNCN has been
recorded on the balance sheet, as cumulative losses applicable to the minority
interest in USNCN exceed the minority interest in the equity capital of USNCN,
and there is no obligation of the minority interest to make good such losses.
As future earnings materialize, the minority interest will recognize the
benefit of those earnings only to the extent they exceed USNCN's accumulated
losses.
14. CAPITAL STOCK
Redeemable Preferred Stock
In 1995, the Board of Directors approved the designation of 20,000 shares of
the authorized preferred stock as Series A 10% senior cumulative preferred
stock ("Series A") and the remaining 30,000 shares as Series A-2 10% senior
cumulative preferred stock ("Series A-2"). The Company's stockholders of
Series A-2 and Series A are entitled to the following rights and privileges:
Dividends--All preferred stockholders are entitled to cumulative
dividends of 10% per annum on the sum of $1,000 per share plus all
accumulated and unpaid dividends. No dividends have been declared or paid
on the preferred stock. Dividends in arrears on preferred stock were
approximately $2,462,000 for Series A and $1,348,000 for Series A-2 at
December 31, 1995. No cash dividends may be paid on Series A so long as any
Series A-2 shares are still outstanding, other than as provided under the
liquidation and redemption preferences. No cash dividends may be paid on
common stock so long as any preferred stock remains outstanding.
Liquidation--Upon any liquidation of the Company, the holders of Series
A-2 shall be entitled to be paid up to $26.2 million, to redeem the
outstanding shares of Series A-2 before any distribution is made to any
other stockholders. After the full $26.2 million has been paid to Series A-
2 holders, the Series A-2 and Series A holders shall be entitled to be
paid, before any distribution is made to the common stockholders, $1,000
per share plus all accumulated and unpaid dividends.
F-12
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Redemption--Redemption rights can be exercised at $1,000 per share plus
all accrued and unpaid dividends for the holders of 33% or more of Series
A-2 and Series A stock outstanding after five years have elapsed from the
date of issuance of those shares. Special redemption rights are also
available to holders in the event of a change in ownership of the Company,
as defined in the Certificate of Designation. The Company cannot redeem any
shares of Series A so long as the Company has not redeemed any shares of
Series A-2 which the holder has requested to be redeemed. The Company
cannot redeem, purchase or acquire common stock so long as any preferred
stock remains outstanding, other than stock issued upon the exercise of
stock options.
In the event the Company fails to comply with the covenants in the agreement
with the preferred stockholders, the Company is required to increase the
dividend rate by 5%, with an additional increase of 2.5% for each succeeding
90-day period in which the Company remains in noncompliance. Additionally, the
preferred stockholders may demand immediate redemption of all or any portion
of their preferred stock at the aforementioned liquidation values. At December
31, 1995, the Company was in compliance with all covenants.
Common Stock
In October 1995, the Board of Directors approved the repricing of the common
stock issued in 1995 whereby the number of shares issued in 1995 would
increase from 135,899 to 246,056 and the purchase price would decrease from
$1.95 per share to $1.077. The result of this transaction will not change the
amount of total stockholders' equity at December 31, 1995. This transaction is
not reflected in the current financial statements as it had not been finalized
as of December 31, 1995.
15. STOCK OPTION PLAN
The Company has granted options to acquire shares of common stock to certain
officers and other employees. These options become exercisable at a rate of
25% every six months over a period of two years. The options are exercisable
at $1.10 per share, which was no less than the fair market value at the date
of grant, and expire in 2004. The Company has reserved 54,551 shares of common
stock for issuance upon exercise of stock options.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Outstanding at January 1................................... 21,300 --
Granted.................................................... 21,300
Cancelled.................................................. (2,250) --
------ ------
Outstanding at December 31................................. 19,050 21,300
------ ------
Options exercisable at December 31......................... 10,024 --
====== ======
</TABLE>
16. EMPLOYEE BENEFIT PLAN
On January 1, 1995, the Company adopted a qualified 401(k) plan covering all
eligible employees in which the Company contributions are discretionary.
Employees are permitted to make annual contributions through salary deductions
up to 15% of their annual salary. The plan can be amended or terminated at any
time by the Board of Directors. The Company made no contributions to the plan
in 1995.
F-13
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. NET ASSETS HELD FOR SALE
On December 29, 1995, the Company entered into an agreement to sell its
switch-based facilities in Ohio for $9.5 million in cash plus the assumption
of capital and operating leases. The net assets held at December 31, 1995 in
conjunction with this sale are as follows:
<TABLE>
<S> <C>
Switching equipment........................................... $6,233,557
Leasehold improvements........................................ 1,781,260
Outside plant and equipment................................... 423,424
Furniture and equipment....................................... 318,355
----------
8,756,596
Less accumulated depreciation................................. (1,181,587)
----------
Net property and equipment................................ 7,575,009
Deposits...................................................... 100,532
----------
Total assets.............................................. 7,675,541
----------
Less liabilities assumed:
Accrued liabilities......................................... 15,204
Capital lease obligations................................... 6,206,638
----------
Net assets held for sale.................................. $1,453,699
==========
</TABLE>
Additionally, approximately $2.0 million in operating leases will be assumed
by the buyer. The Company will remain contingently liable on capital and
operating leases assumed by the buyer.
The transaction closed on February 29, 1996 and a gain of approximately $8
million was realized. The transaction and the related gain will be recorded in
the 1996 results of the Company. The Company will continue to serve its
customer base as a reseller of telecommunication services.
18. CONTINGENCIES
Loss Contingencies--In 1994, USNCN was named as a defendant in a legal
matter which alleged that USNCN breached an implied contract in the use of a
concept, developed by the plaintiff, in establishing its business and
resulting operations. During 1995, this matter was dismissed in USNCN's favor.
USNCN is contractually required, through its customers, to provide a minimum
level of service volume to an independent carrier. As of December 31, 1995,
USNCN has not complied with prescribed volume requirements but believes that
assertion of a claim by the carrier is unlikely, given contractual
interpretations, past practices, ongoing business relationships, and the
mutual dependency of the parties. Based on an assessment of all such factors,
no amount has been recorded in USNCN's financial statements for settlement of
this exposure as management is unable to reasonably estimate the claim, if
any. However, it is possible that the ultimate resolution of this matter may
have an adverse effect on its financial position, results of operations and
cash flow in future periods.
Gain Contingency--USNCN has submitted a claim of approximately $1.4 million
with TelCo One requesting that certain revenues, purportedly not billed by
TelCo One to its customers, be paid to USNCN. TelCo One is in the process of
reviewing USNCN's claim and has not formally concluded on the amount or terms
of a settlement. While USNCN believes its claim has merit, it is unable to
predict, at this time, whether they will be successful in fully resolving this
matter favorably.
* * * * *
F-14
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $71,390,481 $19,238,964
Accounts receivable (net of allowance for doubtful
accounts:
1996--$220,549; 1995--$89,500)....................... 2,653,580 1,902,172
Prepaid expenses..................................... 61,677 91,512
Interest receivable.................................. 86,859 67,621
Other receivables.................................... 229,940 --
----------- -----------
Total current assets............................... 74,422,537 21,300,269
Property and equipment--net............................ 1,782,850 9,714,373
Other assets........................................... 11,877,699 4,025,485
----------- -----------
Total assets....................................... $88,083,086 $35,040,127
=========== ===========
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON
STOCKHOLDERS' EQUITY
--------------------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable..................................... $ 4,174,694 $ 4,461,273
Accrued expenses and other liabilities............... 1,064,605 1,232,874
Capital lease obligations--current................... 260,444 1,111,007
Current maturities on notes payable.................. 355,860 1,446,511
----------- -----------
Total current liabilities.......................... 5,855,603 8,251,665
Capital lease obligations--noncurrent.................. 349,843 6,249,793
Notes payable.......................................... 154,871 510,731
14% Senior Discount Notes.............................. 48,500,000 --
Original Issue Discount--Senior Notes.................. (18,296,625) --
9% Convertible Subordinated Discount Notes............. 36,000,000 --
Original Issue Discount--Convertible Notes............. (8,355,600) --
----------- -----------
Total liabilities.................................. 64,208,092 15,012,189
Redeemable Preferred Stock:
Series A 10% Senior Cumulative preferred stock; par
value $1;
1995: 20,000 shares authorized; 16,200 shares
outstanding;
liquidation value $1,000 per share.................. -- 16,200
Series A-2 10% Senior Cumulative preferred stock; par
value $1;
1995: 30,000 shares authorized; 25,344 shares
outstanding;
liquidation value $1,000 per share.................. -- 25,344
Accumulated unpaid dividends......................... -- 2,679,467
9% Cumulative Convertible Pay-In-Kind Preferred
Stock; par value $1;
1996: 30,000 shares authorized; 10,000 shares
outstanding......................................... 10,000 --
Additional paid-in capital........................... 9,842,601 39,405,986
----------- -----------
Total Redeemable Preferred Stock................... 9,852,601 42,126,997
Common Stockholders' Equity:
Common stock: par value $.01;
1996: 2,500,000 shares authorized; 716,525 shares
outstanding;
1995: 500,000 shares authorized; 309,123 shares
outstanding......................................... 7,165 3,091
Additional paid-in capital........................... 54,177,244 271,508
Accumulated deficit.................................. (40,160,939) (22,373,658)
Common stock held in Treasury: 1996--1,000 shares.... (1,077) --
----------- -----------
Total common stockholders' equity.................. 14,022,393 (22,099,059)
----------- -----------
Total liabilities, redeemable preferred stock and
common stockholders' equity....................... $88,083,086 $35,040,127
=========== ===========
</TABLE>
See notes to the unaudited condensed consolidated financial statements
F-15
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net service revenue................................. $ 7,598,705 $ 5,825,785
Cost of services.................................... 6,587,126 6,686,199
----------- ------------
Gross margin.................................... 1,011,579 (860,414)
Expenses:
Sales and marketing............................... 5,837,437 4,243,768
General and administrative........................ 10,919,589 7,366,464
----------- ------------
Operating loss...................................... (15,745,447) (12,470,646)
Other income (expense):
Interest income................................... 472,667 422,901
Interest expense.................................. (45,957) (499,657)
Other income...................................... 8,099,593 --
----------- ------------
Other income--net............................... 8,526,303 (76,756)
----------- ------------
Net income (loss)................................... $(7,219,144) $(12,547,402)
=========== ============
</TABLE>
See notes to the unaudited condensed consolidated financial statements
F-16
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(7,219,144) $(12,547,402)
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization................... 254,049 995,223
Amortization of organization costs and
intangibles.................................... 1,105,748 257,317
Gain on disposal of assets...................... (8,078,901)
Changes in:
Accounts receivable........................... (1,469,127) (1,039,964)
Prepaid expenses.............................. 109,434 34,031
Other receivables............................. (229,940) 58,688
Interest receivable........................... (25,844) (67,621)
Other assets.................................. (18,205) --
Accounts payable.............................. 1,440,563 3,305,908
Accrued expenses and other liabilities........ (19,641) 450,072
----------- ------------
Net cash flows from operating activities.... (14,151,008) (8,553,748)
Cash flows from investing activities:
Purchase of property and equipment................ (232,291) (1,606,399)
Proceeds from sale of assets...................... 9,532,600 --
Purchase of Subsidiary............................ -- (892,287)
Purchase of Minority Interest..................... (1,601,207) --
----------- ------------
Net cash flows from investing activities.... 7,699,102 (2,498,686)
Cash flows from financing activities:
Issuance of common stock.......................... 36,300 256,000
Issuance of preferred stock....................... 10,000,000 25,344,000
Financing costs................................... (147,389) (500,000)
Repurchase of common stock........................ (1,077) --
Proceeds from Senior Notes........................ 30,203,375 --
Proceeds from Convertible Notes................... 27,644,400 --
Debt Acquisition Costs............................ (2,732,664) --
Deposits.......................................... (393,884) (112,154)
Payments on assumed Quest indebtedness............ -- (519,746)
Repayment of notes payable........................ (335,442) (42,099)
Repayment of capital lease obligations............ (136,257) (113,825)
----------- ------------
Net cash flows from financing activities.... 64,137,362 24,312,176
----------- ------------
Net (decrease) increase in cash..................... 57,685,456 13,259,742
Cash and cash equivalents--Beginning of period...... 13,705,025 5,979,222
----------- ------------
Cash and cash equivalents--End of period............ $71,390,481 $ 19,238,964
=========== ============
Supplemental cash flow information:
Capital lease obligations incurred................ $ 589,961 $ 4,004,664
=========== ============
Cash paid for interest............................ $ 68,000 $ 475,000
=========== ============
</TABLE>
See notes to the unaudited condensed consolidated financial statements.
F-17
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of September 30, 1996 and
September 30, 1995 and the related condensed consolidated statements of
operations and condensed consolidated statements of cash flows for the nine
months then ended are unaudited. The interim financial statements reflect all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods presented. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the United USN, Inc. 1995 Annual Report to the Board
of Directors and Stockholders. The results of operations for the interim
periods should not be considered indicative of results to be expected for the
full year.
2. RESALE AGREEMENTS
In October 1995, the Company entered into an agreement with a local
telecommunications company ("TelCo One") to allow US Network to resell TelCo
One's local telephone service in the Chicago area. The agreement term is ten
years and contains certain minimum purchase commitments.
In 1996, the Company signed similar agreements with TelCo One and with
another local telecommunications company ("TelCo Two") to resell their local
telephone service in Michigan and Ohio and New York, respectively, to both
business and residential customers. These agreements are also for ten years
and contain certain minimum purchase commitments.
3. SALE OF ASSETS
On December 29, 1995, the Company entered into an agreement to sell its
switch-based facilities in Ohio for $9.5 million in cash plus the assumption
of capital and operating leases. The net assets sold under this agreement are
summarized as follows:
<TABLE>
<S> <C>
Net property and equipment.................................... $7,575,009
Deposits...................................................... 100,532
----------
Total assets.............................................. 7,675,541
Less liabilities assumed:
Accrued liabilities......................................... 15,204
Capital lease obligations................................... 6,206,638
----------
Net assets................................................ $1,453,699
==========
</TABLE>
Additionally, approximately $2.0 million in operating leases was assumed by
the buyer. The Company will remain contingently liable on capital and
operating leases assumed by the buyer. The transaction closed on February 29,
1996 and a gain of approximately $8.1 million was realized. The Company will
continue to serve its customer base as a reseller.
F-18
<PAGE>
UNITED USN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
SEPTEMBER 30, 1996
4. PRIVATE PLACEMENT OFFERING
On September 30, 1996, the Company received approximately $55 million in
cash, net of commissions paid, in exchange for 48,500 Units consisting of
$48.5 million aggregate principal amount at maturity of 14% Senior Discount
Notes due 2003 ("Senior Notes") and warrants (the "Initial Warrants") to
purchase 61,550 shares of Class A Common Stock, and 36,000 units of 9%
Convertible Subordinated Discount Notes due 2004 ("Convertible Notes").
The Senior Notes were sold at a unit price, before commissions, of $622.75.
These notes will accrete interest at an annual rate of 14% from September 30,
1996 to March 31, 2000. Thereafter, the notes will bear interest at an annual
rate of 14%, and will be paid semiannually in arrears, on the aggregate
principal amount at maturity of $48.5 million. The value ascribed to the
warrants issued with the Senior Notes will be amortized over the life of the
debt.
The Convertible Notes were sold at a unit price, before commissions, of
$767.90. These notes will accrete interest at an annual rate of 9% from
September 30, 1996 to September 30, 1999. Thereafter, the notes will bear
interest at an annual rate of 9%, and will be paid semiannually in arrears, on
the aggregate principal amount at maturity of $36 million.
5. CHANGES IN EQUITY
In September 1996, the Board of Directors and the existing shareholders
approved the conversion of all outstanding Series A and Series A-2 Preferred
Stock to newly issued shares of Class A Common Stock. The conversion was
consummated on September 30, 1996, and 267,630 shares of Common Stock were
issued in exchange for the outstanding Preferred Stock, including dividends
accrued through the conversion date. There was no dollar impact to the
financial statements.
In September 1996, the Board of Directors also authorized the issuance of up
to 30,000 shares of Preferred Stock designated as 9% Cumulative Convertible
PIK Preferred Stock ("9% Preferred Stock"). The 9% Preferred Stock has a
liquidation preference and stated value of $1,000 per share. Dividends,
payable in additional shares of 9% Preferred Stock, accrue semiannually at an
annual rate of 9% and are fully cumulative. In connection with the Offering,
the Company issued 10,000 shares of its 9% Preferred Stock to its existing
shareholders, for an aggregate purchase price of $10 million.
6. CONTINGENCIES
Loss Contingency--In April 1996, a derivative action was filed by Mr.
Stephen C. Schwartz, the founder and a former director and officer of USNCN
against the Company and specific officers and directors. On July 16, 1996 the
Company agreed with Mr. Schwartz to repurchase Mr. Schwartz's interest, among
other things, for $1.7 million. The financial impact of this transaction was
recorded in the third quarter of fiscal 1996, $328,000 of which represented
compensation expense due to Mr. Schwartz.
Gain Contingency--USNCN has submitted a claim of approximately $1.4 million
with TelCo Two requesting that certain revenues, purportedly not billed by
TelCo Two to its customers, be paid to USNCN. TelCo Two is in the process of
reviewing USNCN's claim and has not formally concluded the amount or terms of
a settlement. While USNCN believes its claim has merit, it is unable to
predict, at this time, whether they will be successful in fully resolving this
matter favorably.
* * * * *
F-19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED HEREIN OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER
OR SOLICITATION IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
TO SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
SUCH DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 3
Prospectus Summary......................................................... 5
Risk Factors............................................................... 17
Use of Proceeds............................................................ 34
Dividend Policy............................................................ 34
Capitalization............................................................. 35
Selected Historical Consolidated Financial and Operating Data.............. 36
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................. 37
Industry Overview: The Local Telecommunications Service Industry........... 41
Business................................................................... 43
Management................................................................. 56
Certain Relationships and Related Transactions............................. 63
Stock Ownership............................................................ 66
Description of the Notes................................................... 67
Description of the Warrants................................................ 100
Registration Rights........................................................ 103
Description of Capital Stock............................................... 106
Certain Federal Income Tax Considerations.................................. 109
Plan of Distribution....................................................... 111
Legal Matters.............................................................. 112
Experts.................................................................... 112
Glossary................................................................... 113
Index to Consolidated Financial Statements................................. F-1
</TABLE>
------------
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE NEW NOTES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
----------------
PROSPECTUS
----------------
LOGO
UNITED USN, INC.
$48,500,000
14% SERIES B
SENIOR DISCOUNT NOTES
DUE 2003
JANUARY , 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* Certificate of Designations, Powers, Rights and Preferences of 9%
Cumulative Convertible Pay-In-Kind Preferred Stock (the "9% Preferred
Stock") of the Registrant.
3.3* Bylaws of the Registrant.
4.1* Indenture, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Trustee, for the
Registrant's 14% Senior Discount Notes due 2003 (the "Senior Note
Indenture").
4.2* Form of the Registrant's 14% Series B Senior Discount Notes due 2003.
4.3* Registration Rights Agreement dated as of September 30, 1996, by and
among the Registrant and the Initial Purchasers named therein.
4.4* Warrant Agreement, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Warrant Agent.
5.1* Legal Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois).
10.1* Indenture, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Trustee, for the
Registrant's 9% Convertible Subordinated Discount Notes due 2004.
10.2* Employment Agreement, dated as of July 18, 1996, by and between the
Registrant and J. Thomas Elliott.
10.3* Employment Agreement, dated as of July 18, 1996, by and between the
Registrant and Ronald W. Gavillet.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
10.4* Form of Employment Agreement between the Registrant and
certain officers of the Registrant.
10.5* 1994 Stock Option Plan of the Registrant.
10.6* Form of Indemnification Agreement between the Registrant and
certain directors and officers of the Registrant.
10.7* Consulting Agreement, dated January 24, 1995, by and between
the Registrant and Eugene A. Sekulow.
10.8* Promissory Note, dated December 15, 1995, between the
Registrant and J. Thomas Elliott.
10.9* Purchase Agreement, dated as of September 25, 1996, by and
among the Registrant and the purchasers named therein,
relating to the 9% Preferred Stock.
10.10* 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").
10.11* 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").
10.12* Registration Rights Agreement, dated as of April 20, 1994, by
and among the Registrant, CIBC and Chemical.
10.13* 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").
10.14* First Amendment to Stockholders Agreement, dated as of June
10, 1994, by and among the Registrant, the Initial Investors
and the Stockholders.
10.15* First Amendment to Registration Rights Agreement, dated as of
June 10, 1994, by and among the Registrant and the Initial
Investors.
10.16* Third Amendment to Purchase Agreement, dated as of November 1,
1994, by and among the Registrant and the Initial Investors.
10.17* 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").
10.18* Fourth Amendment to Purchase Agreement, dated as of June 22,
1995, by and among the Registrant and the Initial Investors.
10.19* 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").
10.20* Amended and Restated Stockholders Agreement, dated as of June
22, 1995, by and among the Registrant and the Investors.
10.21* Amended and Restated Registration Agreement, dated as of June
22, 1995, by and among the Registrant and the Investors.
10.22* 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").
10.23* Amended and Restated Stockholders Agreement, dated as of July
21, 1995, by and among the Registrant, the Original Purchasers
and the Stockholders.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
10.24* Amendment No. 1 to Asset Purchase Agreement, dated as of
October 27, 1995, by and among UTS, Quest United, QAM, Lavin,
Elliott, and Quest.
10.25* Second Amendment to Purchase Agreement, dated as of March 5,
1996, by and among the Registrant and the Original Purchasers.
10.26* Resale Local Exchange Service Agreement, dated July 8, 1996,
by and between New York Telephone Company and UTS.
10.27* 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.
10.28* Agreement for Resale Services, dated as of April 26, 1996, by
and between the Registrant and Ameritech on behalf of
Ameritech Michigan.
10.29* 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.
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).
24.1* Powers of Attorney.
25.1* Statement of Eligibility and Qualification on form T-1 under
the Trust Indenture Act of 1939 of Harris Trust and Savings
Bank, as Trustee under the Senior Note Indenture.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.4* Form of Letter to Clients.
99.5* Guidelines for Certification of Taxpayer Identification Number
on Form W-9.
</TABLE>
- --------
+Filed herewith.
*Previously filed as an Exhibit to this Registration Statement on Form S-4
(File No. 333-16265).
(b) Financial Data Schedules
[None.]
[All schedules are omitted because the required information is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the financial statements or notes thereto.]
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<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 JANUARY 27, 1997.
UNITED USN, INC.
/s/ J. Thomas Elliott
By: _________________________________
J. Thomas Elliott
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON THE DATES
AND IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ J. Thomas Elliott President, Chief Executive January 27, 1997
____________________________________ Officer and Director
J. Thomas Elliott (Principal Executive
Officer)
Richard J. Brekka* Chairman of the Board January 27, 1997
____________________________________
Richard J. Brekka
Donald J. Hofmann, Jr.* Director January 27, 1997
____________________________________
Donald J. Hofmann, Jr.
Paul S. Lattanzio* Director January 27, 1997
____________________________________
Paul S. Lattanzio
William P. Glasgow* Director January 27, 1997
____________________________________
William P. Glasgow
William A. Johnston* Director January 27, 1997
____________________________________
William A. Johnston
Eugene A. Sekulow* Director January 27, 1997
____________________________________
Eugene A. Sekulow
/s/ Gerald J. Sweas Executive Vice President and January 27, 1997
____________________________________ Chief Financial Officer
Gerald J. Sweas (Principal Financial
Officer and Principal
Accounting Officer)
</TABLE>
/s/ J. Thomas Elliott
<TABLE>
<S> <C> <C>
January 27, 1997
</TABLE>
*By____________________________
Attorney-in-fact
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER NUMBER
------- ----------
<C> <S> <C>
Amended and Restated Certificate of Incorporation of
3.1* the Registrant.
3.2* Certificate of Designations, Powers, Rights and
Preferences of 9% Cumulative Convertible Pay-In-Kind
Preferred Stock (the "9% Preferred Stock") of the
Registrant.
3.3* Bylaws of the Registrant.
4.1+ Indenture, dated as of September 30, 1996, by and
between the Registrant and Harris Trust and Savings
Bank, as Trustee, for the Registrant's 14% Senior
Discount Notes due 2003 (the "Senior Note Indenture").
4.2+ Form of the Registrant's 14% Series B Senior Discount
Notes due 2003.
4.3+ Registration Rights Agreement, dated as of September
30, 1996, by and among the Registrant and the Initial
Purchasers named therein.
4.4+ Warrant Agreement, dated as of September 30, 1996, by
and between the Registrant and Harris Trust and
Savings Bank, as Warrant Agent.
5.1+ Legal opinion of Skadden, Arps, Slate, Meagher & Flom
(Illinois).
10.1+ Indenture, dated as of September 30, 1996, by and
between the Registrant and Harris Trust and Savings
Bank, as Trustee, for the Registrant's 9% Convertible
Subordinated Discount Notes due 2004.
10.2* Employment Agreement, dated as of July 18, 1996, by and
between the Registrant and
J. Thomas Elliott.
10.3* Employment Agreement, dated as of July 18, 1996, by and
between the Registrant and Ronald W. Gavillet.
10.4* Form of Employment Agreement between the Registrant and
certain officers of the Registrant.
10.5* 1994 Stock Option Plan of the Registrant.
10.6* Form of Indemnification Agreement between the
Registrant and certain directors and officers of the
Registrant.
10.7* Consulting Agreement, dated January 24, 1995, by and
between the Registrant and Eugene A. Sekulow.
10.8* Promissory Note, dated December 15, 1995, between the
Registrant and J. Thomas Elliott.
10.9* Purchase Agreement, dated as of September 25, 1996, by
and among the Registrant and the purchasers named
therein, relating to the 9% Preferred Stock.
10.10+ 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").
10.11+ 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").
10.12+ Registration Rights Agreement, dated as of April 20,
1994, by and among the Registrant, CIBC and Chemical.
</TABLE>
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10.13+ 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").
10.14+ First Amendment to Stockholders Agreement, dated as of
June 10, 1994, by and among the Registrant, the
Initial Investors and the Stockholders.
10.15+ First Amendment to Registration Rights Agreement, dated
as of June 10, 1994, by and among the Registrant and
the Initial Investors.
10.16+ Third Amendment to Purchase Agreement, dated as of
November 1, 1994, by and among the Registrant and the
Initial Investors.
10.17+ 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").
10.18+ Fourth Amendment to Purchase Agreement, dated as of
June 22, 1995, by and among the Registrant and the
Initial Investors.
10.19+ 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").
10.20+ Amended and Restated Stockholders Agreement, dated as
of June 22, 1995, by and among the Registrant and the
Investors.
10.21+ Amended and Restated Registration Agreement, dated as
of June 22, 1995, by and among the Registrant and the
Investors.
10.22+ 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").
10.23+ Amended and Restated Stockholders Agreement, dated as
of July 21, 1995, by and among the Registrant, the
Original Purchasers and the Stockholders.
10.24+ Amendment No. 1 to Asset Purchase Agreement, dated as
of October 27, 1995, by and among UTS, Quest United,
QAM, Lavin, Elliott, and Quest.
10.25+ Second Amendment to Purchase Agreement, dated as of
March 5, 1996, by and among the Registrant and the
Original Purchasers.
10.26+ Resale Local Exchange Service Agreement, dated July 8,
1996, by and between New York Telephone Company and
UTS.
10.27+ 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.
10.28+ Agreement for Resale Services, dated as of April 26,
1996, by and between the Registrant and Ameritech on
behalf of Ameritech Michigan.
10.29+ 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.
12.1* Computation of Earnings to Fixed Charges.
21.1+ Subsidiaries of the Registrant.
</TABLE>
2
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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).
24.1+ Powers of Attorney.
25.1* Statement of Eligibility and Qualification on Form T-1
under the Trust Indenture Act of 1939 of Harris Trust
and Savings Bank, as Trustee under the Senior Note
Indenture.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees.
99.4* Form of Letter to Clients.
99.5* Guidelines for Certification of Taxpayer Identification
Number on Form W-9.
</TABLE>
- --------
+Filed herewith.
*Previously filed as an Exhibit to this Registration Statement on Form S-4
(File No. 333-16265).
3
<PAGE>
Exhibit 23.1
[Letterhead of Deloitte & Touche LLP]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No. 333-
16265 of United USN, Inc. of our report dated March 15, 1996, appearing in the
Prospectus, which is part of this Registration Statement, and to the reference
to us under the headings "Selected Historical Consolidated Financial and
Operating Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
January 27, 1997
Chicago, Illinois
